The California Independent System Operator Corp. (California ISO) board of governors unanimously approved adding convergence bidding in the ISO market in early 2011.
Convergence bidding allows market participants to better manage price fluctuations that can occur between the day-ahead and real-time markets. It is used in most competitive energy markets in the U.S. because it reduces risk and provides market liquidity, according to California ISO.
Reducing the price differential between market time frames can provide the following benefits:
– increased liquidity that helps mitigate market power;
– lower cost to serve load through a more efficient day-ahead unit commitment;
– ability to hedge against real-time market exposure stemming from forced generation outages; and
– improved grid operations because the day-ahead market better reflects real-time conditions.
Convergence bids are financial; they do not represent physical energy or load, says California ISO. 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.
Market participants that do not represent physical load or generation can participate in convergence bidding as a way to potentially make a profit if they bid wisely. But, according to California ISO, they also assume some risk, relieving physical load and generation from some of their risk.