Electricity Markets
An electricity market is a system for effecting the purchase and sale of electricity using supply and demand to set the price. Wholesale transactions in electricity are typically cleared and settled by the grid operator or a special-purpose independent entity charged exclusively with that function. Markets for certain related commodities required by (and paid for by) various grid operators to ensure reliability, such as spinning reserve, operating reserves, and installed capacity, are also typically managed by the grid operator. In addition, for most major grids there are markets for electricity derivatives, such as electricity futures and options, which are actively traded. These markets developed as a result of the deregulation of electric power systems around the world. This process has often gone on in parallel with the deregulation of natural gas markets.
Early History
The earliest introduction of market concepts and privatization to electric power systems took place in Chile in the late 1970s, in parallel with other market-oriented reforms associated with the Chicago Boys. The Chilean model was generally perceived as successful in bringing rationality and transparency to power pricing, but it contemplated the continuing dominance of several large incumbents and suffered from the attendant structural problems. 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. One of the principal purposes of the introduction of market concepts in Argentina was to privatize existing generation assets (which had fallen into disrepair under the government-owned monopoly, resulting in frequent service interruptions) and to attract capital needed for rehabilitation of those assets and for system expansion. The World Bank was active in introducing a variety of hybrid markets in other Latin American nations, including Peru, Brazil and Colombia, during the 1990s, with limited success.
