For most regions within the United States, the operation of and transactions in the wholesale market are regulated by the Federal Energy Regulatory Commission.
The wholesale market begins with generators, which, after securing the necessary approval, connect to the grid and generate electricity. The electricity produced by generators is bought by an entity that will often, in turn, resell that power to meet end-user demand. These resale entities will generally buy electricity through markets or through contracts between individual buyers or sellers. In some cases, utilities may own generation and sell directly to end-use customers. In this primer, we will explore how energy markets work, the importance of competition in the energy markets, and how that affects the options that corporations have when buying renewable energy.
After inventing the lightbulb in , Thomas Edison opened the United States' first electrical power plant in lower Manhattan. The coal-fired Pearl Street Station was only 50 by ft and served less than customers including J. Morgan, himself. Because there was no existing infrastructure for the delivery of electricity, in order to deliver the power from Pearl Street, it was incumbent on Edison to build, own, and operate the first electrical distribution systems, as well.
This "vertically-integrated" model of electricity distribution, where a single company owns the power plants, transmission lines, distribution lines, and delivers electricity directly to the end customer, served as the model for most electric utility companies that followed. In fact, Edison's utility, the Edison Illuminating Company, is still around today as Consolidated Edison Con Ed , one of the biggest power suppliers in the country. Though small, the Pearl Street Station marked a tremendous achievement for the burgeoning electricity market and sparked fierce competition between wealthy investors to dominate it.
Within two years of its opening, dozens of new utilities had emerged across the country mimicking the Pearl Street business model. But as Manhattan became blanketed with thousands of power lines, serious safety and reliability concerns came to the fore.
To put it into perspective, imagine a city block where two neighbors bought electricity from two different utility companies, Utility A and B. Each customer would then have entirely different transmission lines and power plants delivering power to them. So, when the power plants of Utility A stopped working, all of its customers would lose power, while all of Utility B's customers still had their lights on. Of course, the first power plants and transmission lines didn't always work how they were supposed to Pearl Street caught on fire within the first two years of operation , so blackouts--and upset customers--were very common.
To address this issue, savvy businessmen lobbied the local and state governments to allow for the consolidation of monopolies. They successfully argued that publicly-regulated monopolies could keep prices lower and make the grid more reliable and safe. Thus, competition was eliminated and single utility companies were given the power to own and operate all transmission within a given geographic region. There are many companies in the electricity generation sector, from large multinationals to small, family-owned businesses running a single site.
There are two types of electricity network: transmission and distribution. Transmission networks carry electricity long distances around the country at high voltages. Distribution networks run at lower voltages and take electricity from the transmission system into homes and businesses.
The transmission system is run by National Grid, which is responsible for balancing the system and making sure that the supply of electricity meets the demand on a second-by-second basis. Similar infrastructure exists for the transmission and distribution of gas. Competition not only creates the need for electrical providers to be cheaper than the next, it also applies pressure for providers to be more innovative than the next.
Markets improve access for new entrants and technologies and grid operators and investors must respond nimbly to changes in fuel prices or demand shifts. Competitive power suppliers have followed market signals to improve operations and efficiency, as well as to retire older, no longer economic power generation technology to invest in newer, more cost-effective, efficient and cleaner approaches.
Competition encourages power providers to be more efficient to meet needs at the lowest cost. This helps reduce emissions from power generation operations. The drive to choose low-cost resources also encouraged many power generators to retire coal plants when natural gas—which emits far less carbon dioxide—became far more affordable than coal. In the PJM Interconnection footprint, which is served by the largest competitive power market in the U.
As renewable resources become increasingly cost competitive, these resources have also been displacing higher emitting resources; a trend that competitive markets can help to accelerate. Competition among providers creates a focus on consumer needs, rather than utility revenues. This matters for consumers, the economy, and the industry as a whole, because competition is what drives us forward.
Our energy landscape is swiftly changing. But the lessons of the competitive market experiment are clear. Skip to primary navigation Skip to main content Skip to primary sidebar Skip to footer.
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