Operating Reserve Demand Curves for the Integration of Variable Renewable Energies in the Chilean Power System

Abstract

When incorporating non-dispatchable renewable sources into an electric power system, it's important to consider how this affects the optimal definition of operating reserves. In order to ensure effective short and long-term investments in new capacity, appropriate price signals must be put in place. The mechanisms used to define the optimal price of new capacities associated with operational reserve must reflect the temporality of the reliability and safety of the electric power system. Society places a high value on electricity consumption, as evidenced by the Value of Lost Load (VOLL). Therefore, the incremental value of reserves that reduce the probability of a loss event (Loss of Load Probability - LOLP) must be greater than zero when reserves are not abundant. To evaluate the adequate reserve requirements that a system needs, operating reserve demand curves (ORDC) are an explicit and dynamic administrative mechanism. They consider multiple sources of uncertainty in the system that cause imbalances between generation and demand, setting a dynamic price based on its contribution to improving the reliability of the system. This provides effective signals of the actual condition of the scenario through its impact on marginal cost. In a market such as the Chilean, introducing this strategy allows operators to increase prices during scarcity events as prices are determined by the marginal cost of the most expensive generation unit operating in the system. Introducing this scarcity mechanism will substantially impact investment incentives, delivering appropriate signals to encourage and support new technologies linked to the new path that Chile is advancing. This paper proposes a methodology to optimally incorporate renewable sources such as wind and sun into systems with hydrothermal characteristics, such as the Chilean one.