Day Ahead v Real Time Price Bias in ISO Markets
Issue. The question of forward bias in the power markets has been probed by
analysts, managers and traders for years. The answer goes to the heart of
power market efficiency. While bias has been noted many times, questions
about the statistical significance of the bias persist.
This article explores that bias with a focus on statistical significance for four
disparate locations for Day Ahead (DA) versus Real Time (RT) Locational
Marginal Price (LMP) in each of these ISO/RTOs: PJM (WH: Western Hub),
ISO-New England (CT Zone), Midwest ISO (IL Hub) and NY-ISO (NY-G,
Summary. There is evidence for slight systematic DA versus RT bias in the LMP
markets examined. Overall, the LMP markets examined are “efficient” in the
sense that there is very little systematic bias.
CT and NY-G showed overall long term bias at the p<0.01 level.
The DA market averaged $2.02 over the RT for CT and $2.22 for NY-G.
IL showed bias at the p<0.10 level, with DA exceeding RT by $0.84, while
WH showed zero bias.
The individual months by years showed scant significance anywhere.
The months overall and years overall showed little significance anywhere.
WH’s zero bias can be attributed to the extensive analysis that has been done
in that market as a consequence of its prominent role as a forward trading
vehicle. In part, this confirms the superior transparency of the PJM Western
Method. Most analyses compare the average DA with the average RT overall by
various time slices using an equality of means test. This analysis, however,
tested whether the mean pairwise difference between RT and DA prices
significantly differed from zero. This variance reduction technique
significantly sharpened the analysis.
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Analysis Procedure: Examined prices were da