Retail Electricity Market
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In a broad sense, an electricity market is a system that facilitates the exchange of
electricity Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as described ...
-related goods and services. During more than a century of evolution of the
electric power industry The electric power industry covers the generation, transmission, distribution and sale of electric power to the general public and industry. The commodity sold is actually energy, not power, e.g. consumers pay for kilowatt-hours, power multipli ...
, the economics of the electricity markets had undergone enormous changes for reasons ranging from the technological advances on supply and demand sides to politics and ideology. A restructuring of electric power industry at the turn of the 21st century involved replacing the
vertically integrated In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply ...
and tightly regulated "traditional" electricity market with multiple competitive markets for electricity
generation A generation refers to all of the people born and living at about the same time, regarded collectively. It can also be described as, "the average period, generally considered to be about 20–⁠30 years, during which children are born and gr ...
,
transmission Transmission may refer to: Medicine, science and technology * Power transmission ** Electric power transmission ** Propulsion transmission, technology allowing controlled application of power *** Automatic transmission *** Manual transmission *** ...
,
distribution Distribution may refer to: Mathematics *Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations * Probability distribution, the probability of a particular value or value range of a vari ...
, and
retailing Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and t ...
. The traditional and competitive market approaches loosely correspond to two visions of industry: the deregulation was transforming electricity from a
public service A public service is any service intended to address specific needs pertaining to the aggregate members of a community. Public services are available to people within a government jurisdiction as provided directly through public sector agencies ...
(like
sewerage Sewerage (or sewage system) is the infrastructure that conveys sewage or surface runoff (stormwater, meltwater, rainwater) using sewers. It encompasses components such as receiving drainage, drains, manholes, pumping stations, storm overflows, a ...
) into a
tradable good Tradability is the property of a Good (economics and accounting), good or Service (economics), service that can be sold in another location distant from where it was produced. A good that is not tradable is called non-tradable. Different goods ha ...
(like
crude oil Petroleum, also known as crude oil, or simply oil, is a naturally occurring yellowish-black liquid mixture of mainly hydrocarbons, and is found in geological formations. The name ''petroleum'' covers both naturally occurring unprocessed crude ...
). As of 2020s, the traditional markets are still common in some regions, including large parts of the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
and
Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
. The initial idea of a simple
wholesale electricity market In a broad sense, an electricity market is a system that facilitates the exchange of electricity-related goods and services. During more than a century of evolution of the electric power industry, the economics of the electricity markets had un ...
restructuring ("energy-only", replacing the regulated electricity price with the market-defined one) did not work out, thus the competitive wholesale electricity market structure is quite complex and typically includes (in addition to two markets for the electricity itself: wholesale – all of these use offer caps in some form – and retail): *
ancillary services Ancillary services are the services necessary to support the transmission of electric power from generators to consumers given the obligations of control areas and transmission utilities within those control areas to maintain reliable operations of ...
markets for the services not directly related to producing electricity and thus providing no income in the "energy-only" model, but essential for overall operation of the system ( frequency control market,
voltage control and reactive power management Voltage control and reactive power management are two facets of an ancillary service that enables reliability of the transmission networks and facilitates the electricity market on these networks. Both aspects of this activity are intertwined (vo ...
, etc.); *
capacity market In a broad sense, an electricity market is a system that facilitates the exchange of electricity-related goods and services. During more than a century of evolution of the electric power industry, the economics of the electricity markets had un ...
or some other mechanism providing an income stream necessary to build and maintain additional generation units ("reserves") for the worst-case scenario. On a typical day, these units are never called upon (not "dispatched") and thus produce no revenue from the sale of electricity either; * cost-based market with
audited cost A cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan. Cost audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with cost accounting principles, ...
s replacing producers' bids in places where the local
market power In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market powe ...
is a concern (e.g., in some parts of the US and entire hydropower-rich countries of
Latin America Latin America or * french: Amérique Latine, link=no * ht, Amerik Latin, link=no * pt, América Latina, link=no, name=a, sometimes referred to as LatAm is a large cultural region in the Americas where Romance languages — languages derived f ...
). The competitive
retail electricity market In a broad sense, an electricity market is a system that facilitates the exchange of electricity-related goods and services. During more than a century of evolution of the electric power industry, the economics of the electricity markets had un ...
s were able to maintain their simple structure. In addition, for most major operators, there are markets for transmission rights and electricity
derivatives The derivative of a function is the rate of change of the function's output relative to its input value. Derivative may also refer to: In mathematics and economics * Brzozowski derivative in the theory of formal languages * Formal derivative, an ...
such as electricity
futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract *Futures exchange, a financial market where futures contracts are traded * ''Futures'' (magazine), an American finance magazine Music * ''Futures'' (album), a ...
and options, which are actively traded. The market externality of
greenhouse gas emissions Greenhouse gas emissions from human activities strengthen the greenhouse effect, contributing to climate change. Most is carbon dioxide from burning fossil fuels: coal, oil, and natural gas. The largest emitters include coal in China and lar ...
is sometimes dealt with by
carbon pricing Carbon pricing (or pricing), also known as cap and trade (CAT) or emissions trading scheme (ETS), is a method for nations to reduce global warming. The cost is applied to greenhouse gas emissions in order to encourage polluters to reduce the co ...
.


Incompleteness

Electricity market is characterized by unique features that are absent in a typical
commodity In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a comm ...
or consumption goods market. These peculiarities make the electricity market fundamentally incomplete. Electricity is by its nature difficult to store and has to be available on demand. Consequently, unlike other products, it is not possible, under normal operating conditions, to keep it in stock, ration it or have customers queue for it, so the supply shall match the demand very closely at any time despite the continuous variations of both (so called
grid balancing Grid balancing ensures that electricity consumption matches electricity production of an electrical grid at any moment. Electricity is by its nature difficult to store and has to be available on demand, so the supply shall match the demand very cl ...
). Frequently, the only safety margins are the ones provided by the
kinetic energy In physics, the kinetic energy of an object is the energy that it possesses due to its motion. It is defined as the work needed to accelerate a body of a given mass from rest to its stated velocity. Having gained this energy during its accele ...
of the physically rotating machinery (
synchronous generator In an alternating current electric power system, synchronization is the process of matching the frequency of a generator or other source to a running network. An AC generator cannot deliver power to an electrical grid unless it is running at the sam ...
s and turbines). If there is a mismatch between supply and demand the generators absorb extra energy by speeding up or produce more power by slowing down causing the
utility frequency The utility frequency, (power) line frequency (American English) or mains frequency (British English) is the nominal frequency of the oscillations of alternating current (AC) in a wide area synchronous grid transmitted from a power station to th ...
(either 50 or 60
hertz The hertz (symbol: Hz) is the unit of frequency in the International System of Units (SI), equivalent to one event (or cycle) per second. The hertz is an SI derived unit whose expression in terms of SI base units is s−1, meaning that on ...
) to increase or decrease. However, the frequency cannot deviate too much from the target: many units of the electrical equipment can be destroyed by the out-of-bounds frequency and thus will automatically disconnect from the grid to protect themselves, potentially triggering a blackout. There are many other physical and economic constraints affecting the electricity network and the market, with some creating non-convexity: * a typical consumer is not aware of the current system frequency and pays a fixed price for a unit of energy that does not depend on the balance between supply and demand, and thus can suddenly increase or decrease the consumption; *
variable renewable energy Variable renewable energy (VRE) or intermittent renewable energy sources (IRES) are renewable energy sources that are not dispatchable due to their fluctuating nature, such as wind power and solar power, as opposed to controllable renewable ener ...
sources are intermittent due to the reliance on the weather and can ramp up or down literally from one minute to another; * the fossil-fuel and nuclear plants have restrictions on the ramping speed: from 5-30 minutes in the gas-fired plants to hours in the coal-fired generation, and even longer for the nuclear ones; * many fossil-fuel plants cannot be ramped down below 20-60% of the
nameplate capacity Nameplate capacity, also known as the rated capacity, nominal capacity, installed capacity, or maximum effect, is the intended full-load sustained output of a facility such as a power station,
; * due to high cost of the start-up, the production cost of electricity might differ from the
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it r ...
in some time intervals thus forcing the providers to bid above the marginal cost. The design of
transmission network Electric power transmission is the bulk movement of electrical energy from a generating site, such as a power plant, to an electrical substation. The interconnected lines that facilitate this movement form a ''transmission network''. This is ...
limits the amount of electricity that can be transmitted from one tighly-coupled area ("node") to another, so a generator in one node might be unable to service a load in another node (due to "
transmission congestion Electricity transmission congestion is a condition of the electrical grid that prevents the accepted or forecasted load schedules from being implemented due to the grid configuration and equipment performance limitations. In simple terms, congestion ...
"), potentially creating fragments of the market that have to be served with local generation ("
load pocket A load pocket is an area of electric grid (typically small) that has limited ability to import electricity due to either very high concentration of demand or insufficient transmission capabilities ("intra-zonal congestion") and therefore cannot be e ...
s").


Traditional market

After its first few years of existence, the electricity supply industry was regulated by the various levels of government. By the 1950s, a wide variety of arrangements had evolved with substantial differences between countries and even at the regional level, for example: *
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
,
Italy Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical re ...
, the
Republic of Ireland Ireland ( ga, Éire ), also known as the Republic of Ireland (), is a country in north-western Europe consisting of 26 of the 32 counties of the island of Ireland. The capital and largest city is Dublin, on the eastern side of the island. A ...
and
Greece Greece,, or , romanized: ', officially the Hellenic Republic, is a country in Southeast Europe. It is situated on the southern tip of the Balkans, and is located at the crossroads of Europe, Asia, and Africa. Greece shares land borders with ...
had nationwide government-owned
vertically integrated In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the supply ...
company; * The
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
had a government-owned generation and transmission (
Central Electricity Generating Board The Central Electricity Generating Board (CEGB) was responsible for electricity generation, transmission and bulk sales in England and Wales from 1958 until privatisation of the electricity industry in the 1990s. It was established on 1 Januar ...
), but the distribution was decentralized in 14 electricity boards; *
Germany Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
combined small number of regional integrated generation and transmission companies with municipal distribution; *
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
had 10 regional vertically integrated monopolies; *
Norway Norway, officially the Kingdom of Norway, is a Nordic country in Northern Europe, the mainland territory of which comprises the western and northernmost portion of the Scandinavian Peninsula. The remote Arctic island of Jan Mayen and t ...
's electricity supply was mostly at the level of municipalities; * In the US, a complex mix of companies, owned either privately or by varying levels of government, evolved, while the regulation favored municipal-level and co-op ownership. For example,
Hawaii Hawaii ( ; haw, Hawaii or ) is a state in the Western United States, located in the Pacific Ocean about from the U.S. mainland. It is the only U.S. state outside North America, the only state that is an archipelago, and the only stat ...
had only privately-owned utilities,
Nebraska Nebraska () is a state in the Midwestern region of the United States. It is bordered by South Dakota to the north; Iowa to the east and Missouri to the southeast, both across the Missouri River; Kansas to the south; Colorado to the southwe ...
only publicly-owned ones, the
Tennessee Valley Authority The Tennessee Valley Authority (TVA) is a federally owned electric utility corporation in the United States. TVA's service area covers all of Tennessee, portions of Alabama, Mississippi, and Kentucky, and small areas of Georgia, North Carolina ...
(the largest generation company) is federally owned, and the
Los Angeles Department of Water and Power The Los Angeles Department of Water and Power (LADWP) is the largest municipal utility in the United States with 8,100 megawatts of electric generating capacity (2021-2022) and delivering an average of 435 million gallons of water per day to more ...
is city-owned. These diverse structures had a few unifying features: very little reliance on competitive markets, no formal wholesale markets, and customers unable to choose their suppliers. The diversity and sheer size of the US market made the potential trade gains large enough to justify some wholesale transactions: * large utilities were providing electricity to smaller (municipal or cooperative) ones under bilateral ''requirements contracts''; * ''coordination sales'' were made between the vertically integrated companies to reduce the costs, sometimes through power pools. On the retail side, customers were charged fixed regulated prices that did not change with
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it r ...
s, retail tariffs almost entirely relied on
volumetric pricing Volumetric pricing is a pricing strategy frequently used by the public utilities (e.g., water tariff, water and Electricity pricing, power tariffs) where the fixed costs of the service are recovered proportionally to the amount of use. For example, ...
(based on the meter readings recorded monthly), and
fixed cost In accounting and economics, 'fixed costs', also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or r ...
recovery was included into the per- kWh price. The traditional market arrangement was designed for the state of the electric industry common pre-restructuring (and still common in some regions, including large parts of the US and Canada). Schmalensee calls this state ''historical'' (as opposed to post-restructuring ''emerging'' one). In the historical regime almost all generation sources can be considered dispatchable (available on demand, unlike the emerging
variable renewable energy Variable renewable energy (VRE) or intermittent renewable energy sources (IRES) are renewable energy sources that are not dispatchable due to their fluctuating nature, such as wind power and solar power, as opposed to controllable renewable ener ...
).


Evolution of deregulated markets

Chile Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
had become a pioneer in deregulation in the early 1980s (the law of 1982 had codified the changes that were started in 1979). Only few years later the new market approach to electricity was formulated in the US, popularized in the influential work by Joskow and Schmalensee, "Markets for Power: An Analysis of Electrical Utility Deregulation" (1983). At the same time in the UK, Energy Act of 1983 made provisions for
common carriage A common carrier in common law countries (corresponding to a public carrier in some civil law systems,Encyclopædia Britannica CD 2000 "Civil-law public carrier" from "carriage of goods" usually called simply a ''carrier'') is a person or compan ...
in the electricity networks, enabling a choice of supplier for electricity boards and very large customers (analogous to " wheeling" in the US).


Wholesale electricity market

A wholesale electricity market, also power exchange or PX, is a system enabling purchases, through bids to buy; sales, through offers to sell. Bids and offers use
supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
principles to set the price. Long-term contracts are similar to
power purchase agreement A power purchase agreement (PPA), or electricity power agreement, is a contract between two parties, one which generates electricity (the seller) and one which is looking to purchase electricity (the buyer). The PPA defines all of the commercial te ...
s and generally considered private bi-lateral transactions between counterparties. A wholesale electricity market exists when competing generators offer their electricity output to retailers. The retailers then re-price the electricity and take it to market. While wholesale pricing used to be the exclusive domain of large retail suppliers, increasingly markets like New England are beginning to open up to end-users. Large end-users seeking to cut out unnecessary overhead in their energy costs are beginning to recognize the advantages inherent in such a purchasing move. Consumers buying electricity directly from generators is a relatively recent phenomenon. Buying wholesale electricity is not without its drawbacks (market uncertainty, membership costs, set up fees, collateral investment, and organization costs, as electricity would need to be bought on a daily basis), however, the larger the end user's electrical load, the greater the benefit and incentive to make the switch. For an economically efficient electricity wholesale market to flourish it is essential that a number of criteria are met, namely the existence of a coordinated spot market that has "bid-based, security-constrained, economic dispatch with nodal prices". These criteria have been largely adopted in the US, Australia, New Zealand and Singapore. Markets for power-related commodities required and managed by (and paid for by) market operators to ensure reliability, are considered
ancillary services Ancillary services are the services necessary to support the transmission of electric power from generators to consumers given the obligations of control areas and transmission utilities within those control areas to maintain reliable operations of ...
and include such names as spinning reserve, non-spinning reserve,
operating reserve In electricity networks, the operating reserve is the generating capacity available to the system operator within a short interval of time to meet demand in case a generator goes down or there is another disruption to the supply. Most power sys ...
s, responsive reserve, regulation up, regulation down, and
installed capacity Nameplate capacity, also known as the rated capacity, nominal capacity, installed capacity, or maximum effect, is the intended full-load sustained output of a facility such as a power station,
.


Market clearing

Wholesale transactions (bids and offers) in electricity are typically cleared and settled by the market operator or a special-purpose independent entity charged exclusively with that function. Market operators do not clear trades but often require knowledge of the trade in order to maintain generation and load balance. Markets for electricity trade net generation output for a number of intervals usually in increments of 5, 15 and 60 minutes. Depending on the market design, the market operator can either: * aggregate both the supply bids for each interval (forming a
supply curve In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or to an individual. Supply can be in produced goods, la ...
) and demand bids (
demand curve In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...
). This creates a
double auction A double auction is a process of buying and selling goods with multiple sellers and multiple buyers. Potential buyers submit their bids and potential sellers submit their ask prices to the market institution, and then the market institution choose ...
(used, for example, by
Nord Pool Nord Pool AS is a pan-European power exchange. Nord Pool has a main office in Oslo and further offices in Stockholm, Helsinki, Tallinn, Berlin and London. The company is owned by the European exchange operator Euronext as well as TSO Holding, ...
). The clearing price is defined by the intersection of the supply and demand curves for each time interval. * aggregate only the supply bids. The clearing can use two arrangements: * pay-as-clear where the price is defined by the highest successful bid ( clearing price). This ''marginal price system'' (MPS) is commonly used by the electricity markets; * pay-as-bid (PAB) where each successful bidder only gets the price stated in the bid. This arrangement is not common, notable cases include the UK and the Nord Pool's intra-day market. Generally, it is assumed that with MPS, in the absence of
collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to att ...
, the producers will bid close to their
short run marginal cost In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productive efficiency, productively efficient firms optimize their production process by minimizing cost consistent ...
to avoid the risk of missing out altogether. MPS is also more transparent, as the new bidder already knows the market price and can estimate the profitability with his marginal cost, in order to do well with the PAB, the bidder needs information about other bids, too. Due to higher risks of the PAB, it gives an extra advantage to the large players that are better equipped to estimate the market and take the risk (for example, by gambling with a high bid for some of their units). Still, the high electricity prices trigger the calls in politics to switch to PAB in order for consumers not to overpay producer with lower costs, with counterargument being that doing so will simply incentivize the lower-cost producers to bid higher.


Centralized and decentralized markets

To handle all the constraints while keeping the system in balance, a central agency, the
transmission system operator File:Electricity grid simple- North America.svg, 380px, Simplified diagram of AC electricity grid from generation stations to consumers rect 2 243 235 438 Power station rect 276 317 412 556 Transformer rect 412 121 781 400 Electric power transmis ...
(TSO), is required to coordinate the
unit commitment Power system operations is a term used in electricity generation to describe the process of decision-making on the timescale from one day (day-ahead operation) to minutes prior to the power delivery. The term power system control describes actions ...
and
economic dispatch The merit order is a way of ranking available sources of energy, especially electrical generation, based on ascending order of price (which may reflect the order of their short-run marginal costs of production) and sometimes pollution, together w ...
. If the frequency falls outside a predetermined range the system operator will act to add or remove either generation or load. Unlike the real-time decisions that are necessarily centralized, the electricity market itself can be centralized or decentralized. In the centralized market the TSO decides which plant should run and how much is it supposed to produce way before the delivery (during the "spot market" phase, or
day-ahead operation Power system operations is a term used in electricity generation to describe the process of decision-making on the timescale from one day (day-ahead operation) to minutes prior to the power delivery. The term power system control describes action ...
). In a decentralized market the producer only commits to the delivery of electricity, but the means to do that are left to the producer itself (for example, it can enter the agreement with another producer to provide the actual energy). Centralized markets make it easier to accommodate non-convexities, while the decentralized allow intra-day trading to correct the possibly suboptimal decisions made day-ahead, for example, accommodating improved weather forecasts for renewables. Due to the difference in the grid construction (US had weaker transmission networks), the design of wholesale markets in the US and Europe had diverged, even though initially the US was followed the European (decentralized) example. To accommodate the transmission network constraints centralized markets typically use
locational marginal pricing In a broad sense, an electricity market is a system that facilitates the exchange of electricity-related goods and services. During more than a century of evolution of the electric power industry, the economics of the electricity markets had un ...
(LMP) where each node has its own local market price (thus another name for the practice, nodal pricing). Political considerations sometimes make it unpalatable to force consumers in the same territory, but connected to different nodes, to pay different prices for electricity, so a modified generator nodal pricing (GNP) model is used: the generators are still being paid the nodal prices, while the load serving entities are charging the end users prices that are averaged over the territory. Many decentralized markets do not use the LMP and have a price established over a geographic area ("zone", thus the name
zonal pricing Zonal can refer to: * Zonal and meridional, directions on a globe, west–east and north–south, respectively. * Zonal and poloidal, directions in a toroidal magnetically confined plasma * Zonal polynomial, a symmetric multivariate polynomial * Zo ...
) or a "region" (''regional pricing'', the term is used primarily for very large zones of the
National Electricity Market The National Electricity Market (NEM) is an arrangement in Australia's electricity sector for the connection of the electricity transmission grids of the eastern and southern Australia states and territories to create a cross-state wholesale elec ...
of
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
, where five regions cover the continent). In the beginning of 2020s there was no clear preference for any of the two market designs, for example, the North American markets went through centralization, while the European ones moved in the opposite direction:


Centralized market

A transmission system operator in a centralized electricity market obtains the cost information (usually three components: start-up costs, no-load costs, marginal production costs) for each unit of generation ("unit-based bidding") and makes all the decisions in the day-ahead and real-time (
system redispatch Power system operations is a term used in electricity generation to describe the process of decision-making on the timescale from one day (day-ahead operation) to minutes prior to the power delivery. The term power system control describes actions ...
) markets. This approach allows the operator to take into consideration the details of the configuration of the transmission system. The centralized market normally uses the LMP, and the dispatch goal is minimizing the total cost in each node (which in a large network count in hundreds or even thousands). The centralized markets use some procedures resembling the vertically integrated electric utilities of the era before the deregulation, so the centralized markets are also called ''integrated electricity markets''. Due to the centralized and detailed nature of the day-ahead dispatch, it stays feasible and cost-efficient at the time of delivery, unless some unexpected adverse events occur. Early decisions help to efficiently schedule the plants with the long ramp-up times. The drawbacks of the centralized design with LMP are: * politically, it proved hard to justify higher electricity pricing for customers in some locations. In the US the solution was found in the form of GNP; * simplified bidding does not allow to properly capture the cost structure of a more complicated plants, like a
combined cycle gas turbine A combined cycle power plant is an assembly of heat engines that work in tandem from the same source of heat, converting it into mechanical energy. On land, when used to make electricity the most common type is called a combined cycle gas turb ...
or a
hydropower cascade Hydropower (from el, ὕδωρ, "water"), also known as water power, is the use of falling or fast-running water to produce electricity or to power machines. This is achieved by converting the gravitational potential or kinetic energy of a wa ...
; * generation companies have an incentive to overstate their start-up costs (in order to capture more make-whole payments, see below); * absence of the intra-day market makes integration of the renewables harder; * the integrated markets are very computation-intensive, this complexity makes them opaque to traders and hard to scale; * the unchecked power of the transmission system operator makes it harder for the regulator to handle. Price of a unit of electricity with LMP is based on the
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it r ...
, so the start-up and no-load costs are not included. Centralized markets therefore typically pay a compensation for these costs to the producer (so called ''make-whole'' or ''uplift payments''), financed in some way by the market participants (and, ultimately, the consumers). Inflexibility of the centralized market manifests itself in two ways: * once set at the day-ahead market, the contract usually cannot be changed (some markets allow for an hour-ahead correction), so unexpected adverse events have to be accommodated in the real-time and thus in suboptimal way, hurting producers with long ramp-up times, complex cost structures, wind power generation; * new technology (
energy storage Energy storage is the capture of energy produced at one time for use at a later time to reduce imbalances between energy demand and energy production. A device that stores energy is generally called an accumulator or battery. Energy comes in ...
,
demand response Demand response is a change in the power consumption of an electric utility customer to better match the demand for power with the supply. Until the 21st century decrease in the cost of pumped storage and batteries electric energy could not be ...
) with new cost structures require time and effort to accommodate.
Market clearing In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand so that there is no excess supply or demand. The new classical economics assumes that in any given market, assum ...
algorithms are complex (some are
NP-complete In computational complexity theory, a problem is NP-complete when: # it is a problem for which the correctness of each solution can be verified quickly (namely, in polynomial time) and a brute-force search algorithm can find a solution by tryi ...
) and have to be executed in limited time (5-60 minutes). The results are thus not necessarily optimal, are hard to replicate independently, and require the market participants to trust the operator (due to the complexity sometimes a decision by the algorithm to accept or reject the bid appears entirely arbitrary to the bidder). If the transmission system operator owns the actual transmission network, it would be incentivized to profit by increasing the congestion rents. Thus in the US the operator typically does not own any capacity and is frequently called an
independent system operator A regional transmission organization (RTO) in the United States is an electric power transmission system operator (TSO) that coordinates, controls, and monitors a multi-state electric grid. The transfer of electricity between states is considered i ...
(ISO).


Cost-based market

The higher degree of centralization of the market involves the direct cost calculations by the market operator (producers no longer submit bids). Despite the obvious problem with generation companies incentivized to inflate their costs (this can be hidden through transactions with affiliated companies), this cost-based electricity market arrangement eliminates the market power of the providers and is used in situation when an abuse of market power is possible (e. g.,
Chile Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
with its preponderance of hydro power, in the US when the local
market power In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market powe ...
is sufficiently high, some European markets). A less-obvious issue is the tendency of market participants under these conditions to concentrate on investments in the
peaker plant Peaking power plants, also known as peaker plants, and occasionally just "peakers", are power plants that generally run only when there is a high demand, known as peak demand, for electricity. Because they supply power only occasionally, the power ...
s to the detriment of the
baseload power The base load (also baseload) is the minimum level of demand on an electrical grid over a span of time, for example, one week. This demand can be met by unvarying power plants, dispatchable generation, or by a collection of smaller intermittent en ...
. One of the advantages of the cost-based market is the relatively low cost to set it up. The cost-based approach is popular in
Latin America Latin America or * french: Amérique Latine, link=no * ht, Amerik Latin, link=no * pt, América Latina, link=no, name=a, sometimes referred to as LatAm is a large cultural region in the Americas where Romance languages — languages derived f ...
: in addition to Chile, it is used in Bolivia, Peru, Brazil, and countries in Central America. A system operator performs an audit of parameters of each generator unit (including heat rate, minimum load, ramping speed, etc.) and estimates the direct
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it r ...
s of its operation. Based on this information, an hour-by-hour dispatch schedule is put in place to minimize the total direct cost. In the process, the hourly
shadow price A shadow price is the monetary value assigned to an abstract or intangible commodity which is not traded in the marketplace. This often takes the form of an externality. Shadow prices are also known as the recalculation of known market prices in o ...
s are obtained for each node that might be used to settle the market sales.


Decentralized market

Decentralized markets allow the generation companies to choose their own way to provide energy for their day-ahead bid (that specifies price and location). The provider can use any unit at its disposal (so called "portfolio-based bidding") or even pay another company to deliver the energy. The market still has the central operator that exclusively controls the system in real-time, but with significantly diminished powers to intervene ahead of delivery (frequently just the ability to schedule the transmission network for
day-ahead operation Power system operations is a term used in electricity generation to describe the process of decision-making on the timescale from one day (day-ahead operation) to minutes prior to the power delivery. The term power system control describes action ...
). This arrangement makes operator's ownership of the transmission capacity less of an issue, and European countries, with the exception of UK, permit it (following the independent transmission system operator or ITSO model). While some operators in Europe are involved in structuring the day-ahead and intra-day markets, the other ones are not. For example, the UK market after the
New Electricity Trading Arrangements New Electricity Trading Arrangements (NETA) is the system of market trading arrangements under which electricity is traded in the United Kingdom's wholesale electricity market as of 27 March 2001. The arrangements provided that parties could trade o ...
in UK and the market in New Zealand let the markets sort out all the frictions before real-time. This reliance on financial instruments leads to the additional names for the decentralized markets: exchange-based, unbundled, bilateral.


Bid-based, security-constrained, economic dispatch with nodal prices

The system price in the day-ahead market is, in principle, determined by matching offers from generators to bids from consumers at each
node In general, a node is a localized swelling (a "knot") or a point of intersection (a vertex). Node may refer to: In mathematics *Vertex (graph theory), a vertex in a mathematical graph *Vertex (geometry), a point where two or more curves, lines, ...
to develop a classic
supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
equilibrium price In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
, usually on an hourly interval, and is calculated separately for subregions in which the system operator's load flow model indicates that constraints will bind transmission imports. The theoretical prices of electricity at each node on the network is a calculated "
shadow price A shadow price is the monetary value assigned to an abstract or intangible commodity which is not traded in the marketplace. This often takes the form of an externality. Shadow prices are also known as the recalculation of known market prices in o ...
", in which it is assumed that one additional
kilowatt-hour A kilowatt-hour (unit symbol: kW⋅h or kW h; commonly written as kWh) is a unit of energy: one kilowatt of power for one hour. In terms of SI derived units with special names, it equals 3.6 megajoules (MJ). Kilowatt-hours are a common bil ...
is demanded at the node in question, and the hypothetical incremental cost to the system that would result from the optimized redispatch of available units establishes the hypothetical production cost of the hypothetical kilowatt-hour. This is known as locational marginal pricing (LMP) or nodal pricing and is used in some deregulated markets, most notably in the
Midcontinent Independent System Operator The Midcontinent Independent System Operator, Inc., formerly named Midwest Independent Transmission System Operator, Inc. (MISO) is an Independent System Operator (ISO) and Regional Transmission Organization (RTO) providing open-access transmissi ...
(MISO),
PJM Interconnection PJM Interconnection LLC (PJM) is a regional transmission organization (RTO) in the United States. It is part of the Eastern Interconnection grid operating an electric transmission system serving all or parts of Delaware, Illinois, Indiana, Kent ...
,
ERCOT The Electric Reliability Council of Texas, Inc. (ERCOT) is an American organization that operates Texas's electrical grid, the Texas Interconnection, which supplies power to more than 25 million Texas customers and represents 90 percent of the st ...
,
New York New York most commonly refers to: * New York City, the most populous city in the United States, located in the state of New York * New York (state), a state in the northeastern United States New York may also refer to: Film and television * '' ...
, and
ISO New England ISO New England Inc. (ISO-NE) is an independent, non-profit Regional Transmission Organization (RTO), headquartered in Holyoke, Massachusetts, serving Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. ISO-NE ov ...
markets in the United States,
New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
, and in Singapore. In practice, the LMP algorithm described above is run, incorporating a security-constrained (defined below), least-cost dispatch calculation with supply based on the generators that submitted offers in the day-ahead market, and demand based on bids from load-serving entities draining supplies at the nodes in question. Due to various non-convexities present in wholesale electricity markets, in the form of economies of scale, start-up and/or shut-down costs, avoidable costs, indivisibilities, minimum supply requirements, etc., some suppliers may incur losses under LMP, e.g., because they may fail to recover their fixed cost through commodity payments only. To address this problem, various pricing schemes that lift the price above marginal cost and/or provide side-payments (uplifts) have been proposed. Liberopoulos and Andrianesis (2016) review and compare several of these schemes on the price, uplifts, and profits that each scheme generates. While in theory the LMP concepts are useful and not evidently subject to manipulation, in practice system operators have substantial discretion over LMP results through the ability to classify units as running in "out-of-merit dispatch", which are thereby excluded from the LMP calculation. In most systems, units that are dispatched to provide
reactive power Reactive may refer to: *Generally, capable of having a reaction (disambiguation) *An adjective abbreviation denoting a bowling ball coverstock made of reactive resin *Reactivity (chemistry) *Reactive mind *Reactive programming See also *Reactanc ...
to support transmission grids are declared to be "out-of-merit" (even though these are typically the same units that are located in constrained areas and would otherwise result in scarcity signals). System operators also normally bring units online to hold as "spinning-reserve" to protect against sudden outages or unexpectedly rapid ramps in demand, and declare them "out-of-merit". The result is often a substantial reduction in clearing price at a time when increasing demand would otherwise result in escalating prices. Researchers have noted that a variety of factors, including energy price caps set well below the putative
scarcity value Scarcity value is an economic factor describing the increase in an item's relative price by a low supply. Whereas the prices of newly manufactured products depends mostly on the ''cost of production'' (the cost of inputs used to produce them, which ...
of energy, the effect of "out-of-merit" dispatch, the use of techniques such as voltage reductions during scarcity periods with no corresponding scarcity
price signal A price signal is information conveyed to consumers and producers, via the prices offered or requested for, and the amount requested or offered of a product or service, which provides a signal to increase or decrease quantity supplied or quantit ...
, etc., results in a
missing money problem Missing or The Missing may refer to: Film * ''Missing'' (1918 film), an American silent drama directed by James Young * ''Missing'' (1982 film), an American historical drama directed by Costa-Gavras * ''Missing'' (2007 film) (''Vermist''), a Bel ...
. The consequence is that prices paid to suppliers in the "market" are substantially below the levels required to stimulate new entry. The markets have therefore been useful in bringing efficiencies to short-term system operations and dispatch, but have been a failure in what was advertised as a principal benefit: stimulating suitable new investment where it is needed, when it is needed. In LMP markets, where constraints exist on a transmission network, there is a need for more expensive generation to be dispatched on the downstream side of the constraint. Prices on either side of the constraint separate giving rise to
congestion pricing Congestion pricing or congestion charges is a system of surcharging users of public goods that are subject to congestion through excess demand, such as through higher peak charges for use of bus services, electricity, metros, railways, tele ...
and constraint rentals. A constraint can be caused when a particular branch of a network reaches its thermal limit or when a potential overload will occur due to a contingent event (e.g., failure of a generator or transformer or a line outage) on another part of the network. The latter is referred to as a ''security constraint''. Transmission systems are operated to allow for continuity of supply even if a contingent event, like the loss of a line, were to occur. This is known as a ''security constrained system''. In most systems the algorithm used is a "DC" model rather than an "AC" model, so constraints and redispatch resulting from thermal limits are identified/predicted, but constraints and redispatch resulting from reactive power deficiencies are not. Some systems take marginal losses into account. The prices in the real-time market are determined by the LMP algorithm described above, balancing supply from available units. This process is carried out for each 5-minute, half-hour or hour (depending on the market) interval at each node on the
transmission grid Electric power transmission is the bulk movement of electrical energy from a generating site, such as a power plant, to an electrical substation. The interconnected lines that facilitate this movement form a ''transmission network''. This is d ...
. The hypothetical redispatch calculation that determines the LMP must respect security constraints and the redispatch calculation must leave sufficient margin to maintain system stability in the event of an unplanned outage anywhere on the system. This results in a spot market with "bid-based, security-constrained, economic dispatch with nodal prices". Many established markets do not employ nodal pricing, examples being the UK,
EPEX SPOT European Power Exchange (EPEX SPOT) SE is an electric power exchange operating in Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Luxembourg, the Netherlands, Norway, Poland, Sweden and Switzerland. EPEX SPOT SE is a compa ...
(most European countries), and
Nord Pool Spot Nord Pool AS is a pan-European power exchange. Nord Pool has a main office in Oslo and further offices in Stockholm, Helsinki, Tallinn, Berlin and London. The company is owned by the European exchange operator Euronext as well as TSO Holding, ...
(Nordic and Baltic countries).


Risk management

Financial risk management is often a high priority for participants in deregulated electricity markets due to the substantial price and volume risks that the markets can exhibit. A consequence of the complexity of a wholesale electricity market can be extremely high price volatility at times of peak demand and supply shortages. The particular characteristics of this price risk are highly dependent on the physical fundamentals of the market such as the mix of types of generation plant and relationship between demand and weather patterns. Price risk can be manifest by price "spikes" which are hard to predict and price "steps" when the underlying fuel or plant position changes for long periods.
Volume risk Volume risk is a commodity risk which refers to the fact that a player in the commodity market has uncertain quantities of consumption or sourcing, i.e. production of the respective commodity. Examples of other circumstances which can cause large de ...
is often used to denote the phenomenon whereby electricity market participants have uncertain volumes or quantities of consumption or production. For example, a retailer is unable to accurately predict consumer demand for any particular hour more than a few days into the future and a producer is unable to predict the precise time that they will have plant outage or shortages of fuel. A compounding factor is also the common correlation between extreme price and volume events. For example, price spikes frequently occur when some producers have plant outages or when some consumers are in a period of peak consumption. The introduction of substantial amounts of
intermittent power sources Variable renewable energy (VRE) or intermittent renewable energy sources (IRES) are renewable energy sources that are not dispatchable due to their fluctuating nature, such as wind power and solar power, as opposed to controllable renewable ene ...
such as
wind energy Wind power or wind energy is mostly the use of wind turbines to electricity generation, generate electricity. Wind power is a popular, sustainable energy, sustainable, renewable energy source that has a much smaller Environmental impact of wi ...
may affect market prices. Electricity retailers, who in aggregate buy from the wholesale market, and generators who in aggregate sell to the wholesale market, are exposed to these price and volume effects and to protect themselves from volatility, they will enter into "
hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoini ...
contracts" with each other. The structure of these contracts varies by regional market due to different conventions and market structures. However, the two simplest and most common forms are simple fixed price
forward contract In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of deriva ...
s for physical delivery and contracts for differences where the parties agree a
strike price In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set b ...
for defined time periods. In the case of a contract for difference, if a resulting wholesale price index (as referenced in the contract) in any time period is higher than the "strike" price, the generator will refund the difference between the "strike" price and the actual price for that period. Similarly a retailer will refund the difference to the generator when the actual price is less than the "strike price". The actual price index is sometimes referred to as the "spot" or "pool" price, depending on the market. Many other hedging arrangements, such as swing contracts, virtual bidding, Financial Transmission Rights,
call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...
s and
put option In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the ''underlying''), at a specified price (the ''strike''), by (or at) a s ...
s are traded in sophisticated electricity markets. In general they are designed to transfer financial risks between participants.


Price capping and cross subsidy

Due to high gas prices because of the 2022 Russia–European Union gas dispute, in late 2022 the EU capped non-gas power prices at 180 euros per megawatt hour and the UK is considering price capping. Fossil fuels, especially gas, may be price capped higher than renewables, with revenue above the cap subsidizing some consumers, as in
Turkey Turkey ( tr, Türkiye ), officially the Republic of Türkiye ( tr, Türkiye Cumhuriyeti, links=no ), is a list of transcontinental countries, transcontinental country located mainly on the Anatolia, Anatolian Peninsula in Western Asia, with ...
. Academic study of an earlier price cap in that market concluded that it reduced welfare, and another study said that an EU-wide price cap would risk "a never-ending spiral of higher import prices and higher subsidies". It has been academically argued via
game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
that a cap on the price of imported Russian gas (some of which is used to generate electricity) could be beneficial, however politically this is difficult.


Wholesale electricity markets

*
Argentina Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the second-largest country in South America after Brazil, th ...
– see
Electricity sector in Argentina The electricity sector in Argentina constitutes the third largest power market in Latin America. It relies mostly on thermal generation (60% of installed capacity) and hydropower generation (36%). The prevailing natural gas-fired thermal genera ...
*
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
– see
Electricity sector in Australia The Australian electricity sector has been historically dominated by coal-fired power stations, but renewables are forming a rapidly growing fraction of supply. Due to its large size and the location of its population, Australia lacks a sing ...
**
Western Australia Western Australia (commonly abbreviated as WA) is a state of Australia occupying the western percent of the land area of Australia excluding external territories. It is bounded by the Indian Ocean to the north and west, the Southern Ocean to th ...
(WEM) – Australian Energy Market Operator (AEMO) **East Coast (NEM) – Australian Energy Market Operator (AEMO) *
Austria Austria, , bar, Östareich officially the Republic of Austria, is a country in the southern part of Central Europe, lying in the Eastern Alps. It is a federation of nine states, one of which is the capital, Vienna, the most populous ...
– see
EPEX SPOT European Power Exchange (EPEX SPOT) SE is an electric power exchange operating in Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Luxembourg, the Netherlands, Norway, Poland, Sweden and Switzerland. EPEX SPOT SE is a compa ...
and EXAA Energy Exchange *
Belgium Belgium, ; french: Belgique ; german: Belgien officially the Kingdom of Belgium, is a country in Northwestern Europe. The country is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeast, France to th ...
– see
APX Group APX Group (APX) is an energy exchange operating the spot markets for electricity in the Netherlands, the United Kingdom, and Belgium. Established in 1999, APX provides exchange trading, central clearing and settlement, and data distribution s ...
*
Brazil Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
– see
Electricity sector in Brazil Brazil has the largest electricity sector in Latin America. Its capacity at the end of 2021 was 181,532 MW.https://antigo.aneel.gov.br/web/guest/sala-de-imprensa-exibicao-2/-/asset_publisher/zXQREz8EVlZ6/content/brasil-termina-2021-com-maior-ac ...
*
Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
– see
Electricity sector in Canada The electricity sector in Canada has played a significant role in the economic and political life of the country since the late 19th century. The sector is organized along provincial and territorial lines. In a majority of provinces, large gove ...
*
Chile Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
– see Electricity sector in Chile *
Colombia Colombia (, ; ), officially the Republic of Colombia, is a country in South America with insular regions in North America—near Nicaragua's Caribbean coast—as well as in the Pacific Ocean. The Colombian mainland is bordered by the Car ...
– see
Electricity sector in Colombia The electricity sector in Colombia is dominated by large hydropower generation (65%) and thermal generation (35%). Despite the country's large potential in new renewable energy technologies (mainly wind, solar and biomass), this potential has ...
*
Czech Republic The Czech Republic, or simply Czechia, is a landlocked country in Central Europe. Historically known as Bohemia, it is bordered by Austria to the south, Germany to the west, Poland to the northeast, and Slovakia to the southeast. The ...
– Czech electricity and gas market operator and Power Exchange Central Europe (PXE) For Czech Republic, Slovakia and Hungary. *
Croatia , image_flag = Flag of Croatia.svg , image_coat = Coat of arms of Croatia.svg , anthem = "Lijepa naša domovino"("Our Beautiful Homeland") , image_map = , map_caption = , capit ...
- Croatian Power Exchange (CROPEX) *
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
– see Electricity sector in France and
EPEX SPOT European Power Exchange (EPEX SPOT) SE is an electric power exchange operating in Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Luxembourg, the Netherlands, Norway, Poland, Sweden and Switzerland. EPEX SPOT SE is a compa ...
*
Germany Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
– see
Electricity sector in Germany Germany's electrical grid is part of the Synchronous grid of Continental Europe. In 2020, due to COVID-19 conditions and strong winds, Germany produced 484 TW⋅h of electricity of which over 50% was from renewable energy sources, 24% fr ...
, European Energy Exchange AG (EEX) and
EPEX SPOT European Power Exchange (EPEX SPOT) SE is an electric power exchange operating in Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Luxembourg, the Netherlands, Norway, Poland, Sweden and Switzerland. EPEX SPOT SE is a compa ...
*
Hungary Hungary ( hu, Magyarország ) is a landlocked country in Central Europe. Spanning of the Carpathian Basin, it is bordered by Slovakia to the north, Ukraine to the northeast, Romania to the east and southeast, Serbia to the south, Croatia a ...
– Hungarian Power Exchange HUPX and Power Exchange Central Europe (PXE) *
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
– see
Indian Energy Exchange About Indian Energy Exchange Indian Energy Exchange(IEX) is India’s premier energy marketplace, providing a nationwide automated trading platform for the physical delivery of electricity, renewables, and certificates. More recently, IEX ha ...
and Power Exchange India Limited (PXIL) *
Ireland Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...
– Single Electricity Market Operator (SEMO) SEMO is a joint venture between EirGrid PLC and SONI Limited. *
Italy Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical re ...
– GME *
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
– see
Electricity sector in Japan The electric power industry in Japan covers the generation, transmission, distribution, and sale of electric energy in Japan. Japan consumed 995.26 TWh of electricity in 2014. Before the 2011 Fukushima Daiichi nuclear disaster, about a quarter ...
and
Japan Electric Power Exchange Japan Electric Power Exchange, Public Interest incorporated organisation (Japanese:一般社団法人日本卸電力取引所(にっぽんおろしでんりょくとりひきしょ)、abbr: JEPX)is an Electricity market, exchange that facilitate ...
(JEPX) *
Korea Korea ( ko, 한국, or , ) is a peninsular region in East Asia. Since 1945, it has been divided at or near the 38th parallel, with North Korea (Democratic People's Republic of Korea) comprising its northern half and South Korea (Republic o ...
Korea Power Exchange (KPX) *
Mexico Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
– Centro Nacional de Control de Energía (CENACE) *
Netherlands ) , anthem = ( en, "William of Nassau") , image_map = , map_caption = , subdivision_type = Sovereign state , subdivision_name = Kingdom of the Netherlands , established_title = Before independence , established_date = Spanish Netherl ...
– see
APX-ENDEX APX Group (APX) is an energy exchange operating the spot markets for electricity in the Netherlands, the United Kingdom, and Belgium. Established in 1999, APX provides exchange trading, central clearing and settlement, and data distribution se ...
*
New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
– see
Electricity sector in New Zealand The electricity sector in New Zealand uses mainly renewable energy, such as Hydroelectricity, hydropower, geothermal energy, geothermal power and increasingly wind energy. , 82% of electricity is generated from renewable sources, making New Zea ...
and
New Zealand Electricity Market The New Zealand electricity market (NZEM) is a decentralised electricity market regulated by the Electricity Industry Participation Code administered by the Electricity Authority (EA). The authority was established in November 2010 to replace th ...
*
Philippines The Philippines (; fil, Pilipinas, links=no), officially the Republic of the Philippines ( fil, Republika ng Pilipinas, links=no), * bik, Republika kan Filipinas * ceb, Republika sa Pilipinas * cbk, República de Filipinas * hil, Republ ...
– Philippine Wholesale Electricity Spot Market *
Poland Poland, officially the Republic of Poland, is a country in Central Europe. It is divided into 16 administrative provinces called voivodeships, covering an area of . Poland has a population of over 38 million and is the fifth-most populous ...
– Polish Power Exchange (POLPX) *
Portugal Portugal, officially the Portuguese Republic ( pt, República Portuguesa, links=yes ), is a country whose mainland is located on the Iberian Peninsula of Southwestern Europe, and whose territory also includes the Atlantic archipelagos of ...
– OMI-Polo Español, S.A. (OMIE),Iberian Electricity Market – day-ahead spot markets. OMIP,Iberian Electricity Market – derivatives markets. Sociedad Rectora del Mercado de Productos Derivados, S.A. (MEFF), and European Energy Exchange AG (EEX) * Scandinavia – see
Nord Pool Spot Nord Pool AS is a pan-European power exchange. Nord Pool has a main office in Oslo and further offices in Stockholm, Helsinki, Tallinn, Berlin and London. The company is owned by the European exchange operator Euronext as well as TSO Holding, ...
* Slovakia – Power Exchange Central Europe (PXE) * Spain – OMI-Polo Español, S.A. (OMIE), OMIP, Sociedad Rectora del Mercado de Productos Derivados, S.A. (MEFF), and EEX *Oman, Sultante of Oman – Oman Electricity Market * Russian Federation – Trade System Administrator (ATS) * Singapore – Energy Market Authority of Singapore (EMA) and Energy Market Company (EMC) * Turkey – see Electricity sector in Turkey, Turkish Electricity Market *
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
– see
APX-ENDEX APX Group (APX) is an energy exchange operating the spot markets for electricity in the Netherlands, the United Kingdom, and Belgium. Established in 1999, APX provides exchange trading, central clearing and settlement, and data distribution se ...
and Elexon *
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
– summarized by the Federal Energy Regulatory Commission (FERC).Electric Power Markets: National Overview ** California Independent System Operator ** ERCOT Market in Texas ** Midwest –
Midcontinent Independent System Operator The Midcontinent Independent System Operator, Inc., formerly named Midwest Independent Transmission System Operator, Inc. (MISO) is an Independent System Operator (ISO) and Regional Transmission Organization (RTO) providing open-access transmissi ...
(MISO Energy) ** New England market **
New York New York most commonly refers to: * New York City, the most populous city in the United States, located in the state of New York * New York (state), a state in the northeastern United States New York may also refer to: Film and television * '' ...
– New York Independent System Operator (NYISO) **
PJM Interconnection PJM Interconnection LLC (PJM) is a regional transmission organization (RTO) in the United States. It is part of the Eastern Interconnection grid operating an electric transmission system serving all or parts of Delaware, Illinois, Indiana, Kent ...
for all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia. ** Southwestern United States, Southwest – Southwest Power Pool, IncSouthwest market *Vietnam – Vietnam wholesale electricity market (VWEM). Operated by EVN


Electric power exchanges

An electric power exchange is a commodities exchange dealing with electric power: *
Indian Energy Exchange About Indian Energy Exchange Indian Energy Exchange(IEX) is India’s premier energy marketplace, providing a nationwide automated trading platform for the physical delivery of electricity, renewables, and certificates. More recently, IEX ha ...
*
APX Group APX Group (APX) is an energy exchange operating the spot markets for electricity in the Netherlands, the United Kingdom, and Belgium. Established in 1999, APX provides exchange trading, central clearing and settlement, and data distribution s ...
*Energy Exchange Austria *European Energy Exchange *European Power Exchange *HUPX Hungarian Power Exchange *Nord Pool AS *Powernext


International trading

Electricity itself, or products made with a lot of electricity, exported to another country may be charged a carbon tariff if the exporting country has no carbon price: for example as the UK has the UK Emissions Trading Scheme, UK ETS it would not be charged the EU Carbon Border Adjustment Mechanism, CBAM whereas Turkey has no carbon price so might be charged.


Retail electricity market

A retail electricity market exists when end-use customers can choose their supplier from competing electricity retailing, electricity retailers; one term used in the United States for this type of consumer choice is 'energy choice'. A separate issue for electricity markets is whether or not consumers face real-time pricing (prices based on the variable wholesale price) or a price that is set in some other way, such as average annual costs. In many markets, consumers do not pay based on the real-time price, and hence have no incentive to reduce demand at times of high (wholesale) prices or to shift their demand to other periods. Demand response may use pricing mechanisms or technical solutions to reduce peak demand. Generally, electricity retail reform follows from electricity wholesale reform. However, it is possible to have a single electricity generation company and still have retail competition. If a wholesale price can be established at a node on the
transmission grid Electric power transmission is the bulk movement of electrical energy from a generating site, such as a power plant, to an electrical substation. The interconnected lines that facilitate this movement form a ''transmission network''. This is d ...
and the electricity quantities at that node can be reconciled, competition for retail customers within the
distribution Distribution may refer to: Mathematics *Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations * Probability distribution, the probability of a particular value or value range of a vari ...
system beyond the node is possible. In the German market, for example, large, vertically integrated utilities compete with one another for customers on a more or less open grid. Although market structures vary, there are some common functions that an electricity retailer has to be able to perform, or enter into a contract for, in order to compete effectively. Failure or incompetence in the execution of one or more of the following has led to some dramatic financial disasters: *Billing *Credit control *Customer management via an efficient call centre *Electricity distribution, Distribution use-of-system contract *Reconciliation agreement *"Pool" or "spot market" purchase agreement *Hedge (finance), Hedge contracts – contracts for differences to manage "spot price" risk The two main areas of weakness have been risk management and billing. In the United States in 2001, California's flawed regulation of retail competition led to the California electricity crisis and left incumbent retailers subject to high spot prices but without the ability to hedge against these. In the UK a retailer, Independent Energy, with a large customer base went bust when it could not collect the money due from customers. Competitive retail needs open access to distribution and transmission wires. This in turn requires that prices must be set for both these services. They must also provide appropriate returns to the owners of the wires and encourage efficient location of power plants. There are two types of fees, the access fee and the regular fee. The access fee covers the cost of having and accessing the network of wires available, or the right to use the existing transmission and distribution network. The regular fee reflects the marginal cost of transferring electricity through the existing network of wires. New technology is available and has been piloted by the US Department of Energy that may be better suited to real-time market pricing. A potential use of event-driven SOA (service-oriented architecture) could be a virtual electricity market where home clothes dryers can bid on the price of the electricity they use in a real-time market pricing system. The real-time market price and control system could turn home electricity customers into active participants in managing the power grid and their monthly utility bills. Customers can set limits on how much they would pay for electricity to run a clothes dryer, for example, and electricity providers willing to transmit power at that price would be alerted over the grid and could sell the electricity to the dryer. On one side, consumer devices can bid for power based on how much the owner of the device were willing to pay, set ahead of time by the consumer. On the other side, suppliers can enter bids automatically from their electricity generators, based on how much it would cost to start up and run the generators. Further, the regional electricity company, electricity suppliers could perform real-time market analysis to determine Rate of return, return-on-investment for optimizing profitability or reducing end-user Cost of goods sold, cost of goods. The effects of a competitive retail electricity market are mixed across states, but generally appear to lower prices in states with high participation and raise prices in states that have little customer participation. Event-driven SOA software could allow homeowners to customize many different types of electricity devices found within their home to a desired level of comfort or economy. The event-driven software could also automatically respond to changing electricity prices, in as little as five-minute intervals. For example, to reduce the home owner's electricity usage in peak periods (when electricity is most expensive), the software could automatically lower the target temperature of the thermostat on the central heating system (in winter) or raise the target temperature of the thermostat on the central cooling system (in summer).


Deregulated market experience

Comparisons between the traditional and competitive market designs experience have provide mixed results. The US experience where the deregulated utilities operate alongside the vertically integrated ones, there is some evidence of the increased efficiencies: * deregulated nuclear and coal-fired plants (but not the gas-fired ones) outperformed their vertically integrated peers; * deregulated plants switched to less capital-intensive strategies of complying with the regulations; * the wholesale trading allowed for substantially better utilization of the generation facilities; * the departures of prices from costs (generation company mark-ups) had increased. Schmalensee concludes that it is plausible that the restructuring resulted in lower wholesale prices, at least in the US and the UK. Regarding resource adequacy, the US market at the start of restructuring had excess generating capacity, confirming the expectation that regulated prices provide an incentive for the generators to overinvest. Initial hope that the revenue stream would be sufficient to continue building up the capacity did not materialize: faced with abuse of market power, all US markets introduced wholesale price regulation, price caps that in many case were much lower than the value of lost load thus creating the "
missing money problem Missing or The Missing may refer to: Film * ''Missing'' (1918 film), an American silent drama directed by James Young * ''Missing'' (1982 film), an American historical drama directed by Costa-Gavras * ''Missing'' (2007 film) (''Vermist''), a Bel ...
" (capping revenue at the time of relatively infrequent shortages causes the shortage of money to build the infrastructure that is only used during these shortages); the problem of over-investment was replaced by underinvestment, dragging down the grid reliability. In response, major transfer payments for capacity were instituted (in the US in 2018 the payments were getting as high as 47% of the new unit's revenue). EU markets followed the American lead in the 2010s. Schmalensee notes that while the process of determining the amount of compensation for new capacity in the US is in principle similar to the integrated resource planning of the traditional markets, the new version is less transparent and provides less certainty due to frequent rule changes (the traditional scheme guaranteed the cost recovery), so an efficiency improvement in this area is unlikely. The introduction of the choice of supplier and variable pricing in the retail market was enthusiastically supported by larger consumers (businesses) that can employ the time of consumption-shifting techniques to benefit from the time-of-use pricing and have access to Hedge (finance), hedging against very high prices. Acceptance among residential customers in the US was minimal. Many regional markets have achieved some success, and the ongoing trend continues to be towards deregulation and introduction of competition. However, in 2000/2001 major failures such as the California electricity crisis and the Timeline of the Enron scandal, Enron debacle caused a slow down in the pace of change and in some regions an increase in market regulation and reduction in competition. However, this trend is widely regarded as a temporary one against the longer term trend towards more open and competitive markets. Notwithstanding the favorable light in which market solutions are viewed conceptually, the "missing money" problem has to date proved intractable. If electricity prices were to move to the levels needed to incentivize new merchant (i.e., market-based) transmission and generation, the costs to consumers would be politically difficult. The increase in annual costs to consumers in New England alone were calculated at $3 billion during the recent Federal Energy Regulatory Commission, FERC hearings on the NEPOOL market structure. Several mechanisms that are intended to incentivize new investment where it is most needed by offering enhanced capacity payments (but only in zones where generation is projected to be short) have been proposed for NEPOOL, PJM Interconnection, PJM and NYPOOL, and go under the generic heading of "locational capacity" or LICAP (the PJM version is called the "Reliability Pricing Model", or "RPM").


Capacity market

In a deregulated grid some sort of incentives are necessary for market participants to build and maintain generation and transmission resources that ''may'' some day be called upon to maintain the grid balance (supporting the "resource adequacy", or RA), but most of the time these resources are idled and do not produce revenue from the sale of electricity. Since "energy-only markets have the potential to result in an equilibrium point for the market that is not consistent with what users and regulators want to see", all existing wholesale electricity markets rely on Price-cap regulation, offer caps in some form. These caps prevent the suppliers from fully recovering their investment into the reserve capacity through the scarcity pricing, creating a
missing money problem Missing or The Missing may refer to: Film * ''Missing'' (1918 film), an American silent drama directed by James Young * ''Missing'' (1982 film), an American historical drama directed by Costa-Gavras * ''Missing'' (2007 film) (''Vermist''), a Bel ...
for generators. To avoid underinvestment into the generation and transmission capacity, all markets employ some kind of RA transfers. Typical regulator requires a Electricity retailing, retailer to purchase firm capacity for 110-120% of its annual peak power. The contracts are either bilateral (between the retailers and generator owners), or are traded on a centralized capacity market (the case, e.g., for the eastern USA grid).


Turkey

The capacity mechanism is claimed to be a mechanism for subsiding coal in Turkey, and has been criticised by some economists, as they say it encourages strategic capacity withholding.


United Kingdom

The Capacity Market is a part of the British government's Electricity Market Reform package. According to the Department for Business, Energy and Industrial Strategy "the Capacity Market will ensure security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible Low-carbon power, low carbon generation sources".


Auctions

Two Capacity Market Auctions are held each year. The T-4 auction buys capacity to be delivered in four years’ time and the T-1 auction is a top-up auction held just ahead of each delivery year. The following Capacity Market Auction results have been published: * 2014, for delivery in 2018 * 2015, for delivery in 2019/20 * 2016, for delivery in 2020/21


Definitions

The National Grid (Great Britain), National Grid 'Guidance document for Capacity Market participants' provides the following definitions: * "CMU (Capacity Market Unit) – this is the Generating Unit(s) or DSR Capacity that is being prequalified and will ultimately provide Capacity should they secure a Capacity Agreement". * "A Generating CMU is a generating unit that provides electricity, is capable of being controlled independently from any other generating unit outside the CMU, is measured by 1 or more half hourly meters and has a connection capacity greater than 2MW". * "A DSR CMU is a commitment by a person to provide an amount of capacity by a method of Demand Side Response by either reducing the DSR customers import of electricity, as measured by one or more half hourly meters, exporting electricity generated by one or more permitted on site generating units or varying demand for active power in response to changing system frequency".


Frequency control market

Within many electricity markets, there are specialised markets for the provision of frequency control and
ancillary services Ancillary services are the services necessary to support the transmission of electric power from generators to consumers given the obligations of control areas and transmission utilities within those control areas to maintain reliable operations of ...
(FCAS). If the electricity system has supply (generation) in excess of electricity demand, at any instant, then the frequency will increase. By contrast, if there is insufficient supply of electricity to meet demand at any time then the system frequency will fall. If it falls too far, the power system will become unstable. Frequency control markets are in addition to, and separate from, the wholesale electricity pool market. These markets serve to incentivise the provision of frequency raise services or frequency lower services. Frequency raise involves rapid provision of extra electricity generation, so that supply and demand can be more closely matched.


See also

* Availability based tariff * CEGB * Competition law * Cost of electricity by source * Distributed generation * Local flexibility markets * Energy demand management * Future energy development * Independent system operator * Load profile * Negawatt Power * NERC Tag * North American Electric Reliability Corporation * Open Energy Modelling Initiative * Power quality * Power purchase agreement * Vehicle-to-grid


References


Sources

* * * * * ** ** ** The page numbering in the cites follows the online source. For the printed book, add about 110 to the page number/ ** * * * * *


Further reading


A 2006 World Bank report on Water, Electricity, and the effect of utility subsidies on the poor
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Net Zero Market Design

List of Power and Energy exchanges worldwide
{{Electricity generation Electric power distribution Electric power exchanges, Electricity markets Governmental auctions