Merit-Order Economics of Free Governor Mode Operation: A Business-Analysis Framework for Heat-Rate-Based Dispatch Priority and Frequency-Regulation Value in the Bangladesh National Grid

Although Free Governor Mode Operation (FGMO) has been extensively studied technically (droop response, frequency deviation, plant fuel efficiency, etc.), the business case for what plant companies are called into FGMO duty, and the economic logic they are based on, has not been investigated. This omission is important because the dispatch decision, which is taken by the system operator like the National Load Despatch Centre (NLDC) of Bangladesh, represents a decision on the allocation of resources with tangible impacts on generator revenue, regulation, and the welfare of industrial customers. This paper builds on the operations and energy-business literature by providing a business-analysis framework based on the engineering parameter, generator heat rate, as a proxy for marginal cost, and its connection to a firm-level economic decision—that of NLDC’s merit-order dispatch practice. We illustrate how lower cost generating units are gradually relegated to higher and higher dispatch levels, that is, they perform both base-load and primary reliability service, but are paid the same rates for both services. We then explore the business case for such an agreement based on Bangladesh-specific estimates of the value of lost load and the
cost of unplanned industrial outages, and conclude that the cost of the fuel premium that the frequently dispatched units pass on to generators is, in most realistic scenarios, well outstripped by the value of the reliability that the unit provides to the rest of the economy. The implications from these findings are clear for
management and regulation: generation companies are currently claiming a reliable-service cost, but without formal recognition, causing a mismatch between private incentives and system-wide value creation. To fix this, the paper suggests a compensation scheme based on heat rate that regulators can implement in
Bangladesh, for instance, the Bangladesh Energy Regulatory Commission (BERC), to create incentives for the firms that are aligned with the outcomes of providing grid reliability, and which could be transferable to other developing electricity markets.