Fungibility: One megawatt-hour (MWh) of electricity is identical regardless of the production source (coal, natural gas).
Simultaneous Production and Use: Must be produced and used simultaneously due to the high cost of industrial battery storage.
Exact Demand-Supply Balance: Supply must meet demand exactly. This is managed through ancillary services and demand response programs.
Role of ISOs and RTOs
Definition: Independent System Operators (ISO) and Regional Transmission Organizations (RTO) maintain the balance between electricity generation and consumption.
Responsibilities:
Forecasting and scheduling generation.
Ensuring backup power for unexpected demand or generation loss.
Operating as non-commercial, neutral entities.
North America: Contains nine ISOs and RTOs.
Market Management: Typically manage four markets—energy, capacity, financial transmission rights, and ancillary services.
Energy Market Management
Day-Ahead Market: Generators and load-serving entities submit bids for the next day's operation, including cost variations by hour.
Real-Time Market: Manages actual production and consumption changes throughout the day (increments of 5 minutes to 30 minutes).
Optimization considers cost, security, and transmission constraints.
Locational Marginal Price (LMP) set at each location based on ISO/RTO prices.
Dispatch instructions sent to generators based on real-time conditions.
Capacity Market
Function: Auctions the commitment for providing electricity generation capacity to ensure long-term stability and exceed load requirements.
Incentives: Encourages long-term investments in generation resources.
Revenues: Paid to capacity providers regardless of whether energy is produced.
CME Group's Role
Contracts Offered: Futures and options contracts for day-ahead, real-time, and capacity markets.
Purpose: Allows market participants to hedge and manage risk exposure in various regional locations.