All About the Present Condition of the Electricity Market

All About Present Condition of the Electricity Market in Nepal and the world: – Economically, electricity is a commodity that can be bought and sold. An electricity market is a system that allows purchases through purchase offers. Sale through sales offers; and short-term trade, usually in the form of financial swaps or bonds.


Offers and offers use the principles of supply and demand to establish the price. Long-term transactions are contracts similar to energy purchase agreements and are generally considered private bilateral transactions between counterparties.

Wholesale transactions (Bids and offers) with electricity are generally handled by the market operator or a separate special purpose vehicle dedicated exclusively to this function. Market operators do not compensate, but often require knowledge of the industry to maintain the balance of production and load.

The goods within an electricity market generally consist of two types: electricity and energy. Power is the net electrical transfer rate measured at a given time and measured in megawatts (MW).

Energy is the electricity that flows through a measurement point over a period of time and is measured in megawatt-hours (MWh). Commodity markets related to energy exchange the performance of the net generation during a series of intervals, generally in increments of 5, 15, and 60 minutes.

The markets for energy-related goods required and managed by (and paid) by market operators are considered auxiliary services and include names such as revolving reserve, non-revolving reserve, reserve, reaction reserve, ascending regulation, descending regulation and installed capacity,

In addition, for most major operators, there are markets for traffic jams and energy derivatives, such as energy futures and options that are actively traded. These markets developed as a result of the global restructuring of energy systems. This process often continued in parallel with the restructuring of natural gas markets.

History of Electric Market

An early introduction to the concepts of the energy market and the privatization of energy systems took place in Chile in the early 1980s in parallel with other market-oriented reforms that involved the Chicago Boys.

The Chilean model was generally considered successful when it came to making electricity prices rational and transparent. Argentina has improved the Chilean model by imposing strict limits on market concentration and improving the structure of payments to the units reserved to guarantee the reliability of the system.

One of the main objectives of the introduction of market concepts in Argentina was the privatization of existing production facilities (which had been left in poor condition under the state monopoly, which led to frequent business interruptions) and the extraction of necessary capital for the rehabilitation of these assets and investments.

The World Bank, with limited success, introduced a large number of hybrid markets in other Latin American countries such as Peru, Brazil and Colombia during the 1990s.

electricity market Nepal


A quantum leap in the theory of electricity prices occurred in 1988 when four professors from MIT and Boston University (Fred C. Schweppe, Michael Caramanis, Richard D. Tabors, and Roger E. Bohn) published the book Spot Pricing of Electricity.

The idea was presented that prices at each site of a transmission network should reflect the marginal cost of supplying an additional demand unit at that location, and then it was proposed to quantify these prices by solving a problem of the entire system of minimizing costs and minimize all operating costs.

System limitations, such as generator capacity limits, location loads, line flow limits, etc., were met through the use of linear programming software, and the price limits of the Site resulted in secondary prices to ease the load limit at each site.

A key event for the electricity markets occurred in 1990 when the British government under Margaret Thatcher privatized the British energy industry.

The process followed by the British was used as a model (or at least a catalyst) for the restructuring of several other Commonwealth countries, in particular the National Electricity Markets in Australia and New Zealand and the Alberta Electricity Market in Canada.

In the United States, the traditional vertically integrated electric service model with a transmission system for its own customers has proven itself for decades.

As dependence on a reliable power source increased and energy was transported over increasing distances, synchronous area network connections were developed. Transactions were relatively rare and were generally planned well in advance.

However, in the last decade of the twentieth century, some political and scientific leaders of the United States. UU. They claimed that the electricity industry would eventually be deregulated, and independent network operators (ISO) and regional broadcasting organizations (RTOs) were formed.

They are designed to handle the large increase in transactions in a competitive environment. About a dozen states have decided to suspend the regulation, but some have withdrawn after the California electricity crises of 2000 and 2001.

In various deregulation processes, institutions and market designs have often varied widely, but many of the underlying concepts have been the same.

These are: separation of the potentially competitive functions of production and retail sale of the functions of natural monopoly of transmission and distribution; and establish a wholesale electricity market and a retail electricity market.

The wholesale market has the task of facilitating trade between electricity producers, retailers, and other financial intermediaries both for short-term electricity delivery and for future delivery times.

Some states are freeing investors who are not investors from some aspects of deregulation, such as B. the choice of the supplier by the customer. For example, some New England states are freeing municipal lighting systems from various aspects of deregulation, and these municipal public services do not have to allow customers to buy from competitive suppliers.

Public utility companies in these states can also choose to act as vertically integrated public services and operate generating facilities both inside and outside their coverage area to supply their supply customers and sell products to the market.

By nature, electricity is difficult to store and should be available when necessary. Consequently, unlike other products under normal operating conditions, it is not possible to store, ration, or queue customers. In addition, supply and demand vary continuously.

Therefore, there is a physical requirement for a control body, the operator of the transmission system, to coordinate the dispatch of the generating units to meet the expected demand of the system on the transmission system. If there is a gap between supply and demand, the generators accelerate or decrease, increasing or decreasing the frequency of the system (50 or 60 hertz).

If the frequency is outside a predetermined range, the system operator will add or remove the generation or load. The proportion of electricity lost during transmission and the degree of congestion in a particular branch of the network affect the economic dispatch of the generating units.

Electricity wholesaler

Then, retailers reevaluate electricity and put it on the market. While wholesale prices used to be reserved exclusively for large retailers, markets such as New England are increasingly opening up to consumers.

Large end-users, who want to reduce their energy costs unnecessarily, are beginning to see the benefits of such a purchase. Consumers who buy electricity directly from generators are a relatively recent phenomenon.

The purchase of electricity in bulk is not without problems (market uncertainty, member costs, establishment fees, collateral investment, and organization costs, since electricity, would have to be purchased daily). More benefits and incentives to change.

For an economically efficient wholesale electricity market to thrive, a series of criteria must be met, namely the existence of a spot market coordinated with “economic dispatch based on offers, with security restrictions and node prices.” These criteria have been widely adopted in the United States, Australia, New Zealand, and Singapore.

The price of the system in the daily market is determined in principle by comparing the offers of the generators with the offers of the consumers in each node to develop a classic supply and demand equilibrium price, usually at intervals of one hour, and is calculated by separate for sub-regions. The system operator’s load flow model shows that restrictions prevent the importation of transfers.

The theoretical prices of electricity in each node of the network are a calculated “shadow price”, assuming that an additional kilowatt-hour is requested in the node in question, and the hypothetical additional cost for the system that would result from it.

The units determine the hypothetical production cost of the hypothetical kilowatt-hour. This is known as marginal location prices (“LMP”) or “nodal prices” and is used in some deregulated markets, particularly in the Operator markets of independent systems of the medium-continent, PJM interconnection, ERCOT, New York and New England in the USA UU., New Zealand, and in Singapore.

In practice, the LMP algorithm described above is implemented, which includes a lower cost security limited shipping calculation (see below) based on the generators that submitted quotes in the daily market and demand Offers are based on suppliers of early loading Supply entities that empty supplies at the node in question.

While the concepts of LMP are theoretically useful and obviously not subject to manipulation, in practice, system operators have considerable discretion in terms of LMP results, since they can classify units as out of merit shipments, which by therefore LMP are excluded are the calculation.

In most systems, the units that are provided to provide reactive power to support transmission networks are considered “nonfunctional” (although they are generally the same units found in confined areas and that would otherwise result in signals from shortage). , System operators generally also take online units to keep them spinning reserves to protect themselves from sudden failures or unexpectedly fast demand bulbs and declare them “unprofitable.”

The result is often a significant reduction in the compensation price at a time when increased demand would lead to rising prices.

Researchers have discovered that a variety of factors, including energy price limits, are well below the assumed value of energy shortages, the impact of off-merit shipments and the use of techniques such as voltage reduction during periods of shortage without the corresponding signs of price shortages, etc. Lead to a problem with “lost money.”

The result is that the prices paid to suppliers in the “market” are well below the levels required to stimulate a new entry. Therefore, the markets have been useful in making the operation and delivery of the short-term system more efficient but failed in what was announced as the main benefit: incentives for appropriate new investments where necessary, when necessary.

In LMP markets, where there are restrictions on a transmission network, a more expensive generation must be distributed on the downstream side of the restriction. Prices on both sides of the restriction are separated, resulting in congestion prices and rental restrictions.

A limitation can be caused when a particular branch of a network reaches its thermal limit, or when a potential overload occurs due to a possible event (for example, a generator or transformer failure or power failure) in another part of the network. The latter is called a security condition.

The transmission systems are operated in such a way that the supply is continued even if an event occurs such as the failure of a line. This is known as a restricted security system. Real-time market prices are determined by the LMP algorithm described above, balancing the supply of available units.

This process is performed for each interval of 5 minutes, half an hour or one hour (depending on the market) on each node of the transmission network. The hypothetical calculation of dispatch that determines the LMP must comply with security restrictions, and the calculation of dispatch must leave enough latitude to maintain system stability in the event of an unplanned outage in any part of the system.

This leads to a spot market with “economic shipping based on offers, with restricted security and with node prices”.

Since its launch in New Zealand in 2001 and 2003, there have been bottlenecks, high prices during 2005, and even higher prices, as well as the risk of serious shortages in 2006 (as of April 2006). These problems arose because New Zealand is threatened by drought due to its high proportion of hydropower.

Risk management in the Electricity Market

Financial risk management is often a high priority for participants in deregulated energy markets due to the significant price and volume risks that markets can face.

The specific characteristics of this price risk depend largely on the physical fundamentals of the market, such as the combination of types of production facilities and the relationship between demand and weather patterns. Price risk can manifest itself in price peaks and price steps that are difficult to predict if the underlying fuel or asset position changes over a longer period of time.

Volume risk is often used to refer to the phenomenon that participants in the electricity market have uncertain amounts or quantities of consumption or production.

For example, a retailer may be unable to accurately predict consumer demand for a given time for more than a few days in the future, and a manufacturer cannot predict the exact time at which it will have a system failure or shortage of fuel.

A compound factor is also a frequent correlation between extreme price and volume events. For example, price spikes often occur when some producers have plant interruptions or when some consumers have maximum demand. The introduction of large volumes of intermittent sources of electricity, such as wind power, may affect market prices.

Electricity retailers who buy entirely in the wholesale market and generators that sell in the wholesale market are exposed to these effects of price and volume. To protect themselves from volatility, they will enter into “guarantee agreements” between them.

The structure of these contracts varies according to the regional market due to the different conventions and market structures. However, the two simplest and most common forms are simple fixed price futures contracts for physical deliveries and contracts for differences where the parties agree on an exercise price for a fixed period of time.

In the case of a contract for difference, the generator will reimburse the difference between the exercise price and the actual price if the resulting wholesale price index (as specified in the contract) during a given period is greater than the exercise price for that period. Similarly, a retailer will refund the difference to the generator if the actual price is below the “base price.” The real price index is sometimes called the “spot” or “pool” price, depending on the market.

Many other coverage agreements, such as swing contracts, virtual purchase offers, financial transfer rights, purchase options, and sales options, are negotiated in complex electricity markets. In general, they must transfer financial risks among participants.

Electricity retail market

There is a retail electricity market when end users can choose their suppliers from competing electricity retailers. A term used in the United States for this type of consumer decision is “energy decision.”

A separate issue for electricity markets is whether consumers are exposed to real-time prices (prices based on the variable wholesale price) or prices set in other ways, such as: For example, average annual costs.

In many markets, consumers do not pay based on real-time prices and, therefore, do not have incentives to reduce demand in times of (wholesale) prices or to change their demand to other periods.

Demand Response can use pricing mechanisms or technical solutions to reduce peak demand. In general, the retail electricity reform is derived from the wholesale electricity reform. However, it is possible to have only one electric company and continue to have competition in the retail sector.

If a wholesale price can be determined on a node in the transmission network and the amounts of electricity on that node can be matched, it is possible for private customers to compete within the distribution system outside the node. For example, in the German market, large vertically integrated service companies compete for customers in a more or less open network.

Although the market structures are different, there are some common functions that an electricity merchant needs to be able to or hire to compete. Failure or incompetence in carrying out one or more of the following measures has led to dramatic financial catastrophes:

  1. Billing
  2. Credit Control
  3. Customer management through an efficient call center.
  4. Distribution contract to use the system.
  5. reconciliation agreement
  6. Purchase contract “Pool” or “Spot Market”
  7. Coverage contracts: difference contracts to control spot price risk

The two main weaknesses were risk management and billing. In the United States, the faulty California regulation of retail competition in 2001 led to the energy crisis in California, leaving established retailers subject to high cash prices without being able to protect against them.

In the United Kingdom, a retailer, Independent Energy, went bankrupt with a large customer base when it was unable to collect money owed by customers.

Competitive retailing needs open access to distribution and transmission lines. This in turn requires the pricing of these two services. They must also provide the owners of the cables with adequate returns and promote the efficient location of the power plants.

There are two types of rates, the access rate, and the regular rate. The access fee covers the costs of existence and access to the available cable network or the right to use the existing transmission and distribution network. The regular rate reflects the marginal cost of transmitting electricity through the existing cable network.

There is a new technology available that has been tested by the US Department of Energy. UU. And that may be more suitable for real-time market prices. Potential event-driven use of SOA could be a virtual energy market where dryers can offer in real-time the price of the electricity, they consume in a market price system.

The real-time market price and the control system could make electricity customers actively participate in the management of the electricity grid and their monthly electricity bills. For example, customers can set the amount of electricity they pay to operate a dryer, and electricity providers willing to pay for electricity at that price receive an alert through the grid and can sell electricity to the dryer.

On the one hand, consumer devices can bid for electricity based on the amount that the device owner was willing to pay, previously set by the consumer. On the other hand, suppliers can automatically submit offers for their generators, depending on how much it would cost to order and operate the generators.

In addition, electricity providers could perform a real-time market analysis to determine ROI to optimize profitability or reduce asset costs for the end-user. The effects of a competitive electricity retail market vary from country to country, but prices appear to fall in high-participation countries and increase prices in low-participation countries.

SOA event-based software could allow owners to adapt many different types of appliances located in their homes to the desired level of comfort or economy. Event-based software could also automatically respond to changes in electricity prices every five minutes.

For example, to reduce the owner’s energy consumption during peak periods (when electricity is more expensive), the software can automatically reduce the setpoint temperature of the central heating thermostat (in winter) or increase the setpoint temperature of the thermostat in the central cooling system (in summer).

Experience in the electricity market

The experience of launching wholesale and retail competition was essentially inconsistent. Many regional markets have achieved some success, and the continuing trend continues to deregulate and introduce competition.

However, in 2000-2001, major failures such as the California electricity crisis and the Enron debacle lowered the exchange rate and, in some regions, increased market regulation and reduced competition. However, this trend is generally seen as a long-term temporary trend towards more open and competitive markets.

Despite the favorable light in which market solutions are conceptually considered, the problem of “lost money” has so far proved irresolvable. If electricity prices moved to the level required to stimulate the transmission and generation of electricity by new traders (that is, in the market), the cost to consumers would be politically difficult.

The increase in annual costs for the consumer in New England alone was estimated at the US $ 3 billion during the recent FERC hearings on the NEPOOL market structure.

Several mechanisms have been proposed for NEPOOL, PJM, and NYPOOL to encourage new investments where they are most needed by offering higher capacity payments (but only in areas where production is expected to below).

They are included in the general heading “location capability” or LICAP (the PJM version is known as the “Reliability pricing model” or “RPM”). There is considerable doubt about whether one of these mechanisms will really lead to new investments given the regulatory risk and chronic instability of market rules in US systems. UU. increase and costs for consumers in restricted areas.

Bilateral Market

Bilateral trade or trade compensation is a trade between two states only, in particular bartering, which is based on bilateral trade between governments and does not use a strong currency for payment. Bilateral trade agreements often aim to minimize trade deficits by maintaining a compensation account in which a deficit accumulates.

The Soviet Union conducted bilateral trade relations with two nations, India and Finland. On the Soviet side, trade was nationalized, but on the other hand, private capitalists also traded. Of particular importance for such entrepreneurs were relations with foreign policy politicians.

The framework limited the goods sold to goods produced in the country and, as such, constituted a subsidy to the national industry. The Soviet side was motivated to participate in the compensation trade, as the agreement provided essentially cheap credit.

The option was to sell obligations in the international market and pay interest in currencies. Capital, such as icebreakers, railroad cars, or consumer goods, could come from Finland, and the costs would simply lead to a deficit in the account balance and eventually be reimbursed.

Crude oil or as orders as nuclear power plants.  Compensation was the most active until the 1970s but gradually lost momentum in the 1980s. In recent years, the indebtedness of the Soviet Union began alarmingly to the agreement.

Writer: Er. Shishir Acharya