The design of efficient market structures for ancillary services [electricity industry]

The electricity industry has particular characteristics that create barriers to its successful commercialization. Electrical energy is instantaneously transmitted from generators to end-use equipment according to physical laws rather than commercial contracts. Any blueprint for commercialization must be compatible with these characteristics. The main commercial activities in a restructured electricity industry assume that electrical energy behaves as a commodity. Ancillary services play a crucial role in underwriting that assumption. Therefore, it is even more complex to achieve economically efficient outcomes in ancillary services than in the main commercial activities. This paper discusses approaches to this problem, with particular emphasis on recent proposals for changes to the implementation of ancillary services in Australia. It will be several years before the success of these proposals can be measured.