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Impact of Reserve Margin Variance on Competition for Creating Price Efficiency and Investment Encouragement

Ira Savitri 1, Eleftheria M. Polykarpou 2, and Glenn R. Drayton 2
1. School of Energy and Resources, UCL Australia, Adelaide 5000, Australia
2. School of Energy and Resources, UCL Australia and Energy Exemplar Pty Ltd, Adelaide, Australia
Abstract—The restructure of electricity market systems aims to achieve price efficiency and encourage new investment. However, these two intentions are contradictory with regard to the reserve margin level in the system. Hence, an ‘optimum’ reserve margin is sought that establishes a balanced condition that can create price efficiency and encourages investment. This research examines the optimum reserve margin of the Java-Bali prospective competitive market with energy-only and spot-price system, by simulations using PLEXOS® software. To reflect perfect competition in the market model, the short-run marginal cost (SRMC) simulation was used, while imperfect competition was attained by imposing a combination of game theoretic, Nash-Cournot and Bertrand simulations. The model was validated for both physical and competition conditions in order to ensure the accurate representation of real market conditions. Due to a lack of data for the Java-Bali spot-price market, the Australia’s National Electricity Market (NEM) was used as a representative of the future spot-price market design of the Java-Bali system. The simulations yielded different levels of optimum reserve margin in perfect and imperfect competition conditions. Sensitivity analysis on the results concerning the existence of market power suggests that high reserve margin does not necessarily improve price efficiency.

Index Terms—reserve margin, competition, price efficiency, investment encouragement, company/generator behavior, SRMC, Nash-Cournot, Bertrand

Cite: Ira Savitri, Eleftheria M. Polykarpou, and Glenn R. Drayton, "Impact of Reserve Margin Variance on Competition for Creating Price Efficiency and Investment Encouragement," International Journal of Electrical Energy, Vol. 1, No. 4, pp. 206-212, December 2013. doi: 10.12720/ijoee.1.4.206-212
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