Electricity Markets (cont)
A key event for electricity markets occurred in 1990 when the UK Government under Margaret Thatcher privatised the UK Electricity Supply Industry. The process followed by the British was then used as a model or at least a catalyst for the deregulation of several other Commonwealth countries, notably Australia and New Zealand, and regional markets such as Alberta. However, in many of these other instances the market deregulation occurred without the widespread privatisation that characterised the UK example.
In different deregulation processes the institutions and market designs were often very different but many of the underlying concepts were the same. These are: separate the contestable functions of generation and retail from the natural monopoly functions of transmission and distribution; and establish a wholesale electricity market and a retail electricity market. 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).
Wholesale Electricity Market
A wholesale electricity market exists when competing generators offer their electricity output to retailers.
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. 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.
