🌎 Getting in tune with power markets

Part I: How power markets set the stage for energy innovation

Joe Eilers

Longtime transmission guru Carl Zichella once called the American electric grid the “most complicated machine we’ve ever built”, and with $1T of IRA-driven renewable investments in the pipeline, it’s only going to get more complex. The power grid, in the US or in markets around the globe, is an intricate web of transmission and distribution lines, regulated operators, and markets.

The promise of a clean energy future predicated on abundant, cheap, green electrons starts with the grid. But while the grid serves as the underlying infrastructure, the power markets keep the entire operation humming and direct the complex flow of electrons from generators to consumers. 

Next week, we’ll deep-dive into the nuts and bolts of the technologies that make our grid more reliable, resilient, and clean (aka ‘gridtech’). But first, we’ll set the stage for how the power markets work, who the players are, and how the grid of the future is starting to take shape.

A power(ful) market evolution

The power markets have evolved significantly since Edison’s Pearl Street in 1882. Regulated markets where vertically integrated utilities control the full power generation, transmission, and distribution value chain have been opening up into more competitive wholesale power markets. Here, electricity can be traded between generators and retailers before being sold to consumers (for a longer history, check out the aptly-named The Grid).  

Power market deregulation set the stage for the grid we know today, which is why we’ll be focusing exclusively on the wholesale power market in this feature. 

Wholesale power markets serve two primary functions:

1. Act as a matchmaker between electricity buyers and sellers. In doing so, the market must ensure electricity delivery is reliable, resilient, and at the best possible price for consumers. And where required and/or possible, clean. Utility priorities run roughly in the following order: Safety first, reliability second, price third, and finally clean.

2. Inform participants, through price signals, on decisions to improve market system design. This generally includes introducing incentives or regulations to drive grid reliability and operations or alleviate congestion. 

The three musketeers

There are three core players in wholesale power markets - generators, operators, and utilities. However, increased grid flexibility has enabled other players to participate, providing ancillary services.   

  • Generators: Generate electricity from fossil fuels, renewables, and nuclear 
  • Operators: Ensure the grid is reliable and demand is met
  • Utilities: Purchase wholesale electricity and deliver power to end-consumers
  • (Bonus) Service providers: Adjust balance of electricity, ensure supply meets demand, and make the grid more flexible (i.e. Distributed Energy Resources)

Tale of two markets

Power markets broadly break down into day-ahead and real-time categories:

  • Day-ahead markets: Market participants such as utilities can buy and sell wholesale electricity one day before the operating day producing an initial settlement. 
  • Real-time markets: Participants buy and sell wholesale electricity during the operating day. It acts as a balancing market where day-ahead commitments are balanced out with actual supply and demand on the operational day.  

Both markets act through an auction process and follow a merit order structure, where generator bids are sorted by price. The auction process works as follows:

  • Generators inform operators (ISOs/RTOs) how much electricity they can generate and at what price. These generator bids are stacked up (A, B, C, etc…) in price order. 
  • Demand is set by the operator who accepts electricity generation below this market-clearing price. The generator bids which are accepted are those coloured in green in the chart below. 
  • Winning generator bidders will then generate electricity at the given price whereas losing bids will not, as highlighted by the gray-coloured bids.
Auction process of wholesale power markets (Source: ISO New England)

The wholesale power market stack

Of course it’s more complex, but the power market stack can be summarized into four main components: the electricity itself, transmission, capacity, and ancillary services.


Electricity is of course the shining star of the show, which is also why power markets differ from conventional markets. Unlike financial, retail, or other commodity markets, it’s not just about the pricing mechanism involved, but the underlying electrons that flow from generators to consumers. So on top of balancing demand/supply in the abstract or financial sense, managing the electricity itself is crucial.


Grids come in all shapes and sizes. In the UK, there is one main grid covering England, Scotland, and Wales. In other locations, grids stretch across international borders. In the continental US, there are three power grids. The Eastern and Western Interconnects, divided by the Rocky mountains, and the Texas Interconnect which is located, you guessed it, in Texas.

In each of these grids every solar module, natural gas, and nuclear power plant is synchronized to generate energy at exactly 60 Hz. This harmonious design keeps a potentially dissonant cacophony of electricity humming along smoothly for millions of consumers at every moment. If things go out of tune, either runaway electrons or scant supply can melt the system, resulting in widespread blackouts.

For much of the US, the Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) are the conductors of this electric light orchestra and balance supply and demand. They represent about two thirds of the US grid, with the rest operated by vertically integrated utilities. 

Source: FERC

To ensure supply perfectly matches demand at all times, grid operators perform three primary duties.

  • Grid Operations: ISOs and RTOs maintain grid reliability and integrity through two key roles. As a balancing authority, they ensure adequate supply of power to meet demand. As a reliability coordinator, they manage the dispatch and use of transmission lines. This includes managing planned outages for maintenance or unplanned outages due to equipment failure or extreme weather. 
  • Transmission Planning: They plan future upgrades to the grid as more customers and suppliers get in line to interconnect. This is especially true today, when electrification of everything from stoves to EVs threatens to hit an overwhelming crescendo. (More on that next week!)
  • Market Operations: Grid operators also control competitive power markets. They hold auctions to set prices and dispatch the most efficient generators first, lowering costs and reducing emissions (as discussed above).

Each of these three competencies intertwine and exist for two main reasons: grid reliability and value creation. New transmission investment today has a direct effect on how grid operators manage future energy flows. Understanding energy industry decisions often requires following the money or the electrons, both of which rest at the center of wholesale energy markets.


Capacity markets exist to guarantee that generation supply will meet projected electricity demand. Grid operators pay power generators to be available at a specified time, whether they’re needed or not. These agreements incentivize generators to maintain existing resources and finance new ones, to increase grid capacity. 

But not all megawatts are created equal. Every generator type is compensated differently for the MW they contribute to the system in a process called capacity accreditation. This accreditation is dependent on a generator's ability to contribute to supply during times of peak load.  

There are several up-and-coming technologies directly affected by capacity market design:

  • Energy storage: Energy storage harnesses energy during peak supply periods and dispatches it later to meet peak demand. This makes energy storage resources like batteries a valuable resource in capacity markets, and is expected to play a growing role in the coming years. However, when these resources can be dispatched and for how long (read: long-duration energy storage) will affect how they are credited and compensated in the capacity markets.
  • Distributed Energy Resources: Demand response or load modifying resources (LMRs) reduce demand during peak times and can also leverage capacity markets. For example, a factory turning off a production line when the grid is overloaded in exchange for cost savings. 

Ancillary services

Ancillary services are the stabilizers of the power markets and incentivize new generators to keep the system ticking during emergency situations. They are the metronomes of the grid, pulling the players back in sync when they veer off course, through a few key functions. 

  • Frequency regulation balances the instantaneous supply and demand of electricity to maintain the grid's frequency at its desired level (60 Hz). 
  • Spinning and non-spinning reserves are generators ready to provide power and synchronize with the grid within 10 minutes when there's an unexpected failure or spike in demand. (Synchronization means matching the frequency, phase angle, and voltage of the power grid.)
  • Voltage support ensures that the electric voltage stays within the required levels for the system to function properly. 

All these functions help to maintain grid reliability and health, and provide a healthy revenue stream. Electric Power Research Institute (EPRI) estimated that the total value of ancillary services in the United States was around $10B in 2020. Innovators have been taking note and are looking to reap the rewards. 

  • Utility-scale storage: Battery technology can provide a range of ancillary services including voltage support, frequency balancing, and congestion management. 
    • Example innovator: Invinity has been using its vanadium flow batteries for ancillary services such as frequency regulation. 
  • Demand Response: These platforms allow consumers and businesses to adjust their power consumption in real-time based on grid needs. 
    • Example innovator: Enel X’s demand response platform helps businesses identify ways that they can participate in ancillary services. 
  • Virtual Power Plants (VPPs): VPPs aggregate distributed energy resources like solar panels, batteries, and electric vehicles to act as a unified power resource. 
    • Example innovator: Enbala offers a VPP platform that helps stabilize the grid using distributed energy resources. This aggregation helps to improve liquidity of the ancillary market and foster price-based incentives for demand-side participants. 

Key takeaways 

  • ISOs/RTOs are the conductors of the power grid. These entities play myriad roles in maintaining both the physical and financial infrastructure of an incredibly complex effort to keep the lights on. They are the gatekeepers for all new entrants looking to innovate on or in the grid.
  • Location, location, location. Power markets are heavily affected by geographies, including what resources are available (e.g. solar or wind), what types of utilities are prevalent (e.g. investor-owned, municipal, or cooperative), and whether the market is regulated or deregulated. 
  • It takes a village of markets. Power markets keep electrons flowing through power lines. Capacity markets ensure future power supply. Ancillary services markets maintain overall grid stability. Each without the other is ineffective and each provides unique opportunities for innovation.
  • Entry into power markets. With the increasing role of DERs, VPPS, demand response, and other technologies that improve grid flexibility, earning revenues from capacity markets and ancillary services is a readily available way to participate in wholesale power markets. For founders, it could mean building startups that can orchestrate DERs to support frequency regulation. For investors, it could mean searching and investing in projects that can improve grid capacity and contribute to capacity markets.
  • Old and vital. Many of the market structures and regulations that exist today evolved over the course of the 100+ years that power grids have been in operation. Legacy assets like fossil fuels have had more time to influence or adapt to those rules compared to novel solutions like variable generation, long duration storage, or DERs.
  • Overall foundation for action. Volatility and uncertainty in wholesale electricity markets can be used as indicators through price signals to evaluate and inform grid improvements.

A big thank you to John Tan and Oliver Booth for supercharging this perspective on power markets.

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