Pricing Reliability: A Probabilistic Approach

May 1999

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This paper proposes the allocation of operating reserve in power systems through competitive capacity markets using a probabilistic approach. The insurance features of operating reserve are used to derive a valuation model that is analytically consistent and reflects the economic value of increased reliability to customers. The model can be expressed in the form of a demand curve for operating reserve. This curve can be used in auction-type capacity markets to determine the amount of reserve to be provided and its trading price.

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