Think of a market place. Think food. The most obvious players that comes to mind are producers and consumers. When you start digging a little you notice other players, such as retailers, food regulation entities, transportation companies and many more. Similarly the electricity market consist of it's own set of players. However, the nature of the commodity being traded (electricity) sets the stage for a different type of market landscape. By the end of this lesson you will have a good overview of the key important players in an electricity market.
Producers & Consumers
The producers of an electricity market are typically the generating companies that own and operate the power plants. The consumers consist of all entities consuming electricity. Clearly households or large industries are typical examples of consumers. The two largest generating companies in Sweden are Vattenfall and Fortum. Both players need to pay for the benefit of being connected to each other through a rat nest of transmission lines a.k.a the grid. The payment goes to the company that owns the grid. The consumer on the other hand pays the producers for the electricity it uses through the electricity trading market.
The average household has an extremely low electricity usage in comparison to the amounts being produced by power plants. This makes it difficult for most people to buy their electricity straight from the source. Instead we turn to retailers who purchases electricity on our behalf. Thus, retailers buy electricity in large amounts from the generating companies and resell it to consumers. The large variety of retailers provides the end user with a large freedom of choice. Some retailers for example provide consumers with green energy, i.e. electricity that is only produced by renewable energy sources. While many think these are sneaky marketing tricks, it does however increase environmental action and awareness.
Electricity is a very unique commodity that is traded. This is mainly because electricity can not be easily stored. In fact, as soon as you turn on your light switch at home there is some power plant generating that required electricity. There is a lot of things that can go wrong before electricity actually makes it to your home. If you think about it, the generators need to be fully functional and the transmission system must withstand the power flowing through the network. To avoid different type of transmission/distribution failures there are a number of parameters that are monitored to ensure system stability. Some of these parameters include frequency (50 Hz standard in Europe), active and reactive power. Now, let's not go into too much detail on what those things are but let's just say that somebody needs to make sure these parameters are maintained at the correct level when electricity is distributed. The player who is assigned this responsibility is called the System Operator. Their most important task is to be responsible for the technical operation of the power system. In Sweden the government owns the company Svenska Kraftnät which acts as our system operator.
This player is responsible for the financial adjustment in the market. Remember all these parameters the system operator has to make sure is maintained? Well, often there are deviations and things go wrong. The balance responsible has to make sure in that case that players are paid for all energy they have supplied to the grid and that they pay for the right amount of power being extracted. The player who takes the responsibility of being balance responsible receives a payment for this service.
The electricity distribution system is referred to "the Grid" as mentioned earlier. There is no competitive market in electricity distribution for several reasons. The most obvious one is the high investment cost necessary to even enter this market. Most of the overhead electricity cables you see in your town or city were built in the 60's! And there is a reason people have tried very hard to meet today's electricity demand without changing too much of the old stuff.
Hence, the grid is generally owned by a company where their main task is to operate, maintain the grid and provide high power quality. The grid owner generates their revenue through grid tariffs, which are paid by all players using the grid.