In the electrical and engineering industries, the argument between day-ahead vs. real-time energy markets is often debated. In this blog post, we explain day-ahead and real-time energy markets in detail, to help you decide where you stand on the debate.
What Is The Day-ahead Energy Market?
The day-ahead energy market is a financial market where individuals and companies can sell and purchase electric energy at financially binding, or day-ahead, prices for the next day. The day-ahead market ensures both buyers and sellers can hedge against price changes and volatility in the real-time energy market as energy prices are locked in before the next operating day.
The day-ahead energy market has a financially binding schedule of commitments for both the sale and purchase of energy. Each day the ISO develops according to the data submitted to the market. Usually, a supply bid or demand offer will be cleared by the day-ahead energy market if the proposed price is equal to or less than the LMP (locational marginal price) for a certain location.
What Is The Real-time Energy Market?
Real-time energy markets enable consumers, companies, and energy distribution businesses to buy and sell energy in real-time, usually, an hour before delivery. Auctions on the real-time market take place every 30 minutes, and the pricing of energy can change throughout the operating day.
Day-ahead Vs. Real-time Energy Markets
There is no definitive answer to the question, which is better day-ahead or real-time energy markets, as both have their benefits and potential drawbacks. For example, the day-ahead energy market lets individuals and companies buy or sell wholesale electricity 24 hours before the operating day, ensuing they avoid being negatively affected by market volatility. This, however, could mean that a buyer or seller misses out on a great financial deal in the real-time energy market because they have already committed to a set price a day in advance.
On the other hand, the real-time energy market lets market users sell and buy wholesale electricity throughout the course of an operating day with no set or previously agreed prices. As the real-time energy market calculates its prices based on day-ahead commitments and the real-time demand for energy, it creates prices that reflect market demand. Buyers and sellers who use the real-time energy market risk being affected negatively by real-time demand, but are also able to react more proactively to lower prices and may be able to secure great deals that were not available on the day-ahead market. You must weight up the pros and cons of both markets before you decide to buy/sell energy.