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Title:

A Reserve Market Reform Proposal

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Review of market design principles and objectives ... Requiring central system dispatch and reserves. The spot ... Centrally managed by the system operator ... – PowerPoint PPT presentation

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Title: A Reserve Market Reform Proposal


1
A Reserve Market Reform Proposal
  • Hung-po Chao and Mario DePillis
  • July 31, 2000

2
Preview
  • Review of market design principles and objectives
  • Phased approach with increasingly sophisticated
    design
  • Numerical examples
  • Conclusion

3
Market Design Issues
4
Reserve and Energy Markets
  • Electricity market is inherently incomplete
  • Electricity is basically not storable
  • Requiring central system dispatch and reserves
  • The spot market is a residual market
  • Transactions are settled ex post
  • Centrally managed by the system operator
  • Decentralized trading is only possible in forward
    markets
  • Separated spot market and forward markets
  • Energy and reserves are complements on the demand
    side but are substitutes on the supply side

5
Goals of reform
  • Fix the last man bidding problem that plagues the
    reserve markets
  • Provide more reasonable price signals for
    reserves
  • Provide a quick interim remedy before the CMS/MSS
    is fully developed
  • Set the stage for CMS/MSS and forward markets

6
What are the problems?
  • Reserves are designated and priced after dispatch
    of energy
  • Unit commitment produces inefficient energy and
    reserves schedules
  • Prices do not value flexibility and ramp rates of
    resources appropriately
  • The demand for reserves is inelastic

7
What is the proposed solution?
  • Incorporate demand for reserves in market design
  • Price reserves when energy and reserves are
    co-optimized
  • Use an appropriate unit commitment model
  • Develop reserve prices using shadow prices from
    the UC model
  • Maintain adequate replacement reserves and
    release uncommitted capacity

8
Phased approach with increasingly sophisticated
designs
  • No reserve bids (Energy bids fixed costs)
  • requires only minor changes to software
  • Reserve and energy bids
  • testing is recommended
  • Reserve and energy bids, with reserve demand
    function
  • needs development and tests

9
Day-ahead reserve markets without reserve bids
  • Each day, the system operator announces a set
    hourly load forecasts for the next day
  • Each bidder submits bids, which include
  • HOL, LOL (MW) - updated monthly or annually
  • energy prices (/MWh)
  • Max reserves, Ramp rates
  • fixed costs (/h) - updated monthly or annually
  • The system operator co-optimizes energy and
    reserve commitments based on bids

10
Day-ahead reserve markets without reserve bids
(contd)
  • Reserve clearing price (RCP) the expected
    shadow price of reserve requirements adjusted to
    recover fixed costs
  • The dispatch order is set by the energy bid plus
    the reliability adder for reserves
  • Financial penalty for non-availability other than
    dispatched for energy
  • Energy clearing prices (ECP) are calculated after
    dispatch as before

11
Reserve or Reliability Adder
  • Avoid over using flexible units for energy
  • Remove incentive to inflate the energy bids
  • Allow optimal dispatch of combined energy and
    reserves, by activating reserves when the energy
    price is high
  • Allow for re-optimization as real-time is
    approached.

12
Value of reserve under uncertainty
Opportunity cost or value of Reserve
RCP
Deterministic price
ELoad
High Load
Low Load
13
Day-ahead reserve markets with reserve bids
  • Each day, the system operator announces seven
    sets of hourly load forecasts for the next day
  • Each bidder submits bids, which include
  • HOL, LOL (MW) - updated monthly or annually
  • energy prices (/MWh)
  • Max reserves, Ramp rates
  • reserve bids (/MWh)
  • The system operator co-optimizes energy and
    reserve commitments based on bids

14
Day-ahead reserve markets with reserve bids
(contd)
  • Reserve clearing price (RCP) the reserve bid of
    the marginal unit that meets the reserve
    requirements of a given quality or higher
  • The dispatch order is set by the energy bid plus
    the reliability adder for reserves
  • Financial penalty for non-availability other than
    dispatched for energy
  • Energy clearing prices (ECP) are calculated after
    dispatch as before

15
Design Reserve Auctions Whats Needed for
Efficiency - I
  • Call for generation in merit order of costs?
    Energy bid P must reveal marginal cost? Optimal
    bid strategy must be Pc c? Use Vickrey
    auction for energy ? In competitive market pay
    the spot price.
  • This is incentive-compatible conditionalon
    winning reserve status in initial procurement
    auction.

Courtesy of Hung-po Chao and Robert Wilson (2000)
16
Design Reserve Auctions Whats Needed for
Efficiency - II
  • Dont disturb incentives for revealing energy
    cost via energy bid, Pc c ? Score(R,P) R
    constant ? In initial procurement auction,
    compare only capacity bids, and ignore energy
    bids.
  • So, use Vickrey auction for capacity procurement
    based solely on capacity bids ? In competitive
    mkt. pay capacity spot price.

Courtesy of Hung-po Chao and Robert Wilson (2000)
17
A Numerical Example
Load 3200 MW
18
Energy and reserves schedules are co-optimized to
meet reserve requirements
19
Energy/reserve bidding could produce the same
results
20
Dispatch based on energy bids plus reserve adders
21
The case with high LOL
22
High LOL could depress prices
23
A simple example
Load 160 MW Reserve requirement 40 MW
24
Fixed cost recovery is vulnerable to incentive
problems
25
Vickrey auction for reserve procurement reduces
uplift
26
Conclusion
  • Priority is to establish meaningful prices
  • Modify the unit commitment model to produce
    correct opportunity costs
  • Commit energy/reserves jointly a day-ahead, and
    price reserves day-ahead
  • Energy/reserve bidding needs testing
  • Demand for reserve needs development
  • Set the stage for CMS/MSS and forward markets
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