The Electricity Market – 2-Minute Briefing

New entrants to the power generation market are at a significant advantage compared to the established companies utilizing existing plants. With an ever-changing regulatory landscape it has become harder to see the forest through the trees when it comes to issues such as compliance and conformance to new legislation. One of the often heard complaints is that the regulators and other supervisory agencies don’t provide implementation guidelines, rather, they set the standards. Whilst this has its advantages in terms of flexibility and adaptability, it is a costly endeavour for the parties involved.
With so much going on in the regulatory sphere for the generators, it’s striking to see that the TSOs and DSOs are not keeping up and this has become a weak point in the deregulation process.
Experience in the electricity market to date has shown that there is a general tendency for integration between generation companies and supply companies in order to avoid exposure to risk. It therefore seems likely that, without regulatory intervention, the market structure in generation will be reflected into the structure of retail supply. This may in turn affect the performance of the market since companies will be able to keep prices higher than otherwise without fear of losing their share of the market.
Liquid wholesale markets are an important component of competition in the electricity market because they offer the possibility for companies to purchase or sell electricity on reasonable terms in the event that their generation and supply portfolios do not match. Establishing a liquid market is much easier if there are a sufficient number of competitors. For those member states with companies in very dominant positions, the 2006 report recommended that their bidding behaviour into the market be carefully monitored and regulated.
Ideally, spot markets should have enough liquidity to give a reliable and transparent price signal. Meanwhile, trading in over the counter (OTC) markets normally needs to be several times the volume of actual consumption in order for participants to trade without risking that particular individual transactions cause a shift in the market. The normal benchmark from other commodity markets is that the volume of trade should be roughly 10 times the amount of physical delivery. Only a few markets, such as those of the UK and Nordic markets, are approaching this level.

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