Renewable Energy 171 (2021) 1097e1114

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Renewable Energy
journal homepage: www.elsevier.com/locate/renene

The role of frequency regulation remuneration schemes in an energy

matrix with high penetration of renewable energy
Claudio A. Agostini*, Franco A. Armijo, Carlos Silva, Shahriyar Nasirov

n
Facultad de Ingeniería y Ciencias, Universidad Adolfo Iba ~ ez, Chile

a r t i c l e i n f o a b s t r a c t

Article history: Renewable energies (RE) in Chile and around the world have experienced outstanding growth in recent
Received 22 September 2020 years. However, RE technologies such as solar photovoltaic and wind generate an imbalance between
Received in revised form generation (offer) and consumption (demand) because of their intermittent and variable nature.
18 February 2021
Moreover, RE’s natural variability makes it necessary for conventional technologies to play a significant
Accepted 28 February 2021
role in adjusting for the imbalance in the electric system frequency. As variable RE penetration grows, the
Available online 4 March 2021
need for frequency regulation will increase and, depending on how those higher costs are financed, this
could lead to a disincentive to invest in conventional plants that provide that service.
Keywords:
Renewable energy
In this paper we study the impact of increased photovoltaic energy penetration, the leading RE in
Frequency control Chile, on the profitability of different conventional generation technologies. Specifically, we analyze the
Ancillary services role that the frequency control remuneration mechanism has on that impact. For this purpose, four
Chile different solar photovoltaic penetration scenarios are simulated in Chile’s Northern System, comparing
two payment criteria for frequency regulation services: i) a cost-based pricing system whose payments
relate to the incurred costs and ii) a market-based pricing system where the marginal cost of providing
the services is paid. The results show that as installed photovoltaic capacity increases, the average
marginal cost of energy (operation cost) decreases due to a displacement of more expensive power
plants, but at the same time, investment cost may increase. In the long run, contract prices change as a
result of falling operational costs and rising investment cost, resulting in changes in the profitability of all
technologies. Finally, while both cost-based and market-based systems reward the ability to regulate
frequency, the technologies performing the regulation receive different payments for the service,
affecting both their profitability and the incentives for investment.
© 2021 Elsevier Ltd. All rights reserved.

1. Introduction
Chile is undergoing a remarkable energy matrix transition to-
ward a system with a high penetration of RE. In fact, the net
installed capacity of renewables, excluding large hydro, reached
24.8% of the energy matrix in 2020, exceeding by far the most
optimistic predictions. In addition, there are currently 35 GW in RE
projects approved by the Environmental Impact Evaluation System
(SEIA) ready to begin construction, 90% of which are based on solar
photovoltaic and wind technologies. These projects represent an
increase of six times the current RE capacity, which will lead to the
* Corresponding author.
E-mail addresses: claudio.agostini@uai.cl, agostini@umich.edu (C.A. Agostini),
franco.armijob@gmail.com (F.A. Armijo), c.silva@uai.cl (C. Silva), shahriyar.
nasirov@uai.cl (S. Nasirov).
need for a greater energy margin in the system due to the vari-
ability and intermittency of some of the renewable technologies.
These RE technologies do not contribute to the inertia of the
system, which challenges its safety when facing variations in de-
mand or generation. Wind energy comes from intermittent sources
that do not ensure a constant supply of energy. Therefore, it is
necessary to have backup mechanisms that are able to respond
quickly. Photovoltaic energy is more predictable than wind, but it
can be affected by unexpected changes in the weather. Despite the
variability of RE resources and potential imbalances created be-
tween generation and load, the electrical system must work
consistently at the same nominal frequency, which is 50 Hz in Chile
[1,2]. Electrical systems deal with this challenge by establishing a
procedure to control the frequency and correct imbalances be-
tween the power generated and the power demanded.
Photovoltaic and wind energy technologies can perform fre-
quency control but are considered less suitable candidates for this

https://doi.org/10.1016/j.renene.2021.02.167
0960-1481/© 2021 Elsevier Ltd. All rights reserved.
C.A. Agostini, F.A. Armijo, C. Silva et al.
role, which requires decreasing energy injection into the system
when requested to ramp down, and, even more difficult, main-
taining a reserve margin permanently to increase generation when
the system needs to ramp up. For this reason, electrical systems still
mostly rely on conventional sources, such as hydro, to provide
regulation. This is especially challenging in systems with high
penetration of intermittent and variable energy technology, which
requires the system operator to have a greater margin either in
generating plants that can vary their output more quickly or in
energy storage mechanisms that can vary their generation almost
instantly [3e5].
There is a growing literature devoted to analyzing different
options to procure and remunerate ancillary services, such as fre-
quency regulation, in wholesale electricity markets with high
integration of RE generation into existing grids. In practice, three
procurement mechanisms are usually used to compensate the
provision of ancillary services: compulsory provision with a regu-
lated or fixed price, bilateral contracts, and market-based pro-
curement [6e8]. Under compulsory provision, generators pay a
pre-determined fixed price for frequency services, which is calcu-
lated based on the opportunity cost that a service provider has from
forgoing the energy market [9]. This type of design has been
implemented in many emerging markets, including Chile [10,11],
Brazil [12], Argentina [13] and others [12,13]. In the case of bilateral
contracts, there exists a contract between the system operator and
the service provider. Alternatively, ancillary services are controlled
by the system operator but procured by market participants. For
instance, in ERCOT (Electric Reliability Council of Texas), market
participants are allowed to self-provide ancillary services [14],
while New Zealand and France are among the countries using
bilateral contracts to compensate ancillary services.
Market-based-procurement mechanisms for ancillary services
are relatively new and have been mostly implemented in advanced
markets [8]. In the academic literature, most of the research dis-
tinguishes between two different procurement approaches for the
provision of market-traded ancillary services that are commonly
used by Independent System Operators: optimization dispatch and
sequential dispatch [15]. The former approach consists of an “in-
tegrated” market design where energy and ancillary services are
simultaneously cleared in a joint market [16] and has been imple-
mented in most of the U.S. markets, including Pennsylvania-New
Jersey-Maryland Interconnection (PJM), New York ISO (NYISO),
New England ISO (ISO-NE), and California ISO [17]. The latter
approach involves a sequential clearing of energy and ancillary
services where energy is cleared first in an energy-only market
(power exchange) and the ancillary services are cleared in a sepa-
rate market (balancing market) [18]. This approach is used in many
European markets such as Spain, Italy and Nordic countries [18,19].
The literature recognizes two distinct approaches within what can
be considered market-based procurement. The first is a cost-based
pricing mechanism, which may use auctions and tenders but are
constrained by the estimations of the costs of providing the service,
similar to the systems implemented in the United States. The sec-
ond is market-based pricing, which allows the market equilibrium
between bids and service requirements to define prices and allo-
cations, similar to the systems implemented in Europe.
Until 2016, the operation of the Chilean electricity market did
not explicitly recognize the ability to regulate frequency as an
attribute. Only power and energy supplied were traded, which
implied that frequency regulation was provided using a rigid
scheme by generators. However, the importance of frequency
regulation led the National Electric System Coordinator (CEN) to
modify its economic incentive system and enact a new regulation
in January 2020 providing remuneration mechanisms for partici-
pants of the frequency regulation service. The new regulatory
1098
Renewable Energy 171 (2021) 1097e1114
framework allows the demanding generators or other providers d
whichever presents the lowest cost d to provide the service of
frequency regulation, thus lowering the system costs. It also
established that the costs associated with additional maintenance
and fuel consumption together with the necessary investment to
provide the frequency regulation service should be paid.
The main problem is that as RE penetration increases in the
electrical system the need for ancillary services such as frequency
regulation also increases, but due to the lower energy prices, the
incentive to invest in plants that provide frequency regulation may
vary. RE plants generally introduce a downward price signal in
energy markets because of the displacement of higher variable-cost
thermal plants [20] with zero variable-cost plants, such as photo-
voltaic and wind technologies. As a result, this reduces the in-
centives to invest in conventional thermal and hydro plants by
decreasing their profitability [21]. The increase in RE energies can
cause an increase in the gap between incentives to invest in flexible
units and the need for these units, which would eventually lead to a
lack of flexible energy, even to the point where security of supply
would be at risk [22].
In the academic literature, the analysis of ancillary services (AS)
to support renewable energy integration in worldwide power
systems has focused either on technology-based balancing mech-
anisms or on the design of the overall AS markets, usually by
examining individual case studies and comparisons of different AS
markets worldwide. Recent and relevant examples related to
technology-based studies are Li [23] and Peng [24] that describe
grid frequency regulation in systems with large scale wind inte-
gration, and Ostergaard [25], who examines the possibility of wind
small-scale CHP hybrid power plants to provide frequency and
voltage control regulations; Mokadem et al. [26], who discuss the
role of wind turbine generators in supplying the primary frequency
regulation; Craciun et al. [27], who demonstrate the capability of
the large-scale solar PV plants to participate in the primary fre-
quency regulation; Faria et al. [28], who examine the role of the
demand response and distributed generation based Virtual Power
Producer (VPP) to provide both energy and reserve regulation; and
Maeyaert et al. [29], who analyze the application of battery energy
storage systems for performing ancillary services in distribution
grids.
There are also studies evaluating the overall market designs for
AS markets. For example, Banshwar et al. [13] presented a short-
term market design and an efficient clearing mechanism for en-
ergy and ancillary services in deregulated market structures
considering both conventional and renewable power generation.
They propose a payment mechanism for the power units offering
their capacity in the energy market and ancillary services market.
In a complementary study, Banshwar et al. [12] conducted a
comprehensive analysis of different market designs of AS in
developed and emerging economies. Although applications of
ancillary services in the power systems have been studied in the
literature, to the best of our knowledge, no study has compared the
remuneration mechanism of ancillary services between a tradi-
tional compulsory cost-based system and a market-based system.
Furthermore, the market-based provision of ancillary services
has been tested in developed economies, and its benefits have been
discussed only in that context. However, those conclusions cannot
be extended to the power systems in Chile and in South America as
these economies still lack some of the main features necessary to
establish a market-based system. Most of the electricity markets in
the region do not explicitly recognize the ability to regulate these
services as an attribute and include them as a compulsory provi-
sion. Over the last few years with the increase in variable renewable
generation, the traditional compulsory provision for ancillary ser-
vices has been criticized in the literature due to the several
C.A. Agostini, F.A. Armijo, C. Silva et al.
technical and economic inefficiencies it can potentially generate
[6]. For this reason, a market-based mechanism for procurement of
these services may become necessary to encourage the individual
participants in the market to provide them.
With the purpose of introducing a market-based mechanism for
ancillary services, this paper presents a simple unit commitment
(UC) model that determines simultaneous provision of energy and
ancillary services in the Chilean electricity market. In particular, the
study compares the remuneration of ancillary services under a
compulsory mechanism with a market-based system with the
objective of quantifying the economic impact on new energy pro-
jects and thus identifying potential disincentives to invest. In this
sense, this work aims to determine which would be the best so-
lution to the existing trade-off between the need for frequency
regulation and investment in the context of high RE penetration.
Even though the energy market simulated in the present study
might appear situation-specific to Chile, we believe that this study
could be particularly relevant for other emerging economies in
South America, all of which have similar technical characteristics
and regulations. Besides, addressing this question is a valuable
contribution to the literature as other emerging economies are
trying to implement market-based regulation for the provision of
ancillary services to handle the variabilities and uncertainties in the
grid as a result of the increasing penetration of renewable energies.
The results of the analysis may also be particularly relevant for
energy regulation authorities considering the implementation of a
market-based mechanism for the procurement and payment of
ancillary services.
The rest of the paper continues as follows. Section 2 describes
the electricity market in Chile. Section 3 explains the proposed Unit
Commitment model for the study. Section 4 describes ancillary
services, with an emphasis on frequency regulation. Section 5 de-
scribes the methodology used and the different scenarios that are
simulated. Section 6 discusses the results obtained under the two
methods of compensation for frequency regulation. Finally, Section
7 concludes with policy implications.
2. Electricity market in Chile
Chile’s electricity market, as in most countries, is divided into
three segments: generation, transmission and distribution. While
the transmission and distribution segments were defined as regu-
lated monopolies, the generation segment was established as a
competitive market to incentivize investment and to minimize the
operation costs of the system.
The market structure for generation is a mandatory pool with
audited generation costs and a spot wholesale market that is
exclusive for generators. This structure is complemented by bilat-
eral financial contracts to reduce energy price uncertainty. The spot
market is established according to a centralized dispatch system.
Generating companies send their operating variable costs to the
operator, who dispatches the generating units on merit order based
on their variable costs. The energy spot price corresponds to the
cost of the unit with the highest variable cost in operation, which is
the one that would meet an increase or decrease in demand. During
the peak demand hours, the system defines the marginal cost of
providing an additional unit of capacity, which is charged to loads
and paid to the generator that can provide such capacity. This
charge corresponds to the availability to provide the service, which
is possible through the installation of capacity and is a stimulus to
the sufficiency1 of the electricity market. The capacity is paid based
1
Sufficiency: attribute of an electrical system whose facilities are suitable to
meet its demand.
1099
Renewable Energy 171 (2021) 1097e1114
on the contribution of each plant to the aggregate capacity offer in
the peak period.
Generator companies, in addition to being able to sell energy
and power, also make long-term financial contracts with their
customers. There are two types of customers who consume energy
and power: free customers and regulated customers. Free cus-
tomers have a consumption greater than 5 MW and their contracts
are a product of the unrestricted negotiation between the parties.
Regulated clients have a consumption less than or equal to 2 MW
and pay a regulated energy price to the distribution company
having a public service distribution concession in the area where
they are located. Customers between 5 MW and 2 MW can choose
to be free or regulated.
Electricity generators may have supply contracts with large
consumers or with distribution companies, which supply energy
and power to regulated customers. The former are contracts freely
negotiated with large consumers who are usually big industrial and
mining customers, and the latter correspond to contracts signed
with distributors that result from public, open, and transparent
tenders for the energy supply required by distributors.
3. The unit commitment model
The CEN uses a Unit Commitment model to determine which
units generate electricity in order to meet the daily demand at the
lowest cost. The process is carried out as an optimization problem,
considering the technical characteristics of each unit and the reg-
ulatory aspects of the market. The goal is to minimize the total cost
of operation, which is defined as the sum of production, start-up,
and stopping costs, complying with the environmental and tech-
nical norms and system security guidelines.
More specifically, the Unit Commitment model considers all the
technical requirements of the electrical system: reserves to regulate
frequency, technical minimums, minimum operating and shut-
down times, start-up and stop costs, among others. The treatment
of wind and photovoltaic plants is deterministic considering four
generation profiles for wind power plants, depending on their
location, and a single profile for photovoltaic generation because all
plants are located in almost the same geographical longitude.
In the empirical analysis, we consider the Unit Commitment
model with actual data for Chile’s Northern Subsystem’s2 gener-
ating plants, modelling their costs in a staggered manner. For this
purpose, we use the specific consumption declared by the com-
panies for each of their generating units, which depend on the
generation level.
The variable cost of generation for each unit is calculated as
follows:
CVi;k ¼ CEi;k ,CCi þ CVNCi (1)
where CVi;k is the variable cost of operation for unit i, operating in
the power range of the step k; CEi;k is the specific consumption of
unit i, operating on step k; CCi is the cost of fuel of unit i;
and CVNCi is the non-fuel variable cost of unit i.
In the mathematical modeling that was carried out, each unit in
the Northern Subsystem was represented by a piece-wise cost
curve (from its specific consumption and fuel cost). Each segment is
modeled as if it were a separate plant with a fixed specific con-
sumption, implying a constant variable cost. All simulations were
performed for four different photovoltaic penetration scenarios,
2
Chile has one large interconnected system, but it is operated considering three
subsystems. The Northern Subsystem mostly provides electricity to mining and
mineral industries in the northern part of the country.
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

using the demand projections and fuels considered by the energy

regulator CNE (National Energy Commission). The Unit Commit-
ment model is formulated as a mixed whole linear programming
optimization problem and presented in more detail in the
Appendix.
As previously mentioned, the objective function is to minimize
total operating costs. Power production costs and the costs incurred
in turning power plants on and off for the entire time horizon are
minimized. The costs of enabling plants to participate in primary
and secondary frequency control and investment in Battery Energy
Storage Systems (BESS) for primary control are also considered.

4. Ancillary services
Fig. 1. Frequency Control Scheme.
All electrical power systems are subject to contingencies, which Source: Own elaboration.
can be system failures or untimely variations in demand, gener-
ating differences between the nominal values of different electrical
magnitudes and the actual values for both voltage and frequency. If
these deviations are not controlled, they can cause failures, making There are two costs incurred by the units involved in frequency
certain equipment unusable and even producing widespread sys- regulation. The first and main one is typically referred as the “op-
tem failure ending in a blackout. Ancillary Services (AS), which are portunity cost” and it represents the impact in the operation cost of
the technical resources necessary to support basic energy and po- the generator caused by it providing regulation to the system. If the
wer services, are delivered to consumers and give a certain quality generator is asked to decrease its output, then this cost would
and safety to the power transmitted from generators to the load. correspond to the difference between the marginal price and the
Each country has its own definitions of what AS are and, therefore, variable cost of the unit. If the generator is asked to increase its
which services fall into this category. Electric frequency regulation output, then this cost would correspond to the direct expense of
is one of the AS that all countries have. producing the required energy to provide the regulation. The sec-
ond cost reflects the greater maintenance resulting from increased
4.1. Frequency control mechanical wear by the automatic or manual adjustments of the
unit providing the regulation.
Frequency control is the set of actions aimed at keeping the
electrical frequency of the system within the established limits. In
Chile the nominal value of the frequency is 50 Hz, and it must be
4.2. Ancillary services in Chile
kept between 49.8 and 50.2 Hz. Frequency variations can cause
problems and affect the operation of charging equipment, such as
In Chile, the regulation defines AS as: “technical resources pre-
motors, whose rotation speed depends on the feed frequency.
sent in the facilities of generation, transmission, distribution, and
Frequency variations can also damage generation equipment, and if
non-price-regulated customers that each electrical system must
the frequency is out of bounds it can also cause a system blackout.
have for the coordinated operation of the system.” In particular,
Frequency control is classified into three levels depending on the
“Ancillary Services are those services that allow at least an
response time:
adequate frequency control, voltage control, and service recovery
Primary Frequency Control (PFC): This is the control action
plan to be carried out, both under normal operating conditions and
exerted quickly on the frequency of the electrical system and
in the face of contingencies.” Payments and charges for the provi-
operates within 2e20 s.
sion of these services are specified in a regulation enacted in 2012,
Secondary Frequency Control (SFC): This is the manual or
called Supreme Decree 130 (DS 130), establishing the obligation to
automatic action intended to compensate for the final frequency
provide such services when requested.
error resulting from the PFC action, allowing participating PFC
In 2016, the “New Transmission Law” [30] established auctions
generating units to restore their primary reserve. The specific
and tenders as a possible mechanism to procure the services, and if
technical standard is that the response time of this action is on the
the conditions that ensure a competitive market could not be
order of several minutes d not to exceed 15 min d and must be
guaranteed, then direct assignment would be used. The allocation
sustainable for at least 30 min.
mechanism ended up being market-based, allowing some leeway,
Tertiary Frequency Control (TFC): This action seeks to return to
but forcing bids to be within a margin of the estimated cost of the
the economic allocation of load, ensuring sufficient energy to meet
service to configure in practice a cost-based pricing mechanism.
demand. It also aims to restore secondary reservation levels to the
In what follows, we describe the remuneration method under
system. It operates in time margins greater than 15 min and must
the existing cost-based pricing and then under the proposed mar-
be maintained for at least 2 h.
ket remuneration system.
Fig. 1 shows how these three types of control work to regulate
variations in the frequency of the interconnected system. Primary
control is the first to act, limiting frequency deviation with the
purpose of keeping it within established limits. The secondary 4.2.1. New regulation of AS (cost-based pricing)
control then acts by restoring the frequency to its nominal value The cost-based pricing establishes that the CEN must identify
and releasing the primary frequency control, so that the primary the existing and available resources in the system and determine
control is available for another event. Finally, tertiary control comes the installation and/or enablement of the necessary equipment to
into operation, freeing up the secondary reserve and resolving the meet the security and quality of service defined in the Ancillary
deviations between generation and consumption considering an Services Technical Standard [31]. The regulation recognizes the
economic operation. following resources available in the system:
1100
C.A. Agostini, F.A. Armijo, C. Silva et al.
1. Capacity to generate active power of each generating unit and
the components or equipment connected and/or synchronized
to the system, measured in MW.
2. Injection or absorption capacity of reagents of each generating
unit and the components or equipment connected and/or syn-
chronized to the system, measured in MVAR.
3. Autonomous starting capacity of each generating unit inter-
connected to the system.
4. Connected power of all users who are supplied from the
respective system, distributors and free customers not subject to
price regulation, measured in MW.
Similarly, six general categories of AS are identified that must be
remunerated:
1. Primary and Secondary Frequency Control.
2. Voltage Control: actions intended to maintain the operating
voltage of the bars of the Interconnected System within the
permissible levels, which are performed by equipment that in-
jects and/or absorbs reactive power.
3. Operation at a variable cost higher than the marginal cost of the
system. For security reasons, it is sometimes necessary to
operate units at costs that are higher than the marginal cost and,
therefore, the operation of these units will not pay their costs
with the revenue received by energy sales.
4. Installation/enabling of service recovery equipment: actions to
restore power in areas affected by a total blackout or partial
blackout, in the shortest possible time, in a safe, reliable, and
organized manner.
5. Operation of service recovery equipment: these are the oper-
ating costs incurred by generators in the service recovery
process.
6. Automatic or manual load detachment: in the event of a con-
tingency preventing generation from satisfying the demand,
user loads are automatically or manually disconnected to ach-
ieve a balance between generation and demand without
compromising the security of the system.
4.2.2. Remuneration for frequency control under cost-based pricing
scheme
The cost-based pricing system states that the CEN should
determine the remuneration that each company receives for in-
vestment costs, additional maintenance, and additional fuel
incurred by each generation unit participating in primary or sec-
ondary frequency control.
To provide the frequency control service, companies must
declare the following costs:
1. Investment costs of the installation and/or enablement of the
equipment necessary for the generation units to participate in
the primary or secondary frequency control, expressed in USD.
2. Additional annual cost of maintenance, expressed in USD/year.
3. Cost of the additional fuel incurred by the generating unit when
participating in primary or secondary frequency control,
expressed in USD/MWh.
The procedure called “Remuneration of Ancillary Services” de-
termines the monthly remuneration received by companies that
carry out the frequency check, according to the following formula:
ACIHJ þ CAAMJ
RSRFJ ¼ þ CAAJ (2)
12
where
1101
Renewable Energy 171 (2021) 1097e1114
RSRFJ is the monthly remuneration for the installation or elec-
trical equipment j for the provision of frequency regulation
service, expressed in USD.
ACIHj is the annuity of the investment cost corresponding to the
installation or electrical equipment j providing the service,
expressed in USD/year.
CAAMj is the additional annual cost of maintenance of the fa-
cilities corresponding to the installation or electrical equipment
j providing the service, expressed in USD/year.
CCAj is the additional fuel cost, corresponding to the installation
of the electrical equipment j due to the provision of the service
during the period of operation, expressed in USD.
The total amount necessary to pay the remuneration for fre-
quency control is provided by all the companies that injected en-
ergy into the system during the corresponding period of operation,
including those that provided the service. The payment corre-
sponding to each company is calculated on a pro rata basis of their
physical energy injections. The regulation also considers a payment
for spinning reserves, in case the reserve is not distributed in a
homogeneous turn between the generating units that operate
during the period of operation. The “Ancillary Services Remuner-
ation” procedure considers the following method for calculating
the money reserve compensation (MRE).
The MRE is first calculated for the generating units that partic-
ipated in the period, using the following formula:
MREj;h ¼ Pmaxj  Pdespj;h (3)
where
MREj,h is the effective reserve margin of generator unit j at hour
h, expressed in MW.
Pmaxj is the maximum power of the generating unit j, in MW,
subject to technical and system safety constraints.
Pdespj,h is the average clearance power verified in the actual
operation of the generating unit j at time h, expressed in MW.
Once the MRE of each unit has been obtained, the Total Spinning
Reserve (RGTS) is determined for each hour of the operating period.
Then, for each generating unit in operation, the Spinning Reserve
Share (CRG) is determined for each hour of the operating period.
For each hour of the operating period and for each generating
unit, its Spinning Reserve Difference (DRG) is determined as the
arithmetic difference between its CRG and MRE. Then, its DRG is
valued at the difference between the hourly marginal cost on the
corresponding injection bar and its own current variable operating
cost. For each generating unit, its Spinning Reserve Value (VRG) is
determined, in the period of operation, integrating the valuations of
its hourly DRGs on the total hours of the operating period.
Finally, for each generating unit, its remuneration or payment
per reserve is determined according to the following criterion: if its
VRG is negative, then the remuneration corresponds at most to the
absolute value of its RVT, whereas if its VRG is positive, its remu-
neration corresponds to its VRG on the pro rata basis of those
positive values. The total amount that each generating unit pays
cannot exceed its RVT. This determines the total payment and the
total remuneration per spinning reserve as the minimum value
between the absolute value of the sum of negative RVTs and the
sum of positive RVTs in the period of operation.
4.2.3. Remuneration for frequency control under market-based
pricing scheme
Consistent with the frequency control remuneration established
in the AS regulation, the remuneration mechanism proposed under
C.A. Agostini, F.A. Armijo, C. Silva et al.
a market system maintains the investment and/or enablement
payments necessary to participate in frequency control but mod-
ifies the payment by spinning reserve of units participating in
primary or secondary frequency control. The remuneration system
under the cost-based pricing mechanism for the spinning reserve
mechanism only pays the opportunity cost, and an estimation of
additional maintenance costs incurred by a generating plant
providing greater spinning reserve than the rest. The proposed
market system pays the highest accepted bid price as a clearing
price in each hour to all the generating plants that provide the
regulation service. The price paid by the market system corre-
sponds to the marginal cost of providing spinning reserve, since if
an additional MW of reserve is needed, it would be provided by the
plant that is already providing spinning reserve and has the highest
bid offer selected. In the proposed market system, each unit that
has injected active energy into the system during the operating
period would be responsible for paying or receiving, as appropriate,
the amount per spinning reserve that is established on the basis of
the following methodology.
First, the opportunity cost of the spinning reserve (CORG), the
main driving component of the cost, must be calculated for each
unit that is regulating frequency, which is determined from the
following expression:
CORGj;h ¼ CMGh  CVj;h cj21; …M (4)
where
CORGj,h is the opportunity cost of the spinning reserve of the
generating unit j at hour h, expressed in USD/MWh.
CMGh is the marginal cost on the corresponding injection bar at
time h, expressed in USD/MWh.
CVj,h is the variable cost of generator unit j at hour h, expressed
in USD/MWh.
M is the number of generating units participating in frequency
control at time h, excluding the marginal unit of the system.
Then, for each hour of operation h, the marginal cost of making a
spinning reserve (CmgRG) is determined. This cost represents the
opportunity cost incurred when generating an additional turn-by-
order unit. The CmgRG is determined as
n o

x CORGj;h ; 0
CmgRGh ¼ M a (5)
Finally, any unit that provided a reserve for primary or sec-
ondary frequency control is remunerated. The remuneration for
spinning reserve (RemRG) is calculated according to the following
expression:
RemRGj;h ¼ RGj;h ,CmgRGh (6)
where
RemRGj,h is the remuneration of providing a spinning reserve for
frequency control of the generating unit j in hour h, expressed in
USD.
RGj;h is the spinning reserve for frequency control provided by
generator unit j at hour h, expressed in MWh.
The amount resulting from adding up the remuneration asso-
ciated with the spinning reserve for frequency control is provided
by all power plants.
1102
Renewable Energy 171 (2021) 1097e1114
5. Methodology
The methodology used in the empirical analysis can be divided
into five stages:
1) First, build a demand profile for the system based on estimations
of the energy regulator CNE, contained in Ref. [32].
2) Second, set the base case using the existing generation and all
projects considered by the energy regulator and documented in
Ref. [33]. The base case contains around 1000 [MW] of installed
photovoltaic capacity. With this generation park, it is possible to
build hourly generation profiles according to the geographical
location of each generation plant.
3) Third, consider four scenarios of additional photovoltaic
expansion, with different installed capacity: E1 with 261.1
[MW], E2 with 514 [MW], E3 with 766.8 [MW] and E4 with
1019.7 [MW]. For each scenario, the primary and secondary
reserve requirements are calculated.
4) Fourth, apply a unit commitment model using the data from (1)
and (2) and the additional photovoltaic expansion included in
each scenario.3
5) Finally, with the results for every scenario, calculate the reve-
nue, rate of return, and the profitability of the different gener-
ation technologies, under both remuneration criteria for
Ancillary Services: cost-based and market-based.
The following diagram (Fig. 2) illustrates the methodology used
to simulate the impact of the various solar energy penetration
scenarios included in (3):
The formulation used in the unit commitment in (4) is fully
described in the Appendix, including the objective function, all
constraints, variables, and parameters.
To speed up the unit commitment computing, the day was
divided into 3-h blocks, assigning a representative generation and
demand to each block.
5.1. Profitability
The Internal Rate of Return (IRR) is used as a financial indicator
to measure profitability. To do this, all the generating plants that
participated in the unit commitment in the simulations were
grouped by technology, and then money flows were added
together, treating all plants of the same type as if they were a single
large power plant. Subsequently, cash flows were calculated
assuming an initial investment, operating and maintenance costs
(O&M), years of construction, and a service life for each technology.
As a result, 5 generating-technology groups of plants were ob-
tained, with the following characteristics:
1) A coal-powered power plant corresponds to a 2169.4 [MW] net
power plant, with a lifespan of 35 years and a construction time
of 2 years. The investment cost is $3,000,000 [USD/MW] and the
annual O&M cost is equivalent to 2% of the initial investment
[34].
2) A natural gas combined cycle plant corresponds to a 910 [MW]
net power plant, with a lifespan of 25 years and a construction
time of 2 years. The investment cost is $1,340,000 [USD/MW]
and the annual O&M cost is equivalent to 2% of the initial in-
vestment [34].
3) A central tower CSP plant (17.5 h of storage) corresponds to a 110
[MW] net power plant, with a lifespan of 30 years and a con-
struction time of 2 years. The investment cost is $9,800,000
3
All simulations were performed using CPLEX 12.6.1 under GAMS 23.5 [14].
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

Fig. 2. Methodology diagram

Source: Own elaboration.

[USD/MW] and the annual O&M cost is $115 [USD/KW] of
installed capacity [35].
4) A wind power plant corresponds to a power plant of 90 [MW] of
net power, with a useful life of 25 years and a construction time
of 1 year. The investment cost is $1,800,000 [USD/MW] and the
annual O&M cost is $39.53 [USD/KW] of installed capacity [36].
5) A photovoltaic plant, depending on the scenario analyzed, cor-
responds to the installed capacity of 261.1 [MW], 514 [MW],
766.8 [MW] and 1019.7 [MW], with a lifespan of 25 years and a
construction time of 1 year. The investment cost is $1,800,000
[USD/MW] (41) and the annual O&M cost is $20 [USD/KW] of
installed capacity [35].
Once energy dispatches and frequency regulation payments are
obtained from the simulations, the only thing that needs to be
determined to calculate the rate of return is the hiring levels of each
of the five selected technologies.
Free unregulated clients represent 89% of Chile’s northern sys-
tem demand, which are mostly large mining industries needing
energy 24/7. The only power plants that can guarantee an even
generation are the coal-central, the combined-cycle power plant,
and the CSP power plant. On the contrary, photovoltaic and wind
generation, being intermittent, take a greater risk when contracted
evenly, as they will be forced to buy in the spot market during the
hours when their generation is less than the contracted energy. By
incorporating more intermittent RE into the system, the base
thermal power plants are displaced, so they could also be forced to
buy in the spot market to meet the contracts. However, unlike RE,
this operation has a lower risk because if thermal power plants are
not generating, it is likely that the spot market price will be lower
than their variable cost.
Based on the demand profiles and the unit commitment in
Chile’s northern system, coal power plants are contracted for
1577.2 MWh for each hour, combined cycle plants for 661.6 MWh,
and CSP for 80 MWh, while photovoltaics are contracted only for
44.6 MWh for a period of 10 h per day (block B), and the wind
power plant is contracted for 45.9 MWh for a period of 5 h per day
(block C). The IRR is then calculated with this information.
6. Simulation results
The results of the simulations demonstrate how different vari-
ables in the system alter the profitability of the different generation
technologies. In particular, we evaluate the effect of marginal
hourly costs, operating costs (generation, turn on and off), and
hourly generation. For this purpose, we calculate the cash flow for
each technology and obtain the rate of return for the four different
photovoltaic penetration scenarios using the two different methods
1103
of remuneration for frequency regulation.
6.1. Power generation
Fig. 3 shows the annual generation by technology for each
photovoltaic RE penetration scenario, while Table 1 shows the
generation percentages with respect to the total.
The results in terms of annual generation of the electricity sys-
tem show a decrease in the share of coal-powered plants and
combined cycles, which are displaced by higher power generation
photovoltaic plants. Fig. 4 shows the average hourly generation of
coal plants for each simulation scenario. As can be seen in the
figure, the generation curve decreases in daylight hours and moves
vertically downwards in higher RE scenarios.
Fig. 5 shows the average hourly generation of the combined
cycle plants for each simulation scenario. As expected, the gener-
ation curve decreases in the daytime and increases at night. The
sharp drop in generation during the day is due to the number of
units often being turned off in the times of higher RE generation.
Unlike coal-powered plants, combined cycle plants increase their
night-time generation in higher RE penetration scenarios because
they cover the energy deficit left by coal plants that were not
dispatched.
6.2. Marginal cost of energy
Fig. 6 shows the average hourly marginal costs for the four RE
penetration scenarios, while Table 2 shows the average marginal
cost for the entire year as a percentage change with respect to
scenario 1 (E1), where there is the lowest installed capacity of
photovoltaic power plants.
Overall, the results show a decrease in the marginal costs of the
system in the afternoon hours, when photovoltaic generation is
higher. In scenario E4, the one with the greatest penetration of
photovoltaic energy, there is a price hike at peak demand times
resulting from the displacement of power plants to less efficient
coal, and the entry of small diesel engines and gas turbines.
Therefore, if the system has a large amount of photovoltaic gener-
ation, it is cheaper not to dispatch more expensive base-plants and,
at times when there is no solar radiation, to meet the demand
surplus with units of higher variable cost such as diesel engines and
gas turbines. Finally, it is important to note that despite the increase
in marginal costs at peak times, the average marginal cost of energy
throughout the day decreases as higher photovoltaic generation
enters, reaching its minimum value in scenario E4.
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

Fig. 3. Annual generation by technology

Source: Own elaboration.

Table 1
Percentage generation by technology.

Scenario 1 (E1) Scenario 2 (E2) Scenario 3 (E3) Scenario 4 (E4)

Coal 74.01% 71.87% 70.48% 66.96%

CC Natural Gas 16.28% 15.10% 13.16% 13.31%
Diesel engine 0.003% 0.003% 0.003% 0.027%
Turbine Natural Gas 0.02% 0.01% 0.01% 0.02%
Photovoltaic 3.46% 6.79% 10.12% 13.46%
Hydraulic 0.39% 0.39% 0.39% 0.39%
Wind 1.05% 1.05% 1.05% 1.05%
Thermosolar CSP 4.19% 4.19% 4.19% 4.19%
Cogeneration 0.59% 0.59% 0.59% 0.59%

Source: Own Elaboration.

Fig. 4. Average hourly generation of carbon thermal plants per scenario

Source: Own Elaboration.

6.3. Remuneration and payments for frequency regulation (cost-
based and market-based pricing)
In the four simulated scenarios, there are three technologies
selected in the unit commitment for frequency control: coal,
combined cycle, and natural gas turbine. Batteries were never
selected because it is cheaper for the system to enable conventional
power plants than to pay the investment costs for battery banks.
Fig. 7 shows, for the average time values, the scheduled spinning
reserve for the frequency control of coal-based plants and com-
bined cycles.
The spinning reserve is mainly provided by the combined cycles
at night and the coal plants during the day, increasing the reserves
in the scenarios of higher penetration of intermittent renewable

1104
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

Fig. 5. Average hourly generation in combined cycle (CC) thermal power plants per scenario
Source: Own Elaboration.

Fig. 6. Average annual hourly marginal costs

Source: Own Elaboration.

Table 2
Annual average of the marginal cost of energy for each scenario.

Installed Photovoltaic Capacity [MW] Average Marginal Cost [USD/MWh] Variation %

E1 261.1 $46.46 0%
E2 514 $45.18 2.75%
E3 766.8 $44.84 3.50%
E4 1019.7 $44.63 3.94%

Source: Own Elaboration.

energy. Table 3 shows the results in terms of the annual remu-
neration and payments for the provision of the supplementary
frequency regulation service for both cost-based and market-based
pricing schemes.
As can be noted in the table, the main beneficiaries of applying
the market-based scheme instead of the cost-based pricing are
generators with combined cycle technology, since the average of
their remuneration increases from 0.11 [USD/MWh] to 2.05 [USD/
MWh]. On the other hand, the most harmed are the RE plants.
Photovoltaic technology increases its payments from 0.36 [USD/
MWh] to 0.87 [USD/MWh], wind from 0.39 [USD/MWh] to 0.91
[USD/MWh], and CSP from 0.38 [USD/MWh] to 0.92 [USD/MWh].
The reason some technologies are favored and others negatively
affected by applying the market system is due to the amount of
energy they generate and the amount of reserve they provide to
regulate the frequency. Combined cycles provide an average of 14%
of the energy in the four scenarios, while 45% of the reserve is
rotated, making them a surplus generator selling reserve. The RE
1105
plants do not contribute to the reserve, therefore, they have deficits
and must buy 100% of the reserve that corresponds to them for
their generation. Coal-based plants generate on average 71% of the
energy and 54% of the reserve, putting them in a deficit position,
but unlike RE they generate a significant part of their reserve.
6.4. Operating costs
Table 4 shows the operational cost of the system for the different
simulated scenarios and the cost variation with respect to E1. The
higher the penetration of RE, the lower is the operating cost as a
result of the decrease in generation costs, reaching a 10.5% variation
between the scenarios with highest and lowest intermittent
(photovoltaic) RE penetration.
Table 5 shows the results in terms of operating costs and average
costs for the two base load technologies, natural gas and coal power
plants.
Table 6 breaks down operational costs between generation and
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

Fig. 7. Spinning reserve for frequency control

Source: Own Elaboration.

Table 3
Remuneration and payments for frequency regulation in USD.

Scenario Cost-based pricing Market-based pricing

Coal Income Payment Total [$/MWh] Income Payment Total [$/MWh]

E1 $1,320,908 -$ 1,228,499 $92,408 $0.01 $10,657,113 -$15,272,687 -$ 4,615,574 -$ 0.30

E2 $1,398,652 -$998,419 $400,233 $0.03 $8,977,084 -$ 13,753,088 -$ 4,776,004 -$ 0.31
E3 $1,354,982 -$ 803,266 $551,717 $0.04 $10,564,439 -$14,004,341 -$ 3,439,901 -$ 0.23
E4 $1,775,856 -$ 1,119,276 $656,579 $0.05 $9,945,380 -$13,607,003 -$ 3,661,624 -$ 0.26
CC natural gas
E1 $417,852 -$71,691 $346,161 $0.10 $9,349,931 -$ 3,263,076 $6,086,855 $1.77
E2 $295,399 -$68,807 $226,591 $0.07 $9,373,548 -$ 2,725,173 $6,648,375 $2.08
E3 $297,782 -$66,048 $231,734 $0.08 $8,503,295 -$ 2,478,270 $6,025,026 $2.17
E4 $670,853 -$106,640 $564,213 $0.20 $9,065,573 -$2,924,361 $6,141,212 $2.18
Photovoltaic
E1 $0 -$ 231,060 -$ 231,060 -$ 0.32 $0 -$ 737,587 -$ 737,587 -$ 1.01
E2 $0 -$499,378 -$499,378 -$ 0.35 $0 -$ 1,188,387 -$ 1,188,387 -$ 0.83
E3 $0 -$ 754,282 -$ 754,282 -$ 0.35 $0 -$1,914,778 -$1,914,778 -$ 0.89
E4 $0 -$ 1,153,134 -$ 1,153,134 -$ 0.41 $0 -$ 2,125,804 -$ 2,125,804 -$ 0.75
CSP Tower
E1 $0 -$372,854 -$372,854 -$ 0.42 $0 -$845,216 -$845,216 -$ 0.95
E2 $0 -$ 326,693 -$ 326,693 -$ 0.37 $0 -$773,501 -$773,501 -$ 0.87
E3 $0 -$285,440 -$285,440 -$ 0.32 $0 -$ 808,458 -$ 808,458 -$ 0.91
E4 $0 -$349,813 -$349,813 -$ 0.39 $0 -$817,215 -$817,215 -$ 0.92
Wind
E1 $0 -$93,347 -$93,347 -$ 0.42 $0 -$219,610 -$219,610 -$ 0.99
E2 $0 -$84,132 -$84,132 -$ 0.38 $0 -$ 190,601 -$ 190,601 -$ 0.86
E3 $0 -$78,581 -$78,581 -$ 0.35 $0 -$204,085 -$204,085 -$ 0.92
E4 $0 -$94,448 -$94,448 -$ 0.43 $0 -$ 191,243 -$ 191,243 -$ 0.86

Source: Own Elaboration.

Table 4 Table 5
System operating cost in [USD/Year]. Operational costs and average costs of the base thermal power plants.

Scenario Operating cost [USD/year] Variation % Natural Gas Coal

E1 $747,034,113 0.0% [MMUSD/year] [USD/MWh] [MMUSD/year] [USD/MWh]

E2 $719,855,708 3.6% E1 $160 $47.56 $579.4 $37.04
E3 $693,367,854 7.2% E2 $154 $48.10 $558.7 $36.79
E4 $668,312,646 10.5% E3 $137 $49.34 $547.9 $36.78
Source: Own Elaboration. E4 $139 $49.46 $518.3 $36.63

Source: Own Elaboration.

starting/stopping for combined cycle plants. Average generation

costs vary while average costs per start and stop have significant lowest penetration rate of photovoltaic energy.
variations of more than 3 [USD/MWh] between the highest and In the case of coal plants, operational costs correspond only to

1106
C.A. Agostini, F.A. Armijo, C. Silva et al.
Table 6
Operational costs of combined cycle plants.
Generation cost Average generation cost
[MMUSD/year] [USD/MWh]
E1 -$ 160,232,333 -$
E2 -$ 148,684,150 -$
E3 -$ 129,465,136 -$
E4 -$ 130,526,187 -$
Source: Own Elaboration.
generation costs, as there are no starts or stops resulting from the
higher revenue of photovoltaic energy. An interesting result is the
decrease in average generation costs in scenarios with higher
intermittent RE penetration. These declines in average costs were
not fully expected because as the revenue of photovoltaic genera-
tion increases, the plants must leave their efficiency point in the
afternoon and many times reach a technical minimum. However,
there is a complete shift of the cost curve downwards caused by the
exit of more expensive coal power plants, leaving only the most
economically efficient in operation.
In addition to a decrease in the total average cost, the average
hourly cost decreases in the afternoon hours, when photovoltaic
generation is higher and more plants are working at a technical
minimum. This drop is due to the loss of lower variable cost plants
whose dispatch is not affected in these hours, while more expen-
sive power plants are brought to a technical minimum increasing
their generation costs but further decreasing the amount of energy
generated. Fig. 8 shows the hourly average costs of coal plants,
where the decrease in average generation costs for the different
scenarios is clearly seen.
6.5. Profitability of generating technologies
The profitability of each generating technology in the four
different photovoltaic energy penetration scenarios, under the two
frequency control remuneration schemes, is presented in Table 7.
The results mainly show that the only technology favored when
applying the market remuneration scheme is the combined cycle
technology, which is also the only one benefiting from higher
intermittent RE revenue. The average IRR in the four scenarios in-
creases by 0.33% points when implementing a market system,
which corresponds to a 2.3% increase in its internal rate of return.
This increase occurs despite the on/off over-cost because the
margin of energy sales in the contract and spot market grows to a
greater extent.
The increase in profit margin in the contract market is due to
two factors: lower generation costs, when combined cycle energy is
Fig. 8. Average costs of generating by schedule in coal plants
Source: Own Elaboration.
Renewable Energy 171 (2021) 1097e1114
Start/stop cost Average start/stop cost
[MMUSD/year] [USD/MWh]
46.56 $0 $0.00
46.58 -$ 4,847,630 -$ 1.52
46.55 -$7,743,908 -$ 2.78
46.39 -$8,636,128 -$ 3.07
displaced by photovoltaic energy and lower cost per MWh of en-
ergy purchased by buying more energy in the daytime hours when
the price is lower and less at the night when the price increases. The
increase in profit margin in the case of the spot market is due to the
higher generation in the evening hours. Scenario 4 (E4) corre-
sponds to one in which energy is generated at night mostly by
combined cycles, and the marginal cost increases when small diesel
engines are introduced.
For coal plants, the average IRR under the market-based pricing
is 0.8% lower compared to cost-based pricing. On the other hand,
the higher revenue of intermittent RE has a marginal impact on the
profitability of coal plants, decreasing from 7.48% to 7.45% under the
cost-based pricing and from 7.42% to 7.39% under the market-based
pricing.
For photovoltaic plants, the average IRR under the market-based
pricing system is 3.27% lower than when applying the cost-based
pricing system. By increasing the penetration of intermittent RE,
the photovoltaic plants are the most affected as their profitability
falls by 55% and 57% between the base and E4 scenarios when
applying the cost-based and market-based pricing systems,
respectively. This is because the sales margin of contracts does not
grow, as their share of that market is limited, and the higher power
generation must be sold to the spot market at a lower price.
Therefore, the market-based system increases the investment and
reduces the income from the energy generated.
For wind power plants, the average IRR under the market-based
pricing system is 2.73% lower than when applying the cost-based
pricing system. Increased intermittent RE penetration leads to a
decrease of 19.8% and 20.2% when comparing E4 to the base sce-
nario between applying the cost-based and market-based pricing
systems, respectively. As in the case of photovoltaic power plants,
spot sales represent the largest income for this technology, there-
fore, lowering the spot price and reducing revenues.
Finally, in the case of CSP plants, the average IRR under the
market-based pricing system is 1.88% lower than when applying
the cost-based pricing system. Increased intermittent RE penetra-
tion decreases the profitability 1.3% and 3.1% between the base
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C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

Table 7
Internal Rate of Return (IRR) for different technologies.

Remuneration mechanism Scenario 1 (E1) Scenario 2 (E2) Scenario 3 (E3) Scenario 4 (E4)

Coal
Cost-based pricing 7.48% 7.47% 7.46% 7.45%
Market-based pricing 7.42% 7.40% 7.41% 7.39%
CC natural gas
Cost-based pricing 14.55% 14.59% 14.55% 14.85%
Market-based pricing 14.87% 14.96% 14.88% 15.16%
Photovoltaic
Cost-based pricing 4.60% 3.18% 2.66% 2.05%
Market-based pricing 4.47% 3.08% 2.55% 1.98%
CSP
Cost-based pricing 2.76% 2.73% 2.74% 2.72%
Market-based pricing 2.71% 2.69% 2.68% 2.67%
Wind
Cost-based pricing 3.80% 3.54% 3.47% 3.05%
Market-based pricing 3.70% 3.45% 3.36% 2.95%

Source: Own Elaboration.

scenario and E4 when applying the cost-based and market-based
pricing systems, respectively.
6.6. Sensitivity analysis: variation in contracting level
The results obtained in the simulations are obviously related to
the level of contracting that each technology has; the average price
of the spot market decreases as the installed capacity in photo-
voltaic plants increases. This contracting is assumed at a fixed price,
in contrast with selling the energy in the spot market. As a result,
surplus power plants decrease their income and deficit power
stations increase it. On the other hand, the market price of contracts
is assumed to be approximately twice the spot price and remains
constant in the different scenarios, so profitability is strongly linked
to contract sales. For this reason, a sensitivity analysis is carried out
for the different generation technologies, regarding the effect of
contracting levels on their profitability.
Table 8 shows the internal rate of return of coal plants for
different contracting levels. Regardless of the level of contracting,
the average IRR of coal plants is smaller with a market system, but
the difference between the two remuneration methods is minimal.
In addition, the results show that when the contracting level is
higher than 82% under cost-based pricing and 80% under the
market-based pricing, the IRR begins to slightly increase as the
penetration of RE is higher. This result reflects that surplus power
plants decrease their incomes, and deficit power plants increase
their income by increasing the amount of RE in the system, as the
inflection points are close to the plant factors of coal plants.
Table 9 shows the IRR of the combined cycle plants for different
contracting levels. In general, regardless of the level of contracting,
the average IRR is favored by a market-based pricing system.
However, when the contracting level is less than 35% under the
cost-based pricing and 36% under the market-based pricing system,
the IRR starts to decrease in higher RE scenarios. These values are
also close to the plant factors of the combined cycle plants.
Finally, Table 10 shows the IRR of the CSP plant for different

Table 8
Coal Plant IRR (different levels of contracting).

Contracting level Cost-based pricing Market-based pricing

E1 E2 E3 E4 Average E1 E2 E3 E4 Average
IRR % IRR % IRR % IRR % IRR % IRR % IRR % IRR %

20% 0.11 0.23 0.36 0.42 ¡0.22 0.01 0.38 0.48 0.55 ¡0.35
25% 0.99 0.75 0.66 0.62 0.75 0.89 0.64 0.58 0.53 0.66
30% 1.82 1.61 1.54 1.51 1.62 1.73 1.52 1.47 1.42 1.53
35% 2.61 2.43 2.37 2.34 2.44 2.52 2.34 2.30 2.26 2.36
40% 3.35 3.21 3.15 3.13 3.21 3.27 3.12 3.09 3.05 3.13
45% 4.06 3.94 3.89 3.87 3.94 3.98 3.85 3.83 3.80 3.87
50% 4.73 4.63 4.60 4.58 4.63 4.66 4.55 4.53 4.51 4.56
55% 5.37 5.30 5.27 5.25 5.30 5.30 5.22 5.21 5.19 5.23
60% 5.99 5.94 5.91 5.90 5.94 5.93 5.86 5.86 5.84 5.87
65% 6.59 6.55 6.54 6.53 6.55 6.53 6.48 6.48 6.47 6.49
70% 7.17 7.15 7.14 7.13 7.15 7.11 7.08 7.09 7.07 7.09
75% 7.74 7.73 7.73 7.72 7.73 7.68 7.66 7.67 7.66 7.67
74% 7.63 7.62 7.61 7.60 7.61 7.57 7.55 7.56 7.55 7.55
75% 7.74 7.73 7.73 7.72 7.73 7.68 7.66 7.67 7.66 7.67
76% 7.85 7.84 7.84 7.83 7.84 7.79 7.78 7.79 7.78 7.78
77% 7.96 7.96 7.95 7.95 7.96 7.90 7.89 7.90 7.89 7.90
78% 8.07 8.07 8.07 8.06 8.07 8.01 8.00 8.02 8.01 8.01
79% 8.18 8.18 8.18 8.18 8.18 8.12 8.12 8.13 8.12 8.12
80% 8.29 8.30 8.30 8.29 8.29 8.23 8.23 8.24 8.24 8.24
81% 8.40 8.41 8.41 8.40 8.40 8.34 8.34 8.36 8.35 8.35
82% 8.51 8.52 8.52 8.52 8.52 8.45 8.45 8.47 8.46 8.46
85% 8.83 8.85 8.85 8.85 8.84 8.77 8.78 8.80 8.80 8.79
90% 9.35 9.39 9.40 9.40 9.38 9.29 9.32 9.35 9.34 9.33
95% 9.87 9.92 9.93 9.93 9.91 9.81 9.85 9.88 9.88 9.86
100% 10.37 10.43 10.45 10.46 10.43 10.32 10.37 10.40 10.40 10.38

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C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

Table 9
Combined Cycle Plant IRR (different levels of contracting).

Contracting level Cost-based pricing Market-based pricing

E1 E2 E3 E4 Average E1 E2 E3 E4 Average
IRR % IRR % IRR % IRR % IRR % IRR % IRR % IRR %

20% 0.32 0.19 0.54 0.08 ¡0.08 0.93 0.55 0.23 0.68 0.60
25% 2.18 1.80 1.58 2.03 1.90 2.74 2.44 2.16 2.58 2.48
30% 3.87 3.58 3.39 3.80 3.66 4.38 4.15 3.92 4.30 4.19
35% 5.42 5.19 5.03 5.41 5.27 5.89 5.72 5.51 5.87 5.75
36% 5.72 5.50 5.34 5.72 5.57 6.18 6.01 5.82 6.17 6.04
37% 6.01 5.80 5.65 6.02 5.87 6.46 6.31 6.12 6.46 6.34
38% 6.29 6.09 5.95 6.32 6.16 6.74 6.60 6.41 6.75 6.62
39% 6.57 6.39 6.25 6.61 6.46 7.01 6.88 6.70 7.04 6.91
40% 6.85 6.67 6.54 6.90 6.74 7.29 7.16 6.99 7.32 7.19
41% 7.13 6.96 6.83 7.18 7.02 7.56 7.44 7.27 7.60 7.47
42% 7.40 7.24 7.11 7.46 7.30 7.82 7.72 7.55 7.87 7.74
43% 7.66 7.51 7.39 7.74 7.58 8.08 7.98 7.82 8.15 8.01
45% 8.19 8.06 7.94 8.28 8.12 8.60 8.52 8.36 8.68 8.54
50% 9.45 9.36 9.26 9.59 9.42 9.84 9.79 9.66 9.96 9.81
55% 10.65 10.60 10.52 10.83 10.65 11.02 11.01 10.89 11.19 11.03
60% 11.80 11.78 11.71 12.02 11.83 12.16 12.18 12.07 12.36 12.19
65% 12.91 12.91 12.86 13.16 12.96 13.25 13.30 13.21 13.49 13.31
70% 13.98 14.01 13.97 14.26 14.06 14.31 14.39 14.31 14.59 14.40
75% 15.02 15.08 15.04 15.33 15.12 15.34 15.44 15.37 15.64 15.45
80% 16.02 16.11 16.08 16.37 16.14 16.34 16.46 16.40 16.67 16.47
85% 17.01 17.12 17.10 17.38 17.15 17.32 17.46 17.41 17.68 17.47
90% 17.97 18.11 18.10 18.37 18.14 18.27 18.44 18.40 18.66 18.44
95% 18.91 19.06 19.06 19.34 19.09 19.20 19.39 19.35 19.62 19.39
100% 19.82 20.00 20.01 20.28 20.03 20.11 20.32 20.30 20.56 20.32

Table 10
CSP Plant IRR (Tower; 17.5 h storage).

Contracting level Cost-based pricing Market-based pricing

E1 E2 E3 E4 Average E1 E2 E3 E4 Average
IRR % IRR % IRR % IRR % IRR % IRR % IRR % IRR %

20% 0.09 0.02 0.05 0.09 ¡0.02 0.03 0.10 0.14 0.17 ¡0.09
25% 0.36 0.26 0.24 0.22 0.27 0.30 0.21 0.18 0.16 0.21
30% 0.62 0.54 0.52 0.49 0.54 0.57 0.48 0.45 0.44 0.48
35% 0.89 0.81 0.79 0.77 0.81 0.83 0.75 0.73 0.71 0.76
40% 1.15 1.08 1.06 1.04 1.08 1.09 1.02 1.00 0.99 1.02
45% 1.40 1.34 1.33 1.31 1.35 1.35 1.29 1.27 1.26 1.29
50% 1.66 1.60 1.59 1.57 1.61 1.60 1.55 1.53 1.52 1.55
55% 1.91 1.86 1.85 1.83 1.86 1.85 1.81 1.79 1.78 1.81
60% 2.15 2.11 2.11 2.09 2.12 2.10 2.06 2.05 2.04 2.06
65% 2.39 2.36 2.36 2.34 2.36 2.34 2.31 2.30 2.29 2.31
70% 2.63 2.60 2.60 2.59 2.61 2.58 2.56 2.55 2.54 2.56
75% 2.86 2.84 2.85 2.83 2.85 2.81 2.80 2.79 2.78 2.80
80% 3.10 3.08 3.09 3.07 3.08 3.05 3.03 3.03 3.03 3.03
85% 3.32 3.31 3.32 3.31 3.32 3.27 3.27 3.27 3.26 3.27
90% 3.55 3.54 3.55 3.54 3.55 3.50 3.50 3.50 3.50 3.50
91% 3.59 3.59 3.60 3.59 3.59 3.54 3.54 3.55 3.54 3.54
92% 3.63 3.64 3.64 3.64 3.64 3.59 3.59 3.59 3.59 3.59
94% 3.72 3.73 3.74 3.73 3.73 3.68 3.68 3.68 3.68 3.68
95% 3.77 3.77 3.78 3.77 3.77 3.72 3.73 3.73 3.73 3.72
100% 3.98 3.99 4.01 4.00 4.00 3.94 3.95 3.95 3.95 3.95

levels of contracting. For all levels of contracting, the average IRR
decreases under a market-based pricing system. With contracting
levels above 92%, profitability begins to increase slightly in higher
RE scenarios. This value matches the plant factor.
7. Conclusion and policy implications
This work simulates the effect on profitability of an increase in
the intermittent RE penetration rate in the Northern part of the
Chilean power system. In particular, the effects on different gen-
eration technologies are analyzed by using two different methods
of remuneration for Ancillary Services (frequency regulation). For
this purpose, an optimal dispatch methodology simulation is
1109
developed and payments and/or remuneration are established
within the market.
First, the simulations show that average marginal costs decrease
with intermittent RE integration, falling by USD 46.5/MWh and
USD 44.6/MWh in the highest and lowest RE scenarios considered,
respectively. In particular, marginal hourly costs decrease during
the day when displacing base thermal power plants. Additionally,
the plant factors of the thermal power plants (coal and combined
cycles) decrease when replaced by photovoltaic energy.
Second, the simulations show that frequency control is provided
by combined cycle plants and coal plants at a higher variable cost.
The only technology favored by incorporating a frequency regula-
tion market-based system is the combined cycle, which increases
C.A. Agostini, F.A. Armijo, C. Silva et al.
its internal rate of return by 2.3% compared to the cost-based
pricing system. This is because combined cycles provide an
average of 14% of the energy in all the scenarios analyzed, while
they contribute 45% of the reserve for frequency control, making
them surplus holders that may sell the reserve. On the other hand,
the technologies most harmed by incorporating a frequency regu-
lation market are REs. The IRR of the photovoltaic power plant
decreases by 3.3% and wind by 2.7%. This is because, at least in the
simulations, the RE plants do not contribute to the reserve to
regulate frequency and, therefore, they have deficits and must buy
100% of their reserve for their generation.
Finally, the results show that with a higher penetration of RE in
the system, the profitability of the coal plants and combined cycle
plants increases or decreases depending on the level of procure-
ment and the plant factor they have. If the hiring level is higher
than the plant factor, the plant will be favored by incorporating
greater RE, and if it is lower, it will be negatively affected.
The results obtained differ from those found in the academic
literature for Spain, the United States, and Germany [37,38]; in
those cases, the results show that the incorporation of RE decreases
the incentives to invest in base plants, especially the more flexible
ones such as combined cycles. This disincentive is caused by a
decrease in plant factors and market prices, causing a reduction in
their income. There are two reasons why the results are different.
The first is that the displacement of base thermal power plants does
not represent a decrease in contract sales. The second is that the
decline in the spot market price does not affect the market price of
contracts.
These differences are due to the way the electricity market
operates in Chile. The spot market is open only to generators.
Consumers must contract 100% of their energy and most of these
contracts are awarded to base plants that can ensure a 24/7 gen-
eration. Then, the costs do not change in the short and medium
X
T X Mi 
N X
Min Z ¼ Energyi;k;t $ VCi;k þ PV Energyt $ PVVC þ Wind Energyt $ WindVC þ
t¼1 i¼1 k¼1
N 
X  XN
 UStopi;t $ Stopping Costi þ ðUEnablePFCi $ EnablingCostPFCi Þ þ
i¼1 i¼1
term. In the cases of Spain, United States, and Germany, there is an
energy exchange in which consumers can participate, and the
decrease in marginal costs is transferred in the short term to
contracts.
In addition, in the case of Germany, less flexible power plants
must offer near-zero prices at the times of increased RE injection to
stay in the market and be dispatched. This is not the case in Chile
where there is a central operator that optimizes dispatches, and if
the marginal cost is less than the variable cost of any plant, the
monetary losses of that plant will be assumed by all the generating
companies based on pro rata withdrawals.
In future extensions of this research it may be relevant to
consider in the analysis the probability of occurrence of different
generation scenarios for wind and solar resources, explicitly
Renewable Energy 171 (2021) 1097e1114
introducing a stochastic model rather than considering the profiles
of RE generation.
CRediT authorship contribution statement
Claudio A. Agostini: Conceptualization, Writing e original draft,
literature review, Writing e review & editing. Franco A. Armijo:
Data curation, data collection, simulations. Carlos Silva: Concep-
tualization, Methodology, Data curation, data collection, Writing e
review & editing. Shahriyar Nasirov: Conceptualization, Writing e
original draft, literature review, Writing e review & editing.
Declaration of competing interest
The authors declare that they have no known competing
financial interests or personal relationships that could have
appeared to influence the work reported in this paper.
Acknowledgements
This work was supported in Chile by the projects ANID/FONDAP/
15110019 (SERC-CHILE) and ANID/FONDECYT/11170424.
Appendix. Optimization Model
7.1.1 Objective Function
The objective function is to minimize total operating costs. Po-
wer production costs are minimized plus the costs incurred in
turning power plants on and off for the entire T-time horizon.
The costs of enabling plants to participate in primary and sec-
ondary frequency control and investment in BESS plants for pri-
mary control are also considered.
 XT X
N   XT
UStarti;t $ Starting Costi þ
t¼1 i¼1 t¼1
X
N
ðUEnableSFCi $ EnableSFCi Þ þ BESS Energy$Cost BESS
i¼1
(1)
where,
i Index associated with each generating unit.
t Index associated with each time period (one hour).
k Index associated with each step of the cost of a generating unit.
7.1.2 Constraints
The constraints define the feasible space for the optimization,
including the demand fulfillment constraint,
Demand fulfillment: Power generation must equal demand plus
losses on transmission lines (3%) for any period of time t.
1110
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

RUi;k;t  PRi;k;t $M M[0; c i; c k; c t (12)

X Mi 
N X 
Energyi;k;t þ PV Energyt þ Wind Energyt þ Hydro Energyt ¼ 1; 03Demandt ct (2)
i¼1 k¼1

The generation of photovoltaic, wind and hydraulic energy has a Power off does not provide PFC: If plant i is not providing power
deterministic generation profile that varies in each time period t. to the system in time t, it cannot provide primary reserve in that
Generation Plant is on or off: If the output of the generation time period.
plant i in step k for time t is zero, then the binary variable takes
value of zero. If generation is greater than zero, then the binary RUi;k;t  Ui;k;t $M M[0; c i; c k; c t (13)
variable takes value from one.
Enablement to participate in PFC: If plant i participates in pri-
Gi;k;t  Ui;k;t ,M M[0; ci; ck; ct (3) mary frequency control in any time period t, then it must be
enabled to perform primary control.
Minimum generation: No less energy can be generated than the
minimum for the generation unit i and the step k. X
T X
Mi
RUi;k;t  UEnablePFCi $M M[0; c i (14)
Energyi;k;t  Gen Mini;k $Ui;k;t c i; c k; c t (4) t¼1 k¼1

If generating plant i performs PFC, it is enabled to perform this

Maximum generation: No more power can be generated than
function, and the activation cost must be added to the target
the maximum for the generation unit i and step k-step.
function ðUEnablePFCi ¼ 1Þ.
Energyi;k;t  Gen Maxi;k $Ui;k;t c i; c k; c t (5) Generation constraint, if generating unit participates in pri-
mary reserve: If generating unit i participates in primary frequency
Maximum photovoltaic generation: The maximum generation control, it must generate under a power level to achieve the ex-
of photovoltaic energy cannot exceed the maximum energy for that pected primary response.
hour coming from its generation profile.  
Gi;k;t  Pot Max PFCi þ 1  RUi;k;t $ M þ PFCi
PV Energy t  Gen Max PVt ct (6) (15)
 PRi;k;t M[0; c i; c k; c t
Maximum wind generation: Maximum wind power generation
Secondary Reserve: The sum of the secondary reserve contrib-
cannot exceed the maximum power for that hour coming from its
uted by the CSF participating plants must be greater than or equal
generation profile.
to the amount required for each time period t.
Wind Energyt  Gen Max Windt ct (7)
X
N X
Mi
Maximum hydraulic generation: Maximum hydraulic power SRi;k;t  Secundary Reservet ct (16)
generation cannot exceed the maximum energy of its generation i¼1 k¼1

profile. Secondary reserve constraint for charging ramp: The second-

ary reserve provided by the generating plant i is at most the gen-
Hydro Energyt  Gen Max Hydro ct (8) eration increase that can be provided in 15 min.
Primary Reserve: The sum of the primary reserve, provided by
the plants and/or batteries, must be greater than or equal to the SRi;k;t  Rampi $15 c i; c k; c t (17)
minimum amount required in the system for all time periods t. Secondary reserve restricted by generation and primary
reserve: The secondary reserve provided by the generating plant i
X
N X
Mi
cannot be greater than the difference between the maximum ca-
PRi;k;t þ BESS  Primary Reserve ct (9)
i¼1 k¼1
pacity of the generating plant i and the generation of this spinning
reserve; in the case in which the plant contributes to the primary
Primary reserve limit: Primary reserve provided by generating reserve, the secondary reserve is also limited.
plant i cannot be greater than its maximum primary response.
SRi;k;t  Gen Maxi $ Ui;k;t  Gi;k;t  RUi;t $
PRi;k;t  PFCi $RUi;k;t c i; c k; c t (10)
ðGen Maxi  Pot Max PFCi Þ c i; c k; c t (18)
Generating unit provides primary reserve: If plant i in its step k
If generating plant i is not providing primary reserve, then the
is providing primary reserve in period t, then the binary variable
secondary reserve must be less than or equal to the spinning
takes the value of one
reserve. In the opposite case when the generating plant i is
contributing to the CPF, then the secondary reserve must be less
RUi;k;t $ M  PRi;k;t M[0; c i; c k; c t (11)
than or equal to the spinning reserve minus the reservation
Generating unit does not provide primary reserve: If plant i in intended for primary control RUi;t ¼ 0.
its step k is not providing primary reserve in period t, then the Enabling to participate in SFC: If plant i participates in sec-
binary variable takes the value of zero. ondary frequency control in any time period t, then it must be
1111
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

enabled to perform secondary control.

X
Mi X
Mi

X
T X
Mi Ui;k;t1  Ui;k;t  UStopi;t c i; c t (24)
SRi;k;t  UEnableSFCi $M M[0; c i (19) k¼1 k¼1
t¼1 k¼1
Minimum operating time: Once a control unit is turned on in
If generating plant i performs SFC, it is enabled to perform this time t, it has to meet a minimum operating time in order to stop.
function and the activation cost must be added to the target
function ðUEnableSFCi ¼ 1Þ X
Mi Min X
Time Oni  
Generation and activation: If the k step of generating unit i in
Ui;k;tþy Min Time Oni $ Ui;k;t Ui;k;t1 c i ; c t
k¼1 y¼0
period t is not activated, then the binary variable takes value of zero
and is considered off Ui;k;t : (25)
Minimum shutdown time: Once the control unit is turned off in
Ui;k;t  Gi;k;t $M M[0; c i; c k; c t (20)
t-time, it has to meet a minimum shutdown time to turn it back on.
Only one step of the control unit has to be on: If one step of the
generating unit is turned on, the others must be turned off, as it is X
Mi X Offi
Min Time
  
Ui;k;tþy  M $ 1  Ui;k;t1  Ui;k;t
the same plant.
k¼1 y¼0

X
Mi  M[0; c i ; c t (26)
Ui;k;t  1 c i; c t (21)
k¼1 Units in maintenance: When the i unit is in maintenance, all its
steps must remain off.
This constraint allows each central i to be divided into Mi plants,
with different variable costs of generation, and then prevents more XX X
Mi
than one step of the plant from being on for each time period t. Ui;k;t  0 c i2Units in maintenance;
Combined Cycle Constraints: The combined cycle is activated in t i k¼1
full cycle mode or open cycle. c t2Time in maintenace (27)

XX
Mi Variable non-negativity: The generation of power plants and
Ui;k;t  1 c t; c i2Combined  Cycled Plants (22) reserves should be positive.
i k¼1
Energyi;k;t ; PRi:k;t ; SRi:k;t ; PV Energyt ; Wind Energyt
In modeling, the combined cycles can operate under two con-
figurations. The first is with an open cycle where only the gas ; Hydro Energyt ; BESS Energy  0 c i; c k; c t
turbine (Gas Turbine mode) is in operation and the second is full (28)
cycle where the gas turbine operates together with the steam tur-
bine (Gas Turbine-Steam Turbine mode).
Start Constraint: Variable takes value 1 if central i in time t is
on.
7.1.3 Continuous variables
X
Mi X
Mi
Ui;k;t  Ui;k;t1  UStarti;t c i; c t (23)
k¼1 k¼1

Energyi;k;t Output of generating plant i in step k, in time t, in [MW].

RPi;k;t Primary reserve provided by generating plant I, in step k, in time t, in [MW].
RSi;k;t Secondary reserve provided by generating plant i, in step k, in time t, in [MW].
PV Energyt Electrical power dispatched by photovoltaic power plants at time t, in [MW].
Wind Energyt Energy output in time t by wind power plants in [MW].
Hydro Energy t Energy output by hydro power plants in time t, in [MW].
BESS Energy Installed power of BESS, in [MW].

Stop Constraint: Variable takes value 1 if central i in time t is 1.1.1 Binary decision variables
stopped.

Ui;k;t 1: Generating plant i is generating energy in step k in time t.

0: Otherwise.
RUi;k;t 1: Generating plant i is providing primary reserve in step k in time t.
0: Otherwise.
UStarti;t 1: Generating plant i was turned in time t.
0: Otherwise.
UStopi;t 1: Generating plant i is stopped in time t.
0: Otherwise.
UEnableCPFi 1: Generating plant i is enabled to perform CPF.
0: Otherwise.
UEnableCSFi 1: Generating plant i is enabled to perform CSF.
0: Otherwise.
1112
C.A. Agostini, F.A. Armijo, C. Silva et al. Renewable Energy 171 (2021) 1097e1114

7.1.4 Parameters

N Number of generating plants i.

Mi Number of steps for the cost curve of the generating plant i.
T Number of time periods t.
VCi;k Variable cost of generating plant i, operating in the power range of step k, in [US$/MWh].
Gen Mini;k Minimum generation of the k-step belonging to the power plant i, in [MW].
Gen Maxi;k Maximum generation of the k-step belonging to the power plant i, in [MW].
Demandt Electricity demand in [MW] in time period t.
Primary Reserve Minimum primary reserve for the system, in [MW]. This parameter is calculated externally, using security analysis.
Secondary Reservet Minimum secondary reserve for the system for time t, in [MW]. This parameter is calculated externally, using security analysis.
Rampi Charging ramp of the control unit i, in [MW/min].
Max Control Uniti Maximum control for generating unit i, in [MW].
Min Control Uniti Minimum limit for the generating plant i, in [MW].
PFCi The amount of primary reserve that the generating plant i can provide, in [MW].
Pot Max PFCi Maximum primary reserve that the generating plant i can provide, in [MW].
Cost Startingi Generating plant i starting cost, in [US$].
Cost Stoppingi Generating plant i stopping cost, in [US$].
Min Time Offi Minimum time that generating plant i must remain off before it starts again, in [hrs].
Min Time Oni : Minimum time that generating plant i should remain on once it starts, in [hrs].
Gen Max PVt Maximum photovoltaic generation power for time t, in [MW].
Gen Max Windt Maximum wind generation power for t-time, in [MW].
Gen Max Hydrot Maximum hydraulic generation power for t-time, in [MW].
PVVC Variable cost for photovoltaic energy, in [US$/MWh] (non-fuel cost).
WindVC Non-fuel variable cost for wind power, in [US$/MWh] (non-fuel cost).
EnablingCostPFCi Annualized cost of enabling plant i to participate in CPF, in [US$].
EnablingCostSFCi Annualized cost of enabling plant i to participate in CSF, in [US$].
Cost BESS Annualized cost of investing in batteries (for a 1 MW and 0.25 MWh storage unit) for the CPF, in [US$].

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