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How the Wholesale Electricity Price is Determined

Running Ontario's power system and the wholesale electricity market is a 24-hour operation, with clearing prices set every five minutes. Here's a step-by step explanation of how Ontario's IESO maintains a reliable supply of electricity and, at the same time, determines the wholesale price of electricity.

Forecasting Demand

Each day, the IESO issues forecasts of how much energy will be needed throughout the following day and up to the month ahead including an "energy reserve", of roughly 1,400 MW above what is actually consumed. These forecasts are continually updated as new information comes in such as changes in weather.

Forecasted demand is posted online so suppliers can anticipate how much electricity will be required. Typically, the IESO's day-ahead forecasts are highly accurate, with less than a two per cent variance from the actual demand figures.

Determining Available Supply

Generators and electricity importers review the forecasted demand and decide how much electricity they are willing to supply and at what price. They electronically send these supply "offers" to the IESO. Every supplier who wishes to inject electricity onto Ontario's transmission system must participate in the market.

At the same time, a small number of large consumers tell the market through a "bid", how much electricity they are willing to consume at a certain price. These consumers stop consuming electricity if the market clearing price rises above their bid price.

Balancing the Market

The IESO then matches the offers to supply electricity against the forecasted demand. It collects these bids and offers until two hours before the energy is needed, so "pre-dispatch" prices, or the price of electricity before the bidding window has closed, can fluctuate as new bids come in.

When it comes time to set the market price, the IESO first accepts the lowest priced offers and then "stacks" up the higher priced offers until enough have been accepted to meet customer demands. All suppliers are paid the same market clearing price which is based on the last offer accepted. The IESO then instructs or "dispatches" generators and importers based on their winning offers to provide electricity to the grid.

Additional suppliers are paid "Operating Reserve" payments, which requires them to be on call to provide energy should a generator unexpectedly break down or demand spike. Operating reserve prices are also determined through the IESO market.

Setting the Hourly Ontario Electricity Price​

The Hourly Ontario Energy Price, or HOEP, is the average of the twelve market clearing prices in each hour. The HOEP is charged to large consumers who participate in the market, as well as local distribution companies (LDC) who in turn recover it from their market price customers.  

The IESO runs a real-time market, meaning purchases of electricity are made as they are needed. There are occasions, when the best-priced energy may not be available due to limitations on the transmission lines. In this case, that generator's offer is still used to help set the price, but another generator may be asked to provide the electricity.  

Current price and demand information is available throughout the day at Power Data.