$40/MWhElectricity is typically measured by kilowatt hour (kWh) for retail use. For example, an electric heater rated at 1000 watts operating for one hour consumes one kWh of electricity. Turning on a 50-watt light bulb for 20 hours uses one kWh of electricity.
Electricity is a relatively new type of tradable commodity. Several characteristics differentiate it from other tangible commodities like crude oil or natural gas:
Due to these unique characteristics of electricity, Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) are responsible for keeping the power grid balanced between generation and load.
ISO forecasts and schedules generation to assure that sufficient generation and back-up power is in place to meet unexpected demand or generation loss. It must be a non-commercial organization, neutral and independent of commercial players.
Currently there are nine ISO/RTOs in North America. Each one is responsible for the reliability, operations, resource planning and expansion in the deregulated electricity market region in North America:
Each ISO/RTO typically operates energy, capacity, financial transmission rights and ancillary services markets.
For short term power grid reliability and resource scheduling, ISO/RTOs provide a forward energy market for participants. This market typically consists of day-ahead and real-time markets.
Electricity generators and load serving entities submit their bids to ISO/RTOs in the day-ahead market to receive or offer electricity to the power grid based on varying costs for each hour for next operating day. ISO/RTOs optimize the generation dispatch schedule considering cost, security and transmission constraints. Market participants will commit to the schedule with a locational marginal price (LMP) set at each location based on published prices from ISO/RTOs.
LMP = System Energy Price + Transmission Congestion Cost + Cost of Marginal Losses
In the deregulated regions, electricity wholesale market starts and centers around the ISO/RTO. Electricity generators and Load Serving Entity (LSE) submit their generation offers and load bids in the day-ahead and real-time market.
System operators balance electricity supply and demand in each location on the bus considering the transmission constraints through an auction process:
The clearing price is based on the marginal unit of generation’s offer price. Given the below options generation options and if the capacity required is 3200 MW, the clearning price set by marginal unit would be $50/MWh.
|Generation Offer||Capacity (MW)||Price ($/MWh)|
In the real-time market, operators send dispatch instructions to each generator based on actual system operating conditions in a real-time basis. Generators get paid at generation bus LMP. Loads pay at load bus LMP. Transactions pay differential in source and sink LMP.
For longer term, ISO/RTOs operate a capacity market that auctions the commitment of a resource to provide energy during system emergency under the capped energy price. And revenues are paid to the resources regardless of whether energy is produced or not.
CME Group offers a variety of futures and options contract for electricity day-ahead, real-time and capacity market participants in various regional locations to hedge and manage risk exposure.