What are wholesale power markets?
A simplistic overview of the power grid, generation technologies and economic dispatch.
The largest machine in the world is the electric power grid to which your lights, appliances, and soon your car are connected. It lives in the wires behind your drywall, atop the distribution lines that frame your street, through a substation and along tall picturesque transmission lines to power plants spanning the continent. It’s an infrastructure project that was built to bring power to your household, every hour of the day and at the beck and call of the flick of your finger.
The power system is at its best when nobody considers its existence — when the silent ebb of electricity flowing along thousands of miles of metal above our heads and through our houses is available without question. Unfortunately, this also means the general public takes for granted the inner-workings of the power system, how it evolved over time, and how it will help prepare us for a carbon-free future. In this instance of Gridlocked, we provide a conceptual overview of the scientific and economic factors that deliver electricity to your door.
What’s the difference between power and energy?
In the least technical terms, power is the amount of energy transferred or converted over some period of time. An often used analogy is the flow of water, as we all intuitively understand that a bathtub fills faster when the tap is opened completely as opposed to opened partly. In both cases, you still deliver the same amount of energy (one bathtub’s worth), but the first one is delivered faster — that’s power.
Electric power is most commonly expressed in watts (kW for homes, MW for small towns, GW for cities) and the consumption of energy in watt-hours. For example, a one watt lightbulb running for one hour consumes one Wh.
Where does electricity come from?
To answer this question, it’s helpful to draw on a concept from physics called charge. Charge is a measurable property of matter just like anything else — mass, volume, density, etc — and comes in two flavours: positive and negative. Electrons are negatively charged and are the particle that “carries charge” when we talk about the flow of electric charge, the literal definition of electricity.
Harnessing electric power for useful work is typically done in one of three ways. The first is to attach an electromagnetic generator to a turbine and spin it fast by either falling water, blowing wind, or steam. The steam is typically heated in a closed-loop system by burning fossil fuels, nuclear reactors, or solar thermal. Solar photovoltaic panels for their part generate power using the photoelectric effect, “catching” light particles called photons. Last but not least, batteries use chemical reactions to create a build up of electrons on one side of the battery that can later be carefully released to produce electricity.
Power plants are distributed throughout the network, but generally not close to where they are needed. Transmission lines are needed to bring power from wherever it’s generated to end-use customers, usually hundreds of miles away along large towers with many cables and at very high voltages. Substations are then used to step-down the voltage to smaller distribution lines like those above sidewalks to residential, commercial and industrial customers.
Historically, there have been relatively few economically efficient and large-scale resources available to store power, and so the exact time and place at which it is generated is extremely important in grid design. The sun doesn’t shine at night, and we can’t build hydro plants without landscape elevation. The cost of generation is also unique; nuclear reactors have a high capital cost but very low variable costs.
Key Takeaways
- Power is generated by a mix of technologies and transported through transmission lines, substations and distribution lines to retail customers.
- Each technology has different characteristics for generating power, which is important when evaluating how the grid may change in the future.
Creation of power markets
About twenty years ago, power markets were vertically integrated monopolies and regulated by state public utility commissions (PUC). Utility companies owned every aspect of the generation, transmission and distribution of power and could charge retail customers based on an allowed rate of return by the relevant PUC.
In the 1990s, deregulation of power markets began in the hopes that competition would improve efficiency. A deregulated wholesale market means any company can build power plants and sell power to the grid. Operation and maintenance of transmission lines are the responsibility of newly created independent system operators (ISOs). On the retail side, distribution lines are maintained by either government organizations or the regulated utility.
Worldwide, deregulation has also been gaining popularity. Most of Europe, Japan, Australia/NZ and some developing nations in South America (Argentina, Chile) have embraced at least partial deregulation.
In addition to the physical infrastructure and managing power flow, ISOs also administer the financial markets associated with the delivery of power to ensure it is reliable and economically dispatched in a least-cost manner.
Different ISOs across the continent incentivize market behavior in different ways, but in general there are energy markets, capacity markets and ancillary markets. Energy markets exist to allow companies on the buy and sell side to transact with each other for power at a specific time of day, at a given location. Depending on the ISO, the price of power can be different according to where it’s being generated (generator node) or consumed (load node). Capacity markets exist in some ISOs to ensure proper reserve of power is available in the event of a supply outage or if actual demand exceeds the forecast. Other ISOs like ERCOT (Texas) rely on scarcity pricing, or the assumption that high prices in the event of scarce supply of power will incentivize long-term planning for capacity. Ancillary markets are a relatively small portion of power systems costs and exist to incentivize technical aspects of grid stability — things like voltage control and short-term spikes in demand.
In some energy markets, the power plants that generate power at the lowest cost are dispatched first. Power plants that have variable costs like coal and gas plants are only compensated for generation if more demand exists and none of the cheaper alternatives can generate any more power. Every MW of power in the grid, regardless of cost, is compensated at the ‘clearing price’, or the price at which the most expensive MW of power is generated. On a windy and sunny day, the price of power would decrease considerably because the variable cost of both power sources are very low. If higher-cost gas plants are needed to satisfy demand, then the price awarded to generate power increases for all sources.
Key Takeaways
- Beginning twenty years ago, many wholesale markets in North America deregulated, meaning any company can build generation and sell it to the grid
- Power plants can generally be compensated in three financial markets by providing capacity, energy or ancillary services to the independent system operator
- In energy markets, plants are compensated based on the difference between their cost of supplying power and the system cost of generating one additional unit of demand
Current trends in wholesale power markets
Since the markets were first designed twenty years ago, there have been considerable shifts in the generation mix and demand patterns of wholesale power markets. The percentage of electricity produced from intermittent renewable sources (wind and solar) has risen from just 0.1% in 2000 to 8% in 2020, and these technologies accounted for 62.3% of planned construction in late 2021. Increased penetration of low-cost renewables has created additional volatility in many ISOs (more on that in the next piece from Gridlocked).
Demand-side resources like electric vehicles are changing demand patterns throughout the day. Concepts that link the wholesale and retail markets like virtual power plants are gaining in popularity as more smart meters become operational, more easily linking the retail and wholesale markets. Utility-scale lithium-ion batteries and underground air-compression chambers are a way for opportunists to purchase power when it’s cheap, and sell it back to the grid when it’s expensive. All of these trends will require intelligently transacting with increasingly volatile power markets.
Enertel AI is building an analytics platform that helps power generation interface with the financial power markets. We use machine-learning that helps power plants predict the price of power at their generator nodes, so that they can limit their exposure to price volatility. Follow along on LinkedIn or reach out to us if you’re interested in learning more.
