Addressing Imbalance Risk with Reserves and Flexibility Options: An ERCOT-like Case Study

TL;DR

This paper compares Flexibility Options and traditional reserves in an ERCOT-like case study, showing both manage imbalances effectively, but Flexibility Options offer better risk management and revenue stability.

Contribution

It introduces and evaluates Flexibility Options as a novel market product, analyzing their economic value, settlement scheme, and impact on system flexibility and operator revenue.

Findings

Both products effectively manage system imbalances.

Flexibility Options provide superior risk management.

Flexibility Options maintain adequate system operator revenue.

Abstract

As the role of variable renewables in electricity markets expands, new market products help system operators manage imbalances caused by uncertainty and variability. Whereas work in the last decade has focused on constructing demand curves for central procurement of those products, little attention has been paid to designing their settlement scheme and understanding the connections between the economic value of these products, the schedule of variable resources, and the cost of flexibility. In this article, we compare a new product called Flexibility Options, which addresses these gaps, with a traditional reserve product using a case study similar to the 2019 Texas (ERCOT) system. Our findings suggest that both products are equally effective in managing imbalances, but Flexibility Options have superior risk management properties and keep the system operator revenue adequate.