Auction design for ancillary reserve products

The precise definition of the ancillary services varies across systems and so is the design of markets for competitive procurement and provision of such services. Ancillary service market designs are based on either a sequential or a simultaneous auction for the different reserve types and may differ with respect to the objective function used by the ISO in the procurement of reserves and the extent to which the ISO is allowed to substitute among reserves types. The only design, which is incentive compatible, is based on a simultaneous auction that clears the market so as to minimize total offered prices (revealed social cost) subject to the hierarchical substitutability constraints. In this design the market clearing procedure is implemented using a linear programming optimization and the market clearing prices for each reserve type are set to the shadow prices corresponding to the demand constraint for each reserve type. Incentive compatibility will induce generators offering reserves to disclose their true capability and marginal cost, thus resulting in a socially efficient dispatch.