Author: Shane Touhey, Commercial Analyst, Electron
We’ve previously outlined some of the ways that DER operators can access revenue today through markets and other services as flexibility service providers. Now, let’s take a step back and delve into what an electricity market actually is and where flex markets fit in.
What’s the role of markets in the energy transition?
Like many products and services, electricity is traded via marketplaces. Electricity markets have been used since the initial roll out of electricity in the late 1800s as a way of managing the electricity grid.
Electricity markets allow system operators, suppliers, generators, flexibility service providers (FSPs), and traders to buy and sell electricity. They follow similar principles as most markets, such as supply and demand, competition, pricing, and consumer behaviour.
Overall, these markets play a vital role in ensuring a stable and efficient electricity supply for homes, businesses, and industries.
As the electricity grid integrates our changing electricity patterns, such as larger electricity use at less predictable times and the variable supply of renewable electricity, markets play a crucial role in facilitating this transition.
Modern markets, such as those offered via ElectronConnect, offer an opportunity for grid operators to balance the changing grid in a simpler, more proactive and agile way.
What types of electricity markets exist?
Markets can be defined in many different ways. These markets are common across regions and countries, though often have different names depending on where they operate and who’s describing them.
Regulated and deregulated markets
Electricity markets are subject to national and international policy. Depending on the country or region, markets can be regulated or deregulated.
In a regulated market, government agencies set prices and oversee the operations of the market to ensure fair competition and consumer protection. Some states in the US are still regulated, such as Texas. Some EU countries (e.g. France and Germany) are also regulated.
In deregulated markets, market forces determine the prices, and participants have more flexibility in how they buy and sell electricity.
The UK and some EU countries (Italy, for example) are deregulated markets, while some states in the US are leading the way with this model, such as California. These can also be referred to as “competitive” markets.
Wholesale and retail markets
There are various market types that exist to help balance the grid. The two main markets for trading electricity are:
- Wholesale electricity markets: This is where suppliers buy electricity from generators.
- Retail electricity markets: This is where consumers buy electricity from suppliers – or energy retailers, such as Ovo, Octopus, etc.
In the UK, the balancing mechanism can then help balance any fluctuations in supply and demand in real time, buying and selling electricity in 30-minute intervals.
The balancing services market supports this activity. This covers a range of services that can be deployed to help maintain the security of the grid’s electricity flows – giving owners and aggregators of flexible energy resources plenty of earning potential.
Long-term and short-term markets
Long-term markets – from four years up to a month before delivery – include forward energy markets, forward transmission markets, and capacity mechanisms.
Wholesale or “spot” markets are shorter term, operating either day-ahead or intraday. These can help adjust electricity delivery against the demand and supply closer to the time.
If that’s not enough, then balancing markets can adjust and balance at close to real time.
What are flexibility markets?
Flexibility markets provide a marketplace where electricity producers, consumers, and grid operators can interact to efficiently manage electricity supply and demand. They do so via price signals that reflect the market and ensure a fair and competitive price.
Local flexibility markets sit alongside the national markets and the wholesale electricity markets. They operate at a local level as another tool that operators can use to balance the grid.
Flexibility market platforms, like ElectronConnect, can facilitate those local markets, helping system operators to coordinate between different markets and to incentivise asset owners or aggregators to offer their assets’ flexible capacity into these markets.
