Industry 101 | Market Settlements: Markets
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5.2.1 WHOLESALE MARKETS
The wholesale market refers to the buying and selling of power between generators and resellers. The resellers can include some or all of the following –
- Electricity utility companies
- Competitive power providers
- Electricity marketers
The price for a wholesale market can be predetermined by a buyer and a seller through a bilateral contract, or it can be set by the organized wholesale market. The clearing price is determined by an auction in which the generation resources offer a price at which they can supply electricity. If a generation resource submits a bid which is a successful bid and thus would be contributing its generation to meet the market demand, it is said to clear the market. The cheapest resource will clear the market first followed by the next cheapest resource until the demand is met. When supply matches the demand, the market is cleared.
5.2.2 RETAIL MARKETS
Electricity bought by the resell entities in the wholesale market is then sold to the end consumers. With electricity reforms and the advent of competition, consumers may have the option of choosing their electricity supply company. Consumers who choose their supplier are also known by the term choice consumers. On the other hand, consumers who do not choose a supplier are served by their incumbent utility through a service called provider of last resort – POLR.
All the retail markets are regulated at the state level.
5.2.3 WORKING OF AN ELECTRICITY MARKET
The major players in an electricity market are:
- Electricity generation resources
- Electricity suppliers (retailers)
- Electricity system operator (firms like ERCOT)
- Domestic/commercial customers
The electricity supplier (retailer) is responsible for purchasing power from the wholesale market through either long-term contracts or several short-term agreements, selling it to the customers, and billing them for the electricity used. As discussed above, with the advent of competition, consumers can choose their supplier and suppliers can choose their generation resource.
The electricity system operator (like ERCOT) is responsible for:
- Balancing the system in real-time, i.e. matching the demand and supply of electricity at the agreed frequency.
- Calculating the imbalance for each supplier, i.e. the difference between the amount of electricity purchased and the total demand of the supplier’s customers, and sending out the invoices for the settlement period under consideration.
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