Abstract
In the California wholesale electricity market, physical power is sold competitively in a multi-unit multi-settlement single-price auction comprised of a day-ahead forward market and a real-time spot market. Historically, significant divergences have arisen between forward and spot prices, leading to market inefficiencies. In 2011, the California Independent System Operator implemented virtual bidding as a partial solution to converge prices between markets by opening the forward market to financial speculators without any ties to physical generation or load. Using 5 years of data between April 2009 and March 2014, I estimate hourly time-series models of the system-wide forward premium, and forward premia at the two largest trading hubs. I find virtual bids and off ers to have had no effect on the forward premia during off -peak hours. During peak hours, I find virtual bidding to have caused forward and spot prices to diverge due to the large number of market participants looking to hedge against — or speculate on — the occurrence of infrequent but large spot price spikes by placing virtual demand bids. Virtuals placed at the largest trading hubs were associated with even larger price divergences, suggesting virtual demand bids also distorted the price of congestion and losses at the nodal level.
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