IEEE Power & Energy Magazine - January/February 2021 - 69

Hydro-Based Systems

Renewables-Based Systems

Timescale of Main
Variability Components

Weekly, Seasonal, and
Interannual

From Minutes to Daily Patterns

Effect on Short-Term
System Operations

Hydro Provides Reserves

Renewables Require Reserves

What Kind of Support
Generation Is Needed?

Resources to Remain On (Off)
for Entire Dry (Wet) Seasons

Fast-Acting Resources to Make
Up for Sudden Imbalance

Risks of Shortage

Rationing
(Energy Constrained)

Blackouts
(Capacity Constrained)

Price Formation

Based on Probability and
Cost Rationing

Based on Probability and
Cost of Sudden Blackouts

figure 3. The parallels between renewable- and hydro-dominated markets.

january/february 2021

Marginal Cost (BRL/MWh)

market reform was discussed in
the country.
100
As we show in Figure 4, the
90
spot price was close to zero in
80
36 out of the 56 months depicted,
70
and the longest low-price period
60
lasted for nearly two years (21
50
months). This behavior is similar
40
for other countries in the region
30
with many hydro resources, and
20
it is similar to the price behavior
10
expected in renewable-driven
0
systems. It merits noting, however, that price volatility in hydrobased systems occurs at a different timescale. Energy prices tend
to exhibit low volatility of spot
figure 4. The historical monthly spot prices in the Brazilian system (BRL/MWh).
prices in the short term, as reservoirs can easily transfer hydro
energy from off-peak to peak hours and modulate load supply. this probability of shortage as a function of the amount of
The second commonality has to do with the principle online reserves by the VoLL, one obtains an estimate for the
used to estimate the value of water in cost-based markets demand side's marginal willingness to pay for an incremental
in Latin America and the idea behind the implementa- amount of reserves to avoid a shortage. It is clear from this
tion of sloped ORDCs in U.S. markets. Sloped ORDCs depiction that increasing the VoLL has a direct influence on
are constructed based on the notion that stochastic fluctua- the shape of the ORDC, thus leading to a more conservative
tions in the supply-demand balance must be accommodated assignment of resources in the short term, pressuring spot
by dispatching part of the system's reserves, or short-term prices upwards and inducing a larger capacity margin at the
operational flexibility, committed in the ex-ante market. If market equilibrium, leading to a more reliable system in the
a lower amount of reserves is procured, therefore, there is a long term.
A very similar logic applies to the calculation of water
probability that the system will not be able to respond and
that some demand will need to be curtailed. A probabilis- values in hydro-dominated systems. Provided that all availtic simulation model representing multiple sources of uncer- able generation resources have zero marginal cost, the water
tainty can be used to assess this type of risk. By multiplying value can be approximated by the product of the VoLL (or,
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IEEE Power & Energy Magazine - January/February 2021

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