Transcription
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 uh neck anomic 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.