EBF 483
Introduction to Electricity Markets

8.0 Introduction


8.0 Introduction

In Lessons 6 and 7, we learned why a number of US states chose to restructure their electric utilities. We also learned by way of a very tough example from California how the establishment of markets for electric power generation needs to happen very very carefully. While there were many problems with California's power market, a major problem was that the PX auction and the Cal ISO dispatch based on those auction results were totally disconnected. The PX "cleared the market" in the manner of equating supply and demand, but as we saw earlier in the course, that market-clearing point means nothing if transmission congestion keeps the power from being delivered to customers. Generating companies in the California market discovered that since the Cal ISO was trying to adjust the PX market clearing to meet real-time demand and avoid overloading the grid at the same time, it was very easy to push the Cal ISO into a kind of panic buying mode.

At the same time that the California power crisis was unfolding, an alternative way of designing electricity markets was being tested in the eastern US. The PJM Interconnection (the "PJM" stands for "Pennsylvania, New Jersey and Maryland" in reference to a long-standing cooperative agreement between utilities in those states) had established a different kind of market design in which it would simultaneously clear the market (set supply equal to demand) and set congestion prices on overloaded lines. Rather than set prices based on different geographic zones, every single node in the network could have its own price in the PJM model.

PJM's electricity market design has become the dominant structure for electricity markets in the US. Most of the areas that have adopted markets for electric power generation (the areas operated by Regional Transmission Organizations) have, to a large extent, adopted the PJM design. Over the next three lessons, we'll talk in detail about the PJM market model. While we will make reference to PJM quite frequently, remember that the concepts discussed in these lessons apply to just about every electricity market in the US.

This lesson will focus on what is called the "energy market" portion of the PJM market model. The energy market is essentially a set of two connected short-term forward markets. The first, called the "day ahead" market, commits generators to be able to produce electricity 24 hours in advance, based on forecasted demand. The second, called the "real-time" market or "hour ahead" market, commits generators to be able to produce electricity one hour in advance, based on an updated demand forecast. You can think about the day-ahead market as setting a schedule of which power plants should be available to produce energy, while the real-time market shifts those schedules around a little bit based on an improved forecast of electricity demand.

Learning Outcomes

By the end of this lesson, you should be able to:

  • Demonstrate market clearing in a uniform price auction and calculate the System Marginal Price;
  • Calculate the power flows associated with the uniform price auction clearing on a three node network;
  • Calculate Locational Marginal Prices (LMP) in a two node and three node network;
  • Explain the two-settlement payments system and calculate payments to generators in the day ahead and real-time markets.

Lesson Roadmap

Lesson 8 Roadmap
To Read Online course material
To Do Homework Assignment 8
Remember Exam 2 follows Lesson 8


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