Spinning Reserve Pricing via Security Instruments in Competitive Electricity Markets

In new environment of restructured electric power markets, ancillary services should be procured via risk hedged mechanisms. Spinning reserve is an ancillary service that may be needed, or may not, for the purpose of reliability in power systems. Option contracts are such security instruments which can guarantee the risks for ancillary services contracts. Competition may imply electricity spot price spike, in the case of supply shortages and high variations in demand. To facilitate perfect competition, exotic option contracts in ancillary service markets will consequently induce an optimal level of reliability in power systems. This paper focuses non-standard or exotic options; the so-called reliability spread options that may present a basic challenge to the quantitative risk management in ancillary service markets.