A multi-settlement market is a centrally-organized electricity market where physical electricity products are bought and sold initially on a forward basis and then resettled in relation to actual production and consumption in the real-time operating horizon. In the U.S. and in other parts of the world with advanced electricity markets, the forward market is organized in the day-ahead time frame. Load bids and resource offers cleared in the day-ahead market are contractually bound physically buy (in the case of loads) or deliver (in the case of resources) in the physical real-time market to deliver or consume physical products or buy or buy back in the market or settle their forward obligation financially at the real-time price.
The day-ahead forward settlement is critical because it coordinates technical and cost issues that are best settled in advance of the operating period. The most important among these is clearing in advance the optimal combination of resources that have varying technical start-up and runtime requirements. Some units need eight hours or more to be ready for production and some units must stay on for a minimum or maximum amount of time. These technical physical attributes cannot always be considered in the real-time market optimization when essentially the market must rely on units already started (or a subset of rather high-running-cost units that can be turned on quickly).
The day-ahead markets solves this issue by economically committing units forward for the next day to provide real-time energy and ancillary services. In the real-time, participant can balance their day-ahead commitments. For example, if a load serving entity purchases 500 MW of energy in the day-ahead market, then consumes 480 MW of energy in real time, it will be charged for 500 MW at the day-ahead price and receive a payment for 20 MW at the real-time price. Day-ahead markets can function well even without active load-serving entities trading in the day-ahead market. In this case, the system operator can procure the forecasted load on behalf of the load and rely on virtual trading and suppliers to allow the day-ahead prices to converge with real-time prices.
The day-ahead market allows participants to make forward purchases and sales of power for delivery in real time. It delivers benefits in a variety of ways. Day-ahead markets:
- Substantially improve the stability of participants’ settlements as real-time markets are typically more than four times more volatile than day-ahead markets.
- Provide a means for participants to hedge risks associated with the real-time price volatility and congestion.
- Reduce costs by coordinating the overall commitment of resources to satisfy the next day’s energy and ancillary services demands at the least cost. This day-ahead coordination generates substantial savings for customers and eliminates uneconomic generator commitments for suppliers.
- Can facilitate greater competition and reduce opportunities to exercise market power since the day-ahead market will naturally commit other resources if a supplier attempts to withhold its supply to raise prices. This supply response is not generally available in the real-time market.
- Ensure that resources are committed in a manner that can accommodate the uncertainties regarding large-scale reliance on intermittent renewable energy resources.
Virtual Trading. One of the key aspects of the day-ahead market that facilitates good market performance and allows participants to hedge risks efficiently is virtual trading. Virtual trading involves buying or selling energy in the day-ahead market financially, which results in the energy being sold or bought back in the real-time market. Virtual demand and supply transactions allow participants to arbitrage differences between the day-ahead and real-time prices. Some markets have resisted including virtual transactions because they are concerned about potential gaming or manipulation. We have not found this to be a significant concern in practice, and these bids and offers play an important role in achieving efficient day-ahead outcomes. The efficiencies described above are achieved when the day-ahead market outcomes converge with the expected outcomes in the real-time market. Virtual transactions play an important role in allowing participants in the day-ahead market to respond to significant price differences. Convergence is achieved as participants arbitrage these differences.
Three-Part Bidding. As described above, a primary role of the day-ahead market is to coordinate the commitment of resources for the following day. This is done by suppliers making offers that reflect not only the marginal energy costs, but also the start-up and other commitment costs as well as other commitment constraints, such as minimum run-times and minimum down times, that can only be considered and optimized in an advanced commitment process. The day-ahead market minimizes the total cost of meeting load for the entire evaluation period rather than each hour discretely, considering both energy and commitment costs. Participants may self-commit, subject to reliability evaluations, but resources committed through the market are guaranteed full cost-recovery, including commitment costs, through market revenues and additional guarantee payments if necessary. Self-committed resources, typically long-lead time baseload resources, are not guaranteed cost-recovery.