Electricity Market - Electricity Market Experience

Electricity Market Experience

In the main, experience in the introduction of wholesale and retail competition has been mixed. Many regional markets have achieved some success and the ongoing trend continues to be towards deregulation and introduction of competition. However in 2000/2001 major failures such as the California electricity crisis and the Enron debacle caused a slow down in the pace of change and in some regions an increase in market regulation and reduction in competition. However, this trend is widely regarded as a temporary one against the longer term trend towards more open and competitive markets.

Notwithstanding the favorable light in which market solutions are viewed conceptually, the "missing money" problem has to date proved intractable. If electricity prices were to move to the levels needed to incent new merchant (i.e., market-based) transmission and generation, the costs to consumers would be politically difficult.

The increase in annual costs to consumers in New England alone were calculated at $3 billion during the recent FERC hearings on the NEPOOL market structure. Several mechanisms that are intended to incent new investment where it is most needed by offering enhanced capacity payments (but only in zones where generation is projected to be short) have been proposed for NEPOOL, PJM and NYPOOL, and go under the generic heading of "locational capacity" or LICAP (the PJM version currently under FERC review is called the "Reliability Pricing Model", or "RPM"). There is substantial doubt as to whether any of these mechanisms will in fact incent new investment, given the regulatory risk and chronic instability of the market rules in US systems, and there are substantial concerns that the result will instead be to increase revenues to incumbent generators, and costs to consumers, in the constrained areas.