Fundamental Drivers of the Cost and Price of Operating Reserves Marissa Hummon, Paul Denholm, Jennie Jorgenson, and David Palchak National Renewable Energy Laboratory Brendan Kirby Consultant Ookie Ma U.S. Department of Energy NREL is a national laboratory of the U.S. Department of Energy Office of Energy Efficiency & Renewable Energy Operated by the Alliance for Sustainable Energy, LLC This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications. Technical Report NREL/TP-6A20-58491 July 2013 Contract No. DE-AC36-08GO28308 Fundamental Drivers of the Cost and Price of Operating Reserves Marissa Hummon, Paul Denholm, Jennie Jorgenson, and David Palchak National Renewable Energy Laboratory Brendan Kirby Consultant Ookie Ma U.S. Department of Energy Prepared under Task No. SA12.0200 NREL is a national laboratory of the U.S. Department of Energy Office of Energy Efficiency & Renewable Energy Operated by the Alliance for Sustainable Energy, LLC This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications. National Renewable Energy Laboratory Technical Report 15013 Denver West Parkway NREL/TP-6A20-58491 Golden, CO 80401 July 2013 303-275-3000 • www.nrel.gov Contract No. DE-AC36-08GO28308 NOTICE This report was prepared as an account of work sponsored by an agency of the United States government. 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Foreword This report is one of a series stemming from the U.S. Department of Energy (DOE) Demand Response and Energy Storage Integration Study. This study is a multi-national-laboratory effort to assess the potential value of demand response and energy storage to electricity systems with different penetration levels of variable renewable resources and to improve our understanding of associated markets and institutions. This study was originated, sponsored, and managed jointly by the DOE Office of Energy Efficiency and Renewable Energy and the DOE Office of Electricity Delivery and Energy Reliability. Grid modernization and technological advances are enabling resources, such as demand response and energy storage, to support a wider array of electric power system operations. Historically, thermal generators and hydropower in combination with transmission and distribution assets have been adequate to serve customer loads reliably and with sufficient power quality, even as variable renewable generation like wind and solar power become a larger part of the national energy supply. While demand response and energy storage can serve as alternatives or complements to traditional power system assets in some applications, their values are not entirely clear. This study seeks to address the extent to which demand response and energy storage can provide cost-effective benefits to the grid and to highlight institutions and market rules that facilitate their use. The project was initiated and informed by the results of two DOE workshops: one on energy storage and the other on demand response. The workshops were attended by members of the electric power industry, researchers, and policymakers, and the study design and goals reflect their contributions to the collective thinking of the project team. Additional information and the full series of reports can be found at www.eere.energy.gov/analysis/. The authors would like to thank the following individuals for their valuable input and comments during the analysis and publication process: Nate Blair, Chunlian Jin, Michael Kintner-Meyer, Mark O’Malley, Michael Milligan, Krishnappa Subbarao, Keith Searight, Aaron Townsend, and Aidan Tuohy. Any errors or omissions are solely the responsibility of the authors. This report is available at no cost from the iii National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications. Abstract Operating reserves impose a cost on the electric power system by forcing system operators to keep partially loaded spinning generators available to respond to system contingencies and random variation in demand. In many regions of the United States, thermal and hydropower plants provide a large fraction of the operating reserve requirement. Alternative sources of operating reserves, such as demand response and energy storage, may provide these services at lower cost. However, to estimate the potential value of these services, the cost of reserve services under various grid conditions must first be established. This analysis used a commercial grid simulation tool to evaluate the cost and price of several operating reserve services, including spinning contingency reserve, upward regulation reserve, and a proposed flexibility/ramping reserve. These reserve products were evaluated in a utility system in the western United States, considering different system characteristics, renewable energy penetration, and several other sensitivities. Overall, the analysis demonstrates that the price of operating reserves depends greatly on many assumptions regarding the operational flexibility of the generation fleet, including ramp rates and the fraction of the fleet available to provide reserves. In addition, a large fraction of the regulation price in this analysis was derived from the assumed generator bid prices (based on the cost of generators operating at non-steady state while providing regulation reserves). Unlike other generator performance data (such as heat rate), information related to an individual generator’s ability to provide reserves is not publicly available. Therefore, reproducing the cost of reserves in a production cost model involves significant uncertainty. While variable renewables increase the total reserve requirements, the additional operational cost of these reserves appears modest in the evaluated system. Wind and solar generation tend to free up generation capacity in proportion to its production, largely canceling out the net cost of the additional operating reserves. However, further work is needed to address issues, such as down reserves and implementation of fast-response regulation, which were not included in this study. Finally, this analysis points to the need to consider how the operation of the power system and composition of the conventional generation fleet may evolve if wind and solar power reach high penetration levels. This report is available at no cost from the iv National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications. Table of Contents 1 Introduction ........................................................................................................................................... 1 2 Energy and Operating Reserves Costs .............................................................................................. 3 3 Simulation of Operating Reserves Costs ........................................................................................... 5 3.1 Test System Description ................................................................................................................ 5 3.2 Reserve Requirements ................................................................................................................... 6 3.3 Unit Commitment and Dispatch Simulations .............................................................................. 10 4 Cost and Price of Ancillary Services ................................................................................................ 11 4.1 Surplus Ramp Capacity in Energy Dispatch ............................................................................... 11 4.2 Operating Reserve Opportunity Costs ......................................................................................... 14 4.3 Base Case Energy and Reserve Costs ........................................................................................