Reserve Trading Within Power Purchase Agreements
R. Proctor, B. Fox, and D. Flynn
School of Electrical & Electronic Engineering
The Queen’s University of Belfast
Ashby Building, Stranmillis Road, Belfast, BT9 5AH,UK
Tel: 028 9027 4053 Fax: 028 9066 0723 E-mail: RProctor@sproggy.freeserve.co.uk
Abstract: Power Purchase Agreements pay for provision
of spinning reserve as an auxiliary service at an agreed
rate. This paper presents a new payment method for
reserve based on the marginal market cost of the reserve
and the amount of reserve provided. It will be shown that
the mechanism provides generators with an incentive to
operate reliably and to maintain a satisfactory dynamic
response.
Keywords: Reserve, Trading, PPA
I Introduction
A power purchase agreement (PPA) is a contract fkom a
purchasing agent with an independent power producer
(IPP) for the sale of energy, availability and other services.
Energy payments are made to the IPP to cover the variable
day to day fuel and operating costs. Generally these are
related to an extemal index such as fuel costs to keep the
IPP competitive and to control its profits [11.
The IPP’s non-variable costs are covered by availability
payments, which are designed to provide an extra revenue
to the IPP to meet capital and fixed costs. The availability
payments add incentive to the IPP to be available
whenever generation capacity is required by the system.
This is achieved by arranging within the PPA a fixed
annual payment for achieving a target level of availability.
A penaltyhonus scheme is specified for availability above
or below a set level. It is in a generator’s best interest to
meet its availability target.
Spinning reserve is the spare generation capacity available
within a system that can be immediately called upon for
extra energy in the event of a system power imbalance
such as a loss of generation. Normally this is provided by
Paper accepted for presentation at the International
Conference on Electric Utility Deregulation and
Restructuring and Power Technologies 2000,
City University, London, 4-7 April 2000.
0-7803-5902-;1000/$10.0002000 IEEE.
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spare capacity available on part-loaded generators. The
loading scheme is typically arranged to provide sufficient
reserve to cover a set fraction of the largest infeed on the
system [ 2 ] . If a system event occurs and insufficient
generation reserve is available to cover the required power
demand, then load shedding will occur.
I1 Reserve Payments
Within current PPAs, payment is not normally made for
available reserve, or, if payment is made, then it is under
the terms of the extra services section of the PPA. This
provides little or no incentive for the generators to provide
a reliable and consistent reserve service.
It is proposed here to treat spinning reserve as an ancillary
service, with an explicit payment scheme. The proposal is
to introduce an availability payment for reserve potential
while a unit is committed. The payment would be based
on the marginal cost of reserve. Should a generator loss
incident occur, the emergency reserve delivered by each
unit would be monitored. Payments and charges for the
actual emergency reserve flows could be based on Value
of Lost Load (VOLL). This is justified on the grounds that
the emergency reserve replaces load shedding.
It will be shown that the proposed b e w o r k provides an
incentive to generators to maintain a satisfactory reserve
capability, and to minimise forced outages without
affecting the overall generation expenditure.
I11 Study System
To examine the feasibility of the reserve payment scheme
outlined above, the costs associated with a typical day’s
operation will be studied for a 16-unit system [3] loaded
from 3080 MW to 4250 MW. The operating costs of each
generator are calculated using two incremental costs and a
fixed cost, a. Below the breakpoint m, incremental cost b,
is used and above breakpoint m, incremental cost b, is
used. The generating data are shown in Table 1.
The 24-hour study period provides different demand levels
set at 30-minute intervals, as shown in Table 2. Using an
economic dispatch program the individual generator
loadings and the totaI generation cost can be computed at
each time interval.
 Table 1 Generation Parameters infeeds are operating at full capacity.
Under normal conditions the reserve level is set to cover
loss of a percentage of the largest infeed connected to the
system. This percentage cover, or Reserve Cover Factor
(RCF), varies fiom system to system, but for secure
operation a value of 1 would completely cover the loss of
the largest infeed. This value may be reduced if load relief
is available, such as fiom load shedding, or support fiom
neighbouring systems. The amount of reserve available
fiom each generator is calculated as in Figure 1. It can be
seen that operating a generator at its Maximum
Continuous Rating (MCR) will provide no reserve, but by
reducing the output to a value below the MCR, the unit
will start to provide reserve (R). For the purposes of this
study, generator reserve at loading D is taken as:

Table 2 24-Hour Load Profile

I Interval 1 Load I Interva I Load I Interv I Load 1

The initial ramp in reserve is not significant as the
minimum loading point ( I, ) is always above this ramp-up
section. For this study, the upper reserve limit ( 1 , ) has
been set to a typical value of 20% of the MCR.

Figure 2 shows the real cost of requesting increased

reserve. A natural reserve level exists which is present
even when no reserve is requested. Therefore, the cost of
reserve up to this natural level is zero, and requesting
reserve above the natural level will increase the generation
costs due to re-scheduling.

60
Demand = 4200 MW
2
2 50
1V Reserve Calculations 5
A
,
40

30
Each generator operating under its full capacity will 0
provide some emergency reserve to the system. Even if no a 20
U
reserve is requested from the system, a considerable
10
amount of reserve will be present from part-loaded
generators. The only time when no reserve would be 0
0.4 0.525 0.65 0.775 0.9
present throughout a system would be when all connected
Reserve Cover Factor

.'1:-r\,.
Reserve (h4w) I, = 0.2MCR Fig. 2 Reserve Cost v Reserve Cover

t I, = 0.7MCR
V Reserve Marginal Cost

The Reserve Marginal Cost (RMC) is the theoretical cost

I
associated with the next MW of reserve requested.
Scheduling a small amount of extra reserve and dividing
I Generator
I
I
I
output (Mw) the resultant increase in generation cost by the amount of
added reserve gives a value for the RMC.
4 4 MCR
To obtain the cheapest generation profile to meet the load
Fig. 1 Generator Reserve demand an economic dispatch program is used. The

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 economic loading program accommodates the increase in
reserve cover by either decreasing the loading of
generators not already operating at their reserve limits (I, ),
or by decreasing the largest infeed to reduce the total
reserve required for the system. As there will always be
some reserve within a power system, whatever the
requested reserve level, the RMC for reserve levels below
this natural level will be zero as shown in Fig. 3. The
RMC tends to increase with RCF as more generation has
to operate below full capacity to provide for the increased
reserve requirement.
only operate when necessary and at less than their MCR.
They therefore provide a considerable reserve value to the
system. The cheapest operating generators receive very
little reserve payment, as under normal conditions it is
desirable that they operate at full capacity for the most
economic generation. The largest generating units also
receive payment for reserve, as occasionally they operate
at reduced load levels in order to boost reserve, and to
reduce the size of the largest infeed.
120 4500

Fig. 4 shows the payment per MWh based on RMC, 4000

covering the 24-hour operating period for the 16-unit study =: 0 80

system. It can be seen that the RMC tends to be at higher s3
values when the system is heavily loaded. This is because
expensive generation has to be re-scheduled to provide the
.- 060

5F 0 4 0
3500-3

B
z
desired reserve cover, resulting in higher costs. 2 3000
z
d
020

When a generator is brought on-line, or disconnected, a

000 2500
sharp increase in the RMC results, as shown by the single 1 5 9 13 17 21 25 29 33 37 41 45
peaks in Fig. 3 and Fig. 4. These are caused by large Time (30 minute periods)
generation scheduling changes and the extra fixed costs
associated with bringing new generation on-line. With a
larger power system the steps in RMC would be greatly Fig. 4 Payment per MWh based on RMC
reduced as unit re-scheduling and generation fixed costs
would more readily be absorbed within the greater total
generation cost. Table 3 Generator Payments

1.2 , 1
Unit Energy Income, A Reserve Income, B B
Demand = 4200 MW -%
(E) (E> A
1

s$, Dl

0.5

5 0.4

0.2

0
0.475 0.575 0.675 0.775 0.875 0.975

Reserve Cover Factor

Fig. 3 RMC Cost v Reserve Cover

14 5,108 0 0.00
Table 3 shows the expected income for each generator
15 970 78 8.07
over the test period. The reserve income is calculated as
the product of the reserve provided multiplied by the 16 619 60 9.73
RMC. This product is calculated at each scheduling Total 184,450 2,960
period and totalled over the payment period to produce a
final payment to each generator.

It can be seen fiom Table 3 that the more expensive VI Changing Reserve Limits
generator units with high fixed and incremental costs
receive a considerable reserve payment in comparison to As reserve payments to generators are based on estimated
their energy income. This arises because these generators reserve, the reserve parameters should reflect the actual

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 reserve available as closely as possible. Otherwise, any reserve after a number of events, it may find its reserve
reserve payments would not truly reflect a generator’s true payments greatly reduced. As it is unknown when the next
performance. The only time when a generator’s actual system event will occur, and the reserve parameter re-
reserve provision can be monitored is when reserve is adjusted, this poor performing generator may find itself
called upon, e.g. following loss of another generator. with a reduced income. This should provide an incentive
for generators to provide a satisfactory amount of reserve.
By adopting the proposed reserve payment scheme, the
amount of lost generation and the resulting increase in VI1 Reliability Incentive
output from each remaining generator would be recorded,
allowing the actual dynamic performance of each Currently within a PPA, each generator receives an
generator to be assessed. Then each unit’s response would availability payment to cover its fixed costs and a bonus
be compared with its expected response, as shown in (penalty) payment for exceeding (falling short off) its
Figure 5 , and the reserve parameters adjusted accordingly. availability target. The availability value is usually set to
Therefore, if a generator provides less reserve than match the economic value of the electricity as closely as
expected following an event, its reserve characteristic for possible. The exact mechanism for setting the bonus value
the reserve calculations would be reduced to match. For can vary greatly from system to system.
units exceeding expectation the reserve limit may be
raised. It is proposed here that if a generator should fail then it
should pay for the extra generation costs incurred due to
As the generator reserve parameters are used within the the failure. If load shedding above expected is required
economic scheduling program, any changes in reserve then the extra load lost should be paid for by the generator
parameters would also affect the economic loading at the Value Of Lost Load (VOLL). This payment should
patterns produced from the economic dispatch program. go to the purchasing agent to cover the increased costs
Changes in the loading of each generator should not affect incurred due to the failure.
operating profits if the cost index is functioning correctly,
so that significant profit is not being made on the sale of Table 4 Modified Generator Payments
energy.
Unit 12, Unit 12,
I, = l o % , I, = l o % , B
Unit -%
Znergy Income, A eserve Income, B A
(f) (f)
1 19,551 598 3.06
2 23,879 3 69 1.55
49.8 g, 3 25,717 1 0.00
c
49.75 9) 4 25,717 1 0.00
49.7 5 18,551 108 0.58
49.65 6 21,918 0 0.00
-Actual MW
7
~

49.6 9,994 459 4.60

8 10,020 459 4.58
ol. L 49.55
0 5 10 15 20 25 30 35 40 9 7,568 386 5.10
Time (s) 10 4,992 307 6.16
Fig. 5 Dynamic Response to Generation LOSS 11 5,147 162 3.15
12 2,383 63 2.65
13 2,340 146 6.26
The effect of a change in reserve parameters is 14 5,108 0 0.00
demonstrated in Table 4. Unit 12’s upper reserve limit 15 965 85 8.81
(I,) has been reduced, from 20% of MCR to 10% of 16 614 65 10.57
MCR, reflecting poor performance during a previous I Total 1 184,465 I 3,210 I,
system event. Unit 12 was chosen because of its small
size and relatively expensive payment rates. This caused In most cases, following forced outage of generation, there
regular usage to boost reserve levels, so a change in its will be no load shedding. However, whether load shedding
reserve parameters would affect its loading pattern. It can occurs or not, part-loaded generators will be called upon to
be seen that unit 12’s reserve income has been greatly deliver their emergency reserve. The system is now in a
reduced fi-om E116 to E63. It can also be seen that the vulnerable state, with little or no emergency reserve.
remaining generators’ income has increased accordingly. Thus, a further loss of generation would result in large-
If a particular generator performs badly when providing scale load shedding. The system operator would seek to

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 restore security by scheduling extra generation.
Unfortunately, conventional generation usually requires
several hours to start up. Thus, in the interim, there is a
need for quick-start plant to be brought on-line. This
would allow existing on-line generators to revert to part
load, and system reserve to be re-established.
Quick-start generation, typically gas turbines, has high
running costs. The system operating cost, however
calculated, will increase while this generation is on-line.
There is a case for allocating this extra cost to the
generator whose outage created the reserve shortfall. In
effect, this cost could be deducted from the reserve
payment to the generator. Such a scheme would provide
all generators with an incentive to operate reliably.
VI11 Conclusions
This paper presents a payment scheme within a power
purchase agreement for rewarding generators for provision
of spinning reserve. Each generator would receive a
payment based upon the product of spinning reserve
provided and the marginal cost of reserve. This payment
would be calculated at each re-scheduling period and
summed to produce a single payment to each generator.
The reserve performance of each generator should be
monitored and corrected for changes at each possible
opportunity to ensure fair payment and encourage reliable
operation.
It is proposed that the extra system operating cost incurred
as a result of a generator outage should be met by that
generator. Thus, there should be an incentive for
generators to operate reliably.
IX References
[ 11 Hunt, S., and Shutteworth,G.: ‘Competitionand choice
in electricity’. (Wiley 1997) pp. 109-1 17
[2] Fox, B., and McCartney, A. I.: ‘Emergency control of
frequency in the NIE system’. Power Engineering
Journal, Vol. 2, No. 4, 1988, pp. 195-201
[3] Villaseca, F.E., and Fardanesh, B.: ‘Fast thermal
generation rescheduling’, IEEE Trans. PWRS, 1987,
Vol. 2, No.1, pp. 65-71
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Technical Biography:
Richard Proctor, BEng AMlEE
Richard Proctor graduated from The Queen‘sUniversity of
Belfast (QUB) in 1997 with BEng in Electrical and
Electronic Engineering. He joined the Power Systems
Group in September 1997 to pursue a PhD, sponsored by
Northem Ireland Electricity (NIE). Research interest lies
in the study of power system oscillations and their
damping, as well as reserve trading.
Brendan Fox, BSc PhD CEng MIEE
Brendan Fox joined QUB as a lecturer in 1980, and was
subsequently appointed to a senior lectureship in 1990 and
a readership in 1996. His interests are in power system
analysis, modelling and operation. He has worked closely
with the local supply utility, NIE, on problems related to
operational economics and supply quality. Current
interests include system integration aspects of embedded
generation, including wind farms, and power system
dynamic stability. He was chairman of the Northem Irish
Power Section in 1993/1994, and is currently an honorary
editor of the IEE Proceedhgs Part C (Generation,
Transmission and Distribution).
Damian Flynn, MEng PhD AMIEE MIEEE
Dr Flynn was awarded a Master of Engineering degree in
Electrical & Electronic Engineering at QUB in 1991. He
then pursued a PhD, in collaboration with Parsons Power
Generation Systems Ltd. Subsequently, he took up a
SERChdustry funded research fellowship in the
university to investigate modelling and control of
generating units using neural networks. In 1995 he was
appointed as a lecturer in power engineering. His research
interests lie in the areas of advanced modelling and control
techniques applied to power plant, and investigating the
use of expert systems for monitoring of boiler plant. He is
also interested in the operation and simulation of power
systems, examining issues such as reserve management
and the causes of system instability.