Organized wholesale electricity markets were created to address ever-increasing electricity prices and to encourage innovation through free-enterprise competition.
In economic terms, electricity is a commodity that can be bought, sold, and traded. An electricity market is a system enabling purchases, through bids to buy; sales, through offers to sell; and short-term trading. A wholesale electricity market exists when competing generators offer their electricity output to retailers. The retailers then re-price the electricity and take it to market. In a competitive wholesale electricity market, owners of electricity resources submit offers to sell power to the system operator who delivers that electricity to utilities and other large electricity users. These markets, like all markets, follow demand and supply and provide price signals that allow power generators to determine what resources to maintain, build, or retire based on their ability to compete against all other generators.
Because power can be generated but cannot be stored in large quantities, it is largely delivered and consumed in real time as it is produced. To ensure power will be available in the future or to address system operational needs not related to the sale of power to end-use consumers, there are different types of markets to address these needs. For example, energy markets buy and sell power for real-time or day-ahead use, while capacity markets secure agreements from power providers to produce electricity at future date. The capacity market helps ensure power will be available by providing resources with a previously agreed-upon price to be available when needed, ensuring reliability and shielding customers from price spikes.