Decentralized decision on operating reserve considering insurance and penalty policies

Abstract

AbstractIn power markets, operating reserve procurement is usually centrally handled according to certain reliability rules and aiming at minimizing the total procurement cost. In this approach, there are no customer choices, no incentives for the independent system operator (ISO) to minimize the social cost or for reserve suppliers to commit promised reserve capacity. It may lead to inefficiency. In this paper, we propose a decentralized approach for operating reserve procurement. In the approach, gencos try to maximize their own expected profits and consumers try to minimize their own expected cost with certain market information announced by the ISO. Insurance theory is applied to the approach. With the insurance policy, consumers are able to transfer their financial risk of loss of supply to the ISO. The claim defined in the insurance policy induces incentive for the ISO to manage the reserve capacity in an efficient manner. A penalty system is introduced as well. Under the penalty system, a genco is required to pay a high penalty if it does not commit the reserve capacity provision, which enforces the liability of gencos to provide operating reserve. A detailed math model and a solution procedure are presented. It is shown that with a properly defined reserve market rule, the decentralized approach can yield same optimal solution as its centralized counterpart aiming at maximizing social welfare in reserve markets. Numerical test results illustrate the effectiveness of the suggested approach. Copyright © 2008 John Wiley & Sons, Ltd.