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Welfare optimal reliability and reserve provision in electricity markets with increasing shares of renewable energy sources

Fridrik Mar Baldursson (), Julia Bellenbaum (), Lenja Niesen () and Christoph Weber ()
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Fridrik Mar Baldursson: Reykjavik University
Julia Bellenbaum: University Duisburg-Essen
Lenja Niesen: University Duisburg-Essen
Christoph Weber: University Duisburg-Essen

Journal of Regulatory Economics, 2022, vol. 62, issue 1, No 3, 47-79

Abstract: Abstract We develop an analytical model to derive the competitive market equilibrium for electricity spot and reserve markets under uncertain demand and renewable electricity generation. The first-best market equilibrium of the model resembles the result of a centralized co-optimization of the markets involved. We then derive the welfare-optimal provision of reserves. At first-best, cost of reserve capacity is balanced against expected cost of outages. Comparative statics and a numerical application based on German secondary reserve provision imply an increase of reserve provision with a growing share of renewable generation. Furthermore, a growing share of renewable generation decreases the level of reliability as measured in energy not served since required reserves to balance higher expected deviations will be more expensive, resulting in a trade-off between higher reserve costs and costs of energy not served.

Keywords: Renewable energy sources; Electricity reserves; Reliability; Electricity market; TSO (search for similar items in EconPapers)
JEL-codes: D81 L52 Q41 Q42 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11149-022-09454-7

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