We develop an analytical model to derive the competitive market equilibrium for electricity spot and reserve markets under uncertain demand and renewable electricity generation. The first-best market equilibrium of the model resembles the result of a centralized co-optimization of the markets involved. We then derive the welfare-optimal provision of reserves. At first-best, cost of reserve capacity is balanced against expected cost of outages. Comparative statics and a numerical application based on German secondary reserve provision imply an increase of reserve provision with a growing share of renewable generation. Furthermore, a growing share of renewable generation decreases the level of reliability as measured in energy not served since required reserves to balance higher expected deviations will be more expensive, resulting in a trade-off between higher reserve costs and costs of energy not served.
Bibliographical noteFunding Information:
The research leading to these results has been partly funded by the European Union Seventh Framework Programme (FP7/2007-2013) under Grant Agreement No. 608540, project acronym GARPUR.
© 2022, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.
- Electricity market
- Electricity reserves
- Renewable energy sources