The Economics of Electricity Markets

3Electricity Industry Market Structure and Competition

The structure of the electricity industry varies greatly around the world. In many countries, electricity is provided by a single integrated monopoly provider. In a few countries, there is active competition in parts of the electricity industry, often coordinated through formal markets. This chapter seeks to provide an overview of the range of forms of markets in the electricity sector, with a more detailed look at those industries that rely primarily on market signals to drive efficient usage decisions and efficient investment decisions.

3.1 Tasks Performed in an Efficient Electricity Industry

One way to think about the task of designing an efficient electricity industry is to list all of the key tasks that must be performed, assign those tasks to different entities, and then to design frameworks, rules and incentives to ensure that those entities have incentives to carry out those tasks efficiently and effectively, and to coordinate and cooperate with the other entities in the execution of their respective tasks.

Let us begin by setting out the key tasks that an efficient electricity industry must perform. As explained in Section 1.1, it is useful to draw a distinction between short-term tasks and longer-term tasks. In addition we will distinguish ‘risk-management’ tasks, which make the bridge between the short-term outcomes and longer-term incentives.

3.1.1 Short-Term Tasks

An efficient electricity industry must perform ...