Optimal reserve allocation and pricing

Competition among service providers in restructured power systems is encouraged by optimal allocation and pricing of available reserves. We introduce a new methodology for allocating and pricing operating reserves. A modified version of the security constrained economic dispatch is formulated. Network constraints and line losses are considered in the formulation. The optimal spot price for operating reserve is calculated from the Lagrange multipliers of reserve constraints. For security purposes, the generation reserve for local contingencies is allocated separately from that used for contingencies in other control areas. An example of 3-area system is used to illustrate the proposed methodology.