Evolution and Diversity of Electricity Markets in the United States
The electricity sector in the United States has undergone significant evolution over the years, characterized by changes in market structures, regulatory frameworks, and the integration of renewable energy sources. This essay explores the dynamics of US electricity markets, highlighting the transition from traditional regulated models to deregulated systems and the role of regional transmission organizations (RTOs) in facilitating wholesale electricity transactions.
Historically, most investor-owned electric utilities in the US operated as regulated monopolies, owning both electricity generators and transmission infrastructure. These vertically integrated utilities were subject to oversight by public utility commissions, which set retail electricity rates to ensure fair returns on investments while protecting consumers from excessive charges (Cleary & Palmer, 2022). However, beginning in the 1990s, several states embarked on deregulation efforts aimed at fostering competition and lowering costs in the electricity sector.
The electricity sector in the United States is a complex ecosystem comprising various stakeholders, regulatory frameworks, and market structures. Central to this ecosystem are Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), which oversee the operation of wholesale electricity markets and ensure the reliability of the transmission grid. In this essay, we explore the functioning of RTOs/ISOs and wholesale electricity markets, drawing insights from the message titled “US Electricity Markets 101” by Kathryne Cleary and Karen Palmer, published by Resources for the Future (RFF).
RTOs and ISOs play a pivotal role in the US electricity system, serving as the backbone of wholesale electricity markets. These organizations are responsible for managing the high-voltage transmission grid within specific regions and overseeing the efficient operation of wholesale electricity markets. Examples of RTOs and ISOs include PJM Interconnection, New York ISO (NYISO), and California Independent System Operator (CAISO) (Cleary & Palmer, 2022).
Wholesale electricity markets operate under the supervision of RTOs/ISOs, providing a platform for electricity generators, utilities, and other market participants to buy and sell electricity in bulk quantities. These markets comprise several key components, including energy markets, capacity markets, and ancillary services markets.
In energy markets, generators offer to sell electricity at various prices, while utilities and other market participants bid for the amount of electricity they need to meet demand. The market clears when the total supply matches the total demand, and generators receive the market price for the electricity they provide. Capacity markets ensure resource adequacy by incentivizing generators to maintain sufficient capacity to meet future electricity demand. Generators offer to provide capacity, and utilities procure capacity to ensure grid reliability. Capacity markets help generators recover fixed costs associated with maintaining their generating assets. Ancillary services markets address grid stability and reliability concerns by procuring services such as frequency regulation and backup power supply (Cleary & Palmer, 2022).
The US electricity system exhibits regional diversity, with different regions adopting varying approaches to market regulation and participation in RTOs/ISOs. Some states have fully embraced deregulation, allowing for retail customer choice and active participation in wholesale markets, while others have maintained regulated structures while leveraging RTOs/ISOs for grid services and market coordination (Cleary & Palmer, 2022).
Deregulation led to the unbundling of electricity generation and transmission functions, creating opportunities for independent power producers and retail electricity suppliers. In deregulated markets, customers gained the freedom to choose their electricity supplier, fostering competition for retail prices. Meanwhile, wholesale electricity transactions became governed by market dynamics, with RTOs and independent system operators (ISOs) overseeing the efficient operation of transmission grids and wholesale markets (Cleary & Palmer, 2022).
The establishment of RTOs and ISOs has been instrumental in facilitating the functioning of wholesale electricity markets in the US. These regional organizations operate energy, capacity, and ancillary services markets, coordinating the buying and selling of electricity among generators, utilities, and other market participants. Energy markets, including day-ahead and real-time auctions, determine electricity prices based on supply and demand dynamics, ensuring the efficient dispatch of generating units to meet demand (Cleary & Palmer, 2022).
Capacity markets, on the other hand, ensure resource adequacy by incentivizing generators to maintain sufficient capacity to meet future demand requirements. Ancillary services markets address grid stability and reliability concerns by procuring services such as frequency regulation and backup power supply (Cleary & Palmer, 2022).
Furthermore, the evolution of electricity markets in the US has led to a diverse landscape, with different states adopting varying approaches to market regulation and participation in RTOs. While some states have fully embraced deregulation, allowing for retail customer choice and active participation in wholesale markets, others have maintained regulated structures while leveraging RTOs for grid services and market coordination (Cleary & Palmer, 2022).
In conclusion, the US electricity sector has witnessed significant transformation, driven by the transition from traditional regulated models to deregulated systems and the emergence of regional transmission organizations. The diversity of market structures across states reflects the complex interplay between regulatory policies, market dynamics, and evolving energy trends. Moving forward, ensuring the reliability, affordability, and sustainability of electricity supply will remain paramount considerations for policymakers, regulators, and industry stakeholders.
Reference:
“US Electricity Markets 101” by Kathryne Cleary and Karen Palmer, published by Resources for the Future (RFF) on March 3, 2020, updated March 17, 2022.
Cleary, K., & Palmer, K. (2022). US Electricity Markets 101. Resources for the Future. Retrieved from https://www.rff.org/publications/explainers/us-electricity-markets-101/
Federal Energy Regulatory Commission (FERC) Energy Primer, 2024.
ISO-New England, New York Independent System Operator (NYISO), PJM Interconnection (PJM), Midcontinent Independent System Operator (MISO), Southwest Power Pool (SPP), California Independent System Operator (CAISO).
This article is a part of the class “751447 SEM IN CUR ECON PROB” supervised by
Asst. Prof. Napon Hongsakulvasu Faculty of Economics, Chiang Mai University
This article was written by Ditsanatda Chotloesak 631615021