Wholesale Electricity

Markets Made Easy

From the Computer Scientists
perspective of the Economist view
of the Market
Ron Coutu
S T RAT E GI C M A R K E T A DV I S OR ( N OT A N E N GI N E ER )

This slide is representative of this

presentation
From
To

Professor William Hogan is

Research Director of the
Harvard Electricity Policy G
roup
(HEPG), who is one of the
fathers of current Market
design in the United States

Me - Computer Scientist
originally trained in COBOL
(This is the original COBOL
team, I am not there)

You: Very
smart
engineers
like Tesla

Todays Objective
To introduction and explain the ISO New Englands Energy Markets
In these auction-based markets, customers buy and sell
$6 to $12 billion of electricity annually
Everyone who lives in New England is implicitly part of this market
since almost every MW produced and consumed flows through the
market

Power System Components

Generators (Make power)

Transformers

Transmission lines

Distribution lines

Loads (Use Power)

Many Different
Perspectives
.

PERSPECTIVES CAN SHAPE YOUR

VIEWS

How many of these are spinning?

Which table is longer? Which is wider?

LETS TALK ABOUT MARKETS

From an Economic Perspective
(put your engineering thoughts on hold)

Topics Covered

Wholesale Energy Markets:

Market Auctions: How do they
work?
Economic Incentives: Why do
they work?
Do they work?: Competitive
markets versus traditional utility
regulation
9

Is an Electricity Market like a

Grocery Store?

10

Dramatic Shift in Energy Production

Region has seen shift from oil to natural gas
100%
90%
80%

7%
2%
16%

13%

12%

2%

1%
11%

13%
1%

6%

18%
Pumped storage

70%
60%
Capacity
(MW)

30%

33%

36%

Coal
31%

50%

1%

1%

46%

46%

40%
30%
20%

34%

10%
0%

Demand Resources*

22%

Nuclear

Oil

Natural gas

15%
6%

1990

2000

2010

2013
11

Natural Gas & Wholesale Electricity Prices Linked

Because of New Englands heavy reliance on natural gas as a fuel source, natural gas typically sets the
price for wholesale electricity
$180

$30

$160
$25

$120

$20

$100
$15
$80
$60

$10

Fuel $/MMBtu

Electric Energy $/MWh

$140

$40
$5
$20
$0

$0

Wholesale Electricity at New England Hub (Real-Time LMP)

Coal

12

Electricity Auctions: Background

Daily auctions for electric power
Determine wholesale electricity
prices

Buyers and sellers are:

Large energy users (buyers)
Load Aggregators (buyers)
(serving homes & businesses)
Power plant owners (sellers)
Financial traders (buy and sell)
13

A Simple Example: Auction Bids and

Offers
Supply: Offers to Sell
Selle Quantit
r ID y (MWh)

Price
($/MWh)

Demand: Bids to Buy

Buyer Quantity
ID
(MWh)

Price
($/MWh)

100

$46

100

$59

190

$47

100

$58

150

$48

250

$57

210

$49

200

$55

200

$51

150

$54

250

$52

200

$53

200

$54

150

$51

275

$55

200

$50

150

$56

200

$49

100

$57

125

$47

What is the Market Clearing Price?

14

Clearing the Market: Price and Quantity

$59

Supply

$57
$55
$53
Price = $52
$51
$49

Demand

$47
Quantity
$45

500

1,000

1,500

2,000

15

What Clears? What Offer Sets Price?

Offers to Sell
ID

Quantity

Price

100

$46

ID

Quantity

Price

190

$47

100

$59

150

$48

100

$58

210

$49

250

$57

200

$51

200

$55

250 150

$52

150

$54

200

$54

200

$53

275

$55

150

$56

150

$51

100

$57

200

$50

200

$49

125

$47

Bids to Buy

Marginal Seller
Marginal Buyer

Offer F Sets the Market Price =

$52

16

Market Settlement: Who Gets Paid

What?
Selle
r ID

Offer
Quantity

Supply Side: Cleared Offers to

Sell
Offer
Cleared
Market
Price

Quantity

Price

Seller
Credit ($)

100

$46

100

$52

$5,200

190

$47

190

$52

$9,880

150

$48

150

$52

$7,800

210

$49

210

$52

$10,920

200

$51

200

$52

$10,400

250

$52

150

$52

$7,800

200

$54

$52

$0

275

$55

$52

$0

150

$56

$52

$0

100

$57

$52

$0

Total Payments to Sellers

$52,000
17

Market Settlement: Demand Side

Demand: Cleared Bids to Buy
ID

Bid
Quantity

Bid
Price

Cleared
Quantity

Market
Price

Buyer
Charge ($)

100

$59

100

$52

$5,200

100

$58

100

$52

$5,200

250

$57

250

$52

$13,000

200

$55

200

$52

$10,400

150

$54

150

$52

$7,800

200

$53

200

$52

$10,400

150

$51

$52

$0

200

$50

$52

$0

200

$49

$52

$0

125

$47

$52

$0

Total Payments by Buyers

$52,000
18

About Clearing the Markets

Timing:
Every hour has a different market price, quantity (247)
Auction is held on a Day-Ahead basis
Todays prices
Published on http://isoexpress.iso-ne.com
ISO to Go - iPhone and Android APP

What happens the next day?

1. Sellers are assured payment at the market clearing price
2. Buyers are assured physical delivery by the market
operator
19

Assuring Delivery the Next Day

ISO New England operates:
Electricity auction markets for New England region; and
Electric power grid to assure deliveries in the region.

Day-Ahead Forward
Market
Real-Time (Spot)
Market

Energy Markets Timelines

RT
(Spot)
Market
opens

00:0
0

13:3
0

DELIVERY DAY REAL TIME MARKET

CLEARS
10:0
0

14:00

DAY-AHEAD FORWARD MARKET CLEARS

Re-Offer Period closes

by 14:00 for the next
days Real-Time
(Spot) Market

Continue to execute the RealTime (Spot) Market during

the delivery (operating) day

00:0
0

DA Forward
Market
results
published
by 13:30
13:3
0

10:0
0

DA Forward
Market
bids and
offers due
10AM

Next DAY-AHEAD FORWARD MARKET

CLEARS

Next DELIVERY
DAY

21

Forward Markets and Spot Markets

Time for a Reality Check:
Suppose buyers (retailers/utilities) purchased a certain amount
of electricity in the Day-Ahead Market auction
What if actual demand turns out to be higher the next day?

Do we need:
Another auction?
New prices?
How and when do we deal with this?

22

Forward Markets and Spot Markets

Theres also a spot (real-time) electricity auction
Intersecting supply offers and actual demand new price!
That means there are two prices:
1. A forward price set in the Day-Ahead Auction; and
2. A spot price set in real-time, based on actual supply and
demand

Who gets paid what, then?

Principle: The price is established when the offer is accepted
. Forward price applies to bids and offers cleared in the forward
market;
. Spot price applies bids and offers cleared in the spot market
23

Example: What if Actual Demand is

Higher?
$59
$57
Spot Price =
$55

$55
$53
Day-Ahead Price = $52

$51
$49

$45

Real-Time
Demand

Day-Ahead
Quantity

$47

500

1,000

1,500

2,000

24

Who Gets Paid What?

Offers to Sell
ID

Quantity

Price

100

$46

190

$47

150

$48

210

$49

200

$51

250

$52

200

$54

275 200

$55

150

$56

100

$57

Incremental offers are cleared

to meet incremental demand
in the spot (real-time) market
Previously Cleared at
Forward Market Price = $52

Now Clear at Spot

Market Price = $55

25

Spot Market Settlement: At Real-Time Price

Sellers F, G, H deliver 500 MW more than they sold in Day-Ahead auction

Offer
Price

Delivere
d
MWh

Day
-Ahead
Sale MWh

Spot
Market
Sale
MWh

Spot
Market
Price

Spot
Market
Credit $

100

$46

100

100

$55

$0

190

$47

190

190

$55

$0

150

$48

150

150

$55

$0

210

$49

210

210

$55

$0

200

$51

200

200

$55

$0

250

$52

250

150

+100

$55

$5,500

200

$54

200

+200

$55

$11,000

275

$55

200

+200

$55

$11,000

150

$56

$55

$0

100

$57

$55

$0

ID

Offer
Quantit
y

Total Payments for Spot Market Sales:

$27,500
26

Real-Time Market Settlement: Demand Side

Assume highlighted buyers demand more in RT than purchased DA

ID

Real-Time
Demand
MWh

Day
Ahead
Purchase
MWh

Spot
Market
Purchase
MWh

Spot
Market
Price

Spot Market
Charge $

150

100

+50

$55

$2,750

200

100

+100

$55

$5,500

250

250

$55

$0

300

200

+100

$55

$5,500

200

150

+50

$55

$2,750

200

200

$55

$0

200

+200

$55

$11,000

R, S,
T

$55

$0

Total Payments for Spot Market Purchases:

$27,500
27

Test Your Auction Intuition

What if demand turns out to be lower the next day?
Then: Spot price < forward price
In real-time: Market operator instructs sellers with offers above
the spot price to not produce, even if they cleared in DA forward
market
In spot market settlement: These sellers are charged the spot
price
By not producing, these sellers incur no (variable) costs

Question: Are they happy about this?

Or: Would they rather be producing?
28

Example: Actual Demand is Lower in

Real Time
$59
Real-Time
Demand

$57
$55

Day-Ahead
Quantity

Seller E
Offer: 200 @
$51

$53

Day-Ahead Price = $52

$51
Spot Price =
$49

$49
$47
$45

500

1,000

1,500

2,000

29

Scenario 1: Seller Es payoff if it

produces to cover its Day-Ahead cleared
position
Consider its Day-Ahead auction position:

Offered:
Cleared:

200 MW at offer price $51 each

200 MW at market price of $52 each

Revenue: $52 200 MW = $10,400

Costs:
No (variable) costs yet; production occurs
tomorrow.

Real-time Scenario 1:
Revenue
Production
cost
Profit

Produce the 200 MW

$10,400 From DA Market (above)

($10,200) $51 x 200 MW delivered
$200

30

Scenario 2: Charging the seller to not

produce
Real-time Scenario 2:

Dont produce the 200 MW

Seller E will be charged the spot price to buy out of its delivery
Revenue

$10,400 From DA Market

Buy out cost

($9,800) 200 x $49 spot market price

Profit

$600

Yes! Seller E is better off paying to not produce in realtime.

Same applies for Seller F. Why?
What about lower-cost sellers with offers below the spot price of
$49, such as Sellers A, B, and C? What would they rather do?
What would happen if the buy-out cost (spot price) is less than $49?
31

How does this influence consumers

bills?
So in the previous examples the wholesale load server
was getting charged as much as $55/MWh
How does this translate into retail bills?
Someone is buying the energy on your behalf, perhaps
at the very volatile prices (prices can range from $0
overnight to $400/MWh on a single day at times)
This gets passed on through a charged which is usually
reflective of the expected average prices over a longer
period of time

32

How Do These Markets Affect

Homeowners Electric Bills?
Wholesale market prices impact
Generation
component of an electric bill
($77.15 / MWh = $0.07715 /kWh)

33

B. Auctions, Costs, and Incentives

In the Day Ahead market example, the clearing price =
$52.
Cheap seller A: Offered $46
Marginal seller F:

Offered $52

Expensive seller J: Offered $57

Who made a profit? Why?

Implications.

What incentives does this create for:

Short term: A sellers operating costs and offer prices?

Long term: Incentives to minimize costs when building power
plants?
34

Competitive Markets and Traditional

Regulation
In many other, non-ISO Market parts of the United States,
there are traditional utilities that:
Own power plants, and build new ones, when power demand grows
Regulated power prices are set by PUCs, passing costs onto consumers

Concerns motivating competitive markets: High costs,

incentives to over-build, and operational inefficiencies
Why use a market-based system to price power
competitively?
Economics says: To improve efficiency! Auction-based markets create
strong incentives to reduce production costs and offer prices.
And: who bears the risk of if a new plant comes in with high costs?

35

Wait! There are more ISO auction

markets!
The energy market auction prices vary by location
Thus: Locational Marginal Prices (LMP)
How many different locational prices? Hundreds.
In the spot market, they can vary every few minutes.
Why? Because at times the cheapest sets of offers cannot service all of the
load in the system due to transmission system limitations

Other ISO Markets:

Capacity market: Long-term forward sales (covers some fixed costs)
Reserves and ancillary services: Special markets for real-time control

All the ISOs markets employ auctions, and follow the similar
principles to those weve explored in this introductory module
NYISO, PJM, MISO, ERCOT, SPP and California ISO
36

Topic Review
ISO New Englands Energy Markets
How the auction markets work
Economic Incentives: Why they work
Big Picture: Competitive markets instead of traditional
regulation

37

YOU MAY NOW RETURN TO VIEWING THE

WORLD FROM AN ENGINEERS POINT OF
VIEW

38