1 
Like any commodity market, the wholesale electricity market establishes a price for its commodity-electricity-by matching supply and demand. The marketplace consists of buyers and sellers whose bids and offers determine a price at which supply is willing to produce electricity and demand is willing to consume it. However, unlike other commodities, electricity must be produced at nearly the same instant it is consumed, requiring a continuous and instantaneous balancing of supply and demand.
In a wholesale electricity marketplace, generators offer prices and quantities of electricity supply they are willing to produce and schedule. At the same time, demand bids the maximum amount it is willing to pay for the anticipated amount to be used. The interaction of these offers and bids ensures that the right amount of power is produced and consumed at an economic price. Establishing this "market price" provides the basis for trading and competition among participants in the market. When supply is tight, prices go up, inducing suppliers to produce more and consumers to use less. When supply is plentiful, prices go down, resulting in less production and normal consumption levels.
There are three levels of trading associated with ISO New England's SMD market: bilateral transactions, short-term forward market trading in the form of a day-ahead market, and a spot market called the real-time market. Market participants can choose to partake in any combination of these. All three trading opportunities are used by participants to manage the daily production and delivery of wholesale electricity throughout New England allowing market participants to manage their portfolios as efficiently as possible.
Bilateral Transactions
The bulk of electricity trading activity is done through bilateral transactions between wholesale buyers and sellers. These are contracts to purchase or sell one or more market products over specified time periods under set prices. Bilateral transactions provide price certainty because these arranged contracts are fixed and not subject to price fluctuations in the day-ahead or real-time markets. What's more, they help market participants balance their portfolios by providing a method for transferring wholesale settlement obligations and reducing certain operating reserve charges.