Design of an efficient ancillary services market

Ancillary Services are essential to the reliability and security of power system operation in any competitive electricity market environment. This paper discusses various AS market design options for procuring, pricing and settling Ancillary Services via competitive auctions by an Independent System Operator (ISO). The paper also discusses problems and potential solutions associated with these market design options based on actual experience of operating ISOs. These problems include price volatility and spikes and price reversals for the various components of the Ancillary Services that can create perverse incentives in the marketplace. Further we elaborate on the design that has been proven so far based on practical experience to be the most efficient.