In deregulated energy markets, wholesale electricity trading is central to their operation. Retail energy suppliers rely on these markets to procure power competitively and offer customized pricing to commercial and industrial customers. Generating asset owners in these markets also benefit from the flexibility of various off-takers and price mechanisms. These dynamics allow generators to revenue stack through physical, financial, ancillary services, and capacity markets. The efficiency and transparency of wholesale markets are what make retail choice possible, allowing customers and suppliers to benefit from price competition and innovative energy solutions.
Retail vs. Wholesale Electricity Prices
Electricity prices at the retail level are fundamentally derived from wholesale market rates, but they include several layers of markup, fees, and risk premiums from suppliers. While wholesale electricity is priced based on real-time market dynamics, such as supply, demand, and congestion, retail electricity reflects a packaged product tailored for end-users.
Wholesale prices are set in regional electricity markets through an auction and clearing system and fluctuate hourly. Prices are determined by the marginal cost of the last generator dispatched in that hour to meet demand. Wholesale buyers, such as utilities and retail suppliers, purchase power at this rate.
Retail prices are what end-users, like homes and businesses, actually pay. These rates incorporate:
-
Wholesale energy costs (hourly or fixed)
-
Transmission charges
-
Capacity and ancillary service fees
-
Risk premiums (to protect suppliers from volatility)
-
Utility delivery fees
-
Administrative and customer service fees
-
Supplier profit margin