The primary mission of the New York
Independent System Operator is to ensure the
reliable operation of the bulk power system. In
other words, we keep the lights on.
Competitive markets for power production
and related services sustain electric system
reliability by providing for dependable delivery
of electric service from the most efficient
resources available at the least cost.
NEW YORK’S
COMPETITIVE MARKETS
FOR ENERGY
Fair, transparent pricing drives market success
New York’s proven market structure for electricity
COMPETITIVE MARKETS DRIVE
BENEFICIAL RESULTS
NYISO-administered competitive markets are
producing public benefits, serving the public
interest, and supporting public policy.
Between 2000 and 2013, New York’s competitive
markets for electricity have contributed to:
Cost-saving Efficiencies
ŒŒ $6.4 billion in reduced fuel costs due to system
efficiency improvements that exceeded national
efficiency gains by 300%.
ŒŒ $540 million in savings from reduced reserve
margin requirements.
Infrastructure Investments
ŒŒ More than 10,400 MW in new/upgraded
generation added to the system (27% of NY’s
electricity requirements).
ŒŒ More than 2,300 megawatts in new
transmission capability that opens access to
more efficient, less costly supplies.
Emissions Reductions
ŒŒ 41% reduction in carbon dioxide emissions;
25 million tons of carbon emissions avoided in
2013 vs. 1999.
ŒŒ 94% reduction in sulfur dioxide emissions.
ŒŒ 81% reduction in nitrogen oxide emissions.
Renewable Resources & Demand Response
ŒŒ Integration of more than 1,700 MW of wind
energy, producing enough electricity annually to
power 490,000 New York homes.
ŒŒ More than 1,100 MW of demand response
resources to support reliability during highdemand conditions.
All competitive wholesale markets for electricity in the United States and
Canada set new electricity prices every day in auctions using a Uniform
Clearing Price (UCP) method for setting prices. In New York – and elsewhere
– this process is widely recognized as a key driver of the success of
competitive electricity markets.
The Federal Energy Regulatory Commission approved the UCP process
for wholesale electricity markets in 1998 because it produces fair and
reasonable wholesale rates. A similar UCP model was adopted later in
New York and eight other states for the Regional Greenhouse Gas Initiative
(RGGI) to price carbon dioxide (CO2) emissions. RGGI has helped reduce
CO2 emissions associated with electricity production in New York State by
more than 40 percent since 2000.
To maintain reliable supply and delivery to consumers, the New York
Independent System Operator (NYISO) uses the UCP process to ensure that
electricity is produced precisely when it is needed and in continuous balance
with changing demand. Wholesale energy markets like the NYISO’s use the
UCP process, which assigns the same price to all electricity generated to
meet consumer demand. The UCP recognizes that every unit of electricity
produced to maintain this balance has equal value to the grid – no matter
what technology is used to produce that electricity. Economists say the UCP
sends efficient price signals for electricity by creating incentives for producers
to minimize costs. This approach rewards efficient producers that can best
reduce costs, benefiting consumers.
UCP auctions set the price of electricity…
In competitive auctions, the NYISO calculates the price of electricity by
determining expected demand for electricity and evaluating many offers to
supply electricity to meet that demand. The NYISO ranks these offers by
cost and chooses the least costly resources until the total demand is met.
All generators selected receive the price set by the last generator needed to
meet demand. This price is known as the clearing price.
…And keep the price-setting process transparent
Because all suppliers and consumers can know the clearing price, the
UCP creates price transparency that provides signals for investment in new
generating resources to meet or beat clearing prices. The pricing structure
is especially helpful for renewable energy generators because they have
minimal fuel costs. This means the NYISO is more likely to choose renewable
energy resources to supply electricity any time they can produce it.
How UCP encourages cost-saving efficiency
The UCP’s market signals encourage investments in new generating facilities as well as investments to cut costs and increase
efficiency within existing generators – because such investments can make these generators more competitive in the UCP
auction. As new resources enter the market and existing resources improve efficiency, resources that cannot reduce costs
enough are pushed out of the market, and clearing prices go down. In this manner, the UCP model gives all consumers the
benefit of both new low-cost resources as well as investments in existing resources.
Uniform prices give generators no incentive to increase bid offers based on their own forecast of likely prices. Instead, the
UCP encourages suppliers to submit offers at their marginal costs of operating – which increases the likelihood of being
selected to meet demand. The margin between a generator’s offer and the eventual clearing price lets that generator recover
its operating costs and apply the margin toward fixed costs, such as those associated with the financing and construction of
the facility. Only after recovering these operating and fixed costs does a generator have an opportunity to earn a profit.
Alternative ‘pay-as-bid’ model introduces costly inefficiencies
Some have suggested that a “pay-as-bid” model, in which generators are paid based on their offer prices, might be preferable
to the UCP model. However, this structure encourages generators to submit higher price offers to try to recover fixed costs
as well as operating costs. What’s more, these generators tweak their price offers to build in their best guesses on what will
be the highest price that will clear in the market that day. Studies suggest1 that pay-as-bid offers are higher than bids in a
UCP model, and pay-as-bid offers vary little between suppliers regardless of their operating costs, as each supplier seeks the
highest successful offer price. In competitive conditions, clearing prices will vary little between the UCP model and pay-asbid model – in the short term. However, because pay-as-bid offers are unlikely to reflect generators’ actual production costs,
the resulting supply mix will be less likely to reflect the lowest system-wide production costs – so the system performs less
efficiently.
In the scenario displayed below, Supplier A is a resource with the lowest operating costs. In a UCP auction, it would be chosen
first and get the clearing price set by Supplier E. As an efficient supplier, it would also get an ample margin to offset fixed
costs. Under a pay-as-bid model, Supplier A increases its offer in an effort to recover fixed costs or maximize profits – and is
rejected as a result.
In this example, the average clearing prices are the same in both models, but the pay-as-bid system is less efficient overall as
the resource with the lowest operating costs sits idle because its bid was rejected.
Alfred E. Kahn, et al., 2001. “Pricing in the California Power Exchange Electricity Market: Should California Switch from Uniform Pricing to Pay-as-Bid Pricing?”
California Power Exchange. Sue Tierney, et al., “Pay-as-Bid Vs. Uniform Pricing: Discriminatory Auctions Promote Strategic Bidding and Market Manipulation”
Public Utilities Fortnightly, March 2008.
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