diff --git a/docs/format.md b/docs/format.md
index 0733fb5..114d40a 100644
--- a/docs/format.md
+++ b/docs/format.md
@@ -28,13 +28,14 @@ Each section is described in detail below. For a complete example, see [case14](
 
 ### Parameters
 
-This section describes system-wide parameters, such as power balance penalties,  optimization parameters, such as the length of the planning horizon and the time.
+This section describes system-wide parameters, such as power balance and reserve shortfall penalties, and optimization parameters, such as the length of the planning horizon and the time.
 
 | Key                            | Description                                       | Default  | Time series?
 | :----------------------------- | :------------------------------------------------ | :------: | :------------:
-| `Time horizon (h)`                     | Length of the planning horizon (in hours). | Required | N
+| `Time horizon (h)` | Length of the planning horizon (in hours). | Required | N
 | `Time step (min)` | Length of each time step (in minutes). Must be a divisor of 60 (e.g. 60, 30, 20, 15, etc). | `60` | N
 | `Power balance penalty ($/MW)` | Penalty for system-wide shortage or surplus in production (in $/MW). This is charged per time step. For example, if there is a shortage of 1 MW for three time steps, three times this amount will be charged. | `1000.0` | Y
+| `Reserve shortfall penalty (\$/MW)` | Penalty for system-wide shortage in meeting reserve requirements (in $/MW). This is charged per time step. Negative value implies no penalty. | `-1` | Y
 
 
 #### Example
@@ -43,6 +44,7 @@ This section describes system-wide parameters, such as power balance penalties,
     "Parameters": {
         "Time horizon (h)": 4,
         "Power balance penalty ($/MW)": 1000.0
+        "Reserve shortfall penalty ($/MW)": -1.0
     }
 }
 ```
diff --git a/src/instance/read.jl b/src/instance/read.jl
index 84e76c2..01573f7 100644
--- a/src/instance/read.jl
+++ b/src/instance/read.jl
@@ -100,7 +100,7 @@ function _from_json(json; repair = true)
     )
     shortfall_penalty = timeseries(
         json["Parameters"]["Reserve shortfall penalty (\$/MW)"],
-        default = [0.0 for t in 1:T],
+        default = [-1.0 for t in 1:T],
     )
 
     # Read buses
diff --git a/src/model/formulations/base/system.jl b/src/model/formulations/base/system.jl
index 88bc78a..f88c15e 100644
--- a/src/model/formulations/base/system.jl
+++ b/src/model/formulations/base/system.jl
@@ -39,12 +39,12 @@ function _add_reserve_eqs!(model::JuMP.Model)::Nothing
         eq_min_reserve[t] = @constraint(
             model,
             sum(model[:reserve][g.name, t] for g in instance.units) + (
-                shortfall_penalty > 1e-7 ? model[:reserve_shortfall][t] : 0.0
+                shortfall_penalty > -1e-7 ? model[:reserve_shortfall][t] : 0.0
             ) >= instance.reserves.spinning[t]
         )
 
         # Account for shortfall contribution to objective
-        if shortfall_penalty > 1e-7
+        if shortfall_penalty > -1e-7
             add_to_expression!(
                 model.obj,
                 shortfall_penalty,