Value of demand flexibility on spot and reserve electricity markets in future power system with increased shares of variable renewable energy

Abstract The growing share of variable renewable energy (VRE) generation and the reduction in conventional power plant capacity creates challenges for power system operation. Increased variability of production causes increased reserve requirements while the number of reserve providers is reduced. For this reasons, power systems' flexibility is a major topic of research nowadays, and electricity demand is considered one of the most valuable flexibility sources. This paper analyzes the impacts of demand flexibility participation in spot and reserve markets in the German power system in 2030. We model the power system dispatch with and without reserve requirements using a partial equilibrium linear programming model, BalmoREG, to quantify the cost of reserves, the value of demand flexibility, and the optimal allocation between the spot market and reserve market. We find that the costs of providing reserves add 0.6–8.6% to the total system cost in the German 2030 power system. According to sensitivity studies, the cost of reserve provision increases substantially with reduced baseload shares or increased VRE shares, while transmission opportunities to neighboring countries reduce the cost. The modelled electricity price is especially sensitive to the addition of reserve requirements in situations of either very high VRE or very low VRE production.