Addressing Imbalance Risk with Reserves and Flexibility Options: An ERCOT-like Case Study

As the role of variable renewables in electricity markets expands, new market products help system operators manage imbalances caused by uncertainty and variability. Whereas work in the last decade has focused on constructing demand curves for central procurement of those products, little attention has been paid to designing their settlement scheme and understanding the connections between the economic value of these products, the schedule of variable resources, and the cost of flexibility. In this article, we compare a new product called Flexibility Options, which addresses these gaps, with a traditional reserve product using a case study similar to the 2019 Texas (ERCOT) system. Our findings suggest that both products are equally effective in managing imbalances, but Flexibility Options have superior risk management properties and keep the system operator revenue adequate.