Electricity Market - Retail Electricity Market

A retail electricity market exists when end-use customers can choose their supplier from competing electricity retailers; one term used in the United States for this type of consumer choice is 'energy choice'. A separate issue for electricity markets is whether or not consumers face real-time pricing (prices based on the variable wholesale price) or a price that is set in some other way, such as average annual costs. In many markets, consumers do not pay based on the real-time price, and hence have no incentive to reduce demand at times of high (wholesale) prices or to shift their demand to other periods. Demand response may use pricing mechanisms or technical solutions to reduce peak demand.

Generally, electricity retail reform follows from electricity wholesale reform. However, it is possible to have a single electricity generation company and still have retail competition. If a wholesale price can be established at a node on the transmission grid and the electricity quantities at that node can be reconciled, competition for retail customers within the distribution system beyond the node is possible. In the German market, for example, large, vertically integrated utilities compete with one another for customers on a more or less open grid.

Although market structures vary, there are some common functions that an electricity retailer has to be able to perform, or enter into a contract for, in order to compete effectively. Failure or incompetence in the execution of one or more of the following has led to some dramatic financial disasters:

• Billing
• Credit control
• Customer management via an efficient call centre
• Distribution use-of-system contract
• Reconciliation agreement
• "Pool" or "spot market" purchase agreement
• Hedge contracts - contracts for differences to manage "spot price" risk

The two main areas of weakness have been risk management and billing. In the USA in 2001, California's flawed regulation of retail competition led to the California electricity crisis and left incumbent retailers subject to high spot prices but without the ability to hedge against these (see Manifesto on The Californian Electricity Crisis). In the UK a retailer, Independent Energy, with a large customer base went bust when it could not collect the money due from customers.

Competitive retail needs open access to distribution and transmission wires. This in turn requires that prices must be set for both these services. They must also provide appropriate returns to the owners of the wires and encourage efficient location of power plants. Independent companies should provide distribution and transmission services. This solves the cherry-picking problem which is a major concern of distribution utilities selling retail services and the ability to institute cross-subsidies, also a major concern of pure retail companies schemes use two transportation prices. There are two types of fees, the access fee and the regular fee. The access fee covers the cost of having and accessing the network of wires available, or the right to use the existing transmission and distribution network. The regular fee reflects the marginal cost of transferring electricity through the existing network of wires.

New technology is available and has been piloted by the US Department of Energy that may be better suited to real-time market pricing. A potential use of event-driven SOA could be a virtual electricity market where home clothes dryers can bid on the price of the electricity they use in a real-time market pricing system. The real-time market price and control system could turn home electricity customers into active participants in managing the power grid and their monthly utility bills. Customers can set limits on how much they would pay for electricity to run a clothes dryer, for example, and electricity providers willing to transmit power at that price would be alerted over the grid and could sell the electricity to the dryer.

On one side, consumer devices can bid for power based on how much the owner of the device were willing to pay, set ahead of time by the consumer. On the other side, suppliers can enter bids automatically from their electricity generators, based on how much it would cost to start up and run the generators. Further, the electricity suppliers could perform real-time market analysis to determine return-on-investment for optimizing profitability or reducing end-user cost of goods. The effects of a competitive retail electricity market are mixed across states, but generally appear to lower prices in states with high participation and raise prices in states that have little customer participation.

Event-driven SOA software could allow homeowners to customize many different types of electricity devices found within their home to a desired level of comfort or economy. The event-driven software could also automatically respond to changing electricity prices, in as little as five-minute intervals. For example, to reduce the home owner's electricity usage in peak periods (when electricity is most expensive), the software could automatically lower the target temperature of the thermostat on the central heating system (in winter) or raise the target temperature of the thermostat on the central cooling system (in summer).