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Short-Term Trading
Electricity supply and demand can be unpredictable and sometimes there are circumstances when production or consumption of electricity changes on short notice. For example, a generator may require urgent maintenance. Weather conditions, such as a heat wave, may influence demand levels, so weather forecasts closer to specific trading days can be used as indicators of electricity needs.
Short-term trading enables participants in the market to manage these short-term changes in predicted generation or demand by adjusting their positions in the market accordingly. Under SMD, this short-term forward market is called the day-ahead market and is available one day ahead of each electricity trading day.
Market participants can also use the day-ahead market to lock in energy prices as a way of managing risk against sudden changes in the real-time, or spot, market.
Spot Market Trading
Spot trading in the form of a real-time market serves to ensure that supply and demand are balanced at all times. Generators and consumers will buy and sell electricity at the spot price for amounts over and under their requirements that are not covered in the day-ahead market or by bilateral transactions.
The spot market carries the most risk for participants as unforeseen events, such as a sudden transmission line failure or unexpected weather, can cause prices to rise or fall dramatically. Nevertheless, the real-time market is essential to fill the gaps in supply where other trades and transactions may not be sufficient to cover the demand.
Market Liquidity and Competition
Liquidity is a measure of the size of a market. A liquid market has many buyers and sellers, allowing hedging of price volatility and reducing the possibility of market manipulation. Under SMD, trading options for market participants increase greatly, which should serve to make the market more liquid, more competitive and more economically efficient. In addition to the three trading opportunities described above, SMD provides complementary tools for managing risk, thus further improving market efficiency. These tools are:
- Locational Marginal Pricing: Provides price transparency, or the openness and certainty of pricing data that allows an appropriate estimation of price of electricity across different locations
- Day-Ahead market that allows virtual trades: Provides flexibility, or the ability to change how an obligation is met, either through physical or financial positions
- Financial Transmission Rights : Provides hedging opportunities to protect against a financial loss
If the market is liquid, competitive and efficient, it ensures that the demand for electricity is met at the lowest possible production cost, consistent with security constraints, and it ensures that, at each time and location, the right amount of power is produced and consumed at the correct price.
In the long-term, these prices provide the correct economic signals indicating where investment in the bulk power system is needed, including the location of new generating units, expansion of transmission facilities and participation in demand-side management programs-elements needed in a well-functioning market to alleviate constraints, further increase competition, and continuously improve the system's ability to meet power demand.