Convergence bidding would allow market participants to manage price fluctuations that can occur between the day-ahead and real-time markets. As reported, it is used in competitive energy markets in the US because it reduces risk and provides market liquidity.
Reducing the price differential between market time frames provides benefits including increased liquidity which helps mitigate market power; lower cost to serve load through a day-ahead unit commitment, and improved grid operations because the day-ahead market reflects real-time conditions.
Convergence bids are financial and they do not represent physical energy or load. If cleared in the day-ahead market, they are settled at day-ahead prices and then automatically liquidated with the opposite position at real-time prices. For example, a virtual supply bid would be an offer to sell energy at the day-ahead price and buy the same amount back at the real-time price. A virtual demand bid would be just the opposite. Generators and utilities that are also bidding to buy and sell physical energy can use these strategies to reduce the risk of being caught on the wrong side of price fluctuations between the day ahead and real time.
Market participants that do not represent physical load or generation can participate in convergence bidding.
The California ISO operates the state’s wholesale transmission grid, providing open access supported by a competitive energy market and planning efforts.
