Spillovers from Ancillary Services to Wholesale Energy Markets

In electricity markets, generators are rewarded both for providing energy and for enabling grid reliability. The two functions are compensated with two separate payments: energy market payments and ancillary services market payments. We provide evidence of changes in the generation mix in the energy market that are driven by exogenous changes in an ancillary services market. We provide a theoretical framework and quasi-experimental evidence for understanding the mechanism, showing that it results from the multi-product nature of power plants combined with discontinuities in costs. Although research in economics typically focuses solely on the energy market, our results suggest that spillovers between markets are important as well. Furthermore, policy changes relating to grid operations, grid reliability, or climate change could have unintended effects.