Procurement and pricing of operating reserves based on the peak on the peak-load pricing theory

Power industry restructuring presents new challenges for procuring and pricing of operating reserves. Efficient procurement and optimum pricing of operating reserves are important issues to be dealt with in competitive electricity markets. A pricing scheme for operating reserves, which is based on the extended traditional peak-load pricing theory and is compatible with auction-based dispatching in the electricity market environment, is proposed in this paper. Under assumptions that accurate system outage cost is known and reserve capacity price bids by generation companies are consistent with their true costs, both economic operation and system reliability can be simultaneously taken into account in the proposed scheme. It provides useful information to the market participants on the cost and reliability.