OFGEM kWh calculation for electricity and it's over strong track of gas whole sale prices

Hellem

Wanting to understand why UK prices seem to be much more impacted then the rest of Europe I looked at this on the OFGEM site: ofgem.gov.uk/energy-data-and-research/data-portal/wholesale-market-indicators
Reading these documents (patience required) came across this phrase: Gas prices drive electricity prices as gas-fired generation is the marginal fuel in GB, so it sets wholesale power prices. They seem to say that gas sets the whole sale price and neglecting that out of the 80TWH/quarter of electricity consumed in britain they base their wholesale reference wholly on the market price of the 27TWh/quater of gas! 
It seems to suggest that they are neglecting to take green (cheaper) energy part (that's 66%) into account in their kWh calculation and would go someway to explain the extreme price venerability of the UK market compared with the rest of Europe. Am I wrong or is this like the student loan interest rates? Please comment.

Spies

From a Tweet from Octopus Energy:

In the current outdated system, the most expensive type of energy (usually gas) sets the price for ALL types of energy, including renewables. It's bonkers. More: https://octo.ps/3QjHYXp

QrizB

Hellem said:

Am I wrong or is this like the student loan interest rates? Please comment.

You are wrong. @[Deleted User] gave a commentary on this in another thread:

https://forums.moneysavingexpert.com/discussion/comment/79472190/#Comment_79472190

[Deleted User]

It's not entirely incorrect to describe it as "over strong", but you're overestimating both how far "over strong" it is and by how much that affects the calculation.

A lot of why the UK market fluctuates more than the EU market is because it's smaller.  Also because there is less storage, we're not so geographically or technologically diverse, and there are no big state actors who tend to provide market inertia.

I'm not averse to efforts to divorce the connection further though.

chris_n

My understanding is that all (maybe there are some on fixed price) producers are paid at the rate of the most expensive generation on the grid.
In the case of renewables they are selling at way over the 'strike' price. However the difference between the strike price and the selling price is paid to the Low Carbon Contracts company. This company also pay the difference if the generation selling price is less than the strike price.
Not quite sure how the government fits into this loop, maybe they finance the Low Carbon Contracts Company.
Either way at this moment in time the consumer is hit with the costs but in defence of the system it was never designed to cope with gas prices rising the way they have.

https://www.lowcarboncontracts.uk/news/announcement/reconciliations-how-does-money-move-through-the-cfd-scheme-resources-0

[Deleted User]

chris_n said:

My understanding is that all (maybe there are some on fixed price) producers are paid at the rate of the most expensive generation on the grid.
In the case of renewables they are selling at way over the 'strike' price. However the difference between the strike price and the selling price is paid to the Low Carbon Contracts company. This company also pay the difference if the generation selling price is less than the strike price.
Not quite sure how the government fits into this loop, maybe they finance the Low Carbon Contracts Company.
Either way at this moment in time the consumer is hit with the costs but in defence of the system it was never designed to cope with gas prices rising the way they have.

https://www.lowcarboncontracts.uk/news/announcement/reconciliations-how-does-money-move-through-the-cfd-scheme-resources-0

Whenever a supplier buys energy, it pays a levy into an LCC account - these levies are calculated daily and returned to generators with a CfD agreement based on their output.  The levy has been set to £0 per MWh for quite some time (since September 2021).

Whenever a generator sells energy over its strike price, it pays a CfD contribution into a different LCC account.  These are totalled on a quarterly basis.

If the LCC CfD account has excess at the end of a review period it pays this money back to electricity suppliers based on their market share.  These payments are taken into account when determining the effective wholesale price component of the price cap - one of the reasons why "wholesale price" in the cap isn't the same as "wholesale price" on the spot market.

In the current period, the payments from generators into the LCC CfD account are expected to total over £450 million. 

QrizB

chris_n said:

My understanding is that all (maybe there are some on fixed price) producers are paid at the rate of the most expensive generation on the grid.

Not all. There are lots of suppliers who are buying energy from generators on fixed-price contracts that were put in place months or years ago, before the recent price inflation.

Not quite sure how the government fits into this loop, maybe they finance the Low Carbon Contracts Company.

The LCCC belongs 100% to BEIS, and BEIS is a department of the British government. There are hundreds of these organisations in the UK.

chris_n

QrizB said:

chris_n said:

My understanding is that all (maybe there are some on fixed price) producers are paid at the rate of the most expensive generation on the grid.

Not all. There are lots of suppliers who are buying energy from generators on fixed-price contracts that were put in place months or years ago, before the recent price inflation.

Not quite sure how the government fits into this loop, maybe they finance the Low Carbon Contracts Company.

The LCCC belongs 100% to BEIS, and BEIS is a department of the British government. There are hundreds of these organisations in the UK.

Ok thanks for that, not disagreeing but trying to understand.
 I assume most of the wind and solar (which are probably currently the cheapest) are on Cfd's and Hinkley Point will be too.
If most of the gas generation is on sold up front fixed price then that doesn't explain the massive increases in electricity cost. If the current nuclear fleet are fixed cost then that only accounts for ~15% of current generation.

[Deleted User]

chris_n said:

QrizB said:

chris_n said:

My understanding is that all (maybe there are some on fixed price) producers are paid at the rate of the most expensive generation on the grid.

Not all. There are lots of suppliers who are buying energy from generators on fixed-price contracts that were put in place months or years ago, before the recent price inflation.

Not quite sure how the government fits into this loop, maybe they finance the Low Carbon Contracts Company.

The LCCC belongs 100% to BEIS, and BEIS is a department of the British government. There are hundreds of these organisations in the UK.

Ok thanks for that, not disagreeing but trying to understand.
 I assume most of the wind and solar (which are probably currently the cheapest) are on Cfd's and Hinkley Point will be too.
If most of the gas generation is on sold up front fixed price then that doesn't explain the massive increases in electricity cost. If the current nuclear fleet are fixed cost then that only accounts for ~15% of current generation.

Broadly speaking - new wind and the unbuilt nuclear are on CfD, with gas, old nuclear and old wind on traditional contracts.  Old wind is making quite a lot of money at the moment on some contracts.  Up front fixed prices don't mean years in advance, it can be a few days or hours in advance - these prices track but are not the same as the spot price.  The balance between the length and timing of contracts is different for each generator, supplier, intermediate trader, bank investment house,....

edit: Oh, and its also a different price in each half-hour of the day on every market.  You could buy 100MWh for delivery at 10:30 tomorrow right now, then sell it to someone else at a different price at 9am, and then buy it again from someone different at 10:25

chris_n

Thanks very much for that, it improves my understanding of who is on Cfd's, I assumed most wind was on Cfd's as there is a lot listed on the LCC website.
The following quote says to me that the rest of the market is broadly following the cost of gas powered generation. The sceptic in me also wonders why there has been constant generation with inefficient (expensive) Open Cycle gas turbines for the last few days despite constant net export to Europe. 

' with gas, old nuclear and old wind on traditional contracts.  Old wind is making quite a lot of money at the moment on some contracts.  Up front fixed prices don't mean years in advance, it can be a few days or hours in advance - these prices track but are not the same as the spot price.'

wrf12345

At least Ms Truss seems to understand how it operates and wants to change it, unlike Boris who did not seem very interested...