Efficient allocation of balancing and ramping costs

Electricity market designs must evolve to incorporate efficiently the large-scale penetration of renewable energy sources and demand side participation. Current renewable energy support schemes and fixed tariff systems fail to address two major power system operation issues and therefore create additional system costs. First, unlike other commodity markets, the provision of reserve capacity is required for reliable operation. Second, power system operation is stressed by increasing flexibility requirements. One way to reduce these costs is to share the costs of ramping and reserve capacity between consumers, producers and the system operator. We present a market mechanism that reduces the cost of reserve capacity and the cost of ramping in a Pareto-efficient manner. Simulation studies demonstrate the cost reduction that this mechanism achieves as compared with a benchmark approach.