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Electricity prices - what next?

AJJewsbury

Electricity prices look to be soaring. Seemingly the tariff I'm on isn't one of those covered by the government's price cap and it looks like the price per kWh for this coming year will be over 80% higher than a year ago. Presumably everyone else will see similar increases soon - when the price cap is next revised in April if not before - or even higher increases as the delay means their suppliers are even more out of pocket. Presumably gas prices will increase by even larger proportions.

It seems the recent inflation is primarily down to demand exceeding supply in the international wholesale gas market causing the price to rocket.

Because of the way the UK wholesale electricity market is organised, if I've understood it correctly, the most expensive generator needed at any point in time effectively sets the price for the entire market. One interesting consequence of this seems to be that those renewable/nuclear generators who have agreed a fixed 'strike price' with the convernment (which for recent wind was lower than the typical price for gas generated electricity) have to charge their customers the full market price, but can only keep the 'strike price' and have to return the remainder to the government/regulator. Effectively renewable customers are in a way subsidising fossil fuelled generation, rather than the other way around - which presumably wasn't the intention.

Hopefully things will stabilise a bit as winter passes - but what's the long term outlook?

"Reforms" to the wholesale electricity market to better protect the whole from changes in price of just one fuel?

An acceleration in the move from using imported fossil fuels for generation to more locally sourced energy (mostly renewables)?

A greater emphasis on demand reduction (more efficient appliances/lighting, significantly better insulation for buildings)?

More "time shifting" of demand - to times of day were there's non-gas generating capacity available?

Another look at minimising distribution "losses" - look again at BS 7671 appendix 17 perhaps?

   - Andy.

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  • AJJewsbury said:
    the most expensive generator needed at any point in time effectively sets the price for the entire market.

    That is true in the balancing market which operates  in the run up to gate closure (1 hour ahead of the half hour concerned).  Most power is traded well ahead of this in bilateral deals or through exchanges and suppliers end up with a portfolio of contracts to cover their expected demand.  It would be very risky for a supplier to rely wholly or excessively on the balancing market (which might explain some of the failures).  Most suppliers will hedge in some way.

    There are a number of renewable schemes around.  The Contract For Differences (CfD) that you describe is the most recent and works to effectively fix the price for the generator if they sell against the index for the difference.  Intermittent generators like wind are indexed to the day ahead price (the price for baseload for tomorrow) and more predictable generators are set twice a year based on average of seasonal (winter / summer) baseload prices.    Previously there was the Renewables Obligation which is a market price plus subsidy arrangement.  Un the RO generators income goes up and down with whatever sales contracts they have struck and they receive a subsidy through being awarded Renewable certificates (technology dependant multiplier) which they sell to suppliers or the market.

    We are quite reliant on gas for power generation and gas prices are at a record high.  Many gas generators have the option of either burning the gas to generate or selling it in the market.  What they do will depend on their power sales contracts.  If they can buy the power cheaper than they can generate they will normally do so.  They then have the option to sell the gas or simply do nothing.  UK tends to have relatively few long term gas purchase contracts so we are at the 'end of the pipe' and are exposed to global gas supply and demand.  We saw the same thing on a lesser scale a few years ago when Japan started to burn much more gas following Fukushima disaster.

    Time of day is going to become much more important again as is flexibility.  We can expect DNOs to seek flexibility to minimise network investments to meet the demand for Low carbon technology such as EVs and Heat Pumps. Some fag packet sums suggest that careful targeted use of vehicle to grid battery storage could net hundreds or low thousands of pounds under some quite plausible scenarios.  

    May you live in interesting times!

Reply
  • AJJewsbury said:
    the most expensive generator needed at any point in time effectively sets the price for the entire market.

    That is true in the balancing market which operates  in the run up to gate closure (1 hour ahead of the half hour concerned).  Most power is traded well ahead of this in bilateral deals or through exchanges and suppliers end up with a portfolio of contracts to cover their expected demand.  It would be very risky for a supplier to rely wholly or excessively on the balancing market (which might explain some of the failures).  Most suppliers will hedge in some way.

    There are a number of renewable schemes around.  The Contract For Differences (CfD) that you describe is the most recent and works to effectively fix the price for the generator if they sell against the index for the difference.  Intermittent generators like wind are indexed to the day ahead price (the price for baseload for tomorrow) and more predictable generators are set twice a year based on average of seasonal (winter / summer) baseload prices.    Previously there was the Renewables Obligation which is a market price plus subsidy arrangement.  Un the RO generators income goes up and down with whatever sales contracts they have struck and they receive a subsidy through being awarded Renewable certificates (technology dependant multiplier) which they sell to suppliers or the market.

    We are quite reliant on gas for power generation and gas prices are at a record high.  Many gas generators have the option of either burning the gas to generate or selling it in the market.  What they do will depend on their power sales contracts.  If they can buy the power cheaper than they can generate they will normally do so.  They then have the option to sell the gas or simply do nothing.  UK tends to have relatively few long term gas purchase contracts so we are at the 'end of the pipe' and are exposed to global gas supply and demand.  We saw the same thing on a lesser scale a few years ago when Japan started to burn much more gas following Fukushima disaster.

    Time of day is going to become much more important again as is flexibility.  We can expect DNOs to seek flexibility to minimise network investments to meet the demand for Low carbon technology such as EVs and Heat Pumps. Some fag packet sums suggest that careful targeted use of vehicle to grid battery storage could net hundreds or low thousands of pounds under some quite plausible scenarios.  

    May you live in interesting times!

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