Electricity market

Lore & Background

Beginning in the late 20th century, many countries restructured their electricity sectors by introducing competition into generation, wholesale trading, retail supply, or other parts, while transmission and distribution remained regulated natural monopolies. Chile pioneered deregulation in the early 1980s, followed by the US (influenced by Joskow and Schmalensee's 1983 work 'Markets for Power') and the UK (Energy Act 1983 enabling common carriage). More recently, reforms have sought to integrate variable renewable energy, improve system flexibility, and reduce greenhouse gas emissions. The incorporation of distributed energy resources has inspired innovative markets like local flexibility markets, where distribution system operators procure services from assets on their networks.

Reader's Guide

Electricity markets are significant because they address the unique challenge of balancing supply and demand in real time, a necessity given that electricity cannot be stored economically at scale. The transition from regulated monopolies to competitive markets has reshaped the industry, introducing wholesale and retail markets, ancillary services, and capacity mechanisms. These markets must manage extreme price volatility—peak prices can be 100 times higher than off-peak—and physical constraints like frequency stability. The evolution continues with efforts to integrate renewable energy and reduce emissions, often through carbon pricing. The diversity of historical arrangements, from nationwide monopolies to fragmented municipal systems, shows that no single model dominates, and ongoing reforms reflect the complexity of balancing reliability, competition, and environmental goals.

Did You Know?

• Electricity must generally be produced and consumed simultaneously, requiring continuous balancing of supply and demand.
• Chile became a pioneer in deregulation in the early 1980s, with changes codified in a 1982 law.
• Peak electricity prices can be 100 times higher than off-peak prices, a magnitude unusual among commodities.
• The UK's Energy Act of 1983 enabled a choice of supplier for electricity boards and very large customers.