Discussion on decentralized ancillary service trading based on insurance theory

In power markets ancillary service is usually centrally handled. The system operator determines the required reserve capacity and purchases it from the reserve suppliers. The corresponding cost is allocated to consumers. This approach may lead to inefficiency and gaming in ancillary service markets. Is there any way that individual consumers can treat the reserve capacity through a decentralized decision-making approach? If so, how should each consumer make optimal ancillary service plan? With a decentralized approach, where each consumer tries to maximize his own benefit, could the maximal social welfare be obtained as its centralized counterpart? In this paper, conceptual study results on these issues are presented. Two cases are investigated. The first case aims at reducing electricity interruption risk of a specified consumer via asking a power supplier to improve generation reliability. The provider insurance theory is introduced to guarantee the improvement of generation reliability. In the second case, there are three participants in the market: a power supplier, a consumer (also the insured) and a reserve capacity provider (also the insurer). Reserve capacity is traded and the insurance policy used to enforce the liability of reserve capacity provider. It is shown that in both cases, once the consumer purchases a well-defined insurance policy, the latter will induce incentives for the insurer to provide the required level of reliability improvement or reserve capacity. With insurance policy, the consumer can reduce his expected outage loss and shift his risk to the risk-neutral insurer. It is proven that the suggested decentralized approach can yield maximal social welfare as well.link_to_subscribed_fulltex