Design of Ancillary Service Markets

We examine the design of bid selection protocols and settlement rules in ancillary service markets. Such markets are typically operated by an independent system operator (ISO) for competitive procurement of reserves that are needed to ensure the secure operation of a competitive electric power system. Reserve types are characterized in terms of response time and they are downward substitutable (faster responding reserves can replace slower ones). We explore how this substitutability is accounted for in alternative market protocols and we analyze the efficiency, distributional aspects and incentive compatibility of such protocols.