EBF 483
Introduction to Electricity Markets

9.0 Introduction


9.0 Introduction

In 2008, the Texas power grid (Electric Reliability Council of Texas, or ERCOT) experienced an unusual meteorological phenomenon. A large weather front moved from west to east across the state very rapidly. As the front passed, the wind suddenly stopped blowing. This would have been of interest only to meteorologists had Texas not been so dependent on wind energy for its power grid. When the front passed through and wind stopped blowing, the massive wind farms in Texas stopped producing power. The grid operator had to scramble to arrange backup supplies to keep the power grid operational, and the state nearly had a monumental blackout.

Texas has another wind problem as well, one that is shared with other windy areas of the US power grid like the MISO region - once wind is built it is incredibly cheap to operate. When the wind is strong, it floods the electricity market with power that is free to produce (at the margin - we don't need to pay for the wind once we pay for the plant). LMPs plummet, and at times can even become negative.

Low prices are great for consumers but lousy for producers, and it leaves power grid operators with a quandary: we need to maintain enough power generation capacity for those times when demand is unexpectedly high or (like that unusual weather pattern in Texas) when some power plants unexpectedly stop producing electricity. But if prices in the day ahead and real-time energy markets are really low, then it's not profitable to keep these plants around.

In previous lessons, we have looked at the tools that grid operators have for scheduling and dispatching power plants based on forecasts of electricity demand that range from 24 hours in advance to one hour in advance. In this lesson we'll look at the tools that grid operators have for keeping the grid stable when forecasts are wrong or when things don't go as planned on the power grid; and the ways that grid operators have tried to keep power plants profitable even when day ahead and real-time market prices are low.

There are a couple of supplementary readings for this lesson:

  • Ancillary services primers
  • PJM's training materials on capacity markets
  • A.N. Kleit and R. Michaels, "If you pay for the power, why pay for the power plant?" (This article describes why capacity payments are very controversial.)

Learning Outcomes

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

  • Identify the types of ancillary services that are needed to keep the power grid stable.
  • Describe when a grid operator would use certain types of ancillary services
  • Describe the "missing money" problem and why some power grid operators use special payments for capacity
  • Calculate the clearing price in a capacity auction.

Lesson Roadmap

Lesson 9 Roadmap
To Read Online course material
To Do Homework Assignment 9


If you have questions, please feel free to post them to the Questions about EBF 483 discussion forum. While you are there, feel free to post your own responses if you, too, are able to help a classmate.