This 15-page report outlines how wholesale power markets work, which helps to understand four emerging controversies. Wholesale power prices are governed by classic microeconomics: day-ahead markets clear at the intersection of downward-sloping demand curves and upward-sloping supply curves.
Power prices are increasingly in focus, with controversies over the future trajectory of load growth, opportunities in load-shifting, batteries, and gas generation behind-the-meter. So the goal of this report is to go back to first principles, and remind ourselves, how do wholesale power markets work?
This is helped by a deep-dive into ERCOT‘s day ahead market, caps, clearing prices and real-time market. ERCOT is the Independent System Operator orchestrating electricity markets across 90% of Texas, with an average load of 54GW in 2024. Details are on pages 2-5.
Most other grids function similarly to ERCOT, albeit they also feature capacity markets, unlike ERCOT, which is energy only. Australia’s NEM is particularly interesting, and unusual, as it is a real-time market, settled every 5-minutes, with no day-ahead component. Interesting variations in different wholesale power markets are on pages 6-8.
Rising demand is inflationary, efficiency gains are deflationary. Moving the demand curve to the right, or to the left, changes the point of intersect with the supply curve. This matters amidst the rise of AI data center loads, as discussed on page 9.
Negative pricing is increasingly prevalent, occurring 1-11% of the time in grids we are tracking, and largely triggered by wind and solar, which have no fueling costs and get paid via separate PPAs, per page 10.
Natural gas often sets the clearing price in wholesale power markets and thus has a disproportionate impact on grid costs. In Australia, gas provides 15% of the electricity but underpins 50% of NEM power costs. The most effective supply-side route to lower wholesale electricity prices is to expand gas output/infrastructure, per pages 11-13.
Demand response, aka load shifting, is the best opportunity across our research to improve the competitiveness of power grids, deflate costs, and accommodate more volatile generation. Especially helped by smart meters, using AI, and time-of-use tariffs, per pages 14-15.
Overall, we hope the report is a helpful reminder for how wholesale power markets work, and a useful framework for thinking about the impacts of other themes in evolving energy markets.