Variable Renewable Energy Participation in U.S. Ancillary Services Markets: Economic Evaluation and Key Issues
Variable renewable energy (VRE) participation in ancillary services (AS) markets could provide
new sources of value for resource owners and new options for system operators to manage grid
reliability. From the perspective of VRE resource owners, AS market revenues could help to
offset expected declines in energy and capacity value as VRE penetrations increase. From the
perspective of system operators and the electricity system, VRE participation in AS markets
could provide lower-cost reserve capacity and additional tools for relieving unit commitment and
ramping constraints.
In the United States, however, VRE participation in organized AS markets is currently low or
nonexistent and many questions around the economic value of VRE participation in these
markets remain unanswered. For instance, how would the economic value of AS market
participation to resource owners and to the electricity system as a whole compare between solar
and wind generation, between standalone and hybrid VRE, across the seven organized electricity
markets, and between different AS products? How might the economic value change with higher
VRE and storage penetrations? What changes in market rules would be needed to allow VRE to
participate in AS markets?
This paper examines the economic value of VRE participation in AS markets from resource
owner and electricity system perspectives across the seven U.S. electricity markets. The analysis
uses a price-taker dispatch model with simple, consistent assumptions that facilitate comparisons
across technologies, VRE configurations, and markets over time. It considers two kinds of VRE2
configurations: (1) standalone VRE facilities, with a standalone solar or wind facility; and (2)
hybrid VRE facilities, with a solar or wind facility paired with battery storage.
In a base case, the analysis focuses on VRE participation in regulation markets using historical
market prices, with interconnection capacity limits sized to the VRE facility’s nameplate
capacity. It also examines sensitivities in which VRE participates in spinning reserve markets,
VRE participates in future regulation markets in electricity systems with higher renewable
penetration, and where interconnection capacity limits are sized to the maximum output of the
combined generator and battery capacity (for hybrids).
For standalone VRE owners, the results suggest that the incremental revenues from providing
regulation and spinning reserves would vary significantly across ISO/RTO markets, across years,
and between solar and wind. For some resources in some markets, the average incremental value
may be non-trivial. For instance, average (2015-2019 market prices) incremental revenues for
providing regulation services in CAISO (solar/wind), ERCOT (solar/wind), and SPP (wind) were
$1.4-3/MWhPC (+6-15%). In other markets and for solar in SPP, incremental revenues were
$1.0/MWhPC (+3%) or less. Regulation markets are, however, relatively thin (< 800 MW in each
direction), and even in ISOs/RTOs with higher incremental value expanding market participation
to VRE and energy storage may lead to market saturation and a decline in AS prices.
Participating in spinning reserve markets added little incremental value for standalone VRE
owners, outside of ERCOT and, to a lesser extent, CAISO. This result underscores that, in most
markets, most of the reserve market value for standalone VRE owners would be in providing
regulation reserves, though differences between ERCOT and other markets suggest that this
result is sensitive to differences in market design and AS procurement practices. The high VRE
penetration sensitivity showed significant increases in the incremental value of regulation market
participation for standalone VRE, due to higher regulation prices and a higher frequency of hours
in which regulation prices exceed energy prices.
At current market prices, revenues from regulation and spinning reserve markets are not large
enough to meaningfully offset declines in solar and wind resources’ energy and capacity value as
their penetrations increase. At higher VRE penetrations, regulation and spinning reserve market
revenues may more meaningfully reduce value declines in some markets.
For hybrid VRE owners, incremental revenues were, as expected, several-fold higher than for
standalone owners, though variation across markets highlights differences in storage value due to
different market designs and resource mixes. In the near term, the results suggest that AS
revenues could be a significant part of hybrid VRE business models, with the POI sensitivity
showing that most of the regulation value of hybrids could be captured with POI capacity limited
to the VRE facility’s nameplate capacity when storage is sized to 50% of VRE capacity.
However, hybrid VRE faces the same uncertainty around AS market prices that standalone VRE
does.
In most ISOs/RTOs, standalone and hybrid VRE participation in regulation markets could
provide significant value to the electricity system as a whole, as measured by the difference
between VRE resources’ average regulation value and average regulation market prices. In other
words, VRE could provide regulation during periods with high market prices, which would put
downward pressure on average market prices and provide ISOs/RTOs with a larger toolset to
resolve emerging, higher-cost system constraints. The results show that, in general, VRE
provision of regulation services in ISOs/RTOs with separate upward and downward regulation
products was higher than in ISOs/RTOs with bidirectional products. Hybrid VRE provided more
regulation service and often, but not always, had higher regulation value than standalone VRE.
The results provide insights on two priority areas for considering VRE participation in ISO/RTO
reserve markets. First, developing separate upward and downward regulation products, for
ISOs/RTOs that do not have them, will enable more efficient use of VRE and storage resources
in regulation markets by taking advantage of the fact that these resources have very different
opportunity costs for upward and downward reserves and that prices for upward and downward
regulation tend to be poorly correlated. Second, and similar to the CAISO’s strategy (CAISO,
2020b), focusing initially on VRE hybrid participation in AS markets may be a more efficient
first step toward expanding market participation, given that hybrids will provide more reserves
than standalone VRE and will generally have higher AS value. That being said, ultimately it may
be beneficial to enable both kinds of resources to participate in AS markets.