Abstract

Increasing wind and solar penetration and low natural gas prices have reduced electricity prices in competitive power markets in recent years, while also increasing the relative importance of ancillary services in balancing short-term net load variability. As a result, ancillary service markets are providing a valuable alternative revenue stream for many market participants. Yet, the price dynamics in these markets are still not understood. In this work, we incorporate unit-level ancillary service offer prices and quantities into a production cost model and examine how prices for frequency regulation are impacted by relatively extreme perturbations of several system parameters. Initial offers are first estimated based on limited available public data and are then iteratively calibrated against historic market outcomes. Through a case study of the PJM Interconnection, we find that doubling the natural gas price increases the average annual regulation price by 36%, while replacing all coal generation with natural gas decreases the average price by 42%. Increasing the wind penetration from 2% to 30% in isolation increases the average regulation price by 32%, while further doubling the regulation requirement results in an 84% increase. These price increases can be mitigated by introducing additional battery storage capacity or by increasing offer quantities from hydro and thermal units. Finally, we discuss various modeling challenges that arise when incorporating ancillary services into traditional production cost models. These include poor data availability, inconsistent product definitions across markets, and complex market rules.

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