This paper presents an H-2-optimal power regulation scheme for balancing authorities to provide regulation services using both generation and load resources in the presence of a significant amount of intermittent renewable generation. The optimal controller is designed to minimize the loss of total economic surplus due to deviations from the schedule because of generation contingencies. The results show that the optimal controller outperforms the conventional ACE control policy by (1) providing faster return to the schedule under varying demand response levels, (2) reducing the cost of using reserve units for regulation services, and (3) minimizing deviations from the global surplus-maximizing schedule.