Wiktor Wise
The electric market structure is a complex system that describes the interaction between various market participants in the production and delivery of electricity to consumers. It involves electricity generation, wholesale markets, system operations, transmission, distribution, and retail supply. The market structure can vary across different geographical regions, with some areas having regulated markets, while others have restructured or deregulated markets. In the US, the market structure can differ from state to state, with some states offering retail choice, where customers can choose their electricity supplier and the resources used for generation, fostering competition and impacting access to green power products. The market structure also determines the investment risk borne by customers or suppliers. Additionally, the introduction of renewable energy sources and the varying structures of wholesale markets further add to the complexity of the electric market structure.
| Characteristics | Values |
|---|---|
| Market Structure | Can depend on bilateral contracts (private contracts between two parties) or organized markets run by a central authority like a Power Exchange (PX), Independent System Operator (ISO), or a mix of both |
| Participants | Generators, suppliers, consumers, and flexibility providers |
| Generator Sources | Renewable resources, fossil fuels, embedded generation, transmission-connected generation |
| Consumer Types | Domestic and industrial |
| Retail Choice | Designed to foster competition among electricity suppliers to reduce prices and provide customers with choices regarding the resources used to generate electricity |
| Wholesale Market | Centralized wholesale markets are where generators sell power, and load-serving entities purchase and sell it to consumers |
| System Operations | Sector that balances supply and demand and maintains system reliability through ancillary services |
| Transmission | High-voltage network that moves power long distances from generators to distribution systems |
| Geographic Differences | Market structures vary by country in Europe and by state in the US |
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What You'll Learn
Electric market structure and its participants
Electric market structure describes how various market participants interact to produce and deliver electricity to the end consumer. The market structure varies depending on the region and the type of market participants involved. The key participants in the electric market include:
Generation Sector
This sector involves the creation of power, typically by large centralized power plants, but also by smaller decentralized plants located near customer facilities. Generation can be owned by vertically integrated utilities, power authorities, independent power producers (merchant generators or gencos), or end users. In some cases, aggregated economic demand response can also participate as a source of generation.
Wholesale Markets
Wholesale markets are where power is bought and sold. The participants include generators, entities that resell power to end users, and traders who buy and sell power among other wholesale participants. Typical buyers and sellers include generators, marketers, and utilities. Wholesale markets can depend on bilateral contracts between private parties or organized markets run by a central authority, such as a Power Exchange (PX) or Independent System Operator (ISO).
System Operations Sector
This sector ensures a balance between supply and demand and maintains system reliability through ancillary services such as frequency regulation, reserves, voltage support, and black start. System operations may be provided by vertically integrated utilities, power authorities, transmission owners, or ISOs.
Transmission Sector
Transmission involves the high-voltage network that moves power over long distances from generators to distribution systems. Transmission may be owned by vertically integrated utilities, power authorities, or stand-alone transmission companies (transcos).
Distribution Sector
The distribution sector delivers electricity to end-use customers, often bundled with other distribution services. In some cases, customers may have the option to buy supply directly from a non-utility retail marketer.
Retail Supply
Retail supply refers to the provision of electricity to the end-use customer. It includes both the distribution company and non-utility retail marketers as participants.
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Wholesale electricity markets
The electric market structure describes the way that various market participants interact to produce and deliver electricity to the end consumer. There are several different markets operating across the electricity system, one of which is the wholesale electricity market. Wholesale electricity markets involve the sale and purchase of electricity between suppliers and generators before it is delivered to consumers.
In the wholesale market, there are three main models that determine how wholesale electricity is priced. In Great Britain, for example, a system called national pricing is used, meaning that at any given moment, there is one price for wholesale electricity across the country. The wholesale price of electricity depends on a range of factors, including the level of demand, carbon taxes, the cost of fuel, and the availability of resources like wind and sun. This price fluctuates throughout the day, affecting which generators are most competitive in the wholesale market.
In a regulated wholesale market, utilities are typically vertically integrated monopolies, meaning they are solely responsible for generating, transmitting, and distributing electricity to their customers. In these markets, utilities determine the mix of resources they use to generate electricity, with approval from state public utility commissions. The electric system in much of the southern and western United States is managed using these traditional wholesale electricity markets. Some states, like California, have deregulated their wholesale markets but not retail markets. In restructured or deregulated wholesale markets, utilities that serve retail customers are only responsible for delivering electricity to their customers; the electricity is generated by other entities.
As renewable generators become a larger portion of the grid's resources, complications may arise with the existing wholesale market structure in deregulated states. Renewable energy sources can offer bids of $0 into the energy and capacity markets as they do not require fuel inputs to run. As these sources make up a larger portion of the grid over time, wholesale prices for energy and capacity could be significantly reduced, potentially discouraging long-term investment for all resources. As a result, wholesale markets may need to adapt in the future to better accommodate different types of resources.
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Retail electricity markets
The electric market structure describes the way that various market participants interact to produce and deliver electricity to the ultimate consumer. In the United States, how electricity is bought and sold varies by region. While many cities are served by municipally owned utilities, and some rural areas are served by customer-owned rural cooperatives, most electricity customers are served by utilities that are owned by investors.
Retail choice is a retail market structure that allows customers who live in states with retail choice to purchase their electricity from other retail suppliers besides their local utility. Retail choice was designed to foster competition among electricity suppliers to reduce prices. It also provides customers with choices surrounding the resources used to generate the electricity they purchase. For instance, in states with retail choice, customers can opt to purchase electricity from a supplier that offers electricity products generated from a larger proportion of emissions-free, renewable electricity than other local suppliers.
Retail choice is not widely available in most parts of the country. While it is more common in states located in restructured wholesale power markets, it is also offered in some states located in regulated wholesale markets—sometimes to certain types of customers, such as commercial or industrial customers.
In the US, some states have deregulated their wholesale markets but not retail markets. For example, California is partially deregulated and formed its own RTO, the California Independent System Operator (CAISO), which operates the grid and wholesale markets. However, the state does not offer individual customer retail electricity choice, although communities can opt out of the local utility through community choice aggregation under which a company hired by the community buys power in wholesale markets for all residents who do not opt out of this arrangement.
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Transmission and distribution services
Electricity transmission specifically refers to the transportation of high-voltage electrical power from power generation plants to distribution substations. This is achieved through transmission lines and associated equipment, such as capacitors and transformers. The transmission network enables the movement of power over long distances, connecting to shorter distribution lines that deliver electricity to customers.
Electricity distribution, on the other hand, involves supplying electricity from the distribution substations to end-use customers, including industrial facilities, businesses, and private consumers. This is done through a network of distribution lines and related equipment, ensuring that electricity is delivered in a usable format, regardless of the generation source.
The transmission and distribution market is projected to grow significantly. The global market size was valued at USD 317.89 billion in 2022 and is expected to reach USD 429.43 billion by 2030, exhibiting a Compound Annual Growth Rate (CAGR) of 3.9%. This growth is attributed to increasing electricity demand, particularly in remote areas that lack reliable access, and the integration of renewable energy sources.
The market structure for transmission and distribution can vary across geographical regions. In the US, it differs by state, while in Europe, it varies by country. The structure may be regulated or restructured, with wholesale markets or utilities managing transmission. Retail choice, where available, offers customers the ability to choose their electricity supplier and the resources used for generation, fostering competition and reducing prices.
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Impact of market structure on customer access to green power products
The electric market structure describes the way various market participants interact to produce and deliver electricity to the end consumer. Market structures often differ among geographical regions. In the US, market structures can vary by state, while in Europe, they vary by country. The generation, wholesale markets, system operations, transmission, distribution, and retail supply are the various sectors that make up the market structure.
The market structure has a significant impact on a customer's access to green power products. For instance, in states with retail choice, customers can choose to buy electricity from a supplier that offers electricity products generated from a larger proportion of emissions-free, renewable electricity than other local suppliers. In some cases, this might enable customers to purchase more green power than they could from their default supplier. Retail choice was designed to foster competition among electricity suppliers to reduce prices. It has also provided customers with choices surrounding the resources used to generate the electricity they purchase.
On the other hand, in vertically integrated markets, a customer’s access to different renewable electricity products will largely be based on what options their local utility makes available. In a regulated wholesale market, utilities are typically vertically integrated monopolies, meaning they are solely responsible for generating, transmitting, and distributing electricity to their customers. In these markets, utilities determine the mix of resources they use to generate electricity, with approval from state public utility commissions. The electric system in much of the South and West of the US is managed using these traditional wholesale electricity markets.
Additionally, the structure of wholesale markets varies across regions. For example, ERCOT, the RTO of Texas, does not run a capacity market and instead relies on price signals in the energy market to ensure reliability. High prices in the energy market, typically caused by low supply and high demand, provide an economic signal for more generators to enter the market, which can then lower energy prices and provide a signal that enough generators are present. As renewable generators become a larger portion of the grid’s resources, complications may arise with the existing wholesale market structure in deregulated states. Renewable energy sources do not require fuel inputs to run, and they can offer bids of $0 into the energy and capacity markets. As these sources make up a larger portion of the grid over time, these $0 bids can significantly reduce wholesale prices for energy and capacity and could discourage long-term investment for all resources. As a result, wholesale markets may need to adapt in the future to better accommodate different types of resources.
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Frequently asked questions
The electric market structure describes the way that various market participants interact to produce and deliver electricity to the ultimate consumer. There are four main parties in the electricity market: generators, consumers, suppliers, and flexibility providers. The market structure is quite complex and varies by region.
The different sectors in the electric market structure include generation, wholesale markets, system operations, transmission, distribution, and retail supply.
In the US, market structures can vary by state. For example, California has partially deregulated its wholesale markets and formed the California Independent System Operator (CAISO), which operates the grid and wholesale markets. Texas, on the other hand, has an energy market that relies on price signals to ensure reliability. Other examples include the Southwest Power Pool (SPP) and the Midwest Independent System Operator (MISO).
The electric market structure can impact consumers' access to different green power product options and their ability to choose their electricity supplier. In regulated wholesale markets, utilities are typically vertically integrated monopolies, and consumers may have limited choices. In restructured wholesale markets with retail choice, consumers may have more options to choose from and can opt for electricity suppliers that offer renewable energy sources.
