The optimal mix of thermal capacity in a load duration curve model with reserve requirements

In electricity markets, a share of plants’ generation capacity needs to be on standby, as reserves, to cancel imbalances produced by quick and random variations of load and generation. In this paper, we derive the optimal thermal generation mix that minimizes the joint cost of a load duration curve and requirements of reserves. We show that regulation-up reserves, which increase real-time generation when needed, requires additional capacity investments of both peak and base-load technologies. In contrast, regulation-down reserves, which are used to decrease real-time generation, shift the mix towards the peak-load capacity. In the model, we calculate energy and reserves’ marginal costs and show that marginal cost pricing decentralizes the planner’s solution with zero profits.