Electric market structure

An electric market structure describes the way that various market participants interact to produce and deliver electricity to the ultimate consumer. Market structures often differ among geographical regions. In the U.S., market structures can vary by state, while in Europe market structures vary by country. To understand electric market structures, one must first understand the roles of various sectors: generation, wholesale markets, system operations, transmission, distribution, and retail supply. 

Generation is the sector in which power is created, usually by large centralized power plants but also by smaller decentralized plants located at or near customer facilities. Generation can be owned by vertically integrated utilities, power authorities, independent power producers (also called merchant generators or gencos) or by end users. And, in some cases, aggregated economic demand response can also participate in markets as a source of “generation.” Storage is also evolving into a substitute for generation in certain instances.

Wholesale markets are where power is bought and sold between generators and entities that resell power to end users or simply between traders that buy and sell power among other wholesale participants. Typical buyers or sellers include generators, marketers, and utilities. These markets can depend on bilateral contracts (private contracts between two parties) or can depend on organized markets, which are run by a central authority such as a Power Exchange (PX), an Independent System Operator (ISO), or a mix of both.

System operations is the sector in which supply and demand are balanced and system reliability is maintained. This occurs through provision of ancillary services such as frequency regulation, reserves, voltage support, and black start as well as real-time balancing of supply and demand. System operations may be provided by a vertically integrated utility, a power authority, a transmission owner, or an ISO.

Transmission is the high-voltage network that moves power long distances from generators to distribution systems. Transmission may be owned by vertically integrated utilities, power authorities or stand-alone transmission companies (transcos). The transmission owner, also called a TO, may provide transmission services directly or services may be provided by the ISO with payment going back to the TO from the ISO.

Distribution is the low-voltage network that moves power from the transmission system to the consumer. Distribution services may be provided by a vertically integrated utility or by a stand-alone utility distribution company (UDC).

Retail supply is the provision of electricity supply to an end-use customer. In many cases retail supply is provided by the distribution company as a service bundled into distribution services. In other cases, end-use customers have the option of buying supply directly from a non-utility retail marketer.

Example of a market structure with an ISO and full retail access for all end-use customers:

So how do you parse out the market structure in a specific area? Simply answer the following questions and you will be able to map out the market structure:

  • Which entities own generation and to whom are they allowed to sell it?
  • Are there centralized markets run by a PX or an ISO, is all wholesale power traded in bilateral markets, or is there a mix of both?
  • If there are centralized markets, which services trade in these markets?
  • Who is responsible for system operations?
  • Which entities own transmission and do they provide services directly to the market? Or are transmission services provided via an ISO?
  • Which entity owns the distribution system?
  • Are any end-use customers allowed to buy supply from non-utility retail marketers or is supply bundled with distribution services?
  • If some end-use customers are allowed to shop for supply from non-utility retail marketers, which customers have that option and do they also have the option of buying bundled services from the distribution company?