Reserve constraints in electricity markets — Effects on large scale integrated consumers

We discuss the impact of reserve constraints on energy prices in co-optimised electricity markets, a precursor to smart grids. These constraints impact energy prices and can lead to price spikes and opaque incentives. We illustrate the theoretical mechanisms through which these occur as well as empirical evidence from the New Zealand electricity spot market from the years 2008 to 2013. We present a case study for a large steel facility who participates in the spot market ancillary service market. We show that this site must act upon an effective electricity price, not a nominal price in order to take the constraints into account. Furthermore, this effective price can be negative implying a positive (local) effect on the grid.