Electricity market

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Download Power Structure Ownership Integration And Competition In The Us Electricity Industry

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I are passed it before, and I'll change it just. However, in the last decade of the 20th century, some US policy makers and academics projected that the electrical power industry would ultimately experience deregulation and independent system operators ISOs and regional transmission organizations 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 of and In different deregulation processes the institutions and market designs were often very different but many of the underlying concepts were the same.

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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 see forward price. 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. 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 , 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 either 50 or 60 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 of the generation units. 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". The system price in the day-ahead market is, in principle, determined by matching offers from generators to bids from consumers at each node to develop a classic supply and demand equilibrium price , 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.

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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, the LMP algorithm described above is run, 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.

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 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 , etc.

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: 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 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. 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. 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.

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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". Since the introduction of the market, New Zealand has experienced shortages in and , high prices all through and even higher prices and the risk of a severe shortage in as of April These problems arose because New Zealand is at risk from drought due to its high proportion of electricity generated from hydro.

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 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 contracts" with each other.

Download Power Structure Ownership Integration And Competition In The Us Electricity Industry

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. 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'.

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 and the electricity quantities at that node can be reconciled, competition for retail customers within the distribution 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:. The two main areas of weakness have been risk management and billing.