Overview

Modern electricity systems do not operate through a single market.

Instead, they comprise multiple markets, each intended to solve a different economic problem.

For example:

• wholesale markets procure energy,
• retail markets serve consumers,
• capacity markets support long-term investment,
• network charging recovers the cost of electricity infrastructure.

Historically, these markets have evolved independently.

Each has been introduced to address a specific challenge, often resulting in overlapping incentives, duplicated payments and increasing market complexity.

FP-AMM takes a different approach.

Rather than viewing these markets as isolated mechanisms, it considers them to be complementary economic layers within a single coordinated system.

Each layer performs a distinct function, while sharing a common objective: delivering electricity safely, reliably and efficiently at the lowest long-term cost.

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Why Multiple Markets Exist

Electricity is unusual.

Unlike most commodities, it must be:

• produced continuously,
• transported across constrained infrastructure,
• balanced in real time,
• delivered with high reliability,
• and supported by long-lived physical assets.

No single pricing mechanism can efficiently solve all of these problems simultaneously.

Different markets therefore exist because they recover different costs and create different investment signals.

Understanding these distinct purposes is essential before considering how they should interact.

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Separating Economic Functions

FP-AMM separates the economic functions of the electricity system into four broad layers.

Wholesale Market

The Wholesale Market coordinates the continuous buying and selling of electrical energy.

Its primary purpose is to recover variable operating costs, particularly fuel costs, while coordinating generation and demand in real time.

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Retail Market

The Retail Market defines the relationship between electricity suppliers and consumers.

It specifies the service being purchased, including energy, power and reliability, while providing incentives for flexible consumption and protecting essential demand.

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Capacity and Availability

The Capacity and Availability layer provides long-term investment signals.

Rather than rewarding energy production alone, it compensates resources for remaining available and contributing to overall system reliability.

Within FP-AMM, these payments are linked to the marginal system value provided by each resource.

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Network Economics

The electricity network is both a physical system and an economic asset.

Network Economics determines how the costs of building, maintaining and reinforcing the grid are recovered while ensuring that congestion, losses and network constraints are reflected in operational decisions and future investment.

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A Coordinated Market Architecture

Although each market performs a different role, they should not operate independently.

Decisions made in one market inevitably influence every other part of the electricity system.

For example:

• wholesale prices influence retail costs,
• retail flexibility changes wholesale demand,
• capacity payments affect future generation investment,
• network constraints determine where electricity can actually flow.

FP-AMM therefore treats these markets as interacting components of a single economic architecture rather than disconnected mechanisms.

The objective is coordination rather than fragmentation.

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Avoiding Double Payment

One consequence of separating economic functions is that each cost should be recovered once, and only once.

For example:

• fuel costs should be recovered through energy prices,
• long-term capital investment should be recovered through capacity and availability payments,
• network infrastructure should be recovered through network charging,
• retail services should be recovered through consumer contracts.

Maintaining clear separation between these functions improves transparency and reduces the risk of duplicated incentives.

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Investment Signals

Every market also serves as an investment mechanism.

Prices influence where new generation is built, how flexible demand responds, where network reinforcement is justified and which technologies remain commercially viable.

Poorly designed markets distort these signals.

Well-designed markets encourage investment that improves the overall performance of the electricity system.

FP-AMM therefore places significant emphasis on ensuring that prices and payments reflect genuine system value rather than historical convention.

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Relationship to FP-AMM

FP-AMM does not replace every existing electricity market.

Instead, it provides a coherent framework through which these economic layers can operate together.

The Automatic Market Maker coordinates real-time operation.

Service Levels define consumer reliability.

Fair Play allocates unavoidable scarcity fairly.

Shapley Settlement recovers shared system costs according to contribution.

The Market Design framework explains how these mechanisms combine to form a complete economic architecture.

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In This Section

The following pages describe each market layer in greater detail.

• Wholesale Market explains how energy is traded and priced.
• Retail Market describes consumer contracts, Service Levels and retail pricing.
• Capacity and Availability explains how long-term reliability and investment are supported.
• Network Economics describes how network costs, congestion and reinforcement are represented within the overall market design.

Together, these layers form the economic foundation of FP-AMM.