Managing Energy Risk: An Integrated View on Power and Other Energy Markets

5

Electricity Retail Products

5.1 INTERACTION OF WHOLESALE AND RETAIL MARKETS

For utilities, pricing of retail contracts was a requirement long before the markets became liberalised, and long before the existence of a wholesale market. Therefore, the question of the way in which wholesale and retail markets are connected is reasonable. In most markets lower prices are expected in the wholesale market than in the retail market, otherwise there would be no profit margin for resellers and no incentive for entry into the retail market. In electricity markets retail prices are sometimes found to be below those in the wholesale market. This can occur at the establishment of a wholesale market, when the market is dominated by strategic considerations of the participants. But if the market is already in place and works effectively, each utility has the opportunity to push the energy onto the wholesale market instead of selling it to individual retail customers. This possibility is only restricted by market liquidity. Even if trading activities are rather low, this opportunity exists at least in a marginal consideration. This means, instead of selling power to a specific customer, there is always the alternative of pushing this incremental energy to the wholesale market. Hence, for this specific customer the retail price deduces from the wholesale price. Because this argument is also true for the next retail offer, prices for trading products will determine prices for end customers. There ...