Frequency Regulation with Mileage Payments: Is a Competitive Market Always the Winner?

The advancement in distributed generation units and storage systems is stimulating a vigorous market for frequency regulation. Nevertheless, as identified by the Federal Energy Regulatory Commission, the un-paced payment structure in use may not well recognize the frequency regulation providers’ performance, which warrants incorporating the “mileage payment” into the structure. Surprisingly, our theoretical analysis illustrates that such a new form of payment, if not designed carefully, may further prevent the independent system operators from achieving cost-effective frequency regulation. We compare two scenarios to support this argument - a competitive market and a regulated one. Counter-intuitively, due to the difficulty in the concise short-term load prediction in a reasonably large window, the competitive market is not the winner. We further establish the performance guarantee for the regulated market. Extensive simulation results confirm our theoretical analysis and demonstrate our approach’s feasibility in the current AGC framework.