The principle by which the electricity price is set in the power market is identical to the principle behind determining the prices of general commodities － balance of supply and demand.
The market price is composed of the system marginal price (SMP) and capacity payment (CP). Capacity payment is the price paid to a generating unit that has declared its availability during the day. Price cap is imposed on the energy price of base load generating units such as coal and nuclear energy.
Method of Determining the System Marginal Price
The system marginal price (SMP) refers to the cost of the most expensive generating unit included in the Price Setting Schedule (PSS). PSS is set up by a computer program that can minimize the total production cost of generating units including the startup cost and incremental fuel cost. During some hours, certain generating units are not entitled to set the market price owing to their technical characteristics such as ramping rates, minimum output level, etc.
Market Price Setting Procedure
KPX forecasts the demand for the trading day and receives offers for available capacity from generation companies one day ahead. It then determines the market price by producing a Price Setting Schedule (PSS). In the PSS, the SMP values for each trading hour are calculated to meet the demand for each hour. Note that congestions or generation constraints such as fuel limitation and district heat supply are not considered in this procedure. Thus, establishing an efficient Operation Schedule that determines the unit commitment (merit order) and output level of generating units is essential to minimizing the total production cost while meeting the necessary demand.