The challenge of electricity markets' competition
By Mohammad Javad Salimian

We live in a sea of marketing. Most of us fail to realize the extent to which our daily lives are influenced by both marketing we do and the marketing that is done to us and nevertheless, marketing is certain to have a significant place in the future of the nation which as a matter of fact is an overwhelming concept. It is everything you do to make your product and service more visible, more desirable and more profitable. It offers you a wealth of information that if applied correctly virtually can ensure your success. An effective marketing plan will certainly boost your sales and increase your profit margins.

A modern energy service is an essential pre-requisite for increasing productivity and improving people’s livelihoods. New approaches are needed to deliver such energy services to meet the needs of the poor and support sustainable development. Policy innovation, technology access, integrated energy and development solutions and new energy investors are all required to overcome energy bottlenecks. Market mechanisms, if properly designed and complemented by regulatory measures can solve energy crisis.

An electricity market is a system for effecting the purchase and sale of electricity using supply and demand to set the price. Wholesale transactions in the physical commodity are typically cleared and settled by the grid operator or a special purpose independent entity charged exclusively with that function.

Markets for certain related commodities required by various grid operators to assure reliability, such as spinning reserves, operating reserves, and installed capacity are also typically managed by the grid operator. In addition, for most major grids there are markets for electricity derivatives, such as electricity futures and options, which are actively traded. These markets developed as a result of the deregulation of electric power systems around the world.

The current electricity industry relies on utilities and their regulators to make virtually all of the important decisions about how the electricity system is structured, operated and paid for. Today utilities and regulators decide how many power plants will be built, who may build them, which technologies to use and how much consumers must pay for them. They decide what services consumers receive, how they are delivered and how much consumers are billed.

Today’s electricity rates typically bundle in a single rate the costs of generation, transmission, distribution, system coordination system, billing and other services currently provided by vertically integrated monopolies. Moreover, pricing tends to be uniform throughout an entire utility service area and overtime, differences in the costs of serving different areas and in the production cost between one period and another are typically ignored for most customers. In today’s uncertain economic environment, consumer confidence is low, investors are leery, and capital for power plant investment has virtually dried up. In this environment, we fail to understand how the rule, as proposed, creates the consistency in the electricity market.

The electricity industry has substantial potential to increase the economic efficiency of the electricity market and make the country as a whole better off. However, electricity rates are an important element in business decisions for many firms, both large and small. The importance of gaining control over electricity rates is a matter of economic survival.

Introducing competition in electricity markets has a strong impact on the structure of electricity markets and national energy policies. In a competitive electricity market with efficient pricing, it will be possible for customers to make more effective decisions about when and how much to use electricity services for various technologies to compete effectively in the right market having greater control over the services they receive and the prices they pay.

Creating a competition market for electricity presents challenges that are both difficult and unique. Competitive markets include both a physical and a commercial component. The physical component is the ability of products and services to be physically delivered from suppliers to consumers. The commercial component of competitive markets consists of the ability of suppliers and consumers to make and implement commercial trades under whatever terms and conditions the parties choose. Suppliers and consumers need the commercial freedom to contract with each other under terms and prices they mutually accept and a mechanism to ensure the physical delivery of the electricity being traded.

Electricity market can be a large part of the solution to the problems of promoting open access and competition. The electricity retail service market is mature as well as highly competitive. The greatest strategic challenge that Electric Distribution companies face is the demand for increasing reliability and quality and the simultaneous restriction of the capital and operating funds needed to produce them. The second most important challenge is sorting out their obligations to deliver electricity and provide commodity energy at regulated rates in volatile, deregulated bulk power markets. The real problem, however, is lack of linkage between the bulk and retail power markets. No one seems to be looking at ways to expose retail consumers to the volatility of the wholesale market.

Consumer behavior defines essential characteristic of the market including the time-varying load profile the market must serve, the variation in demand induced by prices and the spatial configuration of load. These characteristics exist whether or not explicit mechanisms are put in place to enable direct consumer participation in potentially inefficient allocation of resources. In general, the efficient allocation of resources requires market mechanisms on both the supply and demand sides.

Continuation of innovative applications of electricity to increase productivity reduces energy intensity, improve energy efficiency, minimize waste streams, enhance product innovation, and improve business practices. Industrial electro-technologies can reduce waste, use less energy and produce better products.

In the residential and commercial sectors, the uses of electricity are growing, and there is ample room for improvements and moreover, economic productivity itself can be improved by using information technology to more precisely manage business and living activities, attaining the benefits of industrial electro-technologies and modifying the indoor environment to enhance human performance. The anticipated rebuilding and repairing of residential and commercial structures creates an important opportunity for incorporating energy efficiency improvements that could produce long term energy cost savings.

As the basic objective of all efforts to reform electricity markets is to improve the economic efficiency of a secure electricity supply and to benefit consumers through lower prices. A good electricity market competition can create (a) concentrating efforts to reduce expenditure on generation and to maximize returns; (b) re-orienting decision-making to incorporate private rather than public costs and benefits; and (c) leading more transparent and effective pricing, to better reflect costs.

Competition in electricity has proved to be highly potential which must have logical and practical justification, assuming that the objective is to create effective and efficient competition for the ultimate benefit of consumers.

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