Independent System Operator: Pricing and Flexibility in a Competitive Electricity Market

1 Parallel efforts in the United States to advance and implement the concept of an independent system operator provide a source of comparative insights on the principal choices and issues. A competitive electricity market requires supporting structures administered by the system operator. A key debate centers on the approach to transmission access and pricing. Efficient marginal-cost pricing in competitive electricity markets implies locational differences in the presence of transmission constraints. Aggregation of individual nodes into zones appeals as a putative simplification. In a sufficiently dense network, however, zonal aggregation provides less simplification than meets the eye. Illustration of the special features of electric networks and the implications for zonal aggregation suggest that nodal pricing is the simpler approach in a market with flexibility and choice.