Are ITP-Run Day-Ahead Markets Needed?

Sat Nov 30 15:24:00 EST 2002
By Hamish Fraser and Veronica Irastorza

The Federal Energy Regulatory Commission's (FERC) Standard Market Design (SMD) requires the operation of a day-ahead market administered by an independent transmission provider (ITP). There is some benefit to centralized day-ahead markets, such as the ones FERC has proposed. However, these markets can be very costly to set up, and the authors of this article question if a day-ahead market is needed in all electricity markets, or if a real-time market is sufficient by itself. To answer this question, the authors discuss the operation and characteristics of a day-ahead market, and summarize the five primary benefits of a day-ahead market: increases in reliability, increases in demand response, increases in unit commitment efficiency, mitigation of market price uncertainty, and reduction in gaming opportunities.

Based on their analysis, the authors conclude that only certain electricity markets would benefit from having a day-ahead market. System operator/ITP-run day-ahead markets offset the associated costs of having to implement these markets only under certain conditions, including if the system operator/ITP needs day-ahead unit commitment and if the day-ahead market adds valuable demand response. In addition, it is not a foregone conclusion that the benefits listed above would always exist, sufficient to offset the cost of day-ahead markets. While the authors believe the implementation of the SMD will help the industry, they question whether some regions would be better off with a variation in which there is no day-ahead market.