Power Generation

Vincent Kaminski

Understanding generation technology is crucial for all traders and energy analysts. In competitive commodity markets, prices are set at the margin. If we ignore the potential for transmission constraints and line losses, the cost of generating electricity at the unit required to satisfy a marginal megawatt-hour of demand sets the market prices. This statement has to be further qualified once transmission issues and the potential for exercising market power are considered. However, one has to develop a good understanding of the technology behind electricity generation before more complex problems can be addressed.

Generation units vary with respect to size, unit cost of production, technology used to produce electricity and the time required to dispatch them (ie, the time elapsed from the moment the decision to generate electricity is taken to the moment of reaching full capacity output). From the point of view of a trader, units with more flexibility represent higher value. Controlling such units, either through direct ownership or through contractual arrangements, creates opportunities to take advantage of spikes in market prices. Most transactions in the electricity markets