Cost Allocation for Inertia and Frequency Response Ancillary Services

The reduction in system inertia is creating an important market for frequency-containment Ancillary Services (AS) such as enhanced frequency response (e.g., provided by battery storage), traditional primary frequency response and inertia itself. This market presents an important difference with the energy market: while the need for energy production is driven by the demand from consumers, frequency-containment AS are procured because of the need to deal with the largest generation/demand loss in the system (or smaller losses that could potentially compromise frequency stability). Thus, a question that arises is: who should pay for frequency-containment AS? In this work, we propose a cost-allocation methodology based on the nucleolus concept, in order to distribute the total payments for frequency-containment AS among all generators or loads that create the need for these services. It is shown that this method complies with necessary properties for the AS market, such as avoidance of cross-subsidies and maintaining players in this cooperative game. Finally, we demonstrate its practical applicability through a case study for the Great Britain power system, while comparing its performance with two alternative mechanisms, namely proportional and Shapley value cost allocation.