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In different deregulation processes the institutions and market designs were often very different but many of the underlying concepts were the same. These are: separate the contestable functions of Generation and Retail from the Natural Monopoly functions of Transmission and Distribution ; and establish a wholesale electricity market and a '''retail electricity market'''. The role of the wholesale market being to allow trading between generators, retailers and other financial intermediaries both for short-term delivery of electricity (see Spot Price ) and for future delivery periods (see Forward Price ). WHOLESALE ELECTRICITY MARKET A wholesale electricity market exists when competing Generators offer their electricity output to Retailers . Electricity is by its nature difficult to store and has to be available on demand. Consequently, unlike for other products, it is not possible, under normal operating conditions, to keep it in stock, ration it or have customers queue for it. Demand and supply vary continuously. There is therefore a physical requirement for a controlling agency, the Power System Operator , to coordinate the dispatch of generating units to meet the expected demand of the system across the Transmission Grid . If there is a mismatch between supply and demand the generators speed up or slow down causing the system Frequency (either 50 or 60 Hertz ) to increase or decrease. If the frequency falls outside a predetermined range the system operator will act to add or remove either generation or load. In addition, the laws of Physics determine how electricity flows through an electricity Network . Hence the extent of electricity lost in transmission and the level of congestion on any particular branch of the network will influence the Economic Dispatch of the generation units. For an economically efficient electricity wholesale market to flourish it is essential that a number of criteria are met. Professor William Hogan of have developed other criteria. Professor Hogan's model has largely been adopted in New Zealand and supported by the US Federal Energy Regulatory Commission in its proposed Standard Market Design . Bid-based, security-constrained, economic dispatch with nodal prices The theoretical price of electricity at each node on the network is an aggregation of the Marginal electricity generator's offer price and the Marginal Cost of losses and Congestion on the network. This is known as ''locational marginal pricing'' (LMP) or ''nodal pricing'' and is used in some deregulated markets, most notably in the PJM market in the USA and in New Zealand. However, many established markets do not employ nodal pricing, examples being the UK and Nord Pool (Scandinavia and Finland). Since the introduction of the market, New Zealand has experienced shortages in 2001 and 2003, high prices all through 2005 and even higher prices and the risk of a severe shortage in 2006 (as of April 2006). These problems arose because the market designers failed to recognise that NZ is at risk from droughts and that, by its very nature, the market is a disincentive to holding adequate reserve capacity. The cost to the economy has been very much higher than the cost of carrying adequate reserve capacity. A "single buyer" market would have avoided these problems. In LMP markets, where congestion exists on a transmission network, there is a need for load to be shed or more expensive generation to be dispatched on the downstream side of the Constraint . Prices on either side of the constraint separate giving rise to Congestion Pricing and Constraint Rentals . A constraint can be caused when a particular branch of a network reaches its thermal limit or when a potential overload will occur due to a contingent event on another part of the network. The latter is referred to as a ''security constraint''. In essence, transmission systems are operated to allow for continuity of supply even if a contingent event, like the loss of a line, generator or transformer, were to occur. This is known as a ''security constrained system''. The marginal generator is determined by matching offers from generators to bids from retailers at each node to develop a classic Supply and Demand equilibrium price. This process is carried out for each 5-minute, half-hour or hour (depending on the market) interval at each input and exit node on the Transmission Grid . The prices take into account the losses and constraints in the system and generators are dispatched by the system operator, not only in ascending order of offers (or descending order of bids), but in accordance with the required security of the system. This results in a spot market with "bid-based, security-constrained, economic dispatch with nodal prices". Risk management Financial risk management is often a high priority for participants in deregulated electricity markets due to the substantial price and volume risks that the markets can exhibit. A consequence of the complexity of a wholesale electricity market can be extremely high price volatility at times of peak demand and supply shortages. The particular characteristics of this price risk are highly dependent on the physical fundamentals of the market such as the mix of types of generation plant and relationship between demand and weather patterns. Price risk can be manifest by price "spikes" which are hard to predict and price "steps" when the underlying fuel or plant position changes for long periods. "Volume risk" is often used to denote the phenomenon whereby electricity market participants have uncertain volumes or quantities of consumption or production. For example, a retailer is unable to accurately predict consumer demand for any particular hour more than a few days into the future and a producer is unable to predict the precise time that they will have plant outage or shortages of fuel. A compounding factor is also the common correlation between extreme price and volume events. For example, price spikes frequently occur when some producers have plant outages or when some consumers are in a period of peak consumption. Electricity retailers, who in aggregate buy from the wholesale market, and generators who in aggregate sell to the wholesale market, are exposed the these price and volume effects and to protect themselves from volatility, they will enter into " Hedge contracts" with each other. The structure of these contracts varies by regional market due to different conventions and market structures. However, the two simplest and most common forms are simple fixed price forward contracts for physical delivery and Contracts For Differences where the parties agree a Strike Price for defined time periods. In the case of a contract for difference, if a resulting wholesale price index (as referenced in the contract) in any time period is higher than the "strike" price, the generator will refund the difference between the "strike" price and the actual price for that period. Similarly a retailer will refund the difference to the generator when the actual price is less than the "strike price". The actual price index is sometimes referred to as the "spot" or "pool" price, depending on the market. Many other Hedging arrangements, such as swing contracts, Financial Transmission Rights , Call Option s and Put Option s are traded in sophisticated electricity markets. In general they are designed to transfer financial risks between participants. 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'. 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. 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: : Meter Reading :Meter rental : 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 a retailer, Independent Energy, with a large customer base went bust when it could not collect the money due from customers. ELECTRICITY MARKET EXPERIENCE In the main, experience in the introduction of wholesale and retail competition has been mixed. Many regional markets have achieved some success and the ongoing trend continues to be towards deregulation and introduction of competition. However in 2000/2001 major failures such as the California Electricity Crisis and the Enron debacle (see Timeline Of The Enron Scandal ) caused a slow down in the pace of change and in some regions an increase in market regulation and reduction in competition. However, this trend is widely regarded as a temporary one against the longer term one towards more open and competitive markets. Among the countries in the world that have developed successful wholesale electricity markets are:
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