Wholesale Market
Before electricity reaches a customer it is bought and sold, sometimes years in advance and sometimes five minutes ahead. The wholesale market is where generators, utilities and traders settle who runs and at what price.
Two ways to buy power
Roughly half the country buys wholesale power through organized markets run by a regional operator, where every generator offers into a common auction. The other half buys bilaterally: a utility signs a contract directly with a plant owner, or builds and runs its own plants and charges customers the cost. Both arrangements exist under federal oversight, and most utilities use some of each.
Federal orders in 1996 and 1999 made the difference possible. They required transmission owners to carry other people’s power on the same terms as their own, which let generators sell to buyers they were not connected to. Where states went further and separated generation from the wires entirely, competitive markets followed.
Organized markets
Generators submit offers, the operator stacks them from cheapest to most expensive, and a single clearing price settles every trade in that location and interval. Used across the Northeast, Mid-Atlantic, Midwest, Texas and California.
Bilateral contracts
Negotiated, long-dated agreements between two parties, filed with federal regulators. The dominant form in the Southeast and much of the West, and the basis of corporate purchase agreements everywhere.
The merit order and the clearing price
In an organized market the operator dispatches the cheapest available plants first and works up the stack until supply meets demand. The offer of the last plant needed sets the price that every dispatched plant receives. Because fuel is the main variable cost, resources with no fuel bill sit at the bottom of the stack and almost always run, while gas turbines at the top set the price during the hours they are needed.
Prices are not uniform across a region. The operator calculates a separate price at every node on the network, reflecting the cost of energy plus the cost of losses and congestion in getting it to that point. When a transmission line fills up, cheap power on one side of the constraint is stranded and prices on the far side rise. Those differences, aggregated over a year, are the clearest signal of where new transmission would pay for itself.
What is actually being sold
Energy is only one of the products. Operators also procure the ability to produce energy later, and the fast-responding reserves that keep the system stable in between. A plant can earn from several of these at once.
| Product | What it buys | Time horizon | Priced in |
|---|---|---|---|
| Day-ahead energy | Committed delivery for each hour of tomorrow | Cleared once daily, hour by hour | Dollars per megawatt-hour at each node |
| Real-time energy | The difference between the schedule and what is actually needed | Every five minutes | Dollars per megawatt-hour, far more volatile |
| Capacity | A commitment to be available when called, years from now | Auctions one to three years forward | Dollars per megawatt-day; absent in Texas and California |
| Ancillary services | Reserves, frequency regulation and voltage support | Co-optimized with energy, minute by minute | Dollars per megawatt of standby capability |
| Transmission rights | A hedge against congestion between two points | Monthly to multi-year | Settled against the price difference between nodes |
The open arguments
Revenue
Paying for what runs all the time
A market that pays the marginal price in every hour rewards flexibility, but it can leave capital-intensive plants that run continuously short of the revenue needed to stay open or get built.
Scarcity
What a shortage should cost
Price caps determine how much a generator can earn in the few hours the system is stretched. Set them low and nobody invests in peaking capacity; set them high and a single storm can produce bills that take years to litigate.
Policy overlap
State goals inside federal markets
States subsidize the resources they want while federal markets try to set a neutral price. Reconciling the two has occupied capacity market rulemakings for more than a decade.
New load
Large buyers arriving fast
Data centers seeking hundreds of megawatts at a single site are signing long-term contracts directly with generators, reviving a form of bilateral dealing that organized markets were meant to replace.