2011 APPA Neophyte's Guide to Electricity - American Public Power ...

The Markets Operated
by ISOs and RTOs
Energy and Ancillary Services
The RTOs operate day-ahead and real-time spot power markets (which they
use to obtain the locational prices for transmission congestion charges.) The
prices for power in these markets are set every hour based on the bids that
sellers submit to the RTO. (Note that these bids need not reflect the sellers’
own costs of generating the power. Rather, the bids are set by the sellers,
unless the prices they bid trigger certain “market mitigation” thresholds set
by the RTO.) The RTO takes all bids in ascending order and stops with the
last bid needed to supply power to buyers in that time interval. The price all
sellers in that time interval receive, however, is the last bid the RTO accepted.
This market design is known as a “single clearing price” market.
RTO markets with these features (LMP-based pricing of transmission congestion
and single-clearing price spot markets) are called “Day 2” markets.
(SPP has not yet implemented a “Day 2” market, although it has announced
plans to transition to this market structure at a future date.)
In addition to energy markets, RTOs ensure the provision of or operate
markets for “ancillary services,” which are additional services needed to support
the delivery of energy and ensure reliable operation of the system.
There are two general categories of ancillary services provided by RTOs: regulation,
which are short-term adjustments in generation to meet actual load
on a continuous basis, and operating reserves, which is backup power available
to meet shortfalls in capacity during emergencies or unexpected variations
in load.
Capacity Markets
Several RTOs also operate what are known as “capacity markets.” The intent
of these markets is to provide revenue to recover the capital cost of constructing
generation and to ensure that there is sufficient generation capacity
standing by to provide power when needed. Capacity payments are paid to
generators standing ready to provide power and to providers of demand
response, which is an agreement by a customer to cut back on its demand for
power when needed. These capacity markets also operate on a single-clearing
price basis. Two of them (PJM and NY ISO) establish different capacity
prices for certain geographic zones where transmission congestion limits the
amount of capacity imports.
26 PublicPower.org