The Retail Energy Value Chain Explained

The retail energy shopping website Electricity Choice posted a blog entry about 28 Terms Commonly Found While Shopping for Energy. Most of the terms relate to either industry structure, contract types and terminology, or energy technology. Knowing this terminology is a building block for all retail power purchases. Beyond simply knowing the terminology, however, it is important for buyers to understand what happens at each step in the energy value chain in order to evaluate the risk affecting each step of the process.

Electric Power Value Chain

Below is the typical structure of a restructured (or “deregulated”) energy market, which drew on material from the Federal Energy Regulatory Commission’s July 2012 Energy Primer.

  1. Fuel Producer – The company that extracts coal, natural gas or uranium
  2. Midstream Energy Provider – A company that transports fuel by pipeline (natural gas), rail (coal) or barge/tanker (liquefied natural gas)
  3. Independent Power Producer (IPP) – An entity that owns, operates and maintains a power generation facility
  4. Retail Energy Provider (REP) – A company that procures power from producers and sells it to customers; sometimes a subsidiary of the same parent company as the IPP
  5. Distribution Utility – The traditional utility company that owns, operates and maintains the power lines and other infrastructure that transports power from generation facilities to customers; also procures power from IPPs to provide “default service” to customers who do not select their own REPs
  6. Customer – End-users, which are typically broken out into residential and business groups.

The natural gas industry functions much like the electric power industry, but without the IPP. In regulated or “vertically integrated” markets, the IPP and distribution utility are the same entity, and there are no REPs.

Other important players in the space include:

  • Independent System Operator or Regional Transmission Organization – The entity that oversees wholesale power markets and tries to ensure grid reliability and efficient market functioning
  • Broker – An intermediary that can help customers select and negotiate with retail energy providers
  • Distributed Generator – Customer that owns generation resources, such as solar, on-site combustion turbines or combined heat and power facilities.
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