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Resource Adequacy through Operating Reserve Demand Curves: Design Options and their Impact on the Market Equilibrium

Operating reserve demand curves (ORDCs) have become part of the electricity market design in several power systems. They improve the security of supply through enhanced peak prices that occur already when the system is running low on operating reserves, before an actual shortfall occurs. Previous research, however, suggests that the ORDC's impact on resource adequacy would be thwarted by the merit order effect.Hence, we propose a methodology to model the investment in markets with ORDC, which specifically captures the interaction with renewable deployment. A stylized power system setting is used to determine the market equilibrium at different stages of decarbonization, and compared to a conventional energy-only market. Classical ORDCs consistently increase reliability by attracting additional investments. This effect can be amplified by "shifting" the ORDC, increasing the willingness to pay for balancing reserves. Our results suggest that perfect reliability can be achieved with only moderate cost increases.

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Keywords: Operating reserve demand curve, Balancing power, Decarbonization, Electricity market design, Variable renewable electricity

DOI: 10.5547/01956574.45.3.gtho

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Published in Volume 45, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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