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Well-Designed Wholesale Electricity Markets Support System Flexibility

Analysis Insights: April 2015

Market design largely determines the operational mechanisms available to maintain long-term and short-term power system reliability. For systems with high levels of variable generation, well-designed electricity markets drive efficient solutions to meet reliability needs in a least-cost manner, and they can facilitate access to a range of options that increase system flexibility. Table 1 summarizes current and emerging market design approaches and best practices for incentivizing and accessing flexibility. In collaboration with the electric power community, NREL continues to lead analysis on best practices in market design.

Market Approaches and Best Practices for Incentivizing and Accessing Flexibility

Ancillary Services Market

Dynamic system reserve requirements, which vary by time of day and system conditions on an hourly basis, could better target high-risk periods of significant change in the wind resource and reduce integration costs. Market participants would plan ahead to understand what the ancillary services deman might be, similarly to how they anticipate the load demand.

Co-optimization of energy and ancillary service markets has improved the efficiency of scheduling and dispatching resources.

Primary frequency response is an autonomous generator response that stabilizes the system frequency. Explicit compensation for this service (which is typically provided by conventional generators as a part of interconnection through cost-based measures or market designs could help ensure system reliability with high VG.

Energy Market

Dispatch resolution of 5- to 15-minutes improves system flexibility by more closely matching the changes in variable generation and load (net load) economically and reducing use of regulating reserves—cost-effectively optimizing generation.

Integrating Advanced, Centralized Forecasts into market operations could increase market efficiency and provide additional opportunities for wind and solar resources to participate in electricity markets.

More frequent (Intraday) markets could enable participation from power plants with intermediate lead/start-up times and help reduce the relatively high cost of balancing resources on the minutes timescale. The current two-step market with unit commitment in the day-ahead timescale leaves significant forecast errors to be resolved during real-time balancing.

Flexible ramp products could help address operational needs in real-time by maintaining dispatchable flexibility in terms of ramping capability.

Capacity Adequacy Market

Scarcity pricing sends price signals in the real-time market when there is a system wide shortage of power to meet demand and provide sufficient backup reserves. Scarcity pricing can be designed to encourage investments in flexible response, such as storage and price-responsive load, because these resources can respond quickly to brief periods of scarcity.

Capacity markets ensure that new generation is developed on time to meet resource adequacy targets and help these resources recover their capital costs. Capacity markets can help address concerns about declining wholesale electricity prices and ensure system flexibility with increased VG.

Capabilities markets have been proposed as a mechanism to create investment incentives for the right mix of generation, demand-side resources, storage and other grid resources to deliver flexibility and other attributes necessary to cost-efficiently balance systems where there is an increasing proportion of renewable power.