electricity market
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In economic terms,
electricity Electricity is the set of physical phenomena associated with the presence and motion Image:Leaving Yongsan Station.jpg, 300px, Motion involves a change in position In physics, motion is the phenomenon in which an object changes its positio ...

electricity
is a
commodity In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
capable of being bought, sold, and traded. An 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 In economics, a model is a theory, theoretical construct representing economic wikt:process, processes by a set of Variable (mathematics), variables and a set of logical and/or quant ...

supply and demand
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 ter ...
s and generally considered private bi-lateral transactions between counterparties. 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. The commodities within an electric market generally consist of two types:
power Power typically refers to: * Power (physics) In physics, power is the amount of energy transferred or converted per unit time. In the International System of Units, the unit of power is the watt, equal to one joule per second. In older works, p ...
and
energy In physics, energy is the physical quantity, quantitative physical property, property that must be #Energy transfer, transferred to a physical body, body or physical system to perform Work (thermodynamics), work on the body, or to heat it. En ...
. Power is the metered net electrical transfer rate at any given moment and is measured in
megawatt The watt (symbol: W) is a unit of power Power typically refers to: * Power (physics) In physics, power is the amount of energy transferred or converted per unit time. In the International System of Units, the unit of power is the watt, equa ...
s (MW). Energy is electricity that flows through a metered point for a given period and is measured in
megawatt hour The kilowatt-hour ( SI symbol: kW⋅h or kW h; commonly written as kWh) is a unit Unit may refer to: Arts and entertainment * UNIT, a fictional military organization in the science fiction television series ''Doctor Who'' * Unit of action, ...
s (MWh). Markets for energy-related commodities trade net generation output for a number of intervals usually in increments of 5, 15 and 60 minutes. Markets for power-related commodities required and managed by (and paid for by) market operators to ensure reliability, are considered
ancillary servicesAncillary services are the services necessary to support the transmission of electric power from generators to consumers given the obligations of control areas and transmitting 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. In addition, for most major operators, there are markets for transmission congestion and electricity
derivatives Derivative may refer to: In mathematics and economics *Brzozowski derivative in the theory of formal languages *Derivative in calculus, a quantity indicating how a function changes when the values of its inputs change. *Formal derivative, an opera ...
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), ''Futures'' (magazine), an American finance magazine. Music *Fu ...
and options, which are actively traded. These markets developed as a result of the restructuring of electric power systems around the world. This process has often gone on in parallel with the restructuring of
natural gas Natural gas (also called fossil gas; sometimes just gas) is a naturally occurring hydrocarbon gas mixture consisting of methane and commonly including varying amounts of other higher alkanes, and sometimes a small percentage of carbon dioxide ...

natural gas
markets.


History

One controversial introduction of
energy market Energy markets are commodity markets that deal specifically with the trade and supply of Energy (society), energy. Energy market may refer to an electricity market, but can also refer to other sources of energy. Typically energy development is the ...
concepts and
privatization Privatization (or privatisation in British English British English (BrE) is the standard dialect of the English language English is a West Germanic languages, West Germanic language first spoken in History of Anglo-Saxon England, ea ...
to electric power systems took place in
Chile Chile, officially the Republic of Chile, is a country in the western part of South America South America is a continent A continent is one of several large landmasses. Generally identified by convention (norm), convention ra ...
in the early 1980s, in parallel with other market-oriented reforms associated with the
Chicago Boys The Chicago Boys were a group of Chilean economists prominent around the 1970s and 1980s, the majority of whom were educated at the Department of Economics of the University of Chicago The University of Chicago (UChicago, U of C, or Chicago) ...
. The Chilean model was generally perceived as successful in bringing rationality and transparency to power pricing.
Argentina Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country located mostly in the southern half of South America. Sharing the bulk of the Southern Cone with Chile to the west, the country is also bordered b ...
improved on the Chilean model by imposing strict limits on market concentration and by improving the structure of payments to units held in reserve to assure system reliability. One of the principal purposes of the introduction of market concepts in Argentina was to privatize existing generation assets (which had fallen into disrepair under the government-owned monopoly, resulting in frequent service interruptions) and to attract capital needed for rehabilitation of those assets and for system expansion. The
World Bank The World Bank is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its ow ...
was active in introducing a variety of hybrid markets in other Latin American nations, including Peru, Brazil, and Colombia, during the 1990s, with limited success. A quantum leap in electricity pricing theory occurred in 1988 when four professors at MIT and Boston University (Fred C. Schweppe, Michael C. Caramanis, Richard D. Tabors, and Roger E. Bohn) published a book entitled, "Spot Pricing of Electricity". It presented the concept that prices at each location on a transmission system should reflect the marginal cost of serving one additional unit of demand at that location. It then proposed quantifying these prices by solving a systemwide cost minimization problem while complying with all of the system's operational constraints, such as generator capacity limits, locational loads, line flow limits, etc. using linear programming software. The locational marginal prices then emerged as the shadow prices for relaxing the load limit at each location. A key event for electricity markets occurred in 1990 when the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shortha ...

United Kingdom
government under
Margaret Thatcher Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013), was Prime Minister of the United Kingdom The prime minister of the United Kingdom is the head of government The head of government is either ...

Margaret Thatcher
privatised the UK electricity supply industry. The process followed by the British was then used as a model (or at least a catalyst) for the restructuring of several other Commonwealth countries, notably the National Electricity Markets of Australia and New Zealand and the Alberta Electricity Market in Canada. In the United States the traditional vertically integrated electric utility model with a transmission system designed to serve its own customers worked extremely well for decades. As dependence on a reliable supply of electricity grew and electricity was transported over increasingly greater distances, wide area synchronous grid interconnections developed. Transactions were relatively few and generally scheduled well in advance. However, in the last decade of the 20th century, some United States policy makers and academics asserted that the electric power industry would ultimately experience deregulation and
independent system operator A regional transmission organization (RTO) in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It c ...
s (ISOs) and
regional transmission organization A regional transmission organization (RTO) in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It c ...
s (RTOs) were established. They were conceived as the way to handle the vastly increased number of transactions that take place in a competitive environment. About a dozen states decided to deregulate but some pulled back following the
California electricity crisis California is a state in the Western United States The Western United States (also called the American West, the Far West, and the West) is the List of regions of the United States#Census Bureau-designated regions and divisions, region co ...
of 2000 and 2001. In different deregulation processes the institutions and market designs were often very different but many of the underlying concepts were the same. These are: separate the potentially competitive functions of
generation A generation is "all of the people born and living Living or The Living may refer to: Common meanings *Life, a condition that distinguishes organisms from inorganic objects and dead organisms ** extant taxon, Living species, one that is not ex ...
and
retail Retail is the sale of goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (e ...
from the
natural monopoly A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adva ...

natural monopoly
functions of
transmission Transmission may refer to: Science and technology * Power transmissionPower transmission is the movement of energy from its place of generation to a location where it is applied to perform useful Mechanical work, work. Power (physics), Power is d ...

transmission
and
distributionDistribution may refer to: Mathematics *Distribution (mathematics) Distributions, also known as Schwartz distributions or generalized functions, are objects that generalize the classical notion of functions in mathematical analysis. Distr ...
; and establish a wholesale electricity market and a retail electricity market. The role of the wholesale market is to allow trading between generators, retailers and other financial intermediaries both for short-term delivery of electricity (see
spot price In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
) and for future delivery periods (see
forward price The forward price (or sometimes forward rate) is the agreed upon price of an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or inta ...
). Some states exempt non investor-owned utilities from some aspects of deregulation such as customer choice of supplier. For example, some of the New England states exempt municipal lighting plants from several aspects of deregulation and these municipal utilities do not have to allow customers to purchase from competitive suppliers. Municipal utilities in these states can also opt to function as vertically-integrated utilities and operate generation assets both inside and outside of their service area to supply their utility customers as well as sell output to the market.


Nature

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. Furthermore, demand and supply vary continuously. There is therefore a physical requirement for a controlling 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 transmiss ...
, to coordinate the dispatch of generating units to meet the expected demand of the system across the transmission grid. If there is a mismatch between supply and demand the generators speed up or slow down causing the system
frequency Frequency is the number of occurrences of a repeating event per unit of time A unit of time is any particular time Time is the indefinite continued sequence, progress of existence and event (philosophy), events that occur in an apparent ...

frequency
(either 50 or 60
hertz The hertz (symbol: Hz) is the unit Unit may refer to: Arts and entertainment * UNIT, a fictional military organization in the science fiction television series ''Doctor Who'' * Unit of action, a discrete piece of action (or beat) in a theatric ...

hertz
) to increase or decrease. If the frequency falls outside a predetermined range the system operator will act to add or remove either generation or load. The proportion of electricity lost in transmission and the level of congestion on any particular branch of the network will influence the
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 wit ...
of the generation units. Markets may extend beyond national boundaries.


Wholesale electricity market

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.


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 A knot is an intentional complication in Rope, cordage which may be practical or decorative, or both. Practical knots are classified by function, including hitches, bends, loop knots, and splic ...
to develop a classic
supply and demand In microeconomics, supply and demand is an economic model In economics, a model is a theory, theoretical construct representing economic wikt:process, processes by a set of Variable (mathematics), variables and a set of logical and/or quant ...

supply and demand
equilibrium price In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
, 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 a monetary value assigned to currently unknowable or difficult-to-calculate costs in the absence of correct market prices. It is based on the willingness to pay principle – the most accurate measure of the value of a good or ...
", in which it is assumed that one additional
kilowatt-hour The kilowatt-hour ( SI symbol: kW⋅h or kW h; commonly written as kWh) is a unit Unit may refer to: Arts and entertainment * UNIT, a fictional military organization in the science fiction television series ''Doctor Who'' * Unit of action, ...
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 transmission ...
, PJM Interconnection,
ERCOT The Electric Reliability Council of Texas, Inc. (ERCOT) is an American organization that operates Texas Texas (, ) is a state in the South Central United States, South Central region of the United States. It is the second largest U.S. stat ...
,
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 ...
, and
New England New England is a region comprising six states in the Northeastern United States: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. It is bordered by the state of New York (state), New York to the west and by the Cana ...

New England
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 more than 700 List of islands of New Zealand, smaller islands, coveri ...
, 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 Instantaneous power in an electric circuit is the rate of flow of energy past a given point of the circuit. In alternating current Alternating current (AC) is an electric current which periodically reverses direction and changes its magnitude ...
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 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 production (economics), producers, via the price charged for a commodity, product or service, which provides a signal to increase or decrease quantity supplied or quantity demanded. It also pr ...
, etc., results in a "missing money" problem. 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 Electricity is the s ...
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 electric power transmission, transmission grid. 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 (most European countries), and Nord Pool Spot (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 (finance), 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 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 such as wind energy 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 (finance), hedge 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 contracts for physical delivery and contracts for differences where the parties agree a strike price 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 options and put options are traded in sophisticated electricity markets. In general they are designed to transfer financial risks between participants.


Wholesale electricity markets

* Argentina – see Electricity sector in Argentina * Australia – see National Electricity Market, Electricity sector in Australia ** Western Australia (WEM) – Australian Energy Market Operator (AEMO) **East Coast (NEM) – Australian Energy Market Operator (AEMO) * Austria – see EPEX SPOT and EXAA Energy Exchange * Belgium – see APX Group * Brazil – see Electricity sector in Brazil * Canada – see Electricity sector in Canada * Chile – see Electricity sector in Chile * Colombia – see Electricity sector in Colombia * Czech Republic – Czech electricity and gas market operator and Power Exchange Central Europe (PXE) For Czech Republic, Slovakia and Hungary. * Croatia - Croatian Power Exchange (CROPEX) * France – see Electricity sector in France and EPEX SPOT * Germany – see Electricity sector in Germany, European Energy Exchange AG (EEX) and EPEX SPOT * Hungary – Hungarian Power Exchange HUPX and Power Exchange Central Europe (PXE) * India – see Indian Energy Exchange and Power Exchange India Limited (PXIL) * Ireland – Single Electricity Market Operator (SEMO) SEMO is a joint venture between EirGrid PLC and SONI Limited. * Italy – GME * Japan – see Electricity sector in Japan and Japan Electric Power Exchange (JEPX) * Korea – Korea Power Exchange (KPX) * Mexico – Centro Nacional de Control de Energía (CENACE) * Netherlands – see APX-ENDEX * New Zealand – see Electricity sector in New Zealand and New Zealand Electricity Market * Philippines – Philippine Wholesale Electricity Spot Market * Poland – Polish Power Exchange (POLPX) * Portugal – 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 * 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,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shortha ...

United Kingdom
– see APX-ENDEX and Elexon * United States – summarized by the Federal Energy Regulatory Commission (FERC).Electric Power Markets: National Overview ** California – California ISOCalifornia ISO ** ERCOT Market in Texas ** Midwest – Midcontinent Independent System Operator, Inc (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 ...
– New York Independent System Operator (NYISO) ** PJM Interconnection 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 *APX Group *Energy Exchange Austria *European Energy Exchange *European Power Exchange *HUPX Hungarian Power Exchange *Nord Pool AS *Powernext


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 electric power transmission, transmission grid and the electricity quantities at that node can be reconciled, competition for retail customers within the
distributionDistribution may refer to: Mathematics *Distribution (mathematics) Distributions, also known as Schwartz distributions or generalized functions, are objects that generalize the classical notion of functions in mathematical analysis. Distr ...
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 California is a state in the Western United States The Western United States (also called the American West, the Far West, and the West) is the List of regions of the United States#Census Bureau-designated regions and divisions, region co ...
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).


Electricity market experience

In the main, experience in the introduction of wholesale and retail competition has been mixed. 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 California is a state in the Western United States The Western United States (also called the American West, the Far West, and the West) is the List of regions of the United States#Census Bureau-designated regions and divisions, region co ...
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 New England is a region comprising six states in the Northeastern United States: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. It is bordered by the state of New York (state), New York to the west and by the Cana ...

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 incent 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"). There is substantial doubt as to whether any of these mechanisms will in fact incent new investment, given the regulatory risk and chronic instability of the market rules in US systems, and there are substantial concerns that the result will instead be to increase revenues to incumbent generators, and costs to consumers, in the constrained areas.


Capacity market


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 (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

* Ancillary services * 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


Further reading


A 2006 World Bank report on Water, Electricity, and the effect of utility subsidies on the poor
* Insight into the historic performance of the Reserve Capacity Mechanism – Independent Market Operator of Western Australi

* The EU energy sector inquiry that shows up current impediments for competition in the electricity industry in Europ
The EU energy sector inquiry – final report 10 January 2007
* Article by Severin Borenstein on th
Trouble with Electricity Markets
* David Cay Johnston, "Competitive Era Fails to Shrink Electric Bills", NYT October 15, 2006 * Lewis Evans, Richard B Meade, "Alternating Currents or Counter-Revolution? Contemporary Electricity Reform in New Zealand", Victoria University Press, 2006.
Freedom Energy Logistics
* Czech electricity market overview – Year report on the electricity market (technical report) and Expected balance repor
Annual Report
* EDW Technology
Energy Wholesale Market ReviewReport of the European Energy Market Prices for the month of June 2016

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