Allocating Costs of Ancillary Services: Contingency Reserves and Regulation

SUMMARY In general, the costs of the real-power ancillary services (spinning rese rve, supplemental reserve,and regulation) amount to several percent of the wholesale cost of electricity. These costs aretypically recovered from transmission customers on the basis of a very simple billingdeterminant—MWh of energy. However, hourly ener gy use has nothing to do with the factors thatrequire contingency reserves and regulation. Because of the high cost of th ese services and the possible ine quities in the current system usedto charge transmission customers for these services , we collected and analyzed data on alternativecost-allocation methods. For contingency reserves, we focused on the number and size of forcedoutages, the sizes of the large generators online each hour, and system load. Fo r a particular controlarea, we obtained hourly data on the output of the large generating units plus the flows across themajor interties, the number and magnitude of forced outages, th e amounts of contingency reservesrequired and acquired, and the prices of spinning and supplemental re serves. We used these data todevelop and test alternative ways to assign contingency-reserve costs to individual generators.Although retail customers ultimately pay all the costs of electricity production, transmission, anddistribution, substantial efficiency gains might be realized by, in the first instance, charginggenerators for reserves. Charging generators for contingency reserves gives generator owners andinvestors incentive to optimize the tradeoff between higher equipment and maintenance expensesversus fewer forced outages (and therefore lower costs for contingency reserves). Therefore, werecommend a method that assigns these costs on the basis of the number and size of forced outagesand the sizes of the large generators online each hour. Figure S-1 shows how different generatorswould fare if charged for reserves on the basis of these two factors. For regulation, wefocused on the standarddeviation of 1-minutefluctuations for individualcustomers. This methodcharges individual loads(and, in principle, individualgenerators) on the basis oftheir contribution to theoverall variability of systemload. Figure S-2 shows thatindividual loads varyenormously in their relativeuses of regulation andenergy. The results of theseanalyses suggest that theelectricity industry should