An electricity market is a system that enables the exchange of electrical energy, through an electrical grid.[1] Historically, electricity has been primarily sold by companies that operate electric generators, and purchased by consumers or electricity retailers. Contact online >>
An electricity market is a system that enables the exchange of electrical energy, through an electrical grid.[1] Historically, electricity has been primarily sold by companies that operate electric generators, and purchased by consumers or electricity retailers.
The electric power industry began in the late 19th century in the United States and United Kingdom. Throughout the 20th century, and up to the present, there have been deep changes in the economic management of electricity. Changes have occurred across different regions and countries, for many reasons, ranging from technological advances (on supply and demand sides) to politics and ideology.
In recent years, governments have reformed electricity markets to improve management of variable renewable energy and reduce greenhouse gas emissions.[5][6]
The structure of an electricity market is quite complex.[7] Markets often include mechanisms to manage a variety of relevant services alongside energy. Services may include:
A simple "energy-only" wholesale electricity market would only facilitate the sale of energy, without regard for other services that may support the system, and experienced problems once implemented alone. To account for this, the electricity market structure typically includes:[7]
The competitive retail electricity markets were able to maintain their simple structure.[7]
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.[11]
Electricity market is characterized by unique features[12] that are atypical in the markets for commodities or consumption goods.
There are many other physical and economic constraints affecting the electricity network and the market, with some creating non-convexity:[18]
Electricity networks are natural monopolies, because it is not feasible to build multiple networks competing against one another. In order to address this, many electricity networks are regulated to address the risk of price gouging. The two main types of network price regulation are:[19]
The design of transmission network 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"), potentially creating fragments of the market that have to be served with local generation ("load pockets").
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:[20]
These diverse structures had a few unifying features: very little reliance on competitive markets,[21] no formal wholesale markets, and customers unable to choose their suppliers.[22]
The diversity and sheer size of the US market made the potential trade gains large enough to justify some wholesale transactions:[23]
On the retail side, customers were charged fixed regulated prices that did not change with marginal costs, retail tariffs almost entirely relied on volumetric pricing (based on the meter readings recorded monthly), and fixed cost recovery was included into the per-kWh price.[23]
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[4]). Schmalensee[who?] 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).[21]
A wholesale electricity market, also power exchange or PX, (or energy exchange especially if they also trade gas) is a system enabling purchases, through bids to buy; sales, through offers to sell. Bids and offers use supply and demand principles to set the price. Long-term contracts are similar to power purchase agreements 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.[30]
Markets for power-related commodities required and managed by (and paid for by) market operators to ensure reliability, are considered ancillary services and include such names as spinning reserve, non-spinning reserve, operating reserves, responsive reserve, regulation up, regulation down, and installed capacity.
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 may or may not clear trades, but often require knowledge of the trade to maintain generation and load balance.[citation needed]
Markets for electricity trade net generation output for a number of intervals usually in increments of 5, 15 and 60 minutes.[citation needed]
Two types of auction can be used to determine which producers are dispatched:
To determine payments, the clearing can use one of two arrangements:[33]
To handle all the constraints while keeping the system in balance, a central agency, the transmission system operator (TSO), is required to coordinate the unit commitment and economic dispatch.[36] If the frequency falls outside a predetermined range the system operator will act to add or remove either generation or load.
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: [38]
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.[38]
The drawbacks of the centralized design with LMP are:[40]
Price of a unit of electricity with LMP is based on the marginal cost, 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).[38]
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