US Power system: Summary
ISO is the energy industry milestone in the history of America. Before the establishment of ISO, single company who owns the factory, powerplant, power grid and the transmission system in the region, consumers don’t have variety choice to consume the electricity energy from others. As consequences it leads to a single company monopolize the whole […]
ISO is the energy industry milestone in the history of America. Before the establishment of ISO, single company who owns the factory, powerplant, power grid and the transmission system in the region, consumers don’t have variety choice to consume the electricity energy from others. As consequences it leads to a single company monopolize the whole market and charge higher prices and prevent other users entering the market due to the barrier. For instance: high capital expenses on equipment and operating cost on fuel. To address the monopoly and barrier issue. The federal government came up with a series of regulations. The most well-known is Order No.888 where aims to promote the competition level in wholesale market by provide the access their transmission lines to all electricity suppliers and generators with equity. The second goal is to recover the stranded cost by charging the participants. Stranded cost, which is the cost initially invest on the infrastructure, however due to uncertainty when the time pass it didn’t cover the cost. As the consequence of the ISO and the improvement of competitive level in the market.
(RockyMtnGuy, 2008)
ISO is abbreviated from the term “Independent system operators” which was established in 1996 under Order No.888 of Federal Energy Regulatory Commission (FERC). ISO contains a number of groups transmission owners and the existing power pools.
RTO is abbreviated from the term “Regional transmission organization” which was established in 1999 under Order No. 2000 of Federal Energy Regulatory Commission (FERC). It is similar to ISO that operates the transmission systems in the specific region and across the multi-state areas to ensure the reliability and efficiency of the electric grid as well as the equity.
ISO and RTO developed their market individually which allowed the buyers and sellers to be able to bid or offer to generate electricity. The organization uses this market based on bid and offer to scale up the economic activity. Usually, scholars and official reports use the term RTO/ISO. Surprisingly, most of the America region are working under the traditional structure market. Moreover, RTO/ISO provides 2/3 of the national electricity.
The major difference between energy market especially electricity and other market is the demand and drivers. In general, the electricity demand depends on the weather and seasonal conditions. For instance: there is a peak during the summer and winter season due to high use for cooling and heating. Even though it is not always the case, regions are also should be considered as crucial factors of electricity demand. For instance, the northern regions of America only required heating in the winter. Another interesting feature is almost inelastic, in the short-term people are likely to pay more price for electricity due to it is the necessity in daily life. People may reduce their demand a little bit by turning off electronics that they don’t usually use. It is more complex in terms of long-term where government or regions have to generate the amount of electricity based on their forecast. It contains several factors: historical data of electricity consumption, weather forecasts, number of residentials in demographic etc. This forecast is essential in planning for future use, where the suppliers have to ensure there will be no shortage of electricity in the near future. Furthermore, it also includes the factor of the input supply such as biogas and coal.
In the wholesale market level, it has divided into 2 categories: traditional market operated regions and RTO/ISO operate regions. The difference between these two categories or mechanisms is traditional market let the management to make the decision how much to charge their customers. However, RTO/ISO make the decision based on the market as it mentioned above then to setting the price on the result. Both the traditional system and RTO/ISO must ensure a balance of supply and demand. Where Load Serving Entity (LSE) is the company that purchases from RTO/ISO first then sells to the retail customer again. It has 3 ways to supply the electricity: 1) self-supply, LSE will generate the electricity energy by its own power plant. 2) Bilateral purchase, meaning that LSE purchases directly from the supplier. 3) By RTO/ISO, where LSE bid and offer to generate the electricity power in the RTO/ISO market, as mentioned above how RTO/ISO works.
To be note that, bilateral transactions are different from RTO/ISO bidding or offering. In bilateral transactions is more likely to be consumer and buyers directly deal in contract with perfect information. In terms of perfect information, transmitting utilities had been required to let others know their transmission capacity.
The process of bilateral transactions: The generators of electricity can provide their energy into the RTO/ISO operating markets. They submit the bid of how many the quantities and how much the price they would like to sell it. RTO/ISO has the duty to check the reliability of transmission grid and ensure the suppliers supply the energy achieve the demand. After the electricity is generated and consumed, RTO/ISO will engage into the settlement process and finance transactions.
References and Additional resources:
https://bestpracticeenergy.com/2020/05/21/energy101-electricity-iso/
https://www.pcienergysolutions.com/2022/11/29/whats-the-difference-between-iso-and-rto/
https://www.rff.org/publications/explainers/us-electricity-markets-101/
https://www.ferc.gov/media/energy-primer-handbook-energy-market-basics
https://energyfreedomco.org/elec-system.php
By BlckAssn – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=103539132
RockyMtnGuy. (2008, August 16). US Energy Consumption by Sector 2007. Wikimeida Commons. https://commons.wikimedia.org/wiki/File:US_Energy_Consumption_by_Sector_2007.PNG
This article is a part of the class “751447 SEM IN CUR ECON PROB”
supervised by Asst. Prof. Napon Hongsakulvasu
Faculty of Economics,
Chiang Mai University
This article was written by Yuchen Luo 641615523
