Evolution of Electricity Markets
– The electricity market has undergone significant changes due to technological advances, politics, and ideology.
– The traditional electricity market has been replaced by multiple competitive markets for generation, transmission, distribution, and retailing.
– This restructuring transformed electricity from a public service to a tradable good.
– Some regions, like parts of the United States and Canada, still have traditional markets.
– Chile became a pioneer in deregulation in the early 1980s.
– The US formulated a new market approach to electricity shortly after.
– The Energy Act of 1983 in the UK enabled a choice of supplier for electricity boards and large customers.
– Distributed energy resources (DERs) have inspired innovative electricity markets, such as local flexibility markets.
Unique Features of the Electricity Market
– The electricity market is fundamentally incomplete due to its unique characteristics.
– Electricity cannot be stored and must be available on demand.
– Supply and demand must closely match at all times, requiring grid balancing.
– Physical and economic constraints, such as variable renewable energy sources and restrictions on ramping speed, affect the market.
– Transmission network design limits the amount of electricity that can be transmitted between nodes.
Traditional Market Structure
– In the past, the electricity supply industry was regulated by governments.
– Different countries had various arrangements, such as government-owned vertically integrated companies or decentralized distribution.
– Competitive markets were not prevalent, and customers couldn’t choose their suppliers.
– Wholesale transactions between large and smaller utilities were common.
– Retail tariffs relied on fixed regulated prices and volumetric pricing.
Market Externality and Carbon Pricing
– The market externality of greenhouse gas emissions is addressed through carbon pricing.
– Carbon pricing is a mechanism to internalize the cost of emissions.
– It encourages the reduction of greenhouse gas emissions by making them financially costly.
– Carbon pricing can take the form of carbon taxes or cap-and-trade systems.
– Electricity markets often deal with carbon pricing through the trading of electricity derivatives like futures and options.
Additional Electricity Market Components
– Besides the wholesale and retail markets, there are markets for transmission rights and electricity derivatives.
– Transmission rights allow operators to buy and sell the right to use transmission capacity.
– Electricity derivatives, such as futures and options, are actively traded.
– These additional components contribute to the overall functioning and efficiency of the electricity market.
– Market participants use these mechanisms to manage risks and optimize their electricity-related activities. Source: https://en.wikipedia.org/wiki/Electricity_market
This article may be too technical for most readers to understand. (August 2022) |
This article needs to be updated. The reason given is: needs more info on alternatives to marginal cost pricing. (August 2022) |
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 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 and tightly regulated "traditional" electricity market with multiple competitive markets for electricity generation, transmission, distribution, and retailing. The traditional and competitive market approaches loosely correspond to two visions of industry: the deregulation was transforming electricity from a public service (like sewerage) into a tradable good (like crude oil). As of 2020s, the traditional markets are still common in some regions, including large parts of the United States and Canada.
The initial idea of a simple wholesale electricity market 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 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, etc.);
- capacity market 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 costs replacing producers' bids in places where the local market power is a concern (e.g., in some parts of the US and entire hydropower-rich countries of Latin America).
The competitive retail electricity markets were able to maintain their simple structure.
In addition, for most major operators, there are markets for transmission rights[citation needed] and electricity derivatives such as electricity futures and options, which are actively traded.
The market externality of greenhouse gas emissions is sometimes dealt with by carbon pricing.
