A study of operating reserve procurance in power markets with application of insurance theory: Contract-based v.s. pool-based approaches

In the power markets, the ancillary services are treated as special commodities. Operating reserve is an important commodity in the category of ancillary services, which supports the system reliability against unexpected generator outages. In this paper, we study the procurance of operating reserve via two approaches, i.e. contract-based model and pool-based model. In order to guarantee the availability of reserved capacity and reduce the loss of consumer at generator forced outages, insurance policy is applied. Decentralized optimal decision is adopted. After presenting the math models of the two approaches, it is proven that pool-based approach is more cost-effective and should be adopted in the deregulated power markets.