Mining price signals in Ontario’s electricity market.
Russ Houldin is a retired former senior adviser on the staff of the Ontario Energy Board. Bunli Yang is a consultant on electricity and energy markets and their regulation.
In normal markets, with willing buyers and willing sellers, knowing the price is all that’s needed for traders to act. Collectively, and over the long run, their decisions nominally should result in economic efficiency. Like Momma Bear’s porridge in Goldilocks, just the right amount of investment and supply is attracted to serve the just right amount of demand from consumers.
Of course, markets in electric power are complex and don’t function this way.
In North America, even where wholesale competitive markets for electric power exist, they’re accompanied by a capacity market or its equivalent, in tacit recognition that the five-minute or 60-minute price for electricity is ineffective in inducing investments in new supply. Moreover, all such markets display an inordinate degree of volatility, which tends to confound any reliance on price signals. For example, for many large industrial loads, predictability within a four-hour window would be valuable. Yet for certain types of generators, a two-hour window is critical.