Working Paper

A Market for Primary Frequency Response?

While FERC sets standards for primary frequency response capability, it doesn't resolve the provision of headroom in a high-renewables future. A competitive market could spur innovation and cost-effective grid reliability service.

Working Paper

Executive Summary

Major electric grid transformation is underway, driven by an intersection of competitive market forces, consumer preferences, and policy standards. For example, both New York and California require 50% of electric load to be procured from renewable sources by 2030. The increasing share of intermittent renewables on the grid necessitates a rethinking of how to accurately value and procure certain grid reliability services, some of which have been historically provided for free by conventional generators. While there might not be major grid reliability deficiencies now, high penetration of intermittent renewables can change this-potentially requiring adjustments to market designs and operational practices.

As one of the recognized “essential reliability services” of the bulk power system, “primary frequency response” (PFR) represents an example of such a reliability attribute that is currently not being directly compensated in North American electricity systems. After explaining what PFR is in the context of grid reliability, this paper dispels the false notion that only conventional resources can supply it. Distinguishing between two aspects of PFR-capability versus provision -the paper explains that actual provision of PFR during certain events would require generators to always withhold some amount of power output, a concept known as “headroom.” By requiring all newly interconnected generators to maintain PFR capability, a newly implemented rule from the Federal Energy Regulatory Commission would likely ensure adequate PFR capability in the future. This paper focuses on the unaddressed PFR provision issue in the absence of a mechanism to incentivize or guarantee sufficient headroom provision.

I quantify the extent that PFR headroom provision, if left unaddressed, would hypothetically degrade under scenarios of significantly increased renewable energy penetration. An illustrative simulation analysis is performed using publicly available electricity market bid curve data, as well as historical wind generation data from the PJM Interconnection. The results suggest that under very high levels of renewable energy, certain low-load hours would see significantly reduced headroom levels compared to today. The extent that decreased PFR headroom may pose grid reliability challenges would differ across regions, depending on the aggressiveness of projected renewable energy deployment.

Since different resource types face heterogeneous costs to supply PFR headroom, the paper explores the potential economic benefits that can be achieved from a market-based system to procure PFR provision versus a command-and-control headroom requirement. A market system might enable resources other than traditional generators, such as energy storage and demand resources, to also contribute PFR headroom. The costs and operational complexities to implementing a market-based solution to PFR are analyzed, including a discussion of the perspectives of industry stakeholders and grid operators who would be responsible for devising such a market design. 

Ultimately, the capability and provision of PFR today is likely sufficient with existing resources; however, continuing a rapid expansion of intermittent renewables on the grid might require novel market design structures or tweaks to current operating models, in order to ensure continued grid reliability without sacrificing system cost effectiveness. Projected increases in renewable energy penetration may force an evolution in the way PFR provision is obtained. At the end of the day, the optimization question is whether the potential improvements in economic effectiveness and system robustness (by expanding the base of participating resources to load demand and energy storage) outweigh the introduction of operational complexities that could undermine the crucial responsibility of ensuring the grid’s reliability at all times.

Thomas Lee

Research Assistant
Thomas Lee is a graduate of the Jerome Fisher Program in Management and Technology, where he obtained dual degrees in economics and computer science, and an M.S.E. in electrical engineering. He was a research assistant at the Kleinman Center.