Short Run Pricing in Competitive Electricity Markets

Abstract

In recent years there has been an international trend towards the creation of competitive and deregulated electricity markets. These trends stem from industry frustration with regulation, the technological ability to decentralise power system control, and a political interest in increasing the scope and efficiency of the market, capitalising on the economies of trade and innovation. This trend has given rise to a need for more responsive, competitive, and decentralised pricing strategies. In this article we review the type of electricity pricing required to coordinate a competitive wholesale electricity market over time periods typically of the order of one hour. In a competitive electricity market, generators and power buyers should be free to enter the market and trade as they please, at a price of their choosing, without threat of regulation. In contrast, transmission networks are natural monopolies and hence, if competition is to be possible, it is essential that the transmission network operators not artificially restrict access to the grid. In the short run this implies that the prices for using the network must be fair and beyond manipulation. In the longer term, new entrants to the market must also be able to acquire access to the transmission grid at a fair price. These conditions are unlikely to be achieved if the market is vertically integrated, with generating companies, or regional wholesalers/retailers/distributors controlling all, or parts, of the transmission system. For this reason it is widely argued that transmission systems should either be publicly owned, or regulated, or be operated by a group representative of the whole range of market participants.