Energy Price Formation in Wholesale Electricity Markets

Responding countries/regions include:

• Australia (NEM)
• Brazil
• Canada (Ontario)
• Chile
• Colombia
• Estonia
• France
• Gulf Cooperation Council (Kuwait, Saudi Arabia, Bahrain, Qatar, United Arab Emirtes, Oman)
• India
• Japan
• Netherlands
• Norway
• Philippines
• Russia
• Spain and Portugal (joint response)
• United States (ERCOT, MISO, NYISO, PJM)

Market Models and Price Formation

The market models of the responding countries tend to fall into three general categories, with variations in the timing of pricing and the spatial granularity of pricing:

1. Real-time Locational Marginal Pricing (LMP) models
2. Day-ahead zonally priced models
3. Uniform pricing models

Importantly, the timing of the market for which each country responded is also different. The survey sought to identify the pricing methodology for the market that is most closely tied to real-time system operations. This is different by each country/region. For example, some countries only have real-time markets while others only have day-ahead markets.

Real-time LMP Models - Russia, Australia, Philippines, United States, Chile

The real-time LMP-style models are generally characterized by real-time energy markets that are closely tied to real-time dispatch. In these models, security constraints within the network itself are modeled in both the dispatch and pricing and as a result these markets have nodal or zonal prices that reflect the cost of energy and the impact of network limitations. Ancillary services are sometimes dispatched and priced simultaneously with energy.

Some things that differ across these models are the structure of supply offers that are used to derive prices. Specifically, US market models that utilize LMP only include a portion of generator costs in the calculation of the price. This can lead to the need to uplift payments to ensure the markets are not confiscatory and further parallel payments such as capacity payments. This can be contrasted with models such as Australia where supply offers represent the “all-in” cost of a resource and therefore there is no need for uplift payments or parallel payments.

Day-ahead zonally Priced Models – Spain, Portugal, Estonia, France, Netherlands, Norway, Brazil, Japan

Day-ahead zonally priced models are the category of markets that are implemented by various countries in the EU. Responses for these market models focus on Day-ahead Market pricing as real-time trading in these markets do not result in price changes. In the EU model, network constraints are modeled and optimized but only between countries/regions rather than within them. Therefore, each country has a uniform price  but each country’s price may be different from another.

Prices in these models are derived by bids and offers submitted by market actors that are optimized in a manner that maximizes overall welfare while reflecting the inter-tie constraints between each region.

Because prices in these models do not tie directly to the real-time operation of the market, actions taken by the Transmission System Operator (TSO) to maintain real-time reliability are paid through uplift payments.

Uniform Pricing Models – Colombia, Gulf Cooperation Council (Kuwait, Saudi Arabia, Bahrain, Qatar, United Arab Emirates, Oman), India, Canada (Ontario)

This model contains several respondents whose country or region has one single uniform price. The market-clearing mechanisms in these models differ by region and timing (day-ahead/real time). Because these models do not tie directly to the real-time operation of the market, actions taken by the Transmission System Operator (TSO) to maintain real-time reliability are paid through uplift payments.