Strike Price Optimization for ISO New England's Day-Ahead Ancillary Services

Abstract

ISO New England's (ISO-NE) Day-Ahead Ancillary Services Initiative settles reserve products as financial call options on real-time energy prices. The system-wide strike price creates an efficiency-reliability tradeoff: increasing it lowers competitive reserve offers, but weakens resources' incentives to incur preparation costs and remain available for real-time performance. The existing strike price rule does not explicitly account for heterogeneous resource incentives and reserve requirements. We develop an optimization framework that selects the highest strike price while ensuring that enough resources retain an incentive to prepare and collectively satisfy the reserve requirements. Because a resource's preparation decision may affect the resulting real-time price distribution, its incentive depends on an unobservable counterfactual. To address this, we derive a tight lower-bound certificate using only the available conditional price distribution and a bound on the resource's price impact. We show that each resource enters the optimization through a single incentive threshold and that any finite optimal strike price occurs at one of these thresholds. This yields a tractable exact solution method based on threshold calculations and a small number of linear feasibility checks. Using reconstructed ISO-NE conditional price distributions and representative gas-fired resources, we find that higher heat-rate combustion turbines are more likely than combined-cycle resources to constrain the strike price choice.