A first revision onreal systems has revealed that the problem

can betackled in verydifferentways, dependingonthe marketsystem characteristic (nodal orsingle-bus), the dispatching method
(sequential vs.joint) orthe ancillaryservices considered (typically
frequency and loadregulation divided into primary,secondary and
tertiary reserves). In additionto these factors, newpossible market
designs might arise, as,for instance, the existence of a uniquemarket in which the whole group of services is cleared bymeansof a
uniqueoffer.
It has beenpointed out that reserve modelingrequires the consideration of short-term constraints such asthe rampinglimits of
the generationunits orthe responding times of reserves. In addition,reserves are related to uncertain contingencies, reinforcing the
stochastic/probabilisticdimensionof the problem.It also requires
the formulation of interaction factors betweencommoditiesas,for
instance, lost opportunity costs betweenservices,orthe dependencyof reserve requirements onenergydemand.
Centralized dispatcheshave been thoroughly studied and a
widevariety of modelshavebeenelaboratedleading to interesting
results. A challenging via for future workwill bethe study of the
couplingbetweenmedium-term decisions (hydrothermalcoordination,fuel and maintenanceplanning, etc.)withthese short-term
centralized energyand reserve marketmodels.
Onthe contrary, oligopolistic models, havenot yet reached the
same level of maturityfor the combined energy and reserve dispatch than for the onlyenergy dispatch. Asshown in this paper,
the degreeof mathematicalcomplexity turns out to beconsiderablyhigher.Furthermore, the inclusion of additional variablesand
constraints criticallyincreases the size of the problem,and consequently, the expected computational times. These drawbackswill
surely besome of the challengesthat future works will haveto cope
with.
The effect of uncertainty is limited to the growth rate of
demand, to which a Markov Chain Monte Carlo approach is
applied. One hundred sequences of thirty years of demand
growth rates were generated. The performance of each of
the different market designs was tested against each of these
demand growth rate scenarios. With such a large number of
scenarios, statistical analysis of the results yields statistically
significant results. The differences between the average outage
rates are an indicator for the relative reliability of the different
market designs. We should not expect large differences in
long-run average prices, as investment is programmed to
take place up to the point that it is just expected to be profitable. Therefore, in every market design, long-run average
prices should approximate long-run average cost. However,
the differences between the standard deviations in de the different models are an indicator for price volatility. In an earlier
version of the model, historic data and a fixed growth rate were
used ( De Vries and Heijnen, 2006 ). However, we could not
generalize from the historic data while the fixed growth rate
provided little indication of the stability of the different market
designs in the presence of random variations in the growth rate
of demand. The Monte Carlo approach makes it possible to
evaluate the impact of demand growth rate uncertainty upon
various market designs in a statistically significant way.
The basic structure of the model is as follows. For each
year, the model calculates the supply function and the loade
duration curve for an imaginary electricity market (loosely

based upon the Netherlands). The supply function is

constructed by combining existing generation capacity with
the new generators that are built in the course of the model
run. From this the price e duration curve is calculated, which
provides the generating companies revenues. Based on the
merit order, fuel type and efficiency, the generating companies variable costs can be calculated. After subtracting fixed
costs, the net profit remains.
All the versions of the model start with the same generation
portfolio, based upon the Dutch stock of large generating
plants. Capacity is somewhat short in the beginning of the
model run and the same amount of new capacity is assumed
to be in the pipeline in each version of the model, hence
the similar volumes of generation capacity in the first years
of each version.
4. Model results
As a first step, one hundred time series of the demand
growth rate were generated randomly, using the function that
was described in Section3.3.
Fig. 5 shows the distribution of the demand growth rates in
the model runs. These 100 Markov chains formed the basis for
a Monte Carlo analysis of the different market designs.
In the presentation of the results, means and standard
deviations are calculated over only the last 20 years of the
model runs, in order to filter out the effect of any transition
effects that might occur during the first five years of the run.
As mentioned before, the same 100 stochastic runs were
used for each different market design. Differences in the
results are therefore entirely caused by differences in the
market designs, not by random differences between the input
data. The standard deviation was 0.9% points. This is a fairly
modest demand growth rate with also a limited variation in
growth rates. Thus our model provides a conservative testing
environment, in the sense that in many markets, uncertainty
about demand growth is higher than here.
A statistical analysis of the model results is presented. The
main performance indicators of the different market designs
are the average price of electricity (which includes payments
for capacity), the standard deviation of the price and the
average number of hours per year with insufficient generation
capacity. In addition, for each market design the results of one
typical run are plotted.
As a base case, the model is run for an energy-only market,
that is, a market in which there are no provisions for stimulating investment in generation capacity other than the price
mechanism. In addition, several capacity mechanisms are
tested: capacity payments, operating reserves pricing and
capacity obligations. These are all run under the assumption
of effective price competition. Finally, a run is presented in
which market power is simulated.
Where possible, the parameters of the different capacity
mechanisms were chosen to resemble the real-life implementations of these models. The level of capacity payments was
modeled after the payments in Argentina and Chile and the
mandated reserve margin in case of capacity obligations was
taken from PJM. Operating reserves pricing has not been
implemented, but the combination of the size of the operating
reserve and the system operator s willingness to pay for
reserves were calculated to be optimal in theory (De Vries,

2004) and, at 10% of installed capacity, appear to be reasonably large. Of course, choosing different parameters will
lead to different performances. However, because investment
is modeled to always tend towards an equilibrium where price
equals long-run marginal cost, the models will provide
sufficient indication whether an alternative constitutes an
improvement or not. Therefore this comparison provides the
necessary insight into the dynamic behavior of the different
capacity mechanisms, but the results should be interpreted in
a qualitative manner.