Energy 101

Energy is a one of the easiest products to understand. Energy can be converted into light, heat and work. Any time a lightbulb is glowing, a computer is operating or the burner on an electric stove is radiating heat, electrical energy delivered into a home by the local utility is being converted into another form of energy.

For a typical household, electrical energy is measured in terms of kilowatts and kilowatt-hours. A watt is a small unit of work after the Scottish engineer James Watt. A typical home might use somewhere between xx and zz Kwh in a summer month. At the scale on which MISO operates, electrical energy is typically measured in terms of megawatts and megawatts-hours (mega = millions), but sometimes measured in terms of gigawatts and gigawatt-hours (giga = billions).

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Energy Supply and Demand

Energy Supply Curve

The overall supply curve for a market is the aggregation of the individual offer curves of the resources in the market. The supply curve for a particular resource will typically reflect the cost of the fuel burned and how efficient the resource is at converting the fuel into electricity. It is important to note that the cost of fuel for a resource can be zero, which is the case for wind and solar. 

Elasticity is an important property of a supply curve. Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. In a market with an elastic supply curve, a significant amount of additional output from suppleirs can be obtained with only a small increase in price. In contrast, when a supply curve is inelastic, a small increase in the demand for electricity can be accompanied by a significant price increase. 

In electricity markets, it is common for the supply curve to be relatively elastic along most of its length. But when demand reaches peak levels, it can push into a section of the supple curve that is highly inelastic. 

Energy Demand Curve

In the very short run, such as for the dispatch periods in the MISO day-ahead and real-time markets, the demand for electrical energy is fairly inelastic. In other words, the demand curve for electricity can be thought of as a vertical or nearly vertical line. When customers want electricity, they tend to want it now. They don't want some other product becuase there are often no adequate subsititutes for electricity and they are willing to pay a substantial price for it. 

Interaction of Energy Supply and Demand Curve

A shift in demand for electricity will be seen as a movement of the demand curve to the left (diminishing load) or to the right (increasing load). Even if demand is fairly inelastic, the price of electricity established by market dynamics will be quite reasonalbe as long as the supply curve is elastic. But when inelastic demand meets inelastic supply, the price of electricity can go quite high. When inelastic demand pushes far enough into the inelastic portion of the supply, the price for energy and ancillary services can go to extreme levels that do not reflect the ordinary operation of competetive market. All organzied electricity markets, including MISO, have safeguards in place, such as offer caps and price caps, to mitigate the impact of inelastic demand meeting inelastic supply.