The influence of futures markets on real time price stabilization in electricity markets

Markets can interact with power systems in ways that can render an otherwise stable market and an otherwise stable power system into an unstable overall system. This unstable system will be characterized not only by fluctuating prices that do not settle to constant values, but, more worrisome, it creates the possibility of inducing slow electromechanical oscillations if left unchecked. This will tend to happen as a result of "price chasing" on the part of suppliers that can react (and over-react) to changing system prices. This paper examines the role that futures markets may have on the clearing prices and on altering the volatility and potential instability of real time prices and generator output.