Power market modelling is software that models a whole power system and its market years ahead, so that developers, banks, utilities and regulators can see future prices before anything is built. It is also called power market simulation.
The model contains every power plant, every transmission line and the demand of each region, hour by hour. It then simulates how the market would run. For each hour, it switches on the cheapest plants first, until demand is met. This order is called the merit order. The price of that hour is the cost of the last plant needed. It repeats this for every hour of the year, and for many years. Real markets have more rules than this, but this is the basic idea.
Take, for example, a company that plans to build a 300 MW solar plant in Karnataka. Its bank asks one question: what price per unit will the plant earn? The model is run with the new plant added. At midday, many solar plants produce at once and demand is covered by cheap power, so the model shows a price of about ₹2.50 a unit. At 7 p.m. the sun has set and costlier plants are running, so the price is about ₹7. The new plant makes most of its power at midday, so its average price is closer to ₹2.50 than to the yearly average. The bank lends against that lower figure.
In India, most power is sold under long-term contracts with prices fixed in advance, so the exchange price matters most for the share that is sold without a contract. That share is growing. Operators of grids and regulators use the same results to plan new lines and rules. The model uses forecasts from energy market research. Its prices feed energy trading and risk management and tax equity financing software. The grid itself is run in real time by energy management systems for grids. The underlying task is grid balancing.