Hedging Strategy and Electricity Contract Engineering - IFOR

Chapter 2
The electricity market
2.1. Overview
The electricity industry’s basic function is to convert fuel and primary energy
into electricity and transport it to customers. 1 Because it is very costly to store
electricity, the electricity industry has to match supply with demand in real
time. Unlike other businesses, like the gas industry, there is therefore no scope
for suppliers to meet demand from stored reserves. The electricity industry can
be divided into four main groups corresponding to the four-stage vertical interdependent
process that is needed to produce and deliver electricity, namely:
1. Generation, i. e. electricity production.
2. Transmission, i. e. transport of electricity at high voltage.
3. Distribution, i. e. transport and delivery of electricity to customers.
4. Supply, i. e. retail.
1 The SI-unit of energy is joule [J]. One joule equals a constant power of one watt [W] for
one second. In the electricity industry however, energy and power levels are typically
very high, why the industry standard for energy is kilo watt hour [kWh], which corresponds
to the energy stemming from a one hour constant power of 1000 watt. 1 MWh
hence corresponds to 1000 kWh, 1 GWh to 1000 MWh and 1 TWh to 1000 GWh. The
industry standard for power is consequently kW, MW and GW.