IESO - The Independent Electricity System Operator - is the Crown corporation responsible for operating the electricity market and directing the operation of the bulk electrical system in the province of Ontario, Canada. It is one of seven Independent System Operators in North America.
Here's a step-by-step explanation of how Ontario's IESO (http://www.ieso.ca/en/learn/about-the-ieso/user-guide) maintains a reliable supply of electricity and, at the same time, determines the wholesale price of electricity.
Step 1 - How much electricity do we need?
Each day, the IESO issues forecasts of how much energy will be needed throughout the following day and up to the month ahead - including an "energy reserve," of roughly 1400 MW above what is actually consumed. This is the extra supply that is on standby and called upon in emergencies. These forecasts are continually updated as new information comes in such as changes in weather. Typically, the IESO's day-ahead forecasts are highly accurate, with less than a two percent variance from the actual demand figures.
Step 2 - Let the bidding begin.
Generators and importers of electricity review the forecast information and determine how much electricity they can supply and at what price. They send these "offers" to supply electricity into the IESO. Similarly, large-volume consumers of electricity that have the ability to change their consumption patterns on very short notice decide whether there are times of the day when they can cut back on energy use, and offer that into the market as well.
Step 3 - Matching Supply with Demand.
The IESO then matches the offers to supply electricity against the forecasted demand. It first accepts the lowest priced offers and then "stacks" up the higher priced offers until enough have been accepted to meet customer demands. All suppliers are paid the same price - the market-clearing price. This is based on the last offer accepted.
This "stacked" price approach encourages generators to keep their offer prices low in expectation of selling all or most of their potential energy output at the prevailing market price. Without the stacked market-clearing price, the overall result could be a much more
volatile marketplace. The Market Clearing Price approach ensures the lowest possible price while maintaining the reliability of the system.
Step 4 - The Price is Set.
The IESO collects bids and offers until two hours before the energy is needed, so "pre-dispatch" prices or the price of electricity before the bidding window has closed, can fluctuate as new bids come in. The IESO will issue its instructions to power suppliers based on the winning bids, who then provide electricity into the power system for transmission and distribution to customers. The IESO runs a real-time market, meaning purchases of electricity are made as they are needed.
There are occasions, when the best-priced energy may not be available due to limitations on the transmission lines. In this case, that generator's offer is still used to help set the price, but another generator may be asked to provide the electricity.
You can watch market information throughout the day on the Demand and Price Information page which features price and demand graphs that continually update.
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