Energy markets are important for determining how we consume and share electricity. Our energy market definition will highlight a number of key examples, calculations and benefits.
What is an Energy Market?
According to a widely accepted energy market definition, it is a kind of spot market where energy is bought and sold just like any other commodity. The basic purpose of managing an energy market is to ensure a continuous supply of electricity to consumers at competitive rates.
The importance of energy market is evident from that fact that it allows the transmission and consumption of the electricity immediately after its production. This is beneficial, as it is not possible to store electricity.
PJM is one of the examples of energy markets. This particular energy market operates at a wholesale level. The functioning of almost every energy market involves the contribution of the participants, who sell and purchase the electricity on a daily basis.
This helps to establish a price for electricity, which depends on the gap between supply and demand. Competitive retailers and utilities purchase electricity from the wholesale energy market and resell it to the end users at retail prices.
Breaking Down Our Energy Market Definition
The journey of the electricity that we consume starts at one of the power stations working within our state. This is the place where the production of electricity takes place. The powerhouses generate electricity by using fuel or renewable energy sources.
After its production, the electricity is then transmitted to the grid through high power lines. The regulators keep an eye on the electricity markets and regulate them for a continuous supply of electricity.
The basic role of these regulators is to benefit the consumers by protecting their rights. This involves introducing a sense of healthy competition among energy suppliers. The energy market proves to be effective by regulating the cost of electricity and ensure its availability during peak demand.
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Benefits of Energy Markets
The electric energy is the most important thing, which assists us to live a normal life. Hence, it is essential to know what is an energy market and what are the benefits associated with it. The need to generate more electricity is surging with each passing day. Therefore, it is necessary to produce the required amount of electricity and deliver it when the system demands.
The generation and consumption of electricity is the main factor, which controls the working of an energy market. This suggests that this particular sector relies on the supply and demand of energy for its existence.
When it comes to the benefits of the energy market, the major advantage of such a mechanism relates to the rights of end users.
There are numerous companies, which are capable of producing and transmitting electricity in accordance with the actual demand. As a result, it is important to regulate their working to enhance their performance.
Typically, an energy market allows the generators to produce the right amount of electricity at the right time. The energy market works as a place to regulate the cost of electricity. When the supply is more than the demand, the price goes down.
This serves as an indication for the generators to reduce their generation capacity. Since the energy market is a place to buy and sell energy, a variety of suppliers take part in its overall functioning.
As a result, consumers enjoy the opportunity to choose a supplier that offers them a good price for electricity.
Given below are some of the major benefits of the energy market.
- Usually, energy markets are competitive in nature. They allow consumers to make a real-time saving by opting for a particular supplier. In fact, consumers have experienced a decline in the cost of electricity after the introduction of competitive energy markets.
- Another benefit of energy market relates to the budget certainty. This means that by choosing a fixed rate bundle, a customer can overcome the issue of price volatility. Hence, consumers can keep their electricity consumption within a defined budget.
- In addition to the above advantages, energy market also allows you to chose a clean energy option. This means that a consumer can go for a supplier, which offers electricity produced through renewable energy resources. By doing so, you can meet your sustainability and environmental goals.
See Related: Direct Energy Review
How Energy Markets Work
As stated above, the energy market is a wholesale market to sell and buy electricity. The most common factor affecting the price of electricity is the gap between supply and demand. For instance, if the gap between supply and demand is huge, the electricity prices go up.
Nevertheless, generators want to sell their electricity at the best price. As a result, they closely monitor the fluctuations and manage their electricity production in line with the supply.
This leads to a healthy competition between the suppliers and retailers, which enhances the efficiency of an energy market.
The only function of a grid is to transport electricity. Hence, it isn’t possible for the grid to produce its own electricity.
It monitors the usage pattern and forecasts the electricity demand for the future.
It allows the system to generate enough energy to meet the demand at any time of the day or night. For this purpose, the backup power station needs to produce electricity whenever needed.
The generators submit their bids to the grid, which exhibits the total electricity they can produce within a given time span.
The grid takes into account these bids and matches it with the energy demand submitted by the retailers.
The price obtained through this approach is the spot price. When the generators receive the spot price, wholesale markets fix it as the settled price. The retailers purchase the electricity at this price and supply it to their consumers.
This process works in a perfect manner to generate the required amount of electricity. It also helps to keep the electricity cost under control by bridging the gap between supply and demand.
See Related: What Does Behind the Meter Truly Mean?
Conclusion on Energy Market Definition
The energy market is a market, which involves buying and selling of electricity. This market regulates the price of the electricity and ensures a continuous supply of electricity to every consumer.
It works in a similar fashion like any other market that regulates the sale and purchase of a commodity. Furthermore, energy market secures the rights of the end consumer by regulating the cost of electricity.
What do you think of our energy market definition? Let us know if you’d like to see something added to the definition.
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- PJM Interconnection
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- Electricity Spot Market
- Frequency Regulation
- Reserve Margin
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