Wind power and electricity markets - Wind Power Integration: Connection and System Operational Aspects - page 245

Chapter 7
Wind power and electricity markets

7.1 Introduction

The electricity industry is over 100 years old. During this time it has grown
dramatically and has developed organisational structures and methods of doing
business. The industry has particular characteristics that have had a large impact on
these structures. These characteristics include the real-time nature of electricity, i.e.
it is typically generated and consumed at the same instant in time. Storage of
electricity is possible, and is performed on a limited scale, but to date large-scale
storage has proved to be uneconomic (Kondoh et al. , 2000). Another important
characteristic of the industry is that some elements are natural monopolies, e.g. the
transmission and distribution infrastructure - the wires . Until recently, economies
of scale dictated that the generation assets in the electricity industry would typically
be large-scale, capital-intensive, single-site developments. The industry evolved by
adopting structures that could be best described as vertically integrated monopolies.
The businesses owned and operated entire power systems from generation, trans-
mission and distribution down to domestic customer supply. They were regulated
on a cost basis to ensure they would not abuse their dominant position. In many
cases national or local governments owned these business entities, and in others
they were investor owned utilities. Such structures dominated the industry until
recently (Baldick et al. , 2005).
There has been concern among many politicians, policy makers, engineers and
economists that these types of monopolistic structures were inefficient. As a con-
sequence of cost-based regulation there is a tendency for monopolies to over-staff
and over-invest. In recent years and in many regions of the world there has been a
trend away from cost-based regulation towards competitive market structures
(Baldick et al. , 2005). The move towards competition is sometimes described as
deregulation . However, this is a misnomer, as it has led to the creation of regulators
where they did not exist previously, and the term re-regulation has also been used.
A more useful and meaningful term is restructuring , which will be used here. The
restructuring is largely characterised by the replacement of monopolistic, vertically
integrated utilities (VIUs) with a number of smaller entities, and the introduction of
competitive electricity markets. The smaller entities can be categorised as genera-
tion, transmission, distribution and supply.