The wholesale energy markets has a difference with the traditional financial markets and the basic way to understand the difference between them is by grasping the nature of trading electricity and comparing them to financial assets just like equities, bonds and also commodities. The difference that is most important and cannot be overlooked is that electricity itself is produced as well as consumed instantly. It is impossible to store electricity so there must be a very unique balance between its demand and supply.
This now leads to creating different market design which has to be significant compared to the common capital markets. Also, it’s access is restricted in the wholesale markets because despite the fact that the market is open, less experienced traders have kept away due to the intimidating technicalities they have. Regulators have encouraged that traders should join the markets, but there must be a proof of financial strength as well as having technical knowledge before any access can be granted.
Talking about the energy markets, there’s much to note that they are fragmented more than the traditional capital markets. The Independent System Operator (ISO) manages the intraday and the real time markets together. They are non-profit entities and they are organized well on a physical grid arrangement which is commonly called network topology. In the U S alone, there are seven ISO and some cover just one state just like the New York ISO while some cover a number of states singly just like the Midcontinent ISO. These ISO function as the market operators and they perform tasks like dispatching of power plants and also real time power balance operations.
The fact still remains that ISOs do not cover U.S power grid entirely. Some other regions are bilateral markets whereby trades are directly done between generators and also load serving entities. Some settlements are being carried out through bilateral EEI agreements, which are the equivalent of ISDA agreements in power markets. The grid operations are still centralized in these states to an extent. Grid reliability and balancing is controlled and operated by Regional Transmission Operators (RTO).
The prices of energy are influenced by a whole lot of factors which affects the equilibrium between the demand and supply. On the demand side, commonly referred to as load, the factors affecting this side mainly are economic activity, weather and general efficiency of consumption. However, on the supply side, which is basically referred to as generation, the factors which influence this side are fuel prices and availability, construction costs and general fixed costs and they are the drivers of the price of energy.