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To what extent should the independent system operator (ISO) and the spot market (Power Exchange) remain separate? Thinking about how the ISO must operate leads to certain conclusions.
Of necessity, the ISO will operate a noncontract market. That is, the ISO will match some supply and some demand that are not covered by generator-customer contracts. If we want the ISO to operate at least cost, it must acquire at least part of its supply by soliciting hourly offers from generators, producing what amounts to a supply-side spot market. Then, it must charge a variable hourly rate for balancing energy that tracks the supply-side variations in cost. This two-fold process produces a market-clearing price (em a price that balances supply and demand. The issue of "separation" is really a question of access: Whether we will allow all generators and customers to participate in the ISO's spot market (em or require them to trade through a separate spot market called the "Power Exchange." Consumers receive no benefit if they are excluded from the ISO's spot market. Moreover, broader participation will make the ISO's job easier and more efficient.
The ISO's basic job is load balancing. To match aggregate load and supply, the ISO must be able to increase or decrease the output of certain generators to offset the aggregate imbalance of all contractual arrangements. To offset positive imbalances (contract generation greater than contract load), the ISO must hold some dispatchable capacity at all times, producing power that can be backed down.
But where does this noncontract supply go when all contractual supply and demand achieve balance? The answer: The ISO must also hold some noncontract load that it supplies at all times. In short, to balance the overall market, the ISO must itself act as a sort of aggregator, with its own supply and load. The net imbalance in the ISO's market will offset the net imbalance in the rest of the market.
Some proposals seem to envision the ISO taking supply from a designated set of contract generators. But if the ISO is to operate as cost-effectively as possible, it is not sensible to acquire all of the balancing supply from contracts with specific generators. For at least part of its supply, the ISO should be able to solicit offers on an hourly basis from any generator, and choose (i.e., dispatch) the cheapest offers that meet its needs. Some of these offers might take the form of demand-side bids to reduce load, which can also be provided hourly. The result finds the ISO operating what amounts to an hourly spot market.
Clearing the Market
We do not want the ISO "buying" and "selling" power for a profit. Therefore, the price the ISO charges its customers (e.g., consumers with negative imbalances) for energy should equal the price the ISO pays for its balancing energy.
In a competitive market, we want decisions driven by market factors, not by regulation. That means the supply acquired by the ISO should be priced by the market; generators should remain free to ask whatever price they want