A decentralized approach for operating reserve procurement

Abstract

In power markets, operating reserve procurement is usually centrally handled according to certain reliability rules and aiming at minimization of total cost for reserve procurement. In this approach, there are no customers' choices, no incentives for ISO to minimize the total cost or for reserve suppliers to commit promised reserve capacity. It may leads to severe inefficiency. In this paper, we propose a decentralized approach for operating reserve procurement and in the meantime, to discover the market price for it. In the approach, each participant selects the optimal decision to maximize his or her own interests. Insurance theory is applied; which allows consumers to transfer their risk for financial loss of outage to the ISO, and induces incentive for the ISO to manage the entire amount of reserve capacity in an efficient manner. A penalty system is introduced, which improves the liability for the genco to provide operating reserve. Detailed math model and solution procedure are presented. It is also shown that with properly defined reserve market's structure, the decentralized approach can yield same optimal solution as its centralized counterpart. Numerical example results illustrate the effectiveness of the suggested approach.