Market Models Based on

Contractual Agreements
Introduction
• In electricity parlance, either the load or an entity representing a group of loads gets a choice to select its
energy provider,
• or there may exist some mechanism which would cater to the electrical energy needs of these loads at a
competitive level.
• The former mechanism essentially requires bilateral involvement of the entities who wish to get into a power
buy and sell contract.
• In this, the sellers and buyers mutually agree upon the terms and conditions, including the price and time of
delivery.
• A repetitive bilateral interaction between buyers and sellers may lead to an equilibrium point where everyone
is happy.
Types of Market Model
• The choice of choosing a model is a policy decision and is dominated by various prevailing conditions. They
need to be accounted for before making structural changes. Four basic models of industry structure are
suggested. These are:
1. Monopoly model

2. Single buyer mode

3. Wholesale competition model

4. Retail competition model

Monopoly Model
• In this model, a single entity takes care of all the businesses such as generation, transmission and distribution
of electric power to the end users.
Single Buyer Model
• In this model, sales from power pool to retailers take place at a pre-set tariff price. The single buyer or the
existing utility makes a long term contract with Independent Power Producers (IPPs).
Merits and demerits of Single buyer model
• Merits are:
 Private participation in power generation

 Introduction of some competition without expensive set up for a competitive market.

• Demerits are:
 Long term contracts. Setting up a contract is problematic. 

 No true competition.

 Price is not decided by demand-supply interaction.

 End consumers' price is regulated.

Single buyer model with only IPPs
Wholesale Competitive Model (WCM)
• There is an organized market in which the generators can sell their energy at competitive rates.
• There is not much choice for the end user. The end user is still affiliated to the Discom or retailer working in
that geographical area of operation.
Merits and Demerits of WCM
• Merits are:
 Choice of seller provided for Discoms and bulk consumers.

 The buyers and sellers can make forward contracts or buy from a wholesale marketplace.

 The price is decided by interaction between demand and supply. Hence, indicates truly competitive price.

• Demerits are:
 The end consumer still doesn't have a choice. It buys power from the affiliated Discom.

 Rates for end consumers are regulated rather than competitive.

 Discoms face competition at wholesale level, while their returns are regulated.

 Structural and institutional changes required at wholesale level.

Retail Competition Market (RCM)
• In this model, all customers have access to competing generators either directly or through their choice of
retailer.
Merits and Demerits of RCM
• Merits are:
 Supposed to be 100% deregulated model.

 Every consumer has a choice of buying power.

 The price is decided by interaction of demand and supply. Hence, it is truly competitive price.

 There is no regulation in energy pricing.

• Demerits are:
 Need constitutional and structural changes at both, wholesale and retail level.

 Extremely complex settlement system due to large number of participants.

 Requirement of additional infrastructural support.