Cost Allocation in Ancillary Service Markets

Market designs for reserve capacity in power systems face new challenges in terms of demand side participation (DSP) and renewable energy in-feed. In order to enhance power system flexibility and to reduce the amounts required of reserve capacity two key issues have to be tackled: First, financial incentives for DSP to participate in Ancillary Service markets. Second, incentives for intermittent sources and demand to adhere to their forecasted in-feed schedule. Therefore, we consider the public good aspect of reliable electricity supply and treat deviations from the schedule in in-feed or consumption as negative externalities in electricity market operation. Our contributions are twofold: First, we present a novel methodology which incorporates the individual evaluation of reserves via a suitable cost allocation framework and therefore enhances DSP to ensure operational security. Second, we provide a framework to establish market based adaptive in-feed premiums for renewable energy sources and to assess investments in DSP and distributed storage in order to reduce the amount of reserve capacity procured by the System Operator. A simulation study shows that our approach leads to a Pareto-efficient reduction in the amount of procured reserves and hence social costs.