University of California Energy Institute
Joint Energy and Reserves Auction with Opportunity Cost Payment for Reserves
- Author(s): Oren, Shmuel S.
- Sioshansi, Ramteen
- et al.
System operators in the electricity industry are required to procure reserve capacity to deal with unanticipated outages, demand shocks, and transmission constraints. One traditional method of procuring reserves is through a separate capacity auction with two-part bids. We analyze an alternative scheme whereby reserves are procured through the energy market using only energy bids, and capacity payments are made based on a generator's implied opportunity cost. By using the revelation principle, we are able to derive the equilibrium bidding function in this market and show that generators have a clear incentive to understate their costs in order to capture higher capacity rents. We then give a numerical example for a special case and examine the effect of the equilibrium bidding behavior on the generators' total revenues and on the energy payments.