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Abstract-- Ancillary Services are essential to the reliability and

security of power system operation in any competitive electricity market environment. This paper discusses various AS market design options for procuring, pricing and settling Ancillary Services via competitive auctions by an Independent System Operator (ISO). The paper also discusses problems and potential solutions associated with these market design options based on actual experience of operating ISOs. These problems include price volatility and spikes and price reversals for the various components of the Ancillary Services that can create perverse incentives in the marketplace. Further we elaborate on the design that has been proven so far based on practical experience to be the most efficient.

Index Terms—Ancillary Services, Auctions, Energy Market Design, Independent System Operators,

I. INTRODUCTION

ncillary Services (AS) is an essential element in any electricity market design. The Independent System Operator (ISO) relies on AS to ensure system security

and reliability. AS usually include regulation up (Reg-Up), regulation down (Reg-Down), spinning reserve (Spin), non-spinning reserve (Non-Spin), voltage support, and black start. In some markets, AS products are broken in different categories such as 6 second raise, 6 second lower, 60 second raise and 60 second lower, 30 minute standby, etc. Operating reserves, i.e., regulation, spin and non-spin, are usually procured through competitive markets. Bidders submit AS bids and then the market clearing price is found as the price where supply is equal to demand. All offers at or below the clearing price are accepted. Voltage support and black start services are usually procured by resource specific agreements between the ISO and the suppliers. A generator must meet certain performance criteria in order to be eligible for providing a specific AS. For example, a generator must be equipped with AGC devices in order to provide regulation services. Furthermore, the amount of capacity that a unit can provide is limited by the unit’s operating characteristics, such

Dr. Alex Papalexopoulos is with ECCO International, San Francisco, CA

94104 USA (e-mail: alexp@eccointl.com).

as ramping capability. The minimum performance requirements for each ancillary service are usually specified by national reliability organizations such as NERC (North America Reliability Council). Proper product definition and design of AS are the primary determinants of efficiency and liquidity in these markets. This in turn influences system reliability. Based on practical experience from various ISOs, it can be concluded that the AS markets over the years have suffered from various flaws, such as low demand elasticity, price reversals, exercise of market power, and sequential market clearing. These flaws have hindered the smooth operation of AS markets in several occasions. As a result, various ISOs have embarked in various reform efforts that have taken different form in each jurisdiction depending on specific circumstances. This paper discusses various AS market design options for procuring, pricing and settling Ancillary Services via competitive auctions by an Independent System Operator (ISO). The paper also discusses problems and potential solutions associated with these market design options based on actual experience of operating ISOs. These problems include price volatility and spikes and price reversals for the various components of the Ancillary Services that can create perverse incentives in the marketplace. Further we elaborate on the design that has been proven so far based on practical experience to be the most efficient. In this presentation we focus on four market design options even though there certain variations exist for these options. These include the Sequential Auction with uniform market clearing prices (paid to the sellers and charged to the buyers of each commodity); the Simultaneous AS auctions with downward substitution for the different commodities in order minimize the cost of procurement (i.e., the Rational Buyer protocol); the Pay-as Bid auction; and the Simultaneous AS auction in which the constraints that bind the various AS are satisfied by simply solving an optimization LP-based problem.

Design of an Efficient Ancillary Services Market

Dr. Alex D. Papalexopoulos, Fellow, IEEE

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1-4244-1298-6/07/$25.00 ©2007 IEEE.

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For each auction design we’ll discuss its implication with regard to efficiency, procurement costs, incentive compatibility (i.e., are resources motivated to reveal their true cost and capability), and distributional effects between producers and consumers. Even though most market designers would agree that at least in the case of a liquid market for a homogeneous commodity, a uniform clearing price auction is superior to a pay-as-bid rule, in the case of fragmented markets the underlying assumptions favoring the uniform clearing price approach may no longer be valid. AS markets are good examples of such market fragmentation where capacity for AS type is categorized based on response time and auctioned as separate products in sequential or simultaneous auctions. In these cases, it has been suggested that pay-as-bid may be a viable alternative. In this presentation we’ll address this issue. We’ll also discuss certain other aspects that are important for robust procurement of AS, such as effective use of the AS capacity under emergency conditions, delivery time, transmission limitations, and local area requirements. Regional procurement of AS is an approach that results in an effective distribution of reserves. It also ensures continuous reliability in the event of a contingency occurring anywhere in the system. In this presentation we’ll propose a new methodology for procuring and pricing AS on a regional basis, with an explicit representation of imports in a simultaneous energy/reserve market environment. To implement this approach, further work is required to develop standards and procedures in order to determine the regional ancillary service requirements.

II. REFERENCES

[1] Harry. Singh, Alex. D. Papalexopoulos, “Competitive Procurement of

Ancillary Services by an Independent System Operator,” IEEE Trans. Power Systems, vol. 14, No. 2, pp. 498-504, May. 1999.

[2] Hung-po. Chao and Robert. Wilson, “Multi-dimensional procurement auctions for power reserves: Incentive Compatible Evaluation and Settlement Rules, UCEI POWER conference, Berkeley, March 1999.

[3] Alex.D. Papalexopoulos and Harry. Singh, “On the Various Design Options for Ancillary Services Markets,” presented at the 34st International Conference in System Sciences, HICSS-34, Hawaii, January 3-5, 2001.

[4] Rajnish Kamat, Shmuel S. Oren, “Rational Buyer Meets Rational Seller: Reserves Market Equilibria under Alternative Auction Designs,” Journal of Regulatory Economics; 21:3 247-288, 2002, Kluwer Academic Publishers.

[5] Tong. Wu, Mark. Rothleder, Ziad. Alaywan, and Alex. D. Papalexopoulos, “Pricing Energy and Ancillary Services in Integrated Market Systems by an Optimal Power Flow,” IEEE Trans. on Power Systems, vol. 19, No. 1, pp. 339-347, Feb, 2004.

[6] Tong. Wu, George. Angelidis, Ziad. Alaywan, and Alex. D. Papalexopoulos, “Regional Ancillary Services Procurement in Simultaneous Energy/Reserve Markets,” presented at the IEEE PES PSCE Meeting, New York, New York, October 10-13, 2004.

III. BIOGRAPHIES

Dr. Alex Papalexopoulos is president and founder of ECCO International, a specialized Energy Consulting Company that provides consulting services and expert advice on electricity market design, power systems, energy management systems and software issues within and outside the U.S. to a wide range of clients such as Regulators, Governments, Utilities, Independent System Operators and Regional Transmission Operators, Power Exchanges, Marketers, and Brokers. ECCO International is currently involved in various energy restructuring projects around the world including North America and Europe. Prior to forming ECCO International in 1998, Alex was a director of the PG&E’s Electric Industry Restructuring Group in San Francisco, California. Dr. Alex Papalexopoulos received the Electrical and Mechanical Engineering Diploma from the National Technical University of Athens, Greece in 1980, and the M.S. and Ph.D. degrees in Electrical Engineering from the Georgia Institute of Technology, Atlanta, Georgia in 1982 and 1985, respectively. He has published numerous scientific papers in IEEE and other Journals. He is the 1992 recipient of PG&E's Wall of Fame Award, and the 1996 recipient of IEEE’s PES Prize Paper Award. He is a Fellow of IEEE.