Where is the Missing Money? The Impact of Ramping Costs in Dynamic Electricity Markets

Where is the Missing Money? The Impact of Ramping Costs in Dynamic Electricity Markets

Where is the Missing Money? The Impact of Ramping Costs in Dynamic Electricity Markets
Matias Negrete-Pincetic, Luciano de Castro and Sean P. Meyn
In many regions of the world there is increasing demand for greater integration of electricity from renewable resources such as sun and wind. These sources of electricity are volatile, which creates challenges in regulating the grid. Resources are needed to mitigate the impact of volatility — for example, some generators may ramp up and down to compensate for corresponding ramps in wind generation. Without these responsive \textit{ancillary services}, volatility may result in instability of the power grid. It is therefore critical to know if today’s electricity markets provide the necessary incentives for the provision of these ancillary services.
A dynamic competitive-equilibrium economic model is introduced that captures the costs and benefits of responsive generation. The market analysis presented in this paper is based on the solution of the economist’s social planner’s problem (SPP), which is an optimal control problem in this dynamic setting. The following conclusions are obtained:
  • The competitive equilibrium price coincides with marginal value to the consumer, but is never equal to marginal cost.
  • Under general conditions, the average price coincides with average marginal cost of capacity, and is independent of its derivative. Hence, the cost of ramping is not captured by the average prices.
  • If a price for ramping is included in the market, then the competitive equilibrium price is no longer unique. A complete characterization of possible prices is obtained in the paper.
Numerical experiments expose the structure of the solution to the SPP, and illustrate the main results of the paper.
A corollary to these theoretical results is that real-time markets do not provide sufficient incentives for responsive ancillary services. However, it is argued that the analysis presented in this paper can form a foundation for alternative market designs based on contracts for services.