Welfare assessment of decentralized pricing of operating reserves

Operating reserves are generally priced without explicit consideration of the value of reliable power supply to the individual consumer. Though economic theory suggests the allocation of services according to its individual valuation, missing netting of imbalances or strategic behavior of market participants make the implementation of decentralized pricing schemes for reserve capacity is advantageous in terms of welfare gains. In this paper, we assess, in a simulation study, different possible decentralized approaches to price operating reserve capacity. Using insurance theory we evaluate the advantages of demand side elasticity and differentiation in power quality. Our assessment covers spatial and temporal system characteristics, and strategic behavior of generators and loads. We find that the individual valuation of the worth of reserve capacity does not create significant losses in terms of social welfare and supports the economic efficient allocation of reserve capacity. Therefore it serves the economic desirable market property of Pareto efficiency. However, new decentralized market designs for pricing operating reserves have to ensure truthful announcement of preferences for reliability by the demand side.