Wholesale electricity markets are where energy and related services are bought and sold so that electricity reliably arrives at your home, school, or business. In much of the United States, these markets are run by non-profit organizations called Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). The purpose of RTOs and ISOs is to continuously keep supply and demand in balance, operate the transmission grid, and make sure electricity is delivered reliably and at the lowest cost possible.
No two regional markets are exactly the same, but most wholesale markets use the same building blocks.
Building Blocks of Wholesale Electricity Markets
Wholesale electricity markets are made up of several related parts. Each one has a different purpose:
| Market Element | Core Purpose | Plain English Description |
|---|---|---|
| Energy or Energy-Only Market |
Buy and sell electricity used in real time or day ahead |
The market for the megawatt-hours that keep the lights on |
| Capacity Market (available in some regions) |
Pay energy resources to be available in the future. | Ensures there will be enough energy supply for future times when energy consumption is the highest (peak demand) |
| Ancillary Services |
Support grid stability and short-term reliability | Fast-acting tools that help correct sudden changes and keep the system steady |
Each element serves a specific role while working together as one system. For example, energy markets handle real-time needs, while capacity markets and ancillary services make sure resources are ready and reliable when needed.
Functions of Electricity Markets
Electricity markets exist to facilitate the reliable and efficient allocation of power production and transmission. These markets also serve a variety of functions in RTO/ISO areas including:
- A cost recovery function. Markets allow useful power generators to recover their operating costs and to earn a reasonable profit so that they will want to remain in the business of providing electricity.
- A resource allocation function. Electricity markets set prices based on supply and demand, signaling when and where it is profitable to invest in certain types of power resources and when it is economically efficient to retire others.
- A reliability function. Prices set by markets work to ensure sufficient resources to maintain the reliable and efficient transmission of electricity and help to avoid disruptions in electric service.
- A technological integration function. Through effective market rules, markets help foster the integration of new technologies, such as electricity storage, demand response (committing to use less power at key times), energy efficiency products, etc.
Electricity markets allow power resources to compete to provide consumers with the lowest-cost power consistent with system needs. However, as with all competition, safeguards must be implemented to ensure that the competition is just and results in reasonable rates.
RTOs and ISOs manage these markets under rules approved by the Federal Energy Regulatory Commission (FERC).
You can think of wholesale electricity markets like a coordinated system:
- Capacity (long-term readiness) makes sure enough resources will be available.
- Energy markets dispatch resources and deliver electricity real-time, as needed.
- Ancillary services keep the system stable from moment to moment.
Market names and timing, product definitions and participation rules, and pricing structures vary across the regions.
Despite these differences, regions rely on the same core concepts and face similar challenges as the grid changes.
You can learn more by reading the companion handouts in this series:
For further information see FERC’s Energy Primer: A Handbook of Energy Market Basics on our Educational Resources page.