  Substantial changes in the generation portfolio take place due to the fast
growth of renewable energy generation, of which the major types such as wind
and solar power have significant forecast uncertainty. Reducing the impacts of
uncertainty requires the cooperation of system participants, which are
supported by proper market rules and incentives. In this paper, we propose a
bilateral reserve market for variable generation (VG) producers and capacity
resource providers. In this market, VG producers purchase bilateral reserve
services (BRSs) to reduce potential imbalance penalties, and BRS providers earn
profits on their available capacity for re-dispatch. We show in this paper that
by introducing this product, the VG producers' overall imbalance costs are
linked to both their forecast quality and the available system capacity, which
follows the cost-causation principle. Case studies demonstrate how the proposed
BRS mechanism works and its effectiveness.
