Gaming-Based Reserve Constraint Penalty Factor Analysis

Abstract

To ensure secure real-time power system operations, the system operator must schedule sufficient resources to meet energy demand and operating reserve requirements simultaneously. Under a joint real-time energy-reserve market regime, a dominant market participant can exercise pricing power by withholding reserve capability or by marking up energy offers. This paper examines the short-term impact of the choice of reserve price cap on participant behavior and market outcomes. A Stackelberg game is utilized to analyze the strategic bidding behaviors of the dominant participants assuming a range of reserve price caps and market conditions. The market participants play the role of the leaders, while the independent system operator is treated as a follower. The proposed model is applied to the New England electricity market. The computed solutions show that although the reserve price cap is unable to eliminate physical withholding behaviors, it disciplines the participants and limits incentives to withhold economically. Also, it limits prices to a reasonable level during reserve shortage events when only supply-side market power mitigation options are available. Absent any transmission improvements or effective demand response participation, the reserve price cap remains an effective tool to mitigate the impact of the exercise of supplier market power.