An electricity market

An electricity market is a system for effecting purchases, through bids to buy; sales, through offers to sell; and short-term trades, The commodities within an electric market generally consist of two types: power and energy. Power is the metered net electrical transfer rate at any given moment and is measured in megawatts (MW). Energy is electricity that flows through a metered point for a given period and is measured in megawatt hours (MWh).

HISTORY

The earliest introduction of energy market concepts and privatization to electric power systems took place in Chile in the early 1980s, The Chilean model was generally perceived as successful in bringing rationality and transparency to power pricing, Argentina 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.

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 and retail from the natural monopoly functions of transmission and distribution; and establish a wholesale electricity marketand 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) and for future delivery periods.

NATURE OF THE MARKET

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.

In addition, the laws of physics determine how electricity flows through an electricity network. Hence the extent of electricity lost in transmission and the level of congestion on any particular branch of the network will influence the economic dispatch of the generation units.

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.

Buying wholesale electricity is not without its drawbacks , 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. "bid-based, security-constrained, economic dispatch with nodal prices".

The theoretical prices of electricity at each node on the network is a calculated "shadow price", in which it is assumed that one additional kilowatt-hour 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.

In practice, incorporating a security-constrained, least-cost dispatch calculation (see below) 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.

In most systems, units that are dispatched to provide reactive power to support transmission grids are declared to be "out-of-merit". 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".

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. This results in a spot market with "bid-based, security-constrained, economic dispatch with nodal prices".

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. 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.

RETAIL ELECTRICITY MARKET

A retail electricity market exists when end-use customers can choose their supplier from competing electricity retailers; one term used in the United States for this type of consumer choice is 'energy choice'. 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 and the electricity quantities at that node can be reconciled, competition for retail customers within the distribution system beyond the node is possible. The two main areas of weakness have been risk management and billing. 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. Independent companies should provide distribution and transmission services. 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.

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.

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, 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

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