Molly Robertson: Wholesale electricity markets look different across the country and around the world. The United States has a mix of what we call unregulated electricity markets and vertically integrated electricity suppliers.
Before the 1990s, almost all electricity users were served by vertically integrated monopolies that owned the generation, transmission, and distribution systems that delivered electricity from power plants to homes. This structure meant that wholesale markets played a very limited role in determining which generators provided the energy. In these monopolies, utilities were strictly regulated, and prices were set by regulatory bodies so that utilities could cover their costs, thus limiting the ability of utilities to charge monopoly prices.
During the 1990s, there was a wave of restructuring, which took advantage of the fact that the generation component of the electricity system could be part of a competitive market. Several regions in the United States have established competitive markets for electric power; These markets allow generators to bid at auction, and the lowest cost generators are selected by an independent system operator to provide power. This system of competitive markets is common today, although vertically integrated facilities still operate in some regions.
Karen Palmer: Markets operated by independent system operators are designed to provide an incentive for generators to bid in a competitive energy market at a marginal cost of producing electricity. At this price, the generator does not care whether to operate and get the price, or not to operate and save fuel and other operating costs.
Generators are selected for commissioning starting from the lowest bid price. When the auction price reaches a value that ensures equal supply and demand for electricity; The market is “clear”. For electricity markets, generator companies make money when the clearing price is higher than their marginal cost. This cash windfall goes toward paying the fixed costs incurred by the generators and, hopefully, contributes to profits.
