How to Understand Electric Market Structures

By Bob Shively, Enerdynamics’ President and Lead Instructor

Understanding how electric markets are structured used to be simple. Just figure out who the vertically integrated utility is, then who regulates it and how. But since the days of deregulation (or liberalization or restructuring depending on which term you prefer), things are a lot more complex. Today you might find a different market structure in each country. And in some countries such as Australia, Canada, and the U.S., you might find different structures in each province or state. 

With this in mind, we’ve put together the following guide to understanding electric market structures.

First you must understand the various sectors: generation, wholesale markets, system operations, transmission, distribution, and retail supply.  Let’s briefly discuss each one:

  • Generation is the sector in which power is created, usually by large centralized power plants but also by smaller decentralized plants located at or near customer facilities. Generation can be owned by vertically integrated utilities, power authorities, independent power producers (also called merchant generators or gencos) or by end users. And, in some limited cases, aggregated economic demand response can also participate in markets as a source of “generation.”
  • Wholesale markets are where power is bought and sold between generators and entities that resell power to end users. These markets can depend on bilateral contracts (private contracts between two parties) or can depend on organized markets, which are run by a central authority such as a Power Exchange (PX), an Independent System Operator (ISO), or a mix of both.
  • System operations is the sector in which supply and demand are balanced and system reliability is maintained. This occurs through provision of ancillary services such as regulation, reserves, voltage support, and black start as well as real-time balancing of supply and demand. System operations may be provided by a vertically integrated utility, a power authority, a transmission owner (TO), or an ISO.
  • Transmission is the high-voltage network that moves power long distances from generators to distribution systems. Transmission may be owned by vertically integrated utilities, power authorities or stand-alone transmission companies (transcos). The transmission owner, also called a TO, may provide transmission services directly or services may be provided by the ISO with payment going back to the TO from the ISO.
  • Distribution is the low-voltage network that moves power from the transmission system to the consumer.  Distribution services may be provided by a vertically integrated utility or by a stand-alone utility distribution company (UDC).
  • Retail supply is the provision of electricity supply to an end-use customer. In many cases retail supply is provided by the distribution company as a service bundled into distribution services. In other cases, end-use customers have the option of buying supply directly from a non-utility retail marketer.

So now that you understand the sectors, how do you parse out the market structure in a specific area? Simply answer the following questions and you will be able to map out the market structure:

  1. What entities own generation and to whom are they allowed to sell it?
  2. Are there centralized markets run by a PX or an ISO, is all wholesale power traded in bilateral markets, or is there a mix of both?
  3. If there are centralized markets, which services trade in these markets?
  4. Who is responsible for system operations?
  5. What entities own transmission and do they provide services directly to the market? Or are transmission services provided by an ISO?
  6. What entity owns the distribution system?
  7. Are any end-use customers allowed to buy supply from non-utility retail marketers or is supply bundled with distribution services?
  8. If some end-use customers are allowed to shop for supply from non-utility retail marketers, which customers have that option and do they also have the option of buying bundled services from the distribution company?

Want to see an example of how these questions are applied to a real-world scenario? Read the full article in the Q3 issue of our Energy Insider newsletter to see how answering these questions can shed insight on Brazil’s electric market structure.

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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