Designing an integrated combinatorial auction for energy and reserves: An experimental investigation in market design

Electric power systems require reserves---among other ancillary services---to supply energy with reliability and stability. Reserves are exogenously determined according to reliability and quality criteria, complicating the question of how to price reserves. In addition, since generation capacity can be used to provide energy or reserves, demand for reserves competes with demand for energy for a given set of generation resources. Thus we need to consider the interrelatedness of these markets and examine both as a whole. Here we present three alternative market designs for energy and reserves in a wholesale electric power market: A design of sequential markets for energy and reserves, with two-part pricing for reserves; a design of sequential markets with implied opportunity cost pricing for reserves; and an integrated combinatorial market for energy and reserves with implied opportunity cost pricing for reserves. We compare their properties in a controlled environment and find that the sequential markets with two-part pricing for reserves are highly sensitive to competition intensity.