Competitive Electricity Market Design: a Wholesale Primer

A short-term electricity market coordinated by a system operator provides a foundation for a competitive electricity market. Combined with long-term contracts for generation and transmission congestion, the spot-market and competitive market pricing can support open access to the transmission grid. INTRODUCTION Electricity market restructuring emphasizes the potential for competition in generation and retail services, with operation of transmission and distribution wires as a monopoly. Network interactions complicate the design of the institutions and pricing arrangements for open access to the wires. The design of the institutions for the wholesale market can accommodate access for both wholesale and retail competition while recognizing the special requirements of reliability in the transmission grid. A pool-based, short-term electricity market coordinated by a system operator provides a foundation for building an open access system. Coordination through the system operator is unavoidable, and a bid-based spot-market built on the principles of economic dispatch creates the setting in the wholesale market for competition among the market participants. The associated locational prices define the opportunity costs of transmission usage and support transmission rights without restricting the actual use of the system. A system of contracts can provide the connection between short-term operations and long-term investment built on market incentives. The key elements of the wholesale market design include: • A short-term spot market with bid-based security-constrained economic dispatch coordinated by the system operator. • Spot-market transactions at market clearing locational prices to include marginal 1 This paper combines and updates introductory descriptions from previous papers by the author on competitive market design and transmission pricing. The views presented here are not necessarily attributable to any of those mentioned, and any remaining errors are solely the responsibility of the author. 2 losses and congestion. • Bilateral transactions with short-term transmission usage charges equal to the difference in the locational prices at source and destination. • A two settlement system using day-ahead bidding, pricing and contracts, with real-time balancing at the real-time market prices. • Transmission congestion contracts to allocate the benefits of transmission rights. • Network access charges to cover the embedded costs of the grid and other fixed charges. • Usage charges for loads to recover other unbundled ancillary service costs. A sketch of the details outlines the basic elements of the competitive market design that would support both wholesale and retail transactions. A general framework that encompasses the essential economics of electricity markets provides a point of …