Wholesale Energy Market Overview

December 13, 2020
Utility pole

By Ping Wang, Director of Wholesale Energy Market

About 80% of U.S. electric power supply is managed by an organized wholesale market (RTO/ISO), so it is very important to understanding what RTO is, how it works, and what are the benefits to participate in.

Before RTO forming, wholesale power sales are conducted bilaterally through direct contact and negotiation or a voice broker. It was not efficient and had no price transparency.

Starting in the late 20th century, some state regulators changed retail market policies and allowed Retail Utility to purchase power from other generators; and with FERC order 888 and 2000, RTOs started to form as the first to have functional control over the regional transmission grid to create open access to the transmission grid, and later developed market for Generator owners and retail utilities to sell/purchase power. This leads to further development of the financial market for market participators to hedge transmission congestion and capacity markets to ensure middle and long-term resource adequacy. 

RTO is a FERC approval, voluntarily participating, independently operating, not-for-profit, and organized wholesale market used to serve market participators reliably through economically selling and buying power with wholesale prices.

Today there are 7 RTOs in U.S. From West to East including CAISO, ERCOT, SPP, MISO, PJM, NYISO, and ISO-NE. The RTO footprints are continually growing, such as CAISO east expanding and SPP west expanding, the only territory does not have an RTO is southeast. 

Currently, RTOs have three functions including Transmission Service Management, Planning, and Energy and Operating Market to ensure the Transmission’s reliability and economic energy trading, as well the financial market.

  1. Transmission Service Management: RTO manages its transmission system to ensure safe and reliable delivery of power from generation resources to loads. At the same time, it guarantees the Transmission Owner’s revenue requirements through the Transmission Settlement of collecting the fund from transmission customers.
  2. Capacity Market: RTO creates this market to ensure that each Load Serving Entity (LSE) has sufficient generation capacity to meet its peak demand. In this market, Generation Owners can submit capacity offer bids and LSEs can submit capacity demand bids. Then the RTO determines the LSE’s capacity obligation and clears the Generation Resources to meet the capacity requirement. It determines a zonal basis capacity price to credit the Generation Owners of their capacity supply and charges the LSE of its obligation. The LSEs can either self-schedule its Generation or it’s Bilateral Power Purchase Agreement (PPA) to offset its capacity obligation. 
  3. Energy and Operating Reserve Market: RTO provides a wholesale marketplace for the sale of the electric energy and the Operation Reserve Services in both Day-Ahead and Real-Time market. It commits sufficient least-cost generation resources to meet the load forecast, operation reserve requirement, and energy export. The energy and Operation Reserve Services are settled at the locational marginal prices. 
  4. Financial Market: RTOs provide a financial instrument for LSEs to hedge congestion costs in the energy purchase marginal price. This market also allows any financial entities (investment banks) to participate to increase market diversity and congestion revenues.  

Although RTOs provide the benefits to market participants in terms of price transparency, lower costs, and opportunities to sell additional power, there are problems such as market power to influence market prices, complex operation rules, and reliability issues due largely to renewable energy penetration. There are opportunities to enhance RTO policies and operations.