Fundamentals of Energy Markets and Power Systems
What this domain tests
This domain tests how physical power-system constraints shape energy prices and trading decisions. Candidates must connect dispatch, marginal cost, reserves, and network limits to market outcomes, rather than treating electricity as a generic commodity.
Core rules and concepts
- Instantaneous balance: generation plus imports must equal load plus exports plus losses at every instant; frequency deviation is the physical signal of imbalance.
- Merit order: units are dispatched in ascending short-run marginal cost, subject to start-up, minimum-run, ramp, and must-run constraints.
- LMP decomposition: a locational marginal price equals the marginal energy component plus congestion and marginal-loss components; the reference-bus choice changes components, not the total.
- Energy versus capacity: energy is MWh; capacity is MW available for a period. Reserve products procure capability, not delivered energy.
- AC versus DC approximation: DC power flow is a linear approximation useful for market clearing; voltage and reactive-power limits still bind in operations.
Worked example
Demand is 150 MW. Generator A can supply 100 MW at $20/MWh; Generator B can supply 100 MW at $40/MWh. Merit order clears A fully and B for 50 MW. The uniform clearing price is $40/MWh, set by the marginal unit. A earns inframarginal rent of (40 − 20) × 100 = $2,000 per hour; B earns no rent on the margin. If a 20 MW transmission limit prevents A from reaching load, the local price rises and the congestion component becomes positive.
Traps that cost marks
Using average cost instead of marginal cost; ignoring losses and congestion when calculating LMP; treating a capacity obligation as energy; assuming all cleared units are paid their own bids under uniform pricing; and forgetting that minimum-run or ramp constraints can make the marginal unit non-obvious.