Cost Allocation and Net Load Variability

A basic principle of electricity market design is that cost allocation should follow cost causation as closely as possible. As renewable resources play a larger role in electricity generation, system operators have become increasingly concerned about costs related to variability in net load. While variable generation resources have attracted a great deal of attention along these lines, load is a larger source of variability in most systems. This paper introduces a Shapley value framework to assess the total system cost attributable to electricity market participants that either exacerbate or alleviate net load variability. Furthermore, this paper investigates the extent to which these costs are adequately reflected in wholesale market prices. Numerical tests indicate that the cost of variability on the hourly time scale is in most cases internalized by market-integrated generators and buyers, mitigating concerns that variability imposes a socialized cost from ramping or cycling of thermal generators.