Fundamentals of operating reserve procurance using decentralized approach with insurance theory application

In power markets, ancillary service is usually centrally handled. The system operator will determine the required reserved capacity and purchase it from the reserve suppliers. And the corresponding cost is allocated to the consumers. This approach lacks customers' choices and may lead to inefficiency. In the market environment, the decentralized decision-making approach should be strongly encouraged so as to use the 'invisible hand' to achieve efficient market equilibrium. In this paper, we work out two approaches to procure operating reserve. They are the contract-based approach and the pool-based approach. In these two approaches, an insurance policy is applied to improve the availability of reserved capacity and reduce the loss of consumers at generator forced outages. A numerical example is utilized to illustrate the effectiveness of the suggested approaches. It is proven that under certain conditions the pool-based approach is more cost effective and should be adopted in the deregulated power markets. (C) 2002 Elsevier Science B.V. All rights reserved.