Our definition and guide to the electricity spot market will highlight everything you need to know, including benefits and examples.
What is the Electricity Spot Market?
Since we can buy and sell the electricity, it turns out to be a commodity just like oil, gas, gold, and other similar items. The area concerned with the sale and purchase of electricity is commonly known as the electricity market.
In order to set the price, this market takes into account the supply and demand. There are contracts and Long-term trades, identical to power purchase agreements. These contracts serve as the bi-lateral transactions (private) between the parties.
A market operator or independent entity manages the wholesale electricity prices and transactions. These operators not only settle the trades but also help to maintain a balance between load and generation.
The electricity spot market is a part of the electric market where there is a slight difference regarding sale and purchase. This type of market deals with forwarding electricity prices. It trades net generation output in increments of 5, 15 and 60 minutes.
In order to ensure reliability, market operators manage energy-related commodities. Some of these ancillary services include operating reserves, spinning reserve, non-spinning reserve, installed capacity, responsive reserve, regulation up, and regulation down.
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Breaking Down Electricity Spot Market
The electricity spot market handles the whole mechanism to match the supply and demand simultaneously. The basic idea behind this system is to ensure that power plants must generate the required amount of electricity to meet the demand.
This market utilizes the data of real-time electricity consumption to match the supply. All kind of sale or purchase of electricity in the spot market is done through spot price. This is the price, which depends on the electricity needs of a particular state.
Usually, when the supply is surging, spot price also goes up. As a result, power plants increase their output. In some cases, expensive generators also offer their additional electricity to the market.
At present, the spot market updates its prices after every thirty minutes. These prices are generally low in the morning but start to increase gradually as consumption surges. Spot prices tend to reach their peak in the mid-afternoon. This is the time when most of the residential and commercial consumers are using the most power.
The wholesale electricity prices depend on these basic energy cost components.
- Ancillary services
- Transmission congestion & losses
Benefits of the Electricity Spot Market
Electricity spot markets have done a great job to create a demand and supply mechanism. This system has liberated the electricity industry from undue influence. The wholesale markets offer a wide range of advantages. Some of them include:
- Bring on the competition through efficient price signals
- Price transparency is always ensured
- Both consumers and generator enjoy the benefits of positive outcomes
Spot markets offer trade flexibility to both the generators and consumers as compared to the long-term bilateral contracts. Traders are free to manage their trading programs just one day prior to the trade. This refers to the “day-ahead” market.
However, the advantages of electricity spot market depend largely on the pool’s liquidity. The volatility risk is always there to affect the trade negatively.
Its price is usually vulnerable to the fuel price surges or volatility caused by the difference between demand and supply.
Moreover, when a number of electricity markets chose the hourly auction mechanism, it promotes strategic behaviors. As a result, traders experience an unexpected increase in price volatility.
In this situation, the electricity spot market allows the generators to make last minute deals and get the required prices.
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How the Electricity Spot Market Works
In order to schedule the generation, spot electricity prices are usually used by the electricity market. This allows the generators to dispatch the lowest-cost generation at the earliest stage.
At present, the spot prices fall into these four categories.
- Provisional prices
- Interim prices
- Forecast prices
- Final Prices
The calculation of provisional prices is done after generation and consumption of electricity. There is no metering information associated with these prices.
For example, the estimated pricing doesn’t rely on actual meter readings. However, when published, these prices are considered as the best estimates.
This type of price is published after the consumption of electricity. The pricing manager notifies these prices once the data is complete.
Forecast prices are calculated through the dispatch, pricing, and scheduling model.
The pricing manager calculates final prices and conveys them to the clearing manager. These prices are used to calculate the invoices, which help to settle the trade between buyers and sellers.
Pricing Error Claims
After the publishing of the interim prices, participants can claim pricing errors by emailing the pricing manager.
The pricing error includes the following:
- When the pricing error casts a material effect on the party claiming it
- While calculating the interim price, the pricing manager has failed to follow the correct path
- The input used to calculate the interim price was incorrect
- There wasn’t a signal in forecast or dispatch prices
After the submission of a valid claim, the publication associated with all the final reserve prices and final prices would stand delayed for that day.
On the contrary, if there is no valid claim, the interim prices published by the pricing manager would be the final prices till 2 pm the same day.
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Conclusion on Electricity Spot Market
By understanding the mechanism of the electricity spot market and wholesale power prices in a particular region, you can understand the essential pricing factors. It may assist you to know the system and associated factors like demand response and time-of-use pricing.
The elements linked with spot electricity prices like constrained transmission and gas supplies are essential to analyzes. Knowledge about these constraints enables you to make a suitable decision.
Through vigilant monitoring of the electricity spot market, the buyers and sellers can either select a variable rate or choose to defend against future increases by opting for a long-term price. This suggests that you can negotiate the best contract terms and get the ideal price in a given situation.
Spot pricing in the US electricity market allows consumers to optimize their electricity usage through simple management practices.