DESIGNING ELECTRICITY MARKETS FOR FLEXIBILITY: HOW TRANSMISSION EXPANSION, DEMAND RESPONSE, AND OPERATIONAL RESERVES SHAPE POWER SYSTEM PERFORMANCE UNDER INCREASING VARIABILITY

Abstract

The quick rate of scale of the variable renewable energy (VRE) has considerably changed the nature of electricity systems operation and economic bases. Short run dispatch, long run investment and regulatory design are now influenced by variability and uncertainty which were previously subsidiary factors. The classical markets of electricity that were constructed based on stable supply and demand that are mostly inelastic are becoming more and more unsuited to suit the needs of the systems that are dominated by wind and solar production. The arguments presented in this paper are that electricity markets need to be transformed into non-energy-based trading platforms, i.e. integrated flexibility procurement systems. Flexibility here is described as the capacity of the power system to react in an effective way to spatial variations, more so, temporal variations, as well as, stochastic variations.

The paper dwells on three fundamental mechanisms of flexibility which include transmission expansion, demand response and operating reserves. Transmission expansion allows structural flexibility by allowing a renewable resource and load geographic diversification, which decreases congestion and reserve requirements. Demand response offers both behavioral and operational flexibility through conversion of electricity consumption into an active balancing provision. Operating reserves avail probable insuring to unpredictability as a financial benefit. The paper presents interdisciplinary literature of the power system engineering, energy economics and regulatory literature, in that these mechanisms are deeply interdependent and have to be structured as a coordinated portfolio and not as stand-alone market products.

The discussion points out that reserve markets should be analysed as stochastic insurance market, the price of congestion, shortage of reserves has to be used to make transmission planning and demand response should be included in the wholesale market symmetrically and supported by credible measurement and verification. The paper also emphasizes the significance of the frameworks of high-resolution, stochastic and network constrained modeling which determine the flexibility value and guide the market design. In general, it is concluded that flexibility needs to be considered as the main power system infrastructure. The electricity markets will then need to transform not only to be institutions trading energy but also institutions that coordinate uncertainty management, making sure the electricity is reliable, efficient, and deeply decarbonated and more variable.