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The penetration level of variable energy resources, such as wind and solar, has been steadily increasing in many modern power systems, presenting new challenges to system operators. By reducing wholesale electricity prices and increasing reserve requirements, this increased penetration may lessen incentives for new nuclear, coal, and natural gas generating plants to enter the market, thereby potentially leading to shortages of dispatchable capacity in the future. As a result, researchers at Argonne National Laboratory (ANL) have developed a model to help quantify these impacts and analyze different potential market design solutions to ensure long-term resource adequacy and system reliability.

Variable energy resources have two specific properties that present new challenges to system operators. First, once an initial investment is made and variable energy plants have been constructed, the cost of producing each additional unit of electricity is near zero. This tends to depress overall wholesale prices in deregulated power markets. Second, these plants have variable-generation output profiles with limited predictability. Therefore, a system with high variable energy penetration must maintain additional operating reserves to ensure system reliability. Existing market design mechanisms may not always appropriately compensate generators for providing reserve capacity. If new generators are not properly incentivized to enter the market or appropriately compensated once built, the power system could face long-term resource sufficiency issues in the future due to retirements or eroded reserve margins.

In the United States, an independent system operator (ISO) or Regional Transmission Organization (RTO) is an independent entity tasked with procuring generation and reserves to serve demand and ensure system reliability throughout their footprint. Part of this process is ensuring that a sufficient reserve margin is maintained in the system at all times to account for unexpected increases in demand or decreases in supply. Such reductions in supply may occur when generation at wind or solar resources is lower than anticipated because of weather conditions. Each RTO or ISO must therefore implement a mechanism that properly incentivizes generating resources to provide operating reserves to the system.

In most systems, the RTO or ISO sets target levels for various reserves products, and corresponding prices for energy and reserves products are determined as a result of a market-clearing procedure closely linked to system operation. Participating generators are reimbursed accordingly, based on the resulting prices. In the event that these target reserve levels are not achieved, an administratively determined penalty cost may be assessed, potentially leading to large price spikes for both reserve capacity and for the electricity itself. Thermal generators often rely on these relatively infrequent periods of high prices to recover their fixed capital and operating costs. Some systems also operate capacity markets, in which all generating units receive a regular payment for making their capacity available to the system, regardless of how much energy or reserves they supply.

A new mechanism for pricing reserve capacity was introduced in the Electric Reliability Council of Texas (ERCOT) power system, which spans most of the state. Rather than setting discrete reserve targets over a given timeframe, ERCOT established Operating Reserve Demand Curves to value reserve capacity according to a time-dependent, continuous function that decreases with increasing reserves. Therefore, as the level of reserves increases, the market price for the reserves decreases.

ANL researchers have applied their model to compare the ability of different market frameworks to ensure revenue sufficiency for thermal generators as variable energy resource penetration increases, thereby supporting long-term resource sufficiency and system reliability. Findings indicate that these frameworks can be designed in a way to promote comparable investments in new generation capacity and revenues for existing generators; however, the Operating Reserve Demand Curves approach results in a more continuous spectrum of energy prices and less frequent large price spikes. By providing revenue sufficiency while limiting price spikes, this framework may diminish investment and operational risk for generators— particularly flexible units—and reduce concerns over potential market manipulation.

Read more about ANL’s model in Capacity Adequacy and Revenue Sufficiency in Electricity Markets With Wind Power