Introduction to electricity markets
The concept behind the world of competition and the free choice of the consumer to choose its electricity supplier, is that it is possible and even desirable to separate the transportation as a mean from the commodity that is transported. In other words, electric energy as a product can be commercially separated from transmission as a service. The drivers for the restructuring of the electricity sector in the different countries, traditionally under the rule of federal and state governments, are:
· the introduction of competition to reach more efficiency in the operation of the power-producing industry
· the possibility for the customers to choose a supplier
The main measures that are taken to achieve this are:
· the vertical unbundling to separate monopolistic activities from competitive ones, such as the separation of generation from the transmission and distribution of electric- ity
· the horizontal unbundling to stimulate competition in competitive fields, for instance the creation of different generation companies
In essence, the electricity market is similar to any other economic market: buyers and sellers agree on a price. But, there is one big difference: electricity cannot be stored in large quanti- ties. That makes that the cost conditions for the provision of electric supply vary constantly under the influence of the continuously-changing demand and the possible drop out of generat- ing units. In other markets similar phenomena do play a role, but then the ability to store the traded product mitigates this effect. There are some factors that complicate ‘electricity as a product’. First of all, electric energy cannot be labelled or traced back with regard to its source or sink; electricity produced by a windmill, for example, cannot be distinguished from electric- ity that is produced by a nuclear power station. Furthermore, power flows cannot be controlled by financial instruments, they obey the laws of physics.