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Managing Risks
Risks increase in most markets as the delivery date approaches, as unforeseen events can cause prices to spike or to plummet. This principle applies to electric power as well. For example, an outage in real-time may cause congestion on the system and cause the price at a location to rise unexpectedly and become higher than what was scheduled in the DAM. Prices may be lower in the RTM, for example, if demand in real time comes in lower than what was bid in day ahead.
Because the DAM is not affected by events that can happen during actual operation that make prices volatile, the DAM produces more stable prices than the RTM. Therefore, the DAM can help participants hedge RTM risks.
Also, virtual supply offers and demand bids allow participants to forecast or determine LMPs in the DAM and then either protect or hedge against the LMP for real-time. This provides flexibility, as participants can input changes hourly, unlike standard bids and offers, and then adjust bids accordingly. What's more, virtual demand bids are price sensitive-that is, they show what a participant is willing to pay for congestion.
Identifying and understanding prices and risks enables market participants to make more informed decisions about their bids and offers.
What Are the Benefits?
The multi-settlement system allows market participants to secure day-ahead prices and reduce their vulnerability to price fluctuations in the RTM. What's more, day-ahead price signals influence correct, economic real-time behavior-they produce greater certainty of generator performance and exert a powerful incentive for wholesale users to understand and manage their patterns of consumption.
Further, participants are provided with a broader range of options for participating in both the day-ahead and real-time markets. By expanding the horizon for energy transactions,the market becomes more liquid, more competitive, and more economically efficient. Opportunities and incentives for participants to manipulate the market are limited.
Finally, wholesale demand is a full and equal participant in the determination of prices, which provides a market-based means of balancing supply and demand on the system.
