Costs for frequency reserve and regulation power options in Iceland

The price for ancillary services that ensures an efficient use of resources is equal to the marginal costs of providing these services. In an expanding hydro power system there are two optimal designs for expansion; one design is optimal when ancillary services are not to be provided and another design is optimal when these services are to be provided. The right price for ancillary services cover the net difference in costs between the two designs. The difference in design in an expanding system is specific for that particular system and hence no general number can be specified. In an expanding hydro power system, the efficient price typically covers parts of the marginal investment costs for excess capacity in turbine and generator, but no investment costs for waterways and reservoirs.