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Basics of Power Market

Electricity is a unique tradable commodity characterized by its fungibility, the need for simultaneous production and consumption, and the requirement for supply to meet demand exactly. Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) manage the electricity market through day-ahead and real-time markets, ensuring reliability and balancing generation with load. They also operate a capacity market to incentivize long-term investments in generation resources, while CME Group offers futures and options contracts for risk management.

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1 views

Basics of Power Market

Electricity is a unique tradable commodity characterized by its fungibility, the need for simultaneous production and consumption, and the requirement for supply to meet demand exactly. Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) manage the electricity market through day-ahead and real-time markets, ensuring reliability and balancing generation with load. They also operate a capacity market to incentivize long-term investments in generation resources, while CME Group offers futures and options contracts for risk management.

Uploaded by

vaibhav.kothari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Electricity is a relatively new type of tradable commodity several characteristics differentiated

from other commodities such as crude oil or natural gas first it is completely fungible
meaning one megawatt hour of electricity produced from either coal or natural gas contains
exactly the same amount of energy second it must be produced and used simultaneously
industrial battery storage is still prohibitively expensive therefore additional systems need to
be in place to meet peak levels of consumption third the supply must meet demand exactly
in the power grid ancillary services and demand response programs ensure that increases in
demand are handled in real time this means uneconomic generation resources are not
dispatched when demand is low they are only put into service during periods of peak
demand due to these unique characteristics of electricity independent system operators ISO
and regional transmission organizations RTO are responsible for keeping the power grid
balanced between generation and load is OS and RTOS forecast and schedule generation
to assure that sufficient generation and backup power is in place to meet unexpected
demand or generation loss is OS and RTOS must be non-commercial organizations neutral
and independent from commercial players currently there are nine ISO and RTOS in North
America each one is responsible for the reliability operations resource planning and
expansion in the deregulated electricity market each ISO and RTO typically operates and
manages four markets energy capacity financial transmission rights and ancillary services
let's first look at how is OS and RTOS manage the energy market which includes the
generation and consumption of electricity they manage the energy market via two sub
markets the first is through a day ahead market and the second is through the real time
market in the day ahead market electricity generators and load serving entities submit their
bids to ISO RTOS to receive and offer electricity to the power grid based on varying costs for
each hour or next operating day in the real time market is OS and RTOS manage the
change in production and consumption throughout the day this can range from five minutes
to half an hour increments is OS and RTOS optimize the generation dispatch schedule
where they consider cost security and transmission constraints market participants will
commit to the schedule with a locational marginal price or LMP set at each location based on
published prices from ISO RTO in the real-time market operators send dispatch instructions
to each generator based on actual system operating conditions in a real-time basis
generation and load are priced at each node on the bus for longer-term Grid resource
stability is OS and RTOS operate a capacity market that auctions the commitment of
providing electricity generation capacity to ensure generation exceeds load in the long term
this market incentivizes long term capital investment in generation resources and revenues
are paid to the capacity providers regardless of whether energy is produced or not CME
Group offers a variety of futures and options contracts for electricity day ahead real time and
capacity markets this provides market participants a variety of regional locations to hedge
and manage risk exposure

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