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Wholesale Electricity Marketing and Trading Fundamentals

Wholesale Electricity Marketing and Trading Fundamentals: Energy trading and marketing is the buying, selling and moving of bulk energy (electricity and natural gas) from where it is produced to where it is needed.

It’s important to consumers because retail electricity pricing depends heavily on what takes place in wholesale markets. Understanding how wholesale pricing and markets work will give you a much clearer understanding of what drives both short term and long term price movements.

A wholesale electricity market exists when competing generators offer their electricity output to retailers. The retailers then re-price the electricity and take it to market. While wholesale pricing used to be the exclusive domain of large retail suppliers, increasingly markets are beginning to open up to end-users. Large end-users seeking to cut out unnecessary overhead in their energy costs are beginning to recognize the advantages inherent in such a purchasing move.

Consumers buying electricity directly from generators is a relatively recent phenomenon.

On the downside there is market uncertainty, membership costs, set up fees, collateral investment and organization costs, as electricity would need to be bought on a daily basis. That said, the larger the end user’s electrical load, the greater the benefit and incentive to make the switch.

In most markets, there are four main cost components to a wholesale electricity price in a competitive market:

  • Energy– the actual commodity consumed by customers
  • Capacity– the service of making a resource available for dispatch, if needed
  • Ancillary services– additional services to ensure the grid runs properly
  • Transmission congestion & losses– the cost associated with delivering power across congested transmission lines with insufficient capacity and losses from transmitting power over a distance

The ultimate price of a unit of electricity (MWh) is typically referred to as a “locational marginal price” (LMP). It is locational because there are costs associated with transmitting the electricity from the generation source to the location (“node”) where it is consumed. “Marginal” refers to the fact that the cost of all the electricity consumed at a given time and place is determined by the most expensive (“marginal”) resource in the mix.

Wholesale pricing is determined through a combination of factors, such as:

  • Real-time (“spot market”) pricing – reflects price adjustments based on market conditions when the power is consumed (fuel prices, congestion costs, etc.)
  • Auction-based market pricing – forward pricing determined through an auction with a “uniform clearing price;” forward pricing auctions take place a day, week, month, year, or multiple years in the future.
  • Bilateral contracts – contracts between a supplier and a buyer without ISO oversight of the pricing agreement. The supplier is typically either a generation facility or a retail supplier, while the buyer is a retail supplier, utility or end-user.

Retail energy purchases are made under bilateral agreements. However, this article focuses on forward pricing (for energy and capacity), which is instrumental in determining the price charged for retail energy.

The auction process is designed to match electricity supply to demand at the lowest possible price point. The Independent Systems Operator (ISO), which oversees the process, predicts the hourly demand. Each generator offers a specific amount of generation capacity (supply) into the market at specific prices. In theory, the offer prices are based on the cost to operate the facility.

The ISO sorts offers in ascending order to determine how much supply is available at different price points. It then selects the “winning” bids – the lowest-priced combination of offers required to meet demand – which will be dispatched at the hour dictated by the auction. The clearing price is set based on the marginal (most expensive) unit of generation required to meet demand.

Wholesale Electricity Marketing and Trading Fundamentals Course

Tonex offers Wholesale Electricity Marketing and Trading Fundamentals, a 2-day class that covers electrical utility wholesale marketing and trending.

Who Should Attend

This course is designed for engineering project managers, engineers, and technicians from utilities who are interested to understand wholesale market and trading.

Why Tonex?

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