ISO markets

The ISO's market is like a blind second price auction. All participants enter prices at which they'd like to produce power from their power plants and/or buy power for their retail load. The ISO combines all the pricing information and transmission information into an optimization engine to determine the lowest cost way to serve the load without overloading any transmission lines. They publish pricing at which transactions settle at every electrical node in the system. The prices between nodes will differ because of line losses and congestion. Congestion is when one area has too much supply or demand for the electrical lines to move more electricity in or out of which can cause significant price divergence from the rest of the nodes.

 

The market is run for every hour for the following day in what is called the day-ahead market. Within each day, the market will be run again, called the realtime market, every 5 minutes to balance everything to account for deviations from forecast and/or unplanned outages. In realtime, there are no prices on the buy side since utilities have a duty to keep the lights on. In the end, there will be two prices for every node on the grid, one from the day-ahead market, and one for the realtime market.  

Virtual Trading

Virtual trading, sometimes called convergence trading, is when a bid to buy or offer to sell electricity is entered into the day-ahead market. If that order clears then that position will be reversed in realtime and the participant will receive or pay the difference in price.  

History

The electricity industry is split into four main components which are generation, transmission, distribution, and customer service. For a century since the advent of electricity all of these services were provided by a vertically integrated monopoly. In 1996 the Federal Energy Regulatory Commission implemented order 888 which mandated that all utilities with transmission lines had to offer non-discriminatory transmission service on their lines. This more easily allowed utilities to buy and sell excess electricity to one another especially if for those utilities that weren't direct neighbors.

 

Some utilities took this concept a step further and formed Independent Systems Operators (ISOs). An ISO is a third party entity who is given operational control of the electrical grid in their prescribed geographic area. They, by rule, can not hold stake in any of the transmission, generation, or retail operations of their members. In the early days, their scope of responsibility was mostly limited to overseeing reliability and managing their transmission service offerings. ISOs have since evolved into fully integrated marketplaces where all market activity goes through the ISO.