Operating Reserve Demand Curve (ORDC)
The absence of an appropriate Operating Reserve Demand Curve (ORDC) is one of the difficulties in market designs that result in de facto price caps and missing money. A reserve demand curve would improve the prices during scarcity conditions. However, if ORDC does not raise prices towards the average VOLL when operating reserve levels approach the minimum reserve level, then the ORDC is not capable of representing the effects of scarcity or capturing the true opportunity cost at the margin. Operating cost of the most expensive unit running is relevant when there is excess capacity. However, when capacity is constrained and generation supply capacity is fixed over the range, the demand curve for energy and operating reserve should set the price and should be able to set the scarcity price at a higher level, reaching to VOLL.
There is a minimum level of operating reserves (assumed here 3% of load) is required to prevent catastrophic failure of the system. System Operator will not go below this level of reserves even if this required involuntary curtailment of inflexible load. Beyond the minimum level there will be a nominal reserve target, which is assumed 7% of above load. This is the price sensitive part of the operating reserve demand (dashed red line).
When operating reserves reach the minimum level (3% in the present case), the price reaches the average VOLL price of Rs 8 lakh per MWh involuntary load curtailment would be required.
Supply and Pricing
On the supply side, the system operator would receive offers of available generating capacity with prices for energy and reserves. The system operator would use the load bids and supply side offers to determine the bid-based economic dispatch in the usual way.
During normal operating conditions with moderate load and high degree of available generating capacity, the market equilibrium for energy is obtained at a relatively low price. (Fig 11). The operating reserves would be well above the minimum level. All generators providing operating Reserves would be paid the market –clearing –price for the reserves at the energy price (less the avoided variable costs of generators)
Under stressed conditions there would not be adequate capacity to meet all load and maintain target nominal level of reserves. This would give rise to scarcity pricing as shown in Fig 11 at Rs 5.6 Lakh per MWh (assumed) for energy and essentially the same market – clearing price for operating reserves. This would approach the average VOLL.
System Operator would try to reduce the level of Operating Reserves. Flexible customers with real time metering would respond to high price signals by reducing level of operating reserves.Generators supplying reserves would receive this high energy price less the cost of the marginal reserve capacity.Although scarcity conditions with very high prices would apply for relatively few hours, the payments to generators during these hours would include a large fraction of fixed and investment costs.
Conclusion
Electricity Markets are undergoing radical transformation. The transformation is primarily driven by a move away from fossil fuels to address climate change and reduce carbon emissions. India has set in a very ambitious program of expanding Renewables (Solar and Wind) to 500 GW by 2030 and the Markets face new challenges of i) intermittent generation, ii) zero marginal cost, and iii) limited (or nil) inertia.
As inertia falls and generation uncertainty increases fast responding and more operating reserves become necessary. Battery Storage and Demand Response will help address the challenges of renewables.
But the question to be addressed remains: “will the market provide investment incentives for the Battery Storage and improved Demand Response?” In the instances of scarcity where the system operator has limited reserves to maintain power balance the value of the reserves – and the price of energy should reflect the real time value of reserves in avoiding load shedding events. Adequate scarcity pricing, steady improvement in market design to make the system more responsive, forward planning on resource adequacy are necessary for improving the investment signal.
Concluded
Dr. K. S. Gandhi is B.E. (Electrical) from Andhra University College of Engineering, Waltair; and M. Tech. (Electrical Power Systems) from JNTU, Hyderabad. His Ph. D. thesis is titled ‘Market Based Tariff Reforms – A Framework for Indian Power Sector’. After offering his service to many reputed Indian power companies for 50 years, he is now engaged in the teaching activity on regular guest faculty basis for M. Tech. (EPS) batches of a reputed engineering college at Hyderabad. He has delivered more than 30 papers at various seminars in the country and in the training sessions at Engineering Staff College, Institution of Engineers, CPRI etc.
