When it comes to managing the high voltage electricity transmission grid in the U.S., there are nine major players.
Three are traditional wholesale markets — one each in the Southeast, Southwest, and Northwest. The balance of the country is managed by seven different Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs). The California Independent System Operator (CAISO), the Midcontinent Independent System Operator (MISO), the New York Independent System Operator (NYISO), Independent System Operator for New England (ISO-NE), and the Electric Reliability Council of Texas (ERCOT) are ISOs, while the Southwest Power Pool (SPP) and PJM (the Pennsylvania-New Jersey-Maryland Interconnection) have RTO status.
An ISO or RTO does not sell electricity to end users; rather, it manages the markets that ultimately serve those end users. In this blog post, we’ll explain how they accomplished this with two different types of energy markets.
In the simplest terms, energy markets are auctions that ISOs and RTOs use to coordinate the daily electricity production of participants.
Electricity suppliers report to the ISO/RTO which of its generation sources will be available for next-day dispatch, offering to sell the power generated for a specific bid price that’s typically based on the cost to operate the generator. Then, electricity buyers, or the load-serving entities, bid on the available electricity to meet their forecasted demand.
Each ISO and RTO run two different energy markets to ensure both grid reliability and that market demand is met: the day ahead and the real-time energy market.
Day-ahead energy market
As the name implies, the day-ahead energy market is conducted the day prior to when the energy will be consumed — typically in the morning. Buyers agree to purchase a set amount of electricity from sellers at the market price and both parties are committed — the buyer must buy, and the seller must sell.
Real-time energy market
The real-time energy market, or spot market, allows buyers to purchase electricity for immediate use, balancing actual demand and system constraints with the purchase commitments made the previous day. The real-time market typically runs once per hour and once every five minutes to manage real-time load changes and real-time pricing.
Day-ahead vs. real-time: which is better?
There is no one correct answer as to which market is better. Each market has pros and cons, so it’s more about how you strategically manage risks and hedge costs. By locking in prices the day before, you run the risk that real-time prices may be lower than what you’ve committed to pay. On the flip side, real-time energy prices are largely influenced by demand — so if demand is higher than expected, so too will be the cost of purchasing electricity on the real-time market. For this reason, load-serving entities typically opt to make most of their purchases in the day ahead market, hedging against price changes and the volatility inherent in the real-time energy market.
We offer a range of powerful solutions for optimizing day-ahead and real-time energy market participation, as well as managing the resulting settlements. Contact us to learn more about how our solutions can enhance your bidding strategies in day-ahead energy markets.