M1 : Overview of Electricity Markets Transition to electricity markets

Market Structure and Operations Vertically integrated electricity utilities

Transition to electricity markets

Driving factors for the transition
World-wide experiences
Electricity market models
Entities of electricity markets
Different types of electricity markets/derivatives
market
Operational practices

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Utilities own generation, transmission, and possibly The complete power system is subdivided to, utilities,
distribution over a wide geographical area control areas, pools and coordinating councils

Each utility contains one or more control centers for the

purpose of monitoring, dispatching and control

Typically Energy Management Systems (EMS) carried out

the tasks at control centers

An EMS comprises a base SCADA (Supervisory Control

And Data Acquisition) system that is equipped with
additional planning and operations analysis functions to
permit optimisation of the utility's generation and power
delivery systems

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 Main economic features of vertically
Main EMS functions
Short-term load forecasting,
integrated utilities
Unit commitment,
A monopoly (mainly due to economy of scale, scope and
Generation dispatch
capital intensive nature), but regulated
Reactive power control
State estimation Relied on least cost principles for planning and operation
Automatic generation control Cost includes generation, transmission and distribution
Preventive and emergency security control costs up to the consumer connection point
Regulated tariff based on average costs comprising cost of
Controls centers regulate the interchanges across regions service + regulated rate of return but sometimes distorted
in a pool, to increase reserve and security by political intervention
Coordinating councils: broad jurisdiction to establish This regulatory principle is called rate-of-return or cost-
reliability criteria and planning criteria of-service regulation: this assures suppliers will recover all
their costs
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Reasons for the structural changes

Other issues
(restructuring or deregulation)
No consumer choice
Increased energy prices in early seventies, the thought of
Short-term economic inefficiency of average cost based better ways of supplying electricity
pricing
(alternative is the marginal cost based pricing, that is cost of To introduce competition in electricity supply industry, and
last unit sold) consumer choice for price efficiency (to reduce price)
Little incentive to reduce cost
To let the supply and demand to decide electricity price
Heavy financial burdens on governments than the regulator

The change in economy of scale of generation

technologies, e.g. gas turbine (GT), combined-cycle gas
turbine technology (CCGT)

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 Higher technical efficiencies of CCGTs (~ 60%), shorter
construction time (2-3 years), low investment cost (~500
US$/kW) Rapid developments in information technology and
communication systems, which make possible to handle
The regulated utilities may have expected required revenue huge amount of information
(under regulation), but under a competitive market a
revenue deficiency can be occurred known as stranded In developing countries, power sector restructuring is
cost the regulator should devise methods to recover mostly influenced by international funding agencies.
stranded cost during the transition to reduce key state owned assets
the most common argument for deregulation is the
inefficiency of regulation to decrease government control over the sectors of
national economy
deregulation is not equivalent to perfect competition
which is well known to be efficient
to prepare the ground for foreign capital penetration
competition provides much stronger cost minimizing
incentives than typical cost-of-service regulation

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Electricity Markets
Models of Competition
Corporate unbundling of vertically integrated structure
to Generation, Transmission, and Distribution (or Retail) 1. Monopoly
companies.

GenCos, TransCos, DistCos + (Independent) System

Operator + Regulator

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2. Purchasing Agency 3. Wholesale competition

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4. Retail competition The following main services can be unbundled to different

levels (service unbundling),

Real power generation

Real-time load following
Transmission loss generation
Stand-by spinning reserve
Short-term spinning reserve for security purposes
Load-frequency control
Var generation and interruptible loads
Other ancillary services

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 Different market structures in different countries Some markets such as Argentina, Chile, England and
Wales and Spain pay a supplemental capacity payment to
Different levels of competition encourage generation investments (in such a case energy
and capacity price driven investments)
- competition for supply
- retail contestability
In markets such as Australia (NEMMCO), California, New
Zealand and Norway capacity payment is not employed
Trading via a Power Pool or Contracts or Hybrid

Competition : large number of smaller independent Transmission and distribution is mostly a natural
competing GenCos to avoid market power monopoly, regulated transmission tariff

New generation investments driven by competitive prices

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World-wide experiences For more details:

In England and Wales

Chile started as the early 1980s.
The Office of Gas and Electricity Markets (OFGEM)
Argentina deregulated its power industry in 1992 http://www.ofgem.gov.uk
National Grid Company (NationalGrid)
In UK deregulation started in 1980s, 1990 the government http://www.nationalgrid.com/
owned Central Electricity Generation Board (CEGB) was
seperated into four parts

National Power Co.,

PowerGen Co.,
Nuclear Electric Co.,
National Grid Company (NGC).

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 NordPool (The Nordic Power Exchange) the first
international power exchange in the world. In United States initial developments started with the Public
Nordic region operation since 1996, utility Regulatory Policy Act (PURPA) in 1978 and Electricity
Sweden joined in 1996, Policy Act (EPAct) in 1992.
Finland in 1998,
Western Denmark in 1999, Eastern Denmark 2000. And, transmission open access orders issued by FERC in 1996.
California, the first US electricity market in 1998
For more details:
Nord Pool Now, 6 main ISOs:
http://www.nordpool.com/ California (CA ISO),
Swedish ISO
Pennsylvania-New Jersey-Maryland Interconnection
http://www.svk.se/ (PJM),
Finnish ISO New York (NYISO),
http://www.fingrid.fi/
New England (ISO-NE),
Norwegian ISO Texas (Electric Reliability Council of Texas-ERCOT),
http://www.statnett.no/
21 and Midwest (MISO) 22

For more details:

In the United States

Federal Energy Regulatory Commission

http://www.ferc.gov
California ISO
http://www.caiso.com
PJM Interconnection
http://www.pjm.com
New York ISO
http://www.nyiso.com
ISO New England
http://www.iso-ne.com

The Electric Reliability Council of Texas

http://www.ercot.com
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 In Australia, Victorian Power Exchange (Victoria Pool) was With the completion of Directlink (a private interconnector
commenced in July 1994. linking QLD-NSW) and QNI (a interconnector linking QLD-
NSW) in the second half of 2000, Queensland became a part
In 1996, another state-level wholesale electricity market of interconnected NEM.
began operation in New South Wales (NSW) .
Tasmania joined NEM in 2005
A competitive wholesale market was introduced in
Queensland in March 1998. Following the completion of the Basslink in 2006 Tasmania
was connected to NEM-Australia.
National Electricity Market (NEM) began operation as a
wholesale market for the supply of electricity to retailers Present NEM-Australia consists Queensland, NSW, SNW,
and end users in Queensland, NSW, ACT, Victoria and VIC, SOA and TAS
South Australia in December 1998

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NEM - Australia Western Australia Wholesale Electricity Market

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For more details:
In Canada, Electric Energy Marketing Act (EEMA)
Australia established in 1982, Electric Utilities Act (EUA) in 1995.
Power pool of Alberta was the first market.
National Electricity Market Management Company Australia
http://www.nemmco.com.au The Spanish pool for electricity (day-ahead market) started
Independent Market Operator Western Australia Wholesale its operation since January 1998.
Electricity Market
http://www.imowa.com.au New Zealand Electricity Market (NZEM) established in 1996.

Singapore Electricity Pool (SEP) started in 1998.

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Main Electricity Market Models Power Pool (PoolCo) Model

Centralized market place to clear supply (generation)

Electricity Markets operating around the world can be and demand (load)
broadly classified into three basic market models,
Sellers submit supply bids (price; quantity) , buyers
submit purchase bids (price; quantity)
Power pools PoolCo Model
ISO or PX (the market maker) conducts the bid
Bilateral Contracts Model clearance (economic dispatch) and decide spot price
of electricity (market clearing price) on day-ahead or
hour-ahead basis (called ex-post pricing).
Hybrid Model
Market clearing price (MCP) represents the last cleared
energy bid, which signals for effective short-term
consumption and long-term investments

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 Power Pool (PoolCo) Model Bilateral Contracts Model

In an ideal situation (perfect competition) MCP is the

marginal cost of the last (or highest) bid. More decentralized nature, direct access between
suppliers and end users
In power pools winning bidders are settled at MCP,
winning suppliers are paid at MCP, successful buyers Bilateral contracts are negotiable agreements on delivery
are charged at MCP. and receipt of power between two traders.

Two types of pools can be found, Contract terms and conditions are set independent of ISO.
coordinated UC + bid clearance (e.g. PJM)
decentralized UC and centralized bid clearance (UC left to
the generation companies)

Examples PJM, NYISO, ISO-NE, Chile, Argentina,

England and Wales can be identified as pools
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However, ISO would verify for sufficient transmission Contracts involve additional trading cost plus negotiation
capacity to complete transactions and to maintain time and involvement of brokers
transmission security.
Two types of bi-lateral trades exists,
The wholesale electricity market in Norway is
predominately a bilateral contract market with future physical bilateral transactions suppliers self-
contracts schedules their capacity to supply a specific quantity
at a specific price
Bilateral model is a very flexible model as trading parties
are directly involved in deciding contract terms. tradable bilateral transactions long-term contract
between two parties, however participants have
freedom involve in other transactions or to procure
from a spot market (if exist)

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 If a seller and buyer signs a CfD which specifies strike
A typical bi-lateral bid will specify quantities and price, s, market price p and quantity Q.
price p (not a supply function as in the pool) (called ex-
ante pricing)
if p < s seller receives p*Q from the wholesale
Price Hedging in bilateral contracts market plus (s-p)*Q from the buyer;
seller -> p*Q +(s-p)*Q = s*Q, (paid)
Bi-lateral contracts are generally equipped with various buyer -> p*Q + (s-p)*Q = s*Q (charged)
financial instruments to deal with market price and other
uncertainties if p > s buyer is charged for p*Q by the wholesale
market but receives (p-s)*Q from the seller;
Contract for Differences (CfD) is a one mechanism buyer -> p*Q - (p-s)*Q = s*Q, (paid)
designed to sell pre-agreed quantity seller -> p*Q - (p-s)*Q = s*Q (charged)

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If p1 < p2 < s seller receives p1*Q from the wholesale market

In a LMP based market in order to completely hedge, it
plus (s-p2)*Q from the buyer and (p2-p1)*Q for FTR ;
needs an additional Financial Transmission Right (FTR)
between supplier and buyers network connected nodes
having value Q seller -> p1*Q +(s-p2)*Q + (p2-p1)*Q = s*Q,

buyer -> p2*Q + (s-p2)*Q = s*Q

If a seller and buyer signs a CfD which specifies strike
price, s, market price p and quantity, Q with an FTR
defined between nodes connecting seller (node-1) and If p2 > p1 > s buyer is charged for p2*Q by the wholesale
buyer (node-2) having value Q. market but receives (p2-s)*Q from the seller;

buyer -> p2*Q - (p2-s)*Q = s*Q,

seller -> p1*Q - (p2-s)*Q + (p2-p1)*Q = s*Q

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 Hybrid Model Allows more customer choice

California ISO adopted a combination of public exchange

Combines various features of power pools and bilateral (power exchange) and private exchanges and dealers
contracts (scheduling coordinators), which can be identified as a
hybrid model

In hybrid models, utilization of pool is not obligatory,

customers would be allowed to negotiate power supply
agreements directly with suppliers, or choose to accept
power from pool at spot price

Pool will serve all participants (buyers and sellers) who do

not sign bilateral contracts

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Main Entities of Electricity Markets

Market Participants

There are various entities involved in electricity markets Generation Companies (GenCo)
Transmission Companies (TransCo)
Regulator (not for a tight control but to oversee)
Distribution Companies (DistCos)
e.g. FERC in the US, OFGEM in UK
Retailers
Market Operator Customers
Independent System Operator (ISO) or Power Exchange Aggregators
(PX)
Marketers
e.g. NY-ISO, CalPX, NEMMCO Brokers

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 Independent System Operator (ISO)
Administers transmission tariff, maintains system
security, coordinates maintenance scheduling, a role in
A non-profit organization independent of market long-term planning
participants, such as transmission owners, generators,
distribution companies, and end-users
Authority to use system resources or curtail loads for
system security (to avoid emergencies and to maintain
Main task is to keep the system in balance : supply standards).
equals to demand
To ensure proper short-term and long-term economic
ISO establishes independent operation and control of signals to market participants (i.e. short-term resource
grid to ensure non-discriminatory open access to all usage and long-term investments).
transmission system users

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Operational tasks of ISOs

The are two types of ISOs found in practice
To meet the given predicted time-varying demand at
optimum economic efficiency
MinISO main task is maintaining transmission
security, limited role in energy market and generation
Compensate for transmission losses (real and
scheduling, the main market functions are done by a reactive)
separate Power Exchange (PX), but market schedules
are always verified with ISO e.g. California ISO To meet various operating constraints ( such as
thermal or stability constraints on transmission
lines, bus voltage control)
MaxISO [1] integrated ISO and PX, conducts the
electricity auction, and determines market-clearing-price
To provide flexible generation in real-time to balance
(MCP) considering transmission limits and generator deviations from anticipated demand
unit commitment simultaneously - e.g. PJM ISO, NGC
UK, Alberta Pool

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 Generation Companies (GenCos)
To provide standby network resources (generation,
var) in case of credible contingency
GenCos are formed once generation sector is segregated
As a whole such services can be summarized as from existing utilities.
procurement of ancillary services
GenCo may own generating plants or act on behalf of
Owns computing and communication assets to plant owners to trade in short-term market (power
monitor and control power system, e.g. Open Access exchange, power pool, or spot market)
Same-Time Information System (OASIS)
They have opportunity to sell power through negotiated
contracts or through PX

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Should coordinate with ISO to schedule maintenance and

Their offer prices (or bids) are not regulated planed outages

They may act strategically or exercise market power

Also they can trade in energy, or ancillary services
markets
They are responsible for own cost recovery and profits
In the context of vertically integrated utilities generating
companies were sometimes called independent power
producers (IPPs)

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Transmission Companies (TransCo)
The cost plus sufficient rate of return is guaranteed for
regulated Transcos under the transmission pricing
Transmission companies provide non-discriminatory
open access to network users
Transmission prices could comprise transmission
access charge (usage charge) and/or congestion charge
Secure and efficient operation of transmission system is (marginal cost based pricing)
vital for electricity markets
Transmission pricing is applied to network users
Transcos assets will be under the control of regional (suppliers and/or consumers)
ISO, ownership remain to the transco
Transmission transfer capabilities, such as Total
Transfer Capability (TTC) and Available Transfer
Capability (ATC) are decided by the TransCos, but
allocation of transfer capabilities for different
transactions done by the ISO electricity markets

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Distribution Company (DistCo) Retail Company (RetailCo)

Distribute electricity to customers in a certain A newly created entity in competitive environment to re-
geographical region sell electricity to customer

May be a subsidiary of a distribution company

A regulated firm, responsible for building and
maintaining distribution system, and meeting reliability
and availability standards A retailer buys wholesale electricity, and resell to retail
customers, and sends out bills (financial transactions)

In the fully deregulated environment Distco may be May combine electricity products and services into
fully decoupled as energy sales, operation and
maintenance of network, and developments various packages.

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Aggregator
Broker
An entity or firm that combines customers into a buying A middleman who facilitate transactions between buyers
group and seller

Group buys large blocks of electric power and other May act between GenCo/s and marketers
services at cheap price.

Aggregator may act as an agent (broker) between

customers and retailers

When aggregator purchases power and re-sells to its

customers, it acts as a retailer, and should initially qualify
as a retailer.

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Marketers Customers

An entity that may handle both marketing and retailing The final end user of electricity
functions
In deregulated environment customers are no longer
obligated to purchase power from local utility. They may
As name implies it markets electric energy services but have direct access to generators or contracts with other
does not own generating facilities providers of power.

Depending on price and reliability requirements

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Electricity Market Types/Derivative Markets
There are different market types or derivatives markets in
Trading for the power delivered in any particular minute
electricity trading
begins years in advance and continues until real time.
energy market (day-ahead or hour ahead)
This is accomplished by a sequence of overlapping
real-time market markets
ancillary services market
The earliest of which is the forward market that trade
capacity market nonstandard, long-term forward contracts
transmission market
Futures contracts standardized, exchange-traded forward
forward market contracts
futures market
options market (caps, swaps, etc..)

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Electricity futures typically cover a month of power All markets except the RT market are financial markets in
delivered during peak hours and are sold up to a year or the sense that the delivery of power is optional and the
two in advance sellers only real obligation is financial

Most informal forward trading stops about one day prior If power is not delivered, supplier must purchase replace
to real time, at the time system operator holds the day- power or pay liquidated damages
ahead (DA) market
In many forward markets, including many DA markets,
This often followed by hour-ahead (HA) and an real time traders need not own a generator to sell power
(RT) market also conducted by the system operator
But, RT market is a physical market, as all trades
All of these markets except RT market will be classified as corresponds to actual power flows
forward markets
The term spot market is often used to include DA and HA
markets, but most appropriate is to RT market
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 A customer who buys power in a forward market will Any power that is sold in the the DA market but not
receive either electricity delivered by the seller or delivered real time is deemed to be purchased in real time
financial compensation (liquidated damages) at the real time price of energy

But, customers are virtually never disconnected when In a competitive market the RT prices are true marginal
their forward contract falls, power is delivered and they cost prices
are charged for that

In most cases, a seller who cannot deliver power from its

own generator will purchase replacement power for its
customer

The most formal arrangement for purchasing replacement

power occurs in the system operators markets (DA or
RT)
65 66

Real-time Balancing Market

Market rules and architecture depends on the allowed
duration and height of the real-time market price, and how
Balancing market keeps supply and demand in balance
closely frequency and voltage will be maintained.
until the system operator is forced to balance by
shedding loads
The accuracy of balancing and short-term reliability are
largely determined by the structure of the balancing
This market must be administered by the system
market
operator, but it may include a sizable bilateral component

It may be integrated with the markets for operating

reserves, or may be separate

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 A Power Exchange
Day-ahead (DA) Energy Market

There are four typical types of DA markets. Each is a Bidding Restrictions:

locational market locations may be either a nodal or zonal Supply: 24 hourly bids
Demand: 24 hourly bids
Market Type-1: A Power Exchange
Bid Acceptance and Price Determination:
A power exchange is a centralized market, e.g. CA ISO,
Alberta PX Acceptance problem: Maximize total surplus of
accepted bids
Can implement multi-part bids and full nodal prices, but Constraints: Transmission limits
no side-payments
Price: = marginal surplus at each location
System operators job is simple because it ignores the
unit-commitment problem

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Settlement Rules: Market Type-2: A Transmission-Rights Market

Supply: Pay:
Buyers and sellers must find each other and make
Demand: Charge: provisional energy trades that are contingent on the
outcome of the DA transmission market

Notes: is the DA price appropriate to the location of the

accepted bid, . is the quantity actually produced or Bidding Restrictions:
consumed, and is the real-time locational price.
Demand: from i to j 24 hourly bids
Generators cannot bid their start-up costs
A DA market is a forward market, price holds if suppliers
deliver and customers take delivery of the exact DA quantity

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Bid Acceptance and Price Determination:
Acceptance problem: Maximize total surplus = are price of transmission in DA and RT markets

If there are N locations in the network, there could be

Constraints: Transmission limits N*(N-1) number of transactions and prices

Price: from i to j = marginal surplus of a 1

MW increase in the transmission limit from i to j is the marginal surplus of increasing the transmission
limit from i to j. This may be alternatively calculated as the
Settlement Rules: additional benefit when injecting 1 MW at j and extracting at
Demand: Charge: i.

Notes: is the DA price of transmission from i to j. is the

quantity actually produced or consumed, and is the
real-time price from i to j.

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Market Type-3: A Power Pool

Some bids are found to loose money because the pool
pool and poolco were initially popular terms to price is not enough higher than their marginal cost to
describe this type of markets cover their other bid-in costs

power pool will mean an auction market that uses Pools make up side payments to the accepted bidders
side payments and multipart bids to solve the unit who would otherwise loose money
commitment problem centrally
In general, pool process is complex, because some
A pool can implement full nodal pricing apparently losing bids are accepted, loosing bidders
have no way to verify whether their bid was correctly
rejected
pools are defined by the existence of side-payments

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 Settlement Rules:

Bidding Restrictions: Supply: Pay:

Supply: , startup costs, ramp-rate limit, Pay: side-payments for generators with
etc. One bid per day accepted bids

Demand: 24 hourly bids Demand: Charge:

Notes: is the DA price appropriate to the location of the

Bid Acceptance and Price Determination:
accepted bid, . is the quantity actually produced or
Acceptance problem: Maximize total surplus of consumed, and is the real-time locational price.
accepted bids
In PJM, start up insurance is provided to generators who
Constraints: Transmission limits, ramp-rate limits.
are scheduled to start up in the DA market
etc.
Price: = marginal surplus at each location
(computed with accepted/committed generators)
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Market Type-4: PJMs Day-ahead Market (2001)

Bid Acceptance and Price Determination:
Includes all types of bids allowed in the previous three
markets Acceptance problem: Maximize total surplus of
accepted bids, plus the total surplus of transmission
This is the most complex market from the system
operators point of view, it can be quite simple for the
suppliers if they simply bid competitively Constraints: Transmission limits, ramp-rate limits.
etc.
Bidding Restrictions:
Price: = marginal surplus at each location
Supply: , startup costs, ramp-rate limit,
etc. One bid per day (computed with accepted/committed generators)

Demand: 24 hourly bids

Transmission: from i to j 24 hourly bids
Pure Energy: (supply or demand)
24 hourly bids
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 Ancillary Services
Settlement Rules:
Supply: Pay: Ancillary services
Pay: side-payments for generators with
accepted bids Real-power balancing (frequency stability)
Energy Demand: Voltage stability (for customers)
Charge:
Transmission security
Transmission Demand:
Economic dispatch
Charge:
Financial trade enforcement

Black start

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Long-term Contract
The list of ancillary services is organized very roughly
by the time scale, starting with the real power balancing
Long-term contracts can greatly increase the
must be provided on the shortest possible time-scale,
competitiveness in the spot market; A generator that has
ending with the black-start service is seldom used
sold 90 % of its power in a forward market has only 10 %
incentive to raise in the spot market as an identical
Of the six ancillary services, the system operator or its generator that has nothing sold in forward
agent must directly provide transmission security and
trade enforcements and to some extent economic
A utility that has sold half of its generating plants, it will
dispatch
become short of generation and need to buy power, have
an incentive to hold down the market price
The other services, balancing, voltage stability, and
black-start capability, can be purchased from a
But, non-utility generators (NUG) that bought these plants
competitive market but the system operator must
will have a strong incentive to raise price; this exercise
demand and pay for these services
market power
83 84
 To avoid the problem, it is customary and advisable to The long-term energy market utilizes a bilateral forward
sign vesting contracts to sell most of the output back to market that trades individualized forward contracts and
the utility for an extended period of time centralized futures exchanges that trade standardized
future contracts
This hedges the utility bankruptcy and dramatically
reduces the market power of the supplier The transaction cost of trading in the forward market is
greater but provides flexibility while trading in the futures
The price of the long-term contract can be indexed to fuel market provides no flexibility in contracts form but is
costs and inflation, but should not be indexed to the spot expensive
market wholesale price
Bilateral markets can be either direct search markets or
Such vesting contracts were extensively used in Australia brokered markets; brokers do not actually buy or sell in
to keep wholesale prices low under almost all market the market but are paid a commission for arranging a
conditions trade

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The Arbitrage Linkage of Forward to Spot Prices

In a well-arbitraged market the forward price for delivery at

time T will equal to the expected spot price at time T.

A customer can either buy an energy future now, at known

price FT, to be delivered at T, or can wait and buy the power
in the spot market at an as yet unknown price PT. Which is
preferable?
causes futures to be preferred
causes spot purchases to be preferred

The price of a future or forward specified for delivery at

time T is appropriately equal to the expected spot price at
time T.
87