From the BBC:
The government plans to move nuclear and renewable electricity generators to lower price contracts to cut bills, Prime Minister Liz Truss has said.
"Renewable and nuclear generators will move on to contracts for difference, to end the situation where electricity prices are set by the marginal price of gas," Truss told Parliament.
The price paid to these companies is often set by the most costly generator. That is currently hugely expensive gas...
I thought the govt sold off the National Grid in 1995, so why they are now getting involved escapes me.
And why anybody - government or private - would sign up to such terms is a mystery to me. What's wrong with just setting a price of Xp per MWh (which will of course vary by time of day and seasons of the year) and buying from anybody willing to sell at that price? If that means paying France for their spare nuclear, so what?
Somebody who does these calculations for the National Grid once tried to explain it to me and had my head spinning. I am aware that we - as a society - want to have some slack or over-capacity in the system (electricity being as fundamental as it is; we could go a few days without mains gas, rubbish collection or the NHS, but not without leccy), so we have to pay generators simply for having things on stand-by. And we need a mix for security - renewables vs fossil vs nuclear; and domestic vs imported equipment and fuel, so better to err on the side of renewable/domestic, even if that means slightly higher prices (quite how much higher is a judgement call).
At least it explains why domestic prices for electricity went up so much. I thought - wrongly as it turns out - that the National Grid would simply buy much less electricity from the high-cost generators (using gas) until they have sorted themselves out and more from other sources.
Prestigious
33 minutes ago
16 comments:
They start with the lowest cost generators and move upwards from there based on demand via an auction process.
What do you propose they do when the peak demand is more than wind/solar and nuclear can provide?
That's where gas comes in, along with diesel generators when we're really short on supply.
Rationale for the marginal cost pricing is to provide profits for the lower cost operators to add capacity thus bringing down the overall cost of the mix of supply over time.
You can argue that this is excess profits and has only been returned to shareholders, but the point is that where large profits can be made, other companies come in to take some of that for themselves. Hence competition drives prices down.
Now the government have not only removed the incentive to add extra (cheap) capacity, they have fixed the lower cost supplies at a higher level than it otherwise would have been via the long term CFDs.
And these are the people that will save us by nationalising the energy companies!
Analogies only go so far - but let's see if we can run with it...
In a fully competitive market with many participants, then your example is reasonable.
What happens when you have very few buyers (or just one - National Grid for electricity) and Aldi/Lidl are closed to revamp their shop(s) or are waiting on a delivery?
They are not going to have lots of stores open for a single buyer so you can't just go to the next town and shop there.
What happens is you push the price curve upwards. Worst case, you end up paying F&M prices for all your purchases.
So you pay Aldi/Lidl the same price as F&M when you have to therefore giving them a reason to open another shop that can supply you if the local one is unavailable for some reason.
That way you rarely have to go to more expensive suppliers.
M, the single purchaser buying from an oligopoly might skew things somewhat, but my principle stands.
Let's say I'm the lowest cost producer (coal?) and I normally sell 100 MWh for £100 each in a normal period (hour, day, whatever), and I know perfectly well a) that the highest cost producer is going to hold out for £300 or b) it is a particularly cold/high demand period.
I then check my coal reserves and know that I can short term generate 120 units, I can hold out for £150 a unit for those 120 units something, to match the next highest cost generators (wood chips? diesel? no idea). I make my extra marginal profit and use it to stockpile more coal (at maybe higher prices) or set about increasing my capacity, depending on whether I think this is a short term or long-term situation.
If I think that gas will be uncompetitive for a few weeks, I increase capacity short term (pay people overtime). If I think gas will be out of the running long term, I increase longer term capacity (build another turbine, adapt existing ones, whatever).
All the while, my competitors are doing same thing, and I can guess their actions, even if we aren't openly allowed to collaborate.
These people have been doing this for decades, and they always have long term plans, contingency plans, market observers, weather forecasters, statisticians not to mention engineers and trained/ experienced staff actually running things.
M, here's a random recent example to illustrate my points
https://www.proactiveinvestors.co.uk/companies/news/986876/drax-shares-fired-up-on-winter-coal-burning-deal-with-national-grid-986876.html
The other thing worth adding into the mix for discussion is incentives:
Q: What do we want to happen at peak demand times (or for the good of Gaia)?
A: Reduce demand.
Q: How do we achieve this?
A: By making electricity more expensive at peak times.
So, marginal pricing very strongly signals (via prices) that demand is too high. If you allow supplies at different price tiers, then that effect is diminished and we'd keep demand at or near peak for extended periods.
M, what has that got to do with anything?
I hope you realise that my post was about the price which the National Grid PAYS generators for leccy.
Now you try to disprove my logic by talking about the price which NG CHARGES customers for leccy.
(Of course they should have peak prices for customers).
The problem with private electricity supply is balancing supply and demand on a hour by hour rather than month by month basis. This means you have to have a monopoly/monopsony organisation like the National Grid and, since it's a monopoly, it needs to be state run. In addition, unless you have the farcical situation where NG sells the same electricity to different retailers for different prices, there is little point in having any "competition" between retailers. They don't actually add any value to the electricity they buy from NG and sell to you.
"If I think that gas will be uncompetitive for a few weeks, I increase capacity short term (pay people overtime). "
It doesn't work like that. Steam turbines take days to get on line and days to cool down, too. How many people are employed is irrelevant, it is all to do with preventing the parts moving at high speed coming into contact with the parts not moving at all as the whole machine gets bigger as it warms up from room temperature to the insanely high pressures and temperatures of superheated steam. If you get it wrong, you end up picking up pieces of turbine from five miles away.
B, sure, that was just an example. Some things you can turn on and off in minutes (hydro) others take days or weeks or years. I hope that is just assumed.
B From memory nuclear generation can be made quite responsive to changes in demand? Or has my memory failed?
Let's try another analogy...
Your child is diabetic and needs 10 units of insulin per day. They can't make do with less as they will become hyperglycemia which you want to avoid AT ALL COSTS!
* Supplier A can provide 5 units at a cost of £0.20 per unit.
* Supplier B can provide 4 units at a cost of £1 per unit.
* Supplier C can provide 10 units at cost of £5 per unit.
Based on the above, you budget £10 per day for insulin taking 5 units from A, 4 units from B and 1 unit from C.
Now, what happens if Supplier A and Supplier B can't provide any insulin on a specific day?
What are you willing to pay ensure your child is not put at risk?
Presumably you would pay £50 to Supplier C for 10 units?
Now supplier A and B see the market for insulin could support a price of £50 per day, what price would they set for their production?
Would they say "we're happy with the money we make" and keep it the same?
U, it all depends on what you mean by "responsive to changes in demand". Any generation that relies on its energy starting as heat is going to use a turbine to convert that heat to mechanical energy and hence electricity. Although gas turbines, I believe, which are basically terrestrial jet engines are quicker to bring on line, nuclear will, like coal, be using steam turbines. As Mark says, it's only really renewables that can be turned on and off as they don't use heat.
M, poor example. In a competitive market, when patents expire, there will plenty of generics available for about 10p. If all their supply chains break down, sure, I'd pay the the 10 X £5 for a few days until generics are available again
U and B, I'm no expert on finer engineering questions. It's different long term and short term for different types, but things like cold winters or evening peak demand are known well in advance
MW - How is it a poor example?
Patents are (or can be) irrelevant for this analogy.
The low cost producer is not necessarily low cost because the patents have expired - it could be because they run the factory on renewables and so can only produce insulin when the wind blows or the sun shines (so no night shift).
And the point is that the marginal pricing in the electricity market is for the times when there is a dearth of supply - which is the same as you stating you'd "pay the the 10 X £5 for a few days until generics are available again".
No one is suggested you always pay marginal prices for electricity, only during times when demand exceeds supply.
M, it's a poor example because it is hopelessly inapplicable to the actual situation.
There is plenty of coal, oil, wood chips, wind, water etc, there is no surge in demand, no Carrington Event, there is not even a 'shortage' of gas, it is just that through combination of stupidity, corruption (plus what I would consider to be a reasonable motive, punishing Russia, even if that has backfired), that gas prices have spiked to unsustainable levels.
If there were suddenly no coal, oil etc, then sure, we'd have to use gas and only gas and pay ridiculous prices. But no market forces or sensible market negotiations say that the price of leccy should treble, up 10% or 20%, OK, that's life.
I refer you again to my Aldi v Fortnum's example.
For sure, coal and oil generators might take the piss 'a bit' and bump up their prices 'a bit' in the interim, but even at the old price, they are still covering their marginal costs (a lot of their costs are fixed - it's costs money to run a power station, even if it's on stand-by) and have every incentive (absent cartel behaviour i.e. a reasonable number of competitors) to not take the piss 'too much'.
If they do take the piss, NG just says, OK, we are going to stop buying from gas fired power stations, that's out of the equation, here's the max price we are prepared to pay for whatever number of MWh. If the coal, oil, wind people refuse to deliver, they are still stuck with their massive sunk and fixed costs and will be losing a shit load of money. So they will crack first. Failing that, the govt just steps in and forces them (political cost of black outs).
Incidentally, I can remember when the electricity generators weren't allowed to use natural gas, I suppose as it was considered a waste when coal was available. Only "sour" gas could be used, gas that couldn't be sold to domestic users as it had contaminants in it. Alarmism changed all that. Cui bono, I wonder?
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