During a very interesting webinar presentation last month, Mark Lively showed how market can contribute to improve operating conditions in the electricity system.
Mark has been advocating a cash out of unscheduled flows of electricity since he worked in South Africa in 1983/4. He sees the main problem in developing a price for that cash out to be achieving agreement among the parties. Suppliers want the price to be higher. Users want the price to be lower. About the only thing the parties can agree on is the measured frequency of the system being higher or lower than standard. Mr. Lively's WOLF (Wide Open Load Following) pricing model builds on the physical phenomenon of system frequency and its deviations to develop a real time pricing index.
Though parties are supposed to be in balance while operating their systems, each party is occasionally long or short. Having a predetermined formula for the price of those surpluses or shortages reduces the argument about the economic value of those deliveries. A party may end up paying a very high price or receiving a very low price, but those disadvantageous prices are due to the timing of the deliveries, not an automatic bias against a particular participant.
An advantage of pricing unscheduled flows of electricity using a formula driven by concurrent conditions is that all parties have an incentive to act in ways that improve operating conditions. In India, the implementation of Unscheduled Interchange pricing changed the average system frequency from 48.69 Hertz over the month of January 2002; to 49.91 Hertz over the month of January 2003; to 50.02 Hertz over the month of July 2004. The frequency variability index decreased by a factor of 10.
You can access his papers at no charge on his web site. He discusses the improved operating conditions in India in 'Reply Comments Of Mark B. Lively In Regard To Using Prices Instead Of Penalties For (1) Regulation And Frequency Response, (2) Energy Imbalance, (3) Generator Imbalance, And (4) Inadvertent Energy', Preventing Undue Discrimination and Preference in Transmission Services, FERC Docket No. RM05-25-000 and RM05-17-000, 2006 September 20.