Dynamic operating reserve procurement improves scarcity pricing in PJM

Luke Lavin, Sinnott Murphy, Brian Sergi and Jay Apt

Energy Policy, 2020, vol. 147, issue C

Abstract: Competitive electricity markets can procure reserve generation through a market in which the demand for reserves is administratively established. A downward sloping or stepped administrative demand curve is commonly termed an operating reserve demand curve (ORDC). We propose a dynamic formulation of an ORDC with generator forced outage probabilities conditional on ambient temperature to implement scarcity pricing in a wholesale electricity market. This formulation improves on common existing methods used by wholesale market operators to articulate ORDCs by explicitly accounting for a large source of observed variability in generator forced outages, whereby for a fixed load, more reserves are required during times of extreme heat and cold to maintain a constant risk of reserve shortage. Such a dynamic ORDC increases social welfare by $17.1 million compared to current practice in the PJM Interconnection during a high load week in a welfare-maximizing electricity market with co-optimized procurement of energy and reserves. A dynamic ORDC increases reserve prices under scarcity conditions, but has minimal effects on total market payments. The results are directly relevant to the modeled two-settlement electricity market in PJM, which is currently undergoing enhancements to its ORDC.

Keywords: Correlated failures; Electricity markets; Generating Availability Data System (GADS); Operating reserve demand curve; Operating reserves; Scarcity pricing (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:147:y:2020:i:c:s0301421520305747

DOI: 10.1016/j.enpol.2020.111857

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