Demand-side competition

To ensure market liquidity in competitive markets, there must be many sellers and also many buyers. One without the other does not make for a fully competitive market. Having a large number of buyers is sometimes called demand-side competition. Historically there has been a lack of demand-side competition in electric markets because, even if the wholesale markets have been deregulated and opened to competition, the incumbent utility tends to play a dominant role in buying supply on behalf of end-use consumers. This creates a buyers’ monopoly that must be regulated.

To have a fully competitive market there must be the opportunity for end-use customers to choose to buy directly from suppliers rather than through their utility. This has been done in some markets such as Texas. But many states are reluctant to open markets simultaneously to all customers, and experience certainly has shown that there can be advantages to phasing-in customer choice.

Many argue that a sufficient number of buyers can be created by allowing only large commercial and industrial customers the choice of supply. Since they make up significant demand in terms of load (even if not in terms of number of accounts) this is often enough to create market liquidity. Another way to increase buyers is to also allow aggregated groups of smaller customers to buy directly. Some states are providing this opportunity through programs like municipal aggregation where cities buy power on behalf of groups of customers.

A second key requirement for demand-side competition is to create markets where buyers become responsive to short-term electricity prices. Such markets push high wholesale prices directly to users, which encourages them to curtail their usage until prices fall. Many current market structures do not provide for this as end users often pay average utility prices that are fixed for months or longer. If wholesale prices spike to the equivalent of $5/kWh ($5,000/MWh), end users in a traditional market have little incentive to care — they will likely continue to run their air conditioners at full tilt because they are paying the utility average price of $.10/kWh. 

The key to facilitating demand response to price is to create an infrastructure that gives customers the appropriate tools. This requires meters with hourly data that can be accessed by customers in real time, some means of communicating hourly prices to customers, and a wholesale market structure that allows loads to bid into markets in the same way that generation does. Putting retail marketers in the role of serving customers can also help. Retail marketers do not have the regulatory protections that utilities have and thus must choose between taking the risk of absorbing high prices and losing profits or creating products that push wholesale price signals through to end-use consumers. Either way, there is motivation for buyers to moderate demand when prices get too high.  

In the future, transactive energy markets may evolve where end-use consumers have various price-responsive appliances tied directly into electricity markets, and these appliances will automatically adjust usage in response to price signals. A simple example is an electric vehicle (EV) charger. Unless the car owner has pushed an override button stating she wants to charge at any price, the charger is programmed to stop charging the car whenever prices go above a specified level. Such an arrangement would provide direct demand-side competition since electric generators are, in essence, competitive with the economic demand response of the charger.