Impact of Operating Reserve Rules on Electricity Prices with High Penetrations of Renewable Energy

Bethany Frew, Gregory Brinkman, Paul Denholm, Vinayak Narwade, Gordon Stephen, Aaron Bloom, Jessica Lau

Research output: Contribution to journalArticlepeer-review

15 Scopus Citations

Abstract

In competitive wholesale electricity markets, significant effort is devoted to designing markets that set efficient prices for maintaining supply-demand balance. One factor that can impact prices is administratively-set scarcity pricing, which sets prices to a preset level when the market is not able to meet operating reserve or energy requirements. When energy and operating reserves are co-optimized, assumptions surrounding operating reserve requirements and scarcity pricing can impact system-wide price outcomes for both operating reserves and energy. This study uses production cost modeling of an ERCOT-like system to evaluate the impact of operating reserve eligibility, scarcity pricing, and quantity rules on electricity prices, and therefore also on generator revenues. Results reveal economic and operational benefits with allowing open participation in reserve markets, as this enables greater access to the full set of capable resources at lowest cost. Furthermore, both energy and reserve prices are strongly impacted by reserve scarcity pricing events, which reveals that reserve scarcity pricing assumptions can impact price outcomes even for units not providing reserves. This study highlights the importance of operating reserve scarcity pricing rules because of the strong coupling between energy and reserve prices and because these rules serve as proxies for true price responsive demand.

Original languageAmerican English
Article number112443
Number of pages15
JournalEnergy Policy
Volume156
DOIs
StatePublished - 2021

Bibliographical note

Publisher Copyright:
© 2021 Elsevier Ltd

NREL Publication Number

  • NREL/JA-5C00-71888

Keywords

  • Ancillary services
  • ERCOT
  • Renewables
  • Revenue sufficiency
  • Wholesale electricity markets

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