Wind power and electricity markets - Wind Power Integration: Connection and System Operational Aspects - page 250

demand in real time (Section 5.2). There is also a need to deal with technical
constraints that are difficult to deal with in bilateral arrangements and may not be
dealt with in centralised arrangements. For example, the SEM market being pro-
posed for the island of Ireland is a gross pool arrangement, but is unconstrained.
Fossil-fuel and hydro generators are controllable and can generally set their outputs
to desired levels as required. Wind power lacks this ability and therefore con-
tributes to the need for balancing.
While the balancing market will have similarities to a gross pool, it will differ
in a number of important respects. The balancing market will only cover very short
periods of time and is sometimes referred to as a real-time market. The volume of
energy that is traded in the balancing market is small, but the prices are extremely
important to the overall market as they will reflect short-term supply/demand
imbalances. During times of low load and high generator availability, prices should
be low. In contrast, during times of high load and/or low generator availability, the
prices should rise. Persistent high prices indicate the need to invest in generating
capacity.
In some markets there are explicit payments for capacity, made on the basis of
the ability to generate. Markets that do not have capacity payments are referred to
as energy only . SEM has an explicit capacity mechanism while BETTA does not.
The impact of these capacity payments should be to encourage long-term invest-
ment, as the investor has some level of guaranteed income, as opposed to the
energy only market where income will be based purely on production of energy.
Capacity payments should also moderate the energy price received by the gen-
erators, particularly during times of shortage. If there are no explicit capacity
payments then the value of capacity is reflected in the energy price, either within
the pool or through bilateral trades. With no explicit capacity mechanism, and
assuming a competitive market, the argument can be made that there should be no
limit to the price of energy, i.e. whatever the market will bear. It is during times of
shortage when the price is high that capacity is being paid for implicitly. With an
explicit capacity mechanism in place, it can be argued that the energy price should
be capped by the regulator to avoid participants paying for capacity twice. The
capacity payments are based largely on the concept of capacity credit. The capacity
credit for a generator is the additional load that can be served while maintaining
system reliability. Wind does have a capacity credit that decreases with wind
penetration (Section 5.3.5) and should receive some payments under a capacity
mechanism.
Operation of an electricity supply system in a reliable manner requires the
provision of what are termed ancillary services. These technical services include
reserves, reactive power, congestion management and black-start capability
(Section 5.3.6). Ancillary services are being provided increasingly through market
mechanisms, and wind generation has the potential to earn revenue from them.
They can be contracted on a long-term basis in a competitive manner. They can be
provided through centralised markets, e.g. locational pricing for congestion man-
agement, and co-optimised energy and reserve markets (Baldick et al. , 2005).
A wind turbine can provide reserve by not operating at its maximum power output