Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management

CHAPTER 4 Electricity Markets and Products

Stefano Fiorenzani,Bernard MurphyMark Cummins

4.1 MARKET STRUCTURE AND PRICE COMPONENTS

4.1.1 Spot and Forward Markets

The general scope of any liberalization process is to support a more efficient allocation of economic resources, especially when those resources are scarce. Efficient allocation means that resources are allocated to those subjects that are able to make the best economical use of them. This notion of economic efficiency should result in a higher degree of satisfaction for all market participants. The free interaction of demand and supply, which characterizes competitive markets, should produce such efficient allocation of scarce resources. However, perfect competition is just a theoretical notion and often the improvement of the final consumer's utility is not guaranteed at all.

The physical peculiarities of electric power influence greatly the process of power market liberalization. Electricity delivered at distinct times and at different places is a non-fungible and non-storable commodity for end users. In order to make the liberalization process effective, it is necessary to ensure that all market participants (producers and consumers) are granted non-discriminatory access to the market itself. Organized power spot and derivatives exchanges have emerged for this reason. Obviously, the internal organization of these exchanges cannot ignore the physical characteristics of electric power. Hence, peculiar rules have ...