MSE News: Guest Comment - Why are energy prices increasing?

magyar

zeupater wrote: »

Hi

Which 50%+ of generation would that be, or are you relating to capacity ? .... if so, shouldn't the remark be - if you have 50%+ of your generating capacity idle at any one time, then you don't have a very efficient generating strategy ....

Z

No, that would be a very different point. It is generation I was referring to, not capacity - the latter being irrelevant in this respect.

I was postulating that by 2025, we're likely to have about 50% of our generation coming from either nuclear or renewables, both of which will sell their power under a CFD system (probably to a central purchasing company), and receive effectively a fixed price per unit.

Therefore only 50% of the electricity generated would actually be under a market mechanism which is very ineffective and open to gaming.

zeupater

magyar wrote: »

No, that would be a very different point. It is generation I was referring to, not capacity - the latter being irrelevant in this respect.

I was postulating that by 2025, we're likely to have about 50% of our generation coming from either nuclear or renewables, both of which will sell their power under a CFD system (probably to a central purchasing company), and receive effectively a fixed price per unit.

Therefore only 50% of the electricity generated would actually be under a market mechanism which is very ineffective and open to gaming.

Okay, I follow your logic, so there's a simple answer ..... the 'central purchasing company' invite the various suppliers to tender for supply of 'blocks' of energy on a daily basis, effectively an energy supply auction, the least competitive vendor is left with idle capacity and an incentive to bid lower next time round ...... works in most other business sectors ....

Z

magyar

zeupater wrote: »

Okay, I follow your logic, so there's a simple answer ..... the 'central purchasing company' invite the various suppliers to tender for supply of 'blocks' of energy on a daily basis, effectively an energy supply auction, the least competitive vendor is left with idle capacity and an incentive to bid lower next time round ...... works in most other business sectors ....

Z

You miss my point: under the proposed CFD mechanism, whatever the 'out-turn' price of this auction (which is I presume exactly what they would do) is, the generator gets 'topped up' to an agreed strike price which makes that technology economic.

So there is little incentive for the generator to run their plant at a time when prices are high - they would run nukes when the price was low, knowing the taxpayer is topping them up - and gas when prices were high.

grahamc2003

zeupater wrote: »

Hi

Which 50%+ of generation would that be, or are you relating to capacity ? .... if so, shouldn't the remark be - if you have 50%+ of your generating capacity idle at any one time, then you don't have a very efficient generating strategy ....

Z

I think under current plans, this scenario is the most likely driver ensuring higher prices in the years ahead - a large overcapacity in a capital intensive industry can't be sen as anything other than an inefficient strategy. It just means very expensive plant is idle much of the time.

Talking about pricing mechanisms in 2025 in this industry is nothing more than guesswork - the pricing philosophy has changed drastically over the years, latterly to favour renewables. I'm pretty sure that will be seen as unacceptably expensive in the years ahead, and new pricing for electricity will come along to lower the massive wasteage current pricing forces. This isn't any sort of 'free market', and it never has been. Electricity has always been driven by politics - in a way, it's just too important to be out of government control (which is frightening in itself!). Any transactions/auctions/bidding, CFD mechanisms etc may give the impression of some sort of marketdriven actions, but in reality, all those things happen (if they do) under a tightly controlled market framework which reflects the government priorities of the day (therefore likely to change a lot).

magyar

grahamc2003 wrote: »

Talking about pricing mechanisms in 2025 in this industry is nothing more than guesswork

It's far from guesswork. This is the whole point: Decc have just brought out a white paper proposing the CFD system which will support both large renewables and large nuclear, neither of which would be economic without some sort of support mechanism.

In order to invest in new nuclear build, developers will need to know there is a system in place which will support their construction. Even getting to the point of an investment decision will take tens of millions of pounds, with no return until they start generating. Companies simply will not spend this unless they know there's a credible system in place to give them a return.

The first CFDs will be issued in 2014, for plants which would start generating in 2017 onwards. It's just the nuclear that won't be around until about 2025.