Changes have occurred across different regions and countries, for many reasons, ranging from technological advances (on supply and demand sides) to politics and ideology.
[2] The traditional and competitive market approaches loosely correspond to two visions of industry: the deregulation was transforming electricity from a public service (like sewerage) into a tradable good (like crude oil).
[4] In recent years, governments have reformed electricity markets to improve management of variable renewable energy and reduce greenhouse gas emissions.
If there is a mismatch between supply and demand the generators absorb extra energy by speeding up or produce more power by slowing down causing the utility frequency (either 50 or 60 hertz) to increase or decrease.
While wholesale pricing used to be the exclusive domain of large retail suppliers, increasingly markets like New England are beginning to open up to end-users.
Large end-users seeking to cut out unnecessary overhead in their energy costs are beginning to recognize the advantages inherent in such a purchasing move.
Wholesale transactions (bids and offers) in electricity are typically cleared and settled by the market operator or a special-purpose independent entity charged exclusively with that function.
In the absence of collusion, it is expected that MPS incentivizes producers to bid close to their short run marginal cost to avoid the risk of missing out altogether.
[36] Due to the difference in the grid construction (US had weaker transmission networks), the design of wholesale markets in the US and Europe had diverged, even though initially the US was followed the European (decentralized) example.
The centralized market normally uses the LMP, and the dispatch goal is minimizing the total cost in each node[clarification needed] (which in a large network count in hundreds or even thousands).
[38] Due to the centralized and detailed nature of the day-ahead dispatch, it stays feasible and cost-efficient at the time of delivery, unless some unexpected adverse events occur.
The results are thus not necessarily optimal, are hard to replicate independently, and require the market participants to trust the operator (due to the complexity sometimes a decision by the algorithm to accept or reject the bid appears entirely arbitrary to the bidder).
A less-obvious issue is the tendency of market participants under these conditions to concentrate on investments in the peaker plants to the detriment of the baseload power.
[43] A system operator performs an audit of parameters of each generator unit (including heat rate, minimum load, ramping speed, etc.)
[43] Decentralized markets allow the generation companies to choose their own way to provide energy for their day-ahead bid (that specifies price and location).
System operators also normally bring units online to hold as "spinning-reserve" to protect against sudden outages or unexpectedly rapid ramps in demand, and declare them "out-of-merit".
A consequence of the complexity of a wholesale electricity market can be extremely high price volatility at times of peak demand and supply shortages.
The particular characteristics of this price risk are highly dependent on the physical fundamentals of the market such as the mix of types of generation plant and relationship between demand and weather patterns.
[52] It has been academically argued via game theory that a cap on the price of imported Russian gas (some of which is used to generate electricity) could be beneficial,[53] however politically this is difficult.
Failure or incompetence in the execution of one or more of the following has led to some dramatic financial disasters: The two main areas of weakness have been risk management and billing.
[91] The real-time market price and control system could turn home electricity customers into active participants in managing the power grid and their monthly utility bills.
Further, the electricity suppliers could perform real-time market analysis to determine return-on-investment for optimizing profitability or reducing end-user cost of goods.
[95] Event-driven SOA software could allow homeowners to customize many different types of electricity devices found within their home to a desired level of comfort or economy.
The US experience where the deregulated utilities operate alongside the vertically integrated ones, there is some evidence of the increased efficiencies:[96] Schmalensee concludes that it is plausible that the restructuring resulted in lower wholesale prices, at least in the US and the UK.
[97] MacKay and Mercadal in a large-scale analysis of the US market between 1994 and 2016, while confirming Schmalensee's findings on lower costs, reached the opposite conclusion on the prices: deregulated utilities realized significantly higher prices due to higher markup of the generation facilities and double extraction of the profit margin by the two vertically separated companies.
However, in 2000/2001[101] major failures such as the California electricity crisis and the Enron debacle caused a slow down in the pace of change and in some regions an increase in market regulation and reduction in competition.
[102] Notwithstanding the favorable light in which market solutions are viewed conceptually, the "missing money" problem has to date proved intractable.
[8] These caps prevent the suppliers from fully recovering their investment into the reserve capacity through the scarcity pricing, creating a missing money problem for generators.
The contracts are either bilateral (between the retailers and generator owners), or are traded on a centralized capacity market (the case, e.g., for the eastern USA grid).
This will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources".