Strategic Interaction Between Wholesale and Ancillary Service Markets

David Brown, Andrew Eckert and Douglas Silveira

No 2022-11, Working Papers from University of Alberta, Department of Economics

Abstract: In electricity markets, system reliability requires the instantaneous balancing of supply and demand. In addition to the wholesale electricity market, the procurement of various ancillary services is vital in achieving this objective. An important design feature is whether ancillary service markets clear simultaneously or sequential with wholesale markets. We propose a model to study the strategic implications of simultaneous versus sequential timing when firms compete in the ancillary services and wholesale electricity markets. Considering the case where ancillary services markets clear before wholesale markets, we demonstrate that when firms face increasing marginal cost curves, a strategic incentive to reduce ancillary services output and, consequently, lower their marginal costs in the wholesale market arises. We employ data from Alberta’s electricity markets to demonstrate the quantitative implications of our findings. Our numerical results show that the strategic commitment effect has a small impact on wholesale market outcomes but a large impact on the equilibrium in the ancillary services market, elevating the market-clearing price.

Keywords: ancillary services; electricity; market power; strategic commitment (search for similar items in EconPapers)
JEL-codes: L13 L50 L94 Q40 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2022-10-19
New Economics Papers: this item is included in nep-com, nep-ene, nep-ind and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://sites.ualberta.ca/~econwps/2022/wp2022-11.pdf Full text (application/pdf)

Related works:
Journal Article: Strategic interaction between wholesale and ancillary service markets (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2022_011

Access Statistics for this paper

More papers in Working Papers from University of Alberta, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Joseph Marchand ().