How Electricity Markets Work

Course Organization

Technological developments such as the transmission of electricity over long distances with low losses using alternating current (AC) networks and the ability to meter electric consumption at the customer level led to the birth of an electric industry at a commercial scale. In the early years of the twentieth century, the industry was characterized by rapid growth and a “wild west” environment with many abusive practices as the industry searched for a viable business model. Legislative action in the 1930s ushered in a stable era of “cost of service regulation” that lasted through the 1970s. Declining demand and cost overruns for new generating plants led to dissatisfaction with “cost of service regulation.” This dissatisfaction, combined with the development of an intellectual framework to organize wholesale generation activity based on market principles, led to the development of competitive wholesale electric markets for generation across large swaths of the country.

This is a foundational course designed to provide a fundamental understanding of how such competitive wholesale markets operate and the functions of institutions required to make these markets work. This foundation - the mechanics of how wholesale electric markets clear and the resulting hourly prices – is essential to establish the correct economic value of electric energy bought and sold. Establishing the correct economic value for electric energy will remain critical as markets evolve to deal with increasing penetration of renewables, greater two-way flows on the grid, and reflecting the price of carbon in wholesale market prices.

Course Organization

The course, made up of 16 sections organized in four blocks, provides a foundation for understanding the workings of modern, competitive wholesale electric markets.

Block 1 comprises sections 1 and 2 and provides history and perspective on industry evolution, from Edison’s first commercial power plant to a discussion of early challenges stemming from abusive business practices in the industry.

Block 2 includes sections 3, 4, 5, and 6, provides background on the establishment of industry governance as well as institutions, and covers the “Golden Years” of the industry characterized by steady growth, economies of scale, and falling end-user prices under a “regulatory compact.” At the end of Block 2, the course traces the breakdown of the regulatory compact and the push to organize well-functioning, competitive markets for electric generation at the wholesale level.

Block 3 comprises sections 7, 8, 9, 10, and 11 and lays a foundation for understanding the economic fundamentals of a competitive wholesale electric market. It provides a detailed discussion of market operations for the principal products – energy, capacity, and ancillary services.

Block 4 consists of sections 12, 13, 14, 15 and 16. This block assesses how competitive wholesale electric markets have performed relative to expectations over the past two decades. Specific stress events such as California in 2000, PJM in 2014, and, most recently, Texas in the winter of 2021 are discussed and analyzed. The course ends by highlighting the role of competitive markets as the grid evolves.

The Audience

The course is designed to provide a wide range of professionals with a fundamental understanding of competitive electric markets.

• Energy industry professionals seeking to understand how electric energy is valued in competitive markets as they develop environment, sustainability, governance (ESG), and energy resilience programs.

• Federal and state energy policy analysts looking to develop an understanding of the electric industry and the operation of competitive electric markets.

• Academics/graduate students in interdisciplinary energy studies programs that require a foundational course on electric market operations.

• Researchers in multiple disciplines, such as law, economics, and public policy, need to develop a perspective on the electric industry and the operation of competitive markets.

Meet the Instructor:

Mr. Venki Venkateshwara, President of Epoch Energy Advisory Services, is a long-time energy industry consultant with experience at leading management consultancies, including McKinsey Company, Charles River Associates, and FTI Consulting, where he served as a Managing Director till early 2020. In addition, he has experience working at leading energy companies including AREVA, a global nuclear and renewables supplier, where he led several strategic initiatives, and at Consolidated Edison, a major U.S. utility, where he served as Director, Strategic Planning. He is a Visiting Scholar at the Environmental and Energy Management Institute at George Washington University.

He brings a wealth of experience and insight into electric and gas markets, public policy, and regulatory actions, as well as the challenges and opportunities for the energy industry from an ever-changing landscape.

Mr. Venkateshwara earned a PhD in Energy Management Policy from the University of Pennsylvania and an MBA from the Wharton School. He holds a bachelor’s degree from the Indian Institute of Technology and a master’s degree from Clemson University, both in mechanical engineering.