Electricity Primer - The Basics of Power and Competitive Markets
What Is a Wholesale Electricity Market?
In many cases, electricity is generated by a power company that ultimately will not deliver it to the end-use customer. A single megawatt (MW - the most common unit of electricity used in discussions - is generally enough power to light 750 to 1,000 homes), like any other commodity, is frequently bought and re-sold a number of times before finally being consumed. These transactions are considered "sales for re-sale," and make-up the wholesale electricity market.
The wholesale market is open to anyone who, after securing the necessary approvals, can generate power, connect to the grid and find a counterparty willing to buy their output. These include competitive suppliers and marketers that are affiliated with utilities, independent power producers (IPPs) not affiliated with a utility, as well as some excess generation sold by traditional vertically integrated utilities. All these market participants compete with each other on the wholesale market.
To be a participant in the wholesale market, however, one does not need to either own any generation or serve any end-use customers. Just as with many other commodities - pork bellies, oil or stocks - individual traders (or power marketers) exist who buy power on the open market and re-sell it.
Trades in the wholesale market are understood to be occurring within a multi-state interconnection, and thus are interstate sales. Due to the interstate nature of the sales, the wholesale market is regulated across the country - except in ERCOT - by the Federal Energy Regulatory Commission (FERC). ERCOT functions as an exception due to the fact - as described above - that the entire interconnection lies in a single state, Texas.
Within regional wholesale markets, however, there exists a split structure. A number of regions - including the Northeast, Mid-Atlantic, much of the Midwest, ERCOT and California - organize their markets under an independent system operator (ISO) - sometimes also referred to as a regional transmission organization (RTO). Most states in these regions also allow for retail competition (further discussed below). By adopting this ISO/RTO structure, these regions have moved to expand competition in electricity. In fact, two-thirds of the electricity consumed in the U.S. is by consumers in an ISO/RTO.1
Other regions - including the Southeast, Southwest, Inter-Mountain West and Northwest - chose to retain the traditional regulatory model. Under this regime, vertically-integrated utilities retain functional control over the transmission system and therefore choose what generator is dispatched when. Such a model, however, has led to preferential treatment by these utilities for their own generation rather than more affordable and environmentally responsible generation available from competitive suppliers and marketers.
1 "The Value of Independent Regional Grid Operators," The ISO/RTO Council, November 2005.