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Liu, J.; Hu, H.; Yu, S.S.; Trinh, H. Development of Pricing in the Power Grid. Encyclopedia. Available online: (accessed on 09 December 2023).
Liu J, Hu H, Yu SS, Trinh H. Development of Pricing in the Power Grid. Encyclopedia. Available at: Accessed December 09, 2023.
Liu, Jiaqi, Hongji Hu, Samson S. Yu, Hieu Trinh. "Development of Pricing in the Power Grid" Encyclopedia, (accessed December 09, 2023).
Liu, J., Hu, H., Yu, S.S., & Trinh, H.(2023, June 25). Development of Pricing in the Power Grid. In Encyclopedia.
Liu, Jiaqi, et al. "Development of Pricing in the Power Grid." Encyclopedia. Web. 25 June, 2023.
Development of Pricing in the Power Grid

The continuous changes in the power industry have driven reforms in energy pricing within the distribution system, improving efficiency while reducing wholesale electricity costs. Pricing is one of the essential factors in marketing strategies, benefiting stakeholders, maintaining the balance of the power system, and enabling the creation of new regional markets using more renewable energy sources (RESs).

demand-side ancillary services electricity market electricity pricing

1. Brief History

The continuous changes in the power industry have driven reforms in energy pricing within the distribution system, improving efficiency while reducing wholesale electricity costs. Pricing is one of the essential factors in marketing strategies, benefiting stakeholders, maintaining the balance of the power system, and enabling the creation of new regional markets using more RESs. This provides more options for electricity access while reducing carbon emissions [1]. The electricity price reform will also be a great challenge for grid companies. The opening of the electricity sales market requires grid companies to have high market competitiveness [2]. In the evolving market environment, power grid companies have transitioned from a model focused solely on selling electricity to a profit model centered around electricity transmission and distribution.
The earliest analysis of electricity prices and power market reforms can be found in [3], which reveals the impact of regulatory reforms on retail prices for industrial customers and the ratio of industrial to residential prices from 1986 to 1994. The retail electricity market expanded, industrial electricity prices fell, but the price difference between industrial and residential users widened, indicating that industrial users benefited from the reforms [4]. It was also observed that unbundling electric generation and introducing wholesale electricity markets did not necessarily lower electricity prices. From 1995 to 2002, European countries proposed liberalizing markets to provide reliable and secure electricity supplies, but electricity prices in each market model showed an upward trend despite increased competition [5]. This trend was partly due to the significant investments needed to upgrade infrastructure and meet environmental regulations. Additionally, market concentration remained high in some countries, limiting the benefits of competition. The liberalization process also faced opposition from trade unions and some political groups who feared job losses and the loss of national control over energy resources. It was not until 2007 that energy reforms impacted household energy prices [6]. Prior to this, the state-owned electricity company had a monopoly on the energy market and set prices according to governmental regulations. However, the market was opened for competition, and private companies were allowed to enter the market. This led to a decrease in electricity prices for industrial and commercial customers, as the new competition forced the state-owned electricity company to lower prices in order to remain competitive. However, it took several years for this to impact household energy prices as the reforms were implemented gradually. Although unbundling electric generation was not proven to have a significant effect on household electricity prices, the freedom to choose electricity suppliers was valued by consumers, leading to price reductions. By 2011, the large-scale integration of RESs into the grid can lead to changes in electricity prices, but it is not always the case that consumers profit from using RESs [7]. In some cases, electricity prices may decrease due to an oversupply of electricity from RESs during high production, but this may not necessarily translate into lower retail prices for consumers. Additionally, some utility companies may charge higher rates to customers who use RESs due to the cost of implementing and maintaining the necessary infrastructure to integrate them into the grid. Therefore, while integrating RESs can lead to changes in electricity prices, the impact on consumers may vary depending on the specific circumstances. In 2014, there was a notable discrepancy in the power system where household electricity prices generally increased despite a decline in wholesale electricity prices [8]. This divergence can be attributed to the lack of a simultaneous competitive marketing scheme in the industry and the government’s regulation of retail electricity prices, which prevented market forces from influencing them. Moreover, the lack of competition in the power system created a need for additional incentives for electricity retailers to lower prices and attract customers. This was exacerbated by the fact that many households could not switch electricity providers due to contractual obligations or a lack of awareness of alternative options. In recent years, researchers have proposed various new electricity price policies and mechanisms to adjust electricity market prices because there has been a push toward increased competition in the electricity market and the deregulation of retail prices. This led to more household pricing options and increased pressure on retailers to provide competitive prices in order to retain customers. In [9], the authors suggest a combined electricity price and capacity addition tariff as an analytical approach for evaluating the optimal pricing mechanism for wind and solar energy. The study concludes that the price of RESs will vary greatly depending on the location and type of RESs. A dynamic distributed solar energy pricing model is proposed in [10], considering unit cost, profit, and taxation. This incentive mechanism has resulted in a significant drop in electricity prices from 2017 to 2020. The authors in [11] conclude that different regional grids need to provide different price mechanisms. In today’s electricity system, the wholesale electricity prices can vary widely from hour to hour, and peaks often occur during peak hours due to the high cost of generating electricity. Almost all end users are currently charged some fixed rate retail electricity price [12]. However, this will cause users to consume more electricity during peak hours, introduce high costs to retailers, and negatively impact the grid. Retailers will therefore want to better allocate electricity at different times of the day by implementing proper demand-side management. Figure 1 shows important events during the development of electricity pricing.
Figure 1. Timeline of key historical events of electricity pricing.

2. Electricity Price Structure

The electricity price paid by users encompasses not only the cost of energy consumption but also incorporates the power supply fee and service fees associated with energy usage. The components that contribute to the electricity price are shown in Figure 2.
Figure 2. Components of electricity price.
A brief description of the main components of electricity price is as follows [13]:
  • Wholesale electricity price: The wholesale electricity price is simply the cost incurred when preparing to transmit electricity to the user. It includes the cost of generating electricity, distributing it, and the cost of operating and maintaining transmission infrastructure. No matter what kind of energy is used (coal and RESs), it will enter the wholesale market once generated. Wholesale electricity prices are determined by supply and demand in the wholesale electricity market, which is where energy producers and retailers buy and sell electricity. Retailers buy electricity from the wholesale market, where prices are generally set every 30 min but fluctuate based on supply and demand. The factors that influence wholesale electricity prices include fuel prices, weather, electricity demand, transmission capacity, and renewable energy generation.
  • Network costs (poles and wires): The network cost is the cost of the transmission and distribution network when transmitting energy required by the user to the user’s place of consumption. It includes the cost of building, operating, maintaining, and upgrading the infrastructure necessary to transmit and distribute electricity or gas. Energy suppliers typically charge network costs to cover using the energy grid in order to transport energy to customers. Network costs are regulated by regulatory bodies in each country to ensure that they are fair and transparent and that energy companies do not overcharge customers. These costs are usually calculated based on the amount of energy used by customers, as well as the distance between the energy source and the user’s location. Some factors that can affect network costs include the age and condition of the infrastructure, the level of demand and consumption, the cost of raw materials and labor, and the level of investment in new technologies and renewable energy sources. Reducing network costs is often a key priority for energy suppliers, as it can help them remain competitive and provide cost-effective energy solutions to their customers.
  • National government schemes and state or territory government schemes and levies: Many national and state governments have environmental programs, such as Australia’s Large Scale Renewable Energy Target and Small Renewable Energy Plan. The cost of these government programs can also affect electricity prices for consumers. However, it is important to note that while these programs may increase electricity prices in the short term, they are ultimately expected to lead to greater energy efficiency and a transition toward RESs, which may ultimately reduce prices in the long term. Furthermore, the cost of environmental damage caused by non-renewable sources is often not factored into electricity prices, so these programs may lead to cost savings in the long run by reducing the impact of pollution on public health and other resources. Overall, government environmental programs can have a complex and nuanced impact on electricity prices, but they are ultimately a necessary step toward a more sustainable and equitable energy future.
  • Retail services and other charges: Retail service is the bridge between energy retailers (such as ActewAGL) for consumers and the wholesale market. Energy retailers buy electricity for consumers from wholesale markets; arrange their meters, bills, and connections; and ensure that consumers can better manage their energy throughout the process. Retail services also offer customers a wide range of energy plans and options depending on their needs and preferences. They advise on energy efficiency, RESs, and the latest technologies that can help customers reduce their energy usage and bills. The retail services team manages customer accounts, billing, customer service, and support. They provide customers with information on their energy usage, tariffs, and billing and help them understand their consumption patterns and habits. Retail services also offer various payment options and plans to help customers manage their energy bills more effectively. In summary, retail services play a crucial role in ensuring the smooth and efficient operation of energy markets and in providing customers with high-quality services and support. Their expertise and knowledge help customers make informed decisions and take action to reduce their energy usage and bills while also contributing to a sustainable energy future.

3. The Evolution of the Electricity Market

The framework of the electricity market has also changed with the development and progress of society. For most of the 20th century, the electricity market has operated within the framework of a monopoly model, as shown in Figure 3a. In this model, a single entity integrates generation, transmission, and distribution to form vertical marketing [14]. The monopoly model controls the timing and price strategy of electricity flow in the grid and has strict rules for transferring electricity. This model has been criticized for its lack of competition, which can lead to higher prices and lower-quality service. It also discourages innovation and investment in the sector, as the sole entity may have different incentives to invest in new technologies or improve existing infrastructure. Additionally, consumers may not be able to choose their electricity provider or negotiate prices, resulting in limited options for them. Many countries have moved toward a more competitive market model, such as a liberalized or deregulated one. In these models, multiple companies are allowed to participate in the market, which can lead to increased competition, innovation, and investment. Consumers may have more options and are able to negotiate prices, leading to improved overall service. Then, the electricity market framework of the single-buyer model emerges, as shown in Figure 3b. Independent power producers and existing traditional power generation companies have generated competition on the power generation side. Purchasing agencies can purchase electricity from power generation companies or independent power producers [15]. However, distribution companies do not have the right to choose power producers, and they can only follow the policy of the framework. The main purpose of the single-buyer model is to encourage private participation in the electricity market. However, its disadvantage is that consumers still need to sign long-term contracts and are subject to regulated prices. Table 1 compares the advantages and disadvantages of the monopoly and single-buyer models [14][15].
Figure 3. (a) Monopoly model; (b) single-buyer model.
Table 1. Advantages and disadvantages of the monopoly and single-buyer models.
The current electricity system market consists of a wholesale market model and a retail market model, as shown in Figure 4 and Figure 5. In the wholesale market model, there is competition between generators and distributors [16]. Consumers can choose to buy electricity directly from retailers who buy electricity directly from the electricity generation company, or they can choose to buy electricity from distributors who buy electricity from multiple generators and then sell it to consumers. This model allows more competition, which can lead to lower prices for consumers. However, there are also concerns about the potential for market manipulation by large distributors and generators. In some cases, these companies may engage in anti-competitive behavior, such as price-fixing or limiting the electricity supply to drive up prices. Many countries have implemented regulations to ensure fair competition in the wholesale electricity market. These regulations may include measures that prevent market manipulation, increase transparency, and promote the development of renewable energy sources. In the retail market model, prosumers can obtain electricity from retailers or between prosumers and RESs (producers) [17]. Retailers purchase electricity from wholesale markets and sell it to end users, including prosumers. These retailers often offer fixed or variable rate plans for residential or commercial customers, considering factors such as demand, seasonality, and market prices. Prosumers can also choose to obtain electricity from RESs. They can enter into agreements with RESs to purchase a set amount of electricity directly, eliminating the need for an intermediary retailer. In some cases, prosumers may even generate and supply excess electricity back to the grid, receiving compensation from the retailer or network operator. This model gives customers the power to choose the seller, and its advantage is that it is more economical and efficient for consumers to purchase electricity. The downside is that transmission and distribution costs can increase during peak periods and in remote locations. Overall, the wholesale market model can effectively provide consumers with affordable electricity while promoting competition and innovation in the energy industry. However, it is important to balance the benefits of competition with the need for regulatory oversight to ensure fair and equitable market practices. The retail market model allows flexibility and provides choices for prosumers, who can select the most cost-effective and sustainable source of electricity for their needs.
Figure 4. Wholesale market model.
Figure 5. Retail electricity model.


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