Power Markets Glossary

C

CAISO – CAISO stands for the California Independent System Operator. See the CAISO map.

Capacity factor – Capacity factor is generation in MW divided by either the nameplate, summer, or winter capacity, multiplied by 100.

Capacity market – This is a market used by the ISO or RTO to ensure there will be enough generation available in the coming years. Generators can offer to remain operational for a set period of time for a fee, called a capacity payment.  

CENACE – CENACE stands for Centro Nacional de Control de Energia, Mexico’s competitive electricity market.

Clearing price – The clearing price is the price the buyer and seller agree on. Once they agree on the price, it clears the market.

Coal plants – Coal plants are power plants that produce electricity by burning coal to heat water. This produces steam, which turns the turbines, which turn the magnets producing electricity.

Combined cycle plants – Combined cycle plants use both a combustion turbine and a steam turbine to produce electricity more efficiently. The combustion turbine runs as usual, then the exhaust heat produced by the combustion turbine that would otherwise go to waste is captured to create steam that turns the steam turbine, producing more electricity. 

Combustion turbines – Combustion turbines ignite fuel to expand it, rotating a turbine connected to a generator that produces electricity.

Commodity – Commodities are products or goods that are interchangeable and can be bought or sold. Examples are oil and coffee.

Congestion – Congestion is similar to a traffic jam – it occurs when there is too much electricity traveling across a transmission line. Congestion can also occur when another line goes down, creating a binding constraint on another piece of transmission equipment. Congestion is the most variable component of the LMP.

Congestion Revenue Right (CRR) – This is the name for financial transmission rights in CAISO and ERCOT.

Constraint – A transmission constraint occurs when there is too much power flowing across a transmission line. If actions are not taken to alleviate the constraint, damage to the line can occur.

Contingency – Equipment that has been identified whose deactivation could overload other transmission equipment in the area. 

Consumer – A consumer is someone using an economic good or service. 

D

Day-ahead market – The ISO or RTO predicts the next day’s load in the day-ahead market and schedules generation to supply that load.

DECs – This is short for decrement offers, a type of virtual trade where the trader bids to buy power at or below a certain price point at a specific pricing node.

Department of Energy (DOE) – The Department of Energy’s mission statement is “to ensure America’s security and prosperity by addressing its energy, environmental and nuclear challenges through transformative science and technology solutions.”

Distributed energy resources (DERs) – DERs are small-scale power generation or storage technologies that can provide an alternative to or an enhancement of the traditional electric power system. They can be located on the distribution system, a subsystem of the distribution system, or behind a customer meter.

Deregulated markets – Vertically integrated utilities own and operate the grid in regulated energy markets. Deregulated energy markets allow for increased competition by enabling a larger number of participants to participate in generation and transmission services.

Deregulation – Deregulation is the decrease or eradication of the government’s involvement in a specific industry. It usually occurs in an attempt to increase competition in the industry. 

Direct current – Direct current is electrical current flowing in one direction, unlike alternating current.

Dispatch types – Dispatch types are categories of power plants that system operators use to determine which to call upon to produce generation. The types are baseload, intermediate, peaking, and intermittent.

Distribution – Distribution is the system by which electricity is delivered to the end user. Electricity is transported on lower voltage lines, analogous to residential roads, before arriving in homes and businesses. Distribution consists of the distribution substations, distribution lines, and distribution transformers.

E

Economic dispatch – The system used by the ISO or RTO to determine which generators will be used at what times of day. The system of economic dispatch uses the cheapest feasible generation providers first, only taking the more expensive generator’s offers when necessary to meet the forecasted load.

EIM – The EIM is the Western Energy Imbalance Market. It is operated by CAISO, and unlike the other ISOs, participation in EIM is completely voluntary. EIM is a real-time market, not a day-ahead and real-time dual settlement market like the other ISOs and RTOs. See an EIM map.

Electric cooperatives/cooperative utilities – Electric cooperatives are utilities that local communities build and own.

Electrical grid – This is a giant, complex circuit with many sources (generators), conductors (transmission lines), and consumers (electrical demand).

Electricity markets – This is a system enabling purchases through bids to buy and offers to sell. Bids and offers use supply and demand principles to set the price.

Electricity storage – Electricity storage is a means to store electricity during periods of relatively high production and low demand, then release it back to the electric power grid during periods of lower production or higher demand.

Electromagnetic generators – Electromagnets use Michael Faraday’s discovery that moving a magnet in a coil of copper produces an electric current in the wire. Electromagnetic generators use rotating electromagnetic shafts surrounded by a stationary case made of insulated coils of wire. When the shafts turn the magnet inside the wire casing, it produces an electric current.

Energy-only market (EOM) – An EOM is a market where power producers are paid only for the power they actually provide. 

ERCOT – The Electric Reliability Council of Texas is the ISO/RTO in Texas. See the ERCOT map. 

F

FERC – FERC stands for the Federal Energy Regulatory Commission.  It’s a regulation organization ensuring reliable, efficient, and sustainable electricity.  

Financial power market participants – Financial participants are participants who bid into the market but are not generating or consuming load. Financial participants provide liquidity to the market and encourage economic efficiency. 

Financial transmission rights (FTRs) – Financial transmission rights are financial contracts where there is no obligation to deliver electricity. They are similar to spreads – they are transmission paths from a source to a sink, but they are much longer-term contracts than spreads.

FPC – The Federal Power Commission was the predecessor of the Federal Energy Regulatory Commission (FERC).

G

Gas plants – Gas plants are power plants that use natural gas as their main fuel input for the purpose of generating electricity. 

Generation – ISOs schedule generation in the day-ahead and real-time markets using the system of economic dispatch.

Generation scheduling – ISOs schedule generation in the day-ahead and real-time markets using the system of economic dispatch.

Gross generation – This is the total generation produced by the plant/unit off the generator.

H

Heat input – Heat input is a measure of the fuel used by the generator (usually measured in mmBtu).

Heat rate – Heat rate is a measurement of generator efficiency. You calculate it by dividing the heat input (mmBtu) by the total electrical output (MW). The lower the heat rate, the more efficient the plant.

Hedging – Hedging occurs when an individual or entity makes an investment to reduce the risk associated with another one of their assets. Often, assuming an offsetting position is a hedge.

Hub – A hub is a group of nodes within a region or zone for which several LMPs are used to create a single price to represent a geographical area.

Hydraulic turbines – See hydro dams below.

Hydro dams – Hydro dams produce electricity by preventing the natural flow of water and siphoning water through the dam’s penstock. At the end of the penstock, the water turns the turbine that rotates the magnets producing electricity. Dams use flowing water to turn turbines rather than steam. 

I

IESO – IESO stands for the Independent Electricity System Operator, one of Canada’s two ISOs. See the IESO map.

INCs – This is short for increment offers, a type of virtual trade, where the trader sells power into the day-ahead market for a given price at a specific pricing node.

Independent power producers (IPPs) – Independent power producers are generators owned by entities that are not utilities or municipalities.

Independent System Operator (ISO) – ISOs are independent, not-for-profit organizations, with the responsibility of coordinating generation and transmission. ISOs have two main goals: providing reliable and cost-effective electricity.

Integrated resource plan – This is a process for a utility to forecast future demand, evaluate all its options for satisfying that demand, and develop a supply plan for serving it. Utilities will consider weather patterns, demographics, and business activity to forecast demand. This typically is done seven to 10 years out from build.

Intercontinental Exchange (ICE) – ICE is an intermediary organization, or exchange, for over-the-counter (OTC) and bilateral trades. ICE trading is purely speculative. While transactions are tied to ISO pricing signals, they are transacted completely on ICE and not through the ISO.

Intermittent generators – Renewable power sources are intermittent generators. Their output is based on uncontrollable environmental factors, and no one can precisely plan their dispatch. 

J

K

L

Levelized cost of energy (LCOE) – This is the cost that a generator will pay for each MW of energy over a plant’s entire lifespan. The LCOE is made up of four costs (capital costs) the cost of building, fixed costs (operational costs excluding the cost of producing the power, i.e. labor, maintenance, lights on), variable costs (operational and maintenance costs based on use/dispatch), and fuel costs (cost of fuels).

Liquidity – Liquidity is the feasibility and ease of exchanging an asset for cash. If it’s easy to exchange the asset for cash, it is a liquid market; if it’s difficult to exchange the asset for cash, it is an illiquid market.

Load – Load is the total demand for electricity at any point in time. The end consumers represent the load.

Load curve – Load curve is a graph that shows the demand for electricity by hour across the day. System operators use a load curve to determine how they will manage the grid each day.

Load forecast – Load forecast is the analysis of historical data, weather forecasts, etc. to predict energy demand. 

Locational marginal price (LMP) – The LMP is made of three parts, the marginal energy, loss, and congestion components. The cost of producing the next MW of energy depends on the actual cost of generating that MW.

Load serving entities (LSE) – They’re entities providing electricity to individuals or wholesale buyers. 

M

Marginal unit – The marginal unit is the power plant that is called on to supply the next MW of power. It sets the clearing price for the market.

Mark to market – When a trader executes a future trade, the price he or she executed that trade at is referred to as the “mark.” As time progresses, the future prices will change (market). Mark to market refers to profit and loss, representing the execution price of a trade versus where the market is currently trading. 

Market efficiency – Market efficiency is when the price of electricity mirrors all the available information, leading to increased opportunities for buyers and sellers, with the lowest cost. In power markets, the goal is to provide reliable, affordable electricity.

MISO – MISO stands for the Midwestern Independent System Operator. See the MISO map. 

Municipal utilities – Municipal utilities are nonprofit electric utilities owned by towns or cities to serve their citizens.

N

Nameplate – Nameplate is the maximum capacity of a generator.

Natural monopolies – Monopolies occur when companies face little to no competition in a field or industry. Natural monopolies often happen when there is a high barrier to entry. They are a product of market forces.  

NEISO – NEISO stands for the New England Independent System Operator. See the NEISO map.

Net generation – Net generation is total generation excluding the parasitic plant load.

Node – A node is a pricing location. It can also refer to points across the grid where electricity is injected, removed, or transferred.

Nuclear plants – Nuclear power plants produce electricity using nuclear fission to heat water, which produces the steam that turns the turbines that turn the magnets producing electricity.

NYISO – NYISO stands for the New York Independent System Operator. See the NYISO map.

O

OASIS – This stands for Open Access Same Time Information System. OASIS is the system that provides information on transmission capacity. Transmission service is requested through OASIS as well. 

Off peak – Off-peak hours are the hours during the day when the demand is the lowest. Depending on ISO definitions, this can also include weekends/holidays.

On peak – On-peak hours are the hours during the day when the demand is the highest.

Option – An option is a contract that gives the person who holds it the right to buy or sell a commodity at a certain price in a certain time frame in exchange for a premium payment.

Outages – An outage is when a piece of equipment is out of service, either as a planned or unplanned event.

P

Parasitic load – The parasitic load is the power a generator uses onsite that isn’t available to the grid.

Peaking generators – Peaking generators are the generators that run during peak hours of energy demand or load. They are more expensive to operate but also have faster ramp rates than baseload generators.

Physical power market participants – These are participants who are buying or selling actual electricity; they have a physical need to use the power grid and transmission services.

PJM-ISO – This stands for the Pennsylvania, Jersey, Maryland Interconnection, the area's independent system operator/regional transmission organization. See the PJM map.

Point to point (PTP) – Point to point is the name for spreads in ERCOT.

Power grid – The power grid is the infrastructure that allows for the delivery of electricity. The power grid is made up of generators, transformers, the transmission system, and the distribution system. 

Power plant – A power plant is a facility that produces electricity from primary energy. Most power plants use generators to convert mechanical (kinetic) energy into electrical energy to power the grid. Solar power plants are different, and they use photovoltaic cells (instead of turbines) to produce electricity.

Price convergence – In power markets, price convergence would result if the real-time market ended up matching the day-ahead market exactly, with the day-ahead and real-time prices converging. Price convergence is the goal for ISOs and RTOs

Pricing signals – The ISO balances the grid by sending pricing signals to certain pricing nodes. High pricing signals indicate that generators in that area should ramp up. Low or negative pricing signals indicate that there is too much generation in that area and generators should ramp down.  

Prime mover – A prime mover is the type of equipment that drives the electric generation.

Public utilities commission (PUC) – A PUC is a regulator of electricity who aims to provide quality services with affordable rates. 

Pumped storage – Pumped storage facilities generate electricity by transporting water back and forth between two reservoirs at different elevations. Water is pumped from the lower reservoir to the higher reservoir using electricity (this often takes place during low load periods, such as at night). Then, when the load is higher, the water is released from the higher reservoir to the lower one, passing through turbines in the same way it would in a hydro dam and producing additional electricity.

Q

R

Ramp rate – Ramp rate is how long it takes for a generator to increase or decrease its power output, measured in MW/min.

Real-time market – The real-time market is the market where the ISO or RTO meets the actual demand in real-time, by bringing generators on and offline.

Regional Transmission Organization (RTO) – Functionally, an RTO is the same thing as an ISO. However, FERC Order 2000 outlined specific requirements to be classified as an RTO. Many markets operated as ISOs and became RTOs after meeting FERC’s requirements but kept their original names.

Risk mitigation – This is reducing the level of risk when taking a position in the market, decreasing the chances of losing a large sum of money.

Rolling blackouts – A rolling blackout is when a system operator takes distribution lines out of service to help balance supply and demand during extreme demand or extreme capacity shortage.

S

Security-constrained economic dispatch (SCED) – SCED is the mathematical model used to create the most economic dispatch of generation while also accounting for operation limitations (i.e. congestion, ramp rates, outages, etc.).

Shadow price– The shadow price is the cost of relieving a constraint by one megawatt. 

Sink – The point on the transmission system where electric energy is withdrawn. This is essentially where the energy is going.

Solar farms (photovoltaics) – Solar farms produce electricity by converting photons from sunlight into electricity. Solar panels contain cells made up of semiconductor material. When the sun’s photons strike the panel, they free electrons in the semiconductor and create an electric current, generating electricity.

Source – The point on the transmission system where electric energy is injected. This is essentially where the energy comes from.

Spark/dark/quark/bark/crack spread – This is the difference between the price a generator is paid for producing power and the cost of fuel to produce that power.

SPP – The Southwest Power Pool is the area’s independent system operator/regional transmission organization. See the SPP map.

Spreads – Spreads are similar to virtuals, but instead of bidding on a single price node, you are bidding on the difference in price between two price nodes. The transactions are between two price nodes on the grid – the source and sink. Spreads are bid into the day-ahead market and settled in the real-time market.

Spread trading – Essentially, spreads are bids on whether the congestion cost will be higher or lower in the day-ahead market than the real-time market. Spreads are only an option in PJM (up to congestion) and ERCOT (point to point). 

Step-up and step-down transformers – Transformers use alternating current and iron coils to increase or decrease the voltage of electricity to prepare it for transmission lines or for delivery to the end user. 

Summer/winter capacity – This is the maximum capacity of a generator in the summer or winter. This is based on the actual generation, not the ideal conditions.

Supply and demand – This is the economic commodity relationship between the volume the producers want to sell and the quantity consumers wish to buy.

Steam turbines – Steam turbines use fuel to heat liquid, transforming it into steam. The steam rotates a turbine connected to an electromagnetic generator that produces electricity.

System operators – System operators manage the power grid from computer consoles in a control center. In competitive markets, system operators are the ISOs or RTOs. In regulated markets, the system operators can be vertically integrated utilities, municipal utilities, and federal power agencies.

T

Transformer – A transformer is a piece of equipment that converts energy from one voltage to another.

Transmission – Transmission is the use of high-voltage power lines to transport electricity across long distances. The transmission system is analogous to the US highway system.

Transmission congestion contract (TCC) – TCC is the name for financial transmission rights in NYISO.

Transmission congestion right (TCR) – TCR is the name for financial transmission rights in SPP.

Transmission constraints – A transmission constraint occurs when too much power could flow across a transmission line if system conditions quickly change (unplanned Tx outage, generation trips, etc.). 

Transmission lines – Transmission lines are power lines that carry electricity long distances at high voltages.

Transmission losses – Transmission losses refer to the power that is lost because of dissipated heat when power flows through a transmission line. 

U

Up to congestion (UTC) – UTC is the name for spreads in PJM.

V

VAR – VAR is short for volt-amps reactive. A VAR is a measurement of reactive power. Capacitors and inductors release and store reactive power. 

Vertically integrated utility – Vertically integrated utilities are utilities that own the components of generation, transmission, and distribution.

Virtuals – Virtuals or virtual trades are financial trades bid into the day-ahead market, where the bidder does not have the intention or ability to provide supply, or consume load; these are also called DART (day-ahead, real-time) trades. 

Virtual Trading – These trades are settled in the real-time market. No actual electricity is exchanged. 

Volatility – Volatility is the statistical dispersion between the returns in a given market. Volatility often results in big pricing swings. Assets with more volatility are usually considered riskier.

W

Wind turbines – Wind turbines use natural wind to produce electricity. The wind spins the blades on the turbine around a rotor, spinning the generator and producing electricity.

X

Y

Z