IEEE Power & Energy Magazine - November/December 2015 - 62

Some of these services, like operating reserve used to
accommodate contingency events and regulating reserve
used to control short-term imbalances, have competitive,
dynamically priced markets in many systems. These services have different costs for different resources and at different times. The market allows for the operator to obtain
the amounts it needs without costly over-acquisition. It also
gives an incentive for resources to efficiently provide that
service even when foregoing energy sales to do so. But many
of the remaining system services do not have competitive
markets. Whether they should, and if so, how they would be
designed, is still an ongoing debate.
Many system services are traditionally provided by central
station power plants with large, spinning generators that are
synchronized with the grid frequency. In contrast, most wind
and PV technologies (as well as battery storage and dc transmission lines) have inverter-based interfaces with the rest of
the power system, making them nonsynchronous with grid frequency. Wind and solar also have an upper limit on available
generation that changes with the weather (variable) and is not
perfectly known in advance (uncertain). In spite of these limitations, however, these new inverter-based technologies can
provide substantial flexibility with fast ramp rates, the ability
to provide energy at any level down to zero output, a capability to inject reactive power at all times (even without wind or
sun), and the ability to quickly interpret system frequency and
respond through fast control. So to emphasize the key point,
renewable resources and other emerging technologies can provide system services, but they may do it differently.
These technologies also differ in their economics. To provide a "raise" reserve service (such as quickly increasing generation to correct for low frequency), a generator must have
some headroom available beyond its current output level.
Conventional plants will often run at a cost-effective economic
output level but will typically have headroom beyond this level
that can be used for emergencies. In contrast, incentives and
free fuel sources encourage wind and solar to maximize their
energy output, and they can operate all the way to their maximum output without reduced efficiency, so this headroom may
not be available unless the wind and solar output is intentionally curtailed. Because of this, even though wind and solar can
provide many system services with high speed and accuracy,
it may be more economical to get some services from conventional units during most time periods.

Energy Markets When Fuel Is Free
Power system operators go through a careful process of
scheduling and starting generators that may be needed for
the coming days and hours (unit commitment). Operators
then inform each generator of the precise level of output that
they should provide in real time (dispatch). These decisions
are optimized to minimize cost while enforcing numerous
unit-specific and system constraints. Most system operators
now include wind generators in this process based on wind
forecasts and energy cost offers.
62

ieee power & energy magazine

The general assumption of competitive energy markets is
that each generator will offer into the market at its marginal
cost of production. The least-cost offers are then selected,
and the market will clear at the marginal cost of the last increment of supply, unless there is scarcity. Usually, all units that
clear in the market are paid this clearing price (not just their
individual offer price), so lower operating cost units receive
a larger profit margin above their variable operating cost that
can be used to offset fixed and capital costs. The generator
that "sets the price" will only cover its variable operating
costs for that period.
The energy markets were originally designed around the
assumptions that additional energy is useful and its price
is determined by the cost of fuel for the marginal unit. But
what happens when more of this energy is from generators
with free fuel, like wind and solar? Generators with low
marginal costs will make low offers, tending to lower the
clearing price in the market. During extreme periods of
excess energy (high generation and low load), the market
price can sometimes be negative because renewable sources
would rather accept a negative price than give up production
tax credits or other sources of revenue, and inflexible generators (such as nuclear and large coal plants) may prefer to continue to operate rather than shutting down. Negative prices
cause generators to pay (rather than be paid) if they deliver
energy to the grid. While the concept of negative prices may
initially seem unusual, it is a logical consequence of "supply
and demand" that reflects the willingness of market participants to alter their actions in response to price signals.
If the energy market mostly consists of renewables,
energy prices may be quite low much of the time, which is
already being observed in parts of Europe. Will energy-only
markets still function as designed in these situations? How
will other generators that are still needed for reliability stay
in business? Rather than matching generation to load, will
we need to match load to available energy? Will resources
be forced to offer costs that are above variable cost to guarantee fixed cost recovery (which is allowed in the Alberta,
Canada, market but not permitted in U.S. markets)? Or will
the payments come from system services markets, capacity
markets, or other side-payments, as we will discuss next?

What Role for Markets?
As shown in a general way in Figure 1, revenues in today's
markets are dominated by energy (kilowatthours), but other
system services are also needed for operational reliability, and in some areas compensation is made for long-term
capacity-payments for being available for coming months
or years to meet long-term reliability targets, even when those
resources might provide little or no energy. Many factors,
including cheaper natural gas and the growth of renewables
with free fuel from the wind and sun, are tending to lower
the average payments for energy. Changes in the generation
mix are also motivating the definition and valuation of system services, explicitly assigning a value to such services.
november/december 2015



Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - November/December 2015

IEEE Power & Energy Magazine - November/December 2015 - Cover1
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IEEE Power & Energy Magazine - November/December 2015 - Cover3
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