5 ms·

The EU has a pricing system where all the electricity is sold at the price of the most expensive source. For example, if at a given moment you need 100 MW of so

The EU has a pricing system where all the electricity is sold at the price of the most expensive source. For example, if at a given moment you need 100 MW of solar at €10, 100 MW of wind at €12, and 1 MW of gas at €150, consumers will be billed €150 for each and every MW they consume. I get the intended logic behind the system, which is to incentivize cheap sources (if you run cheap sources, you keep the difference with respect to gas as pure profit), but IMO it's prone to gaming (a lot of incentive to have that single MW of gas up, and electricity companies are an oligopoly...) and doesn't work well even without gaming (if the price of gas is disproportionately high with respect to the rest of sources, things begin to just not make sense). Spain and Portugal negotiated to (temporarily, I think) get out of this system and change it to something saner (with the same basic principles but some compensations so that gas price doesn't dominate anything). The so-called Iberian exception. And it's working: while our prices are still high with respect to historical standards (due to Ukraine and the general underlying energy crisis), they now tend to be much lower than the rest of the EU most of the time.

ragebol 4y ago
> or example, if at a given moment you need 100 MW of solar at €10, 100 MW of wind at €12, and 1 MW of gas at €150, consumers will be billed €150 for each and every MW they consume. Since the power is exactly the same, people don't buy a MW of solar or wind, they just buy a MW, regardless of the source. If you were (owning) a generator, why would you sell your electricity for €12/unit when people are willing to buy it at €150/unit? And since it's a free market, otherwise a middleman will come swooping in to rake in the difference. Market dynamics dictate that when people/businesses are no longer willing to buy a MW for €150, the demand drops, the most expensive generators are not needed anymore and the overall price drops to the new equilibrium price. Also: my fixed contract price per kWh is about €0.81 always, which is, uh, a lot. A friend of mine recently switched to a dynamic tariff and payed about €0.30-0.40 when I last asked him about it. Pondering...
- implements 4y ago
  > Market dynamics dictate that when people/businesses are no longer willing to buy a MW for €150, the demand drops, the most expensive generators are not needed anymore and the overall price drops to the new equilibrium price. Not an economist, but “inelastic market / supply” answers that, I think.
  - ragebol 4y ago
    It might drop, but a little only. Apparently, paying €150 for a MW is acceptable for companies. But the alternative is shutting down, so the cost gets forwarded to consumers of their products eventually. This is of course dampened by middlemen who sell for a fixed price and take the risk of having buy for a high price. And a few small NL energy companies (or rather middlemen) have gone bankrupt when they didn't have the reserves.
- dustymcp 4y ago
  I Also switchede from static to variable billing and saved about 50% on my bill, the static pricing contracts are not worth it currently, they where in August tho, at that point my contract was 50% cheaper than the variable price..
- Al-Khwarizmi 4y ago
  What you explain was also implicitly included when I said "I get the intended logic" (just didn't want to make my post too long). The thing is that this so-called free market works well for generating companies, but makes no sense for consumers. It doesn't matter how cheap producing the bulk of the electricity is, as long as gas isn't turned off completely the consumer always pays the price of gas. In a country evolving from (say) 100% gas to 90% renewables and 10% gas (I know I'm simplifying, these simple mixes don't really exist) the cost of electricity generation would fall through the floor, but the consumer would pay exactly the same. This is clearly dysfunctional, regardless of how nice it can be in theory. It's also not inevitable. You can set a cap to the prices, but then compensate sources that go over the cap (in practice, gas) so they don't operate at a loss. This is what the Iberian exception system is doing, and it works.
  - Gwypaas 4y ago
    What you will accomplish with trying that is that producers will bid what they expect the price to be, instead of their production cost. Thus we still get the marginal cost like all other raw resource markets, but with extra complications. That is a much less efficient system with larger risks.
    - Al-Khwarizmi 4y ago
      They already do that with the existing system. It often happened in Spain (pre Iberian exception) that gas isn't even used, but the price of hydro was set to something like (expected price of gas - 5 €) because they knew they could. So we end up paying the price of gas even when we don't use gas! Honestly, some people talk about the existing system as if it's this perfect free market... but in practice the bar is very low. The Iberian exception system is already showing in practice that it works better.
  - ragebol 4y ago
    Also an option indeed, but eventually the consumers pay for this difference. The incentive with the 'normal' merit order model is that the most expensive generator is that they make barely a profit if at all. Not too attractive. Better build generation capacity that has lower operating costs (ie. no fuel, ie. renewables). At least, that is the theory. I really wonder what happens to this model and the incentives once renewables are the majority and stretch further along the merit-order curve's X axis, pushing out fossil fuels.
sendfoods 4y ago
Interesting, and disappointing. Why is there no discussion about making the Iberian exception the rule?
- Al-Khwarizmi 4y ago
  There is in fact some discussion, but half-hearted. There doesn't seem to be the political will to actually do it. Why? The response to that question is inevitably political (because it's a political question). My personal opinion: because the EU has swallowed neoliberal ideological kool-aid hook, line and sinker, and will blindy follow it even if it leads to self-harm (which is funny, because the US, which is the main source of that ideology, has a much more pragmatic approach and will happily ignore it when it's not beneficial: see all the bans going on with China, etc.) Unpopular opinion here, I guess, but that's my take on it.
bryanlarsen 4y ago
This system is a rule of free market economics summarized as "the price of a commodity is its marginal cost". So changing this system means meddling in the free market. There are times and places where meddling is appropriate and this is likely one such, but there are significant consequences and side effects to doing so, so shouldn't be done lightly.
- hdkrgr 4y ago
  There are also significant consequences and side effects to having a 'free market', they are called externalities and in the case of fossil fuels they lead to huge unconsidered costs. I'm putting 'free market' in quotes, because even beyond externalities, the current system with zonal uniform pricing is only 'free' for a very narrow view of what constitutes a commodity or a marginal cost. Consider two households: (a) in northern Germany close to the Danish border, located in a small town with lots of local wind turbine capacity, (b) in Southern Bavaria with very limited renewable energy production close by. There's also no adequate power transport infrastructure to get the renewable energy from the North (or elsewhere in Europe) to household (b), mostly because local politicians in Bavaria oppose putting up any visible infrastructure, whether power lines or wind turbines). Now, during peak wind hours, a significant portion of the wind turbines in the north will go offline because the network cannot handle the load, while household (b) still needs to get their power from gas. [This is not a contrived example, but reality in Germany.] Yet (a) and (b) both pay the same price -- that of the gas producer. How is this a 'free' market? But to your point, the good news is that people are taking electricity market design very seriously, not lightly. (Section 6 of this white paper is a good read that outlines many of the current market inefficiencies (Disclaimer: my former academic advisor and a few former colleagues are coauthors)): https://synergie-projekt.de/wp-content/uploads/2021/12/Electricity_Market_Design_2030___2050__Shaping_future_electricity_markets_for_a_climate_neutral_Europe_final.pdf https://synergie-projekt.de/wp-content/uploads/2021/12/Elect...
- the_third_wave 4y ago
  Electricity is not sold on a "free market" anyway - I can not just hook up my nuclear power station without paying a specific tax aimed at just nuclear power generation - here in Sweden it is called "effektskatt" (output-power based tax) and is responsible for making it very hard or impossible to profitably run nuclear power stations [1]. The government went so far as to change the leadership for the state-owned power company Vattenfall because the existing leadership was not deemed to be cooperative in leading the change to "renewable" power sources. On the other hand I may be able to put a wind turbine on my premises and get subsidised for doing so which has the opposite effect of the mentioned tax on nuclear power in that it makes it easier to generate wind power profitably. Some users are freed from all sorts of taxes which all others have to pay, here in Sweden this is - or was, the current government seems to want to change this policy - the case for the likes of Facebook, Google and Microsoft who were allowed to establish data centres with the promise of nearly tax-free electricity. These data centres take so much power that the regions where they have been established have found it difficult to allow other energy-intensive industry to establish there for lack of power. Margin pricing on electricity is counterproductive and should be abolished since it makes it more profitable to underinvest in more efficient power generation technologies since that would have a negative effect on market prices. It is better to keep a few inefficient gas turbines online and make sure these are needed at peak hours since they will drive up the market price for all generated power. As long as margin pricing is in place I do not expect something like grid-scale battery storage for peak demand to take hold since that has the potential to drive down prices. [1] https://naringslivets-medieinstitut.se/det-var-marknaden-som-stangde-karnkraften/ https://naringslivets-medieinstitut.se/det-var-marknaden-som...

ragebol 4y ago

> or example, if at a given moment you need 100 MW of solar at €10, 100 MW of wind at €12, and 1 MW of gas at €150, consumers will be billed €150 for each and every MW they consume. Since the power is exactly the same, people don't buy a MW of solar or wind, they just buy a MW, regardless of the source. If you were (owning) a generator, why would you sell your electricity for €12/unit when people are willing to buy it at €150/unit? And since it's a free market, otherwise a middleman will come swooping in to rake in the difference. Market dynamics dictate that when people/businesses are no longer willing to buy a MW for €150, the demand drops, the most expensive generators are not needed anymore and the overall price drops to the new equilibrium price. Also: my fixed contract price per kWh is about €0.81 always, which is, uh, a lot. A friend of mine recently switched to a dynamic tariff and payed about €0.30-0.40 when I last asked him about it. Pondering...

implements 4y ago
> Market dynamics dictate that when people/businesses are no longer willing to buy a MW for €150, the demand drops, the most expensive generators are not needed anymore and the overall price drops to the new equilibrium price. Not an economist, but “inelastic market / supply” answers that, I think.
- ragebol 4y ago
  It might drop, but a little only. Apparently, paying €150 for a MW is acceptable for companies. But the alternative is shutting down, so the cost gets forwarded to consumers of their products eventually. This is of course dampened by middlemen who sell for a fixed price and take the risk of having buy for a high price. And a few small NL energy companies (or rather middlemen) have gone bankrupt when they didn't have the reserves.
dustymcp 4y ago
I Also switchede from static to variable billing and saved about 50% on my bill, the static pricing contracts are not worth it currently, they where in August tho, at that point my contract was 50% cheaper than the variable price..
Al-Khwarizmi 4y ago
What you explain was also implicitly included when I said "I get the intended logic" (just didn't want to make my post too long). The thing is that this so-called free market works well for generating companies, but makes no sense for consumers. It doesn't matter how cheap producing the bulk of the electricity is, as long as gas isn't turned off completely the consumer always pays the price of gas. In a country evolving from (say) 100% gas to 90% renewables and 10% gas (I know I'm simplifying, these simple mixes don't really exist) the cost of electricity generation would fall through the floor, but the consumer would pay exactly the same. This is clearly dysfunctional, regardless of how nice it can be in theory. It's also not inevitable. You can set a cap to the prices, but then compensate sources that go over the cap (in practice, gas) so they don't operate at a loss. This is what the Iberian exception system is doing, and it works.
- Gwypaas 4y ago
  What you will accomplish with trying that is that producers will bid what they expect the price to be, instead of their production cost. Thus we still get the marginal cost like all other raw resource markets, but with extra complications. That is a much less efficient system with larger risks.
  - Al-Khwarizmi 4y ago
    They already do that with the existing system. It often happened in Spain (pre Iberian exception) that gas isn't even used, but the price of hydro was set to something like (expected price of gas - 5 €) because they knew they could. So we end up paying the price of gas even when we don't use gas! Honestly, some people talk about the existing system as if it's this perfect free market... but in practice the bar is very low. The Iberian exception system is already showing in practice that it works better.
- ragebol 4y ago
  Also an option indeed, but eventually the consumers pay for this difference. The incentive with the 'normal' merit order model is that the most expensive generator is that they make barely a profit if at all. Not too attractive. Better build generation capacity that has lower operating costs (ie. no fuel, ie. renewables). At least, that is the theory. I really wonder what happens to this model and the incentives once renewables are the majority and stretch further along the merit-order curve's X axis, pushing out fossil fuels.

sendfoods 4y ago

Interesting, and disappointing. Why is there no discussion about making the Iberian exception the rule?

Al-Khwarizmi 4y ago
There is in fact some discussion, but half-hearted. There doesn't seem to be the political will to actually do it. Why? The response to that question is inevitably political (because it's a political question). My personal opinion: because the EU has swallowed neoliberal ideological kool-aid hook, line and sinker, and will blindy follow it even if it leads to self-harm (which is funny, because the US, which is the main source of that ideology, has a much more pragmatic approach and will happily ignore it when it's not beneficial: see all the bans going on with China, etc.) Unpopular opinion here, I guess, but that's my take on it.

bryanlarsen 4y ago

This system is a rule of free market economics summarized as "the price of a commodity is its marginal cost". So changing this system means meddling in the free market. There are times and places where meddling is appropriate and this is likely one such, but there are significant consequences and side effects to doing so, so shouldn't be done lightly.

hdkrgr 4y ago
There are also significant consequences and side effects to having a 'free market', they are called externalities and in the case of fossil fuels they lead to huge unconsidered costs. I'm putting 'free market' in quotes, because even beyond externalities, the current system with zonal uniform pricing is only 'free' for a very narrow view of what constitutes a commodity or a marginal cost. Consider two households: (a) in northern Germany close to the Danish border, located in a small town with lots of local wind turbine capacity, (b) in Southern Bavaria with very limited renewable energy production close by. There's also no adequate power transport infrastructure to get the renewable energy from the North (or elsewhere in Europe) to household (b), mostly because local politicians in Bavaria oppose putting up any visible infrastructure, whether power lines or wind turbines). Now, during peak wind hours, a significant portion of the wind turbines in the north will go offline because the network cannot handle the load, while household (b) still needs to get their power from gas. [This is not a contrived example, but reality in Germany.] Yet (a) and (b) both pay the same price -- that of the gas producer. How is this a 'free' market? But to your point, the good news is that people are taking electricity market design very seriously, not lightly. (Section 6 of this white paper is a good read that outlines many of the current market inefficiencies (Disclaimer: my former academic advisor and a few former colleagues are coauthors)): https://synergie-projekt.de/wp-content/uploads/2021/12/Electricity_Market_Design_2030___2050__Shaping_future_electricity_markets_for_a_climate_neutral_Europe_final.pdf https://synergie-projekt.de/wp-content/uploads/2021/12/Elect...
the_third_wave 4y ago
Electricity is not sold on a "free market" anyway - I can not just hook up my nuclear power station without paying a specific tax aimed at just nuclear power generation - here in Sweden it is called "effektskatt" (output-power based tax) and is responsible for making it very hard or impossible to profitably run nuclear power stations [1]. The government went so far as to change the leadership for the state-owned power company Vattenfall because the existing leadership was not deemed to be cooperative in leading the change to "renewable" power sources. On the other hand I may be able to put a wind turbine on my premises and get subsidised for doing so which has the opposite effect of the mentioned tax on nuclear power in that it makes it easier to generate wind power profitably. Some users are freed from all sorts of taxes which all others have to pay, here in Sweden this is - or was, the current government seems to want to change this policy - the case for the likes of Facebook, Google and Microsoft who were allowed to establish data centres with the promise of nearly tax-free electricity. These data centres take so much power that the regions where they have been established have found it difficult to allow other energy-intensive industry to establish there for lack of power. Margin pricing on electricity is counterproductive and should be abolished since it makes it more profitable to underinvest in more efficient power generation technologies since that would have a negative effect on market prices. It is better to keep a few inefficient gas turbines online and make sure these are needed at peak hours since they will drive up the market price for all generated power. As long as margin pricing is in place I do not expect something like grid-scale battery storage for peak demand to take hold since that has the potential to drive down prices. [1] https://naringslivets-medieinstitut.se/det-var-marknaden-som-stangde-karnkraften/ https://naringslivets-medieinstitut.se/det-var-marknaden-som...