So the CON is in the wholesale price calculation?

wrf12345

I have been "told off" many times for saying there is a con in the way wholesale energy price is calculated but from what Ms Truss said it seems that the frightening chart of electricity rising, almost exponentially, is not the average electricity price but actually a chart of the max price paid for a source of electricity on any particular day - so if it comes from a gas generator, for instance, at 60pkwh that is what appears on the chart rather than the averaged down price to take into account much cheaper sources. She seemed to be saying that if one producer of expensive electricity was paid Xpkwh that all the other producers would also get X regardless that it might have cost them a fraction of that price to produce electricity.

This is so unfair to the consumer, to such a mind warping extent, that I will be happily corrected, but if it is correct then it is decades of being ripped off! 

tacpot12

While it is certainly true that wholesale buyers of electricity pay the same price for electricity that is generated using expensive methods as they do for electricity that is generated cheaply within each half-hour, I don't know whether the price is the average of the cost of electricity available in that half-hour, or the maximum cost. If it is the maximum cost, this automatically builds in a massive profit margin for 'cheap' generators, and potentially no margin for 'expensive' generators. I doubt the expensive generators would stand for that, so perhaps the price does represent the weighted average based on the amount of electricty available from each source.

I don't see it as being a 'con' if the rules of pricing are known to all in the market - companies need to have an idea of what they will be paid in order to make investment decisions. There might be a better way of doing things. OFGEM seems to be pretty toothless and lacking in initiative. 

[Deleted User]

But that's how an under-supplied market works.  If you have generated some 'cheap' electricity, and you know that your customer (if they don't buy from you) will have to buy expensive electricity, there is no reason to make your price any lower than the expensive seller.

But that only applies to spot trades.  Anything done with a CfD, or a PPA, or a future purchase contract, or any one of the other "not spot" arrangements will be at whatever price was decided in the contract.

jj_43

wrf12345 said:

I have been "told off" many times for saying there is a con in the way wholesale energy price is calculated but from what Ms Truss said it seems that the frightening chart of electricity rising, almost exponentially, is not the average electricity price but actually a chart of the max price paid for a source of electricity on any particular day - so if it comes from a gas generator, for instance, at 60pkwh that is what appears on the chart rather than the averaged down price to take into account much cheaper sources. She seemed to be saying that if one producer of expensive electricity was paid Xpkwh that all the other producers would also get X regardless that it might have cost them a fraction of that price to produce electricity.

This is so unfair to the consumer, to such a mind warping extent, that I will be happily corrected, but if it is correct then it is decades of being ripped off! 

Your understanding is correct. But let's take a step back. We have electricity produced using a variety of methods, some high cost (gas), some low cost (wind) and one price (electricity from sources all is treated the same). There are many goods that are produced in a number of different ways, some high cost, some low cost. Competition and the profit motivate to reduce costs should direct production using a lower cost method. This is the basis of the economic system that you experience every time you buy or sell something. This price setting method isn't the problem but the impact on customers is clear.

Yes the low cost producer will be doing very well as the price is set by the requirement where demand equal supply (currently gas). What this should do is encourage electricity production by these low cost methods (solar, wind, flexible demand) so more demand can be provided by these methods.

But it takes time to build wind farms, solar, nuclear and there are a lot of vested interests which preferring directing investment to high cost production, gas, ignoring the price signal.

jj_43

tacpot12 said:

While it is certainly true that wholesale buyers of electricity pay the same price for electricity that is generated using expensive methods as they do for electricity that is generated cheaply within each half-hour, I don't know whether the price is the average of the cost of electricity available in that half-hour, or the maximum cost. If it is the maximum cost, this automatically builds in a massive profit margin for 'cheap' generators, and potentially no margin for 'expensive' generators. I doubt the expensive generators would stand for that, so perhaps the price does represent the weighted average based on the amount of electricty available from each source.

I don't see it as being a 'con' if the rules of pricing are known to all in the market - companies need to have an idea of what they will be paid in order to make investment decisions. There might be a better way of doing things. OFGEM seems to be pretty toothless and lacking in initiative. 

the price is the highest 1MWh in each half hour.

[Deleted User]

jj_43 said:

tacpot12 said:

While it is certainly true that wholesale buyers of electricity pay the same price for electricity that is generated using expensive methods as they do for electricity that is generated cheaply within each half-hour, I don't know whether the price is the average of the cost of electricity available in that half-hour, or the maximum cost. If it is the maximum cost, this automatically builds in a massive profit margin for 'cheap' generators, and potentially no margin for 'expensive' generators. I doubt the expensive generators would stand for that, so perhaps the price does represent the weighted average based on the amount of electricty available from each source.

I don't see it as being a 'con' if the rules of pricing are known to all in the market - companies need to have an idea of what they will be paid in order to make investment decisions. There might be a better way of doing things. OFGEM seems to be pretty toothless and lacking in initiative. 

the price is the highest 1MWh in each half hour.

And National Grid's balancing price jumps about like a lunatic partly because that.

new_owner

jj_43 said:

But it takes time to build wind farms, solar, nuclear and there are a lot of vested interests which preferring directing investment to high cost production, gas, ignoring the price signal.

Especially when more wind and solar have been refused planning in 2022 than ever before.

Section62

new_owner said:

jj_43 said:

But it takes time to build wind farms, solar, nuclear and there are a lot of vested interests which preferring directing investment to high cost production, gas, ignoring the price signal.

Especially when more wind and solar have been refused planning in 2022 than ever before.

What's the context for that?

Could it be that more (inappropriate) applications for wind and solar have been under consideration in 2022 than ever before?

Could it be that war in the place where a significant proportion of Europe's grains, seeds and food oils come from have led to some re-evaluation of the need to protect agricultural land?

I think the reasons behind this statistic will be complex.

jj_43

[Deleted User] said:

jj_43 said:

tacpot12 said:

While it is certainly true that wholesale buyers of electricity pay the same price for electricity that is generated using expensive methods as they do for electricity that is generated cheaply within each half-hour, I don't know whether the price is the average of the cost of electricity available in that half-hour, or the maximum cost. If it is the maximum cost, this automatically builds in a massive profit margin for 'cheap' generators, and potentially no margin for 'expensive' generators. I doubt the expensive generators would stand for that, so perhaps the price does represent the weighted average based on the amount of electricty available from each source.

I don't see it as being a 'con' if the rules of pricing are known to all in the market - companies need to have an idea of what they will be paid in order to make investment decisions. There might be a better way of doing things. OFGEM seems to be pretty toothless and lacking in initiative. 

the price is the highest 1MWh in each half hour.

And National Grid's balancing price jumps about like a lunatic partly because that.

I suspect that bouncing is the “system” flipping between “short” & “long” with its price for increasing or decreasing generation to match demand. It’s not due to the 1 MWh PAR.

[Deleted User]

jj_43 said:

[Deleted User] said:

jj_43 said:

tacpot12 said:

While it is certainly true that wholesale buyers of electricity pay the same price for electricity that is generated using expensive methods as they do for electricity that is generated cheaply within each half-hour, I don't know whether the price is the average of the cost of electricity available in that half-hour, or the maximum cost. If it is the maximum cost, this automatically builds in a massive profit margin for 'cheap' generators, and potentially no margin for 'expensive' generators. I doubt the expensive generators would stand for that, so perhaps the price does represent the weighted average based on the amount of electricty available from each source.

I don't see it as being a 'con' if the rules of pricing are known to all in the market - companies need to have an idea of what they will be paid in order to make investment decisions. There might be a better way of doing things. OFGEM seems to be pretty toothless and lacking in initiative. 

the price is the highest 1MWh in each half hour.

And National Grid's balancing price jumps about like a lunatic partly because that.

I suspect that bouncing is the “system” flipping between “short” & “long” with its price for increasing or decreasing generation to match demand. It’s not due to the 1 MWh PAR.

I did say "partly", as the identity of the responding generator contributes to the system price - but yes, it's a very weak link as you suggest.

MWT

The generators do not depend on the day-ahead market for selling the majority of their production though, that would be a risky way to plan on covering their costs, and similarly the well run suppliers do not want to depend on those prices for their requirements either, so they will contract for supply many months ahead, this is the 'hedging' we hear about.

So it is not just about the short term price...