A Risk-Based Equilibrium Analysis of Energy Imbalance Reserve in Day-Ahead Electricity Markets

TL;DR

This paper introduces a stochastic equilibrium model to analyze the impact of the novel energy imbalance reserve product in day-ahead electricity markets, considering risk preferences of market participants.

Contribution

It develops a new long-run equilibrium model incorporating risk preferences and evaluates the effects of the EIR product on market outcomes and fuel procurement.

Findings

In a risk-neutral setting, EIR has minimal impact on market outcomes.

Risk-averse agents show increased fuel procurement with EIR presence.

EIR influences market behavior under risk-averse conditions.

Abstract

Energy imbalance reserve (EIR) product is introduced into the Independent System Operator (ISO) of New England's day-ahead wholesale electricity market to provide a better fuel procurement incentive for generating resources. Different from existing forward reserve products, EIR is a novel real option product, which is settled against real-time energy price rather than reserve prices. This novel product has not been analyzed in the research literature in terms of its effects. In this paper, we develop a stochastic long-run equilibrium model that incorporates the risk preference of generator and demand agents participating in the energy and reserve market in both day-ahead and real-time time frame. In a risk neutral environment, we find that the presence of the EIR product makes little difference on market outcomes. We also conduct a series of numerical simulations with risk-averse generators and demand, and observed increased advanced fuel procurement when the EIR product is present.