4 ms·

Author of the article here Electricity prices in the UK (and most other places) are set by the marginal unit, which is the most expensive unit that needs to be

Author of the article here Electricity prices in the UK (and most other places) are set by the marginal unit, which is the most expensive unit that needs to be turned on to meet demand. All other generation for that time period gets paid the same price. The marginal unit in the UK is usually gas, hence the sensitivity to gas prices

ta545 4y ago
My understanding is most wind was bought at a guarenteed price by the government at the time of construction, so a wind farm producing 1MWh gets paid say £40 regardless of the cost of electricity on the grid - even if marginal cost was £20/MWh As users are then paying £90/MWh for gas, does the excess £50 go to the government or to the wind far owner?
- RobinL 4y ago
  See here! https://news.ycombinator.com/item?id=33922390 https://news.ycombinator.com/item?id=33922390
- tialaramex 4y ago
  The government. The mechanism is called Contracts for Difference, and as the name implies they work by ensuring the difference between an agreed strike price and the actual price - in either direction is paid However, notice two further considerations: 1. Such contracts eventually expire. Exactly when varies. But the wind farm is still there, just now the energy price all goes to the operator. 2. Older government subsidies were not CfD. Ten years ago if you built a wind farm you got a direct subsidy. The CfD schemes come into existence from about 2014. They're one of a small number of good ideas the Tories had. They're in line with Tory ideology, but they also actually make sense in the world that actually exists.
  - youngtaff 4y ago
    Even suppliers who sign CFDs can delay the start of the contract - Orsted are doing this for one of their recently commissioned wind farms
  - midasuni 4y ago
    I think the cfds were a Lib Dem idea. Like other good things from the coalition (equal marriage, working people tax cuts etc)
luuurker 4y ago
[dead]
grey-area 4y ago
Is that a good idea? It doesn’t sound very sensible to price everything at the cost of the most expensive unit, why do they do that?
- nawitus 4y ago
  The reasoning is that it incentives electricity producers to offer max amount of electricity at low prices without speculating how to maximize profit (as their sell offer will practically speaking have zero effect on the spot price). Nuclear plants, wind power, solar can just offer to sell at everything at around 0c/kWh. It's claimed that another type of market would cause companies to speculate with their sell offers and thus generate less electricity. It would be interesting to see how this kind of market would work in reality, though.
- tialaramex 4y ago
  What price do you think we should pay for the electricity? Suppose we insist we'll pay less than the price you agree to sell for. Obviously that's not a sale, that's robbery. This problem arises even if we agree to pay everybody the average, because some suppliers didn't bid average, their bid was higher, but we still claimed their electricity, so we are stealing from them. OK, suppose we decide we'll pay all accepted bids at their bid price regardless of the marginal unit cost. If we do this the supplier is incentivised to guess the bid we will accept, so as to collect the difference between their actual price and the price we're willing to pay. If they're very good at this, we pay exactly the same as now, but, regardless of whether they're good at it the grid is significantly destabilized by the increased uncertainty due to lack of efficient price signals. What other ideas do you have ?
  - grey-area 4y ago
    I don’t know much about it; that’s why I asked the question. So the short answer is I have no idea, but I doubt we currently live in the best of all possible worlds. It seems an odd pricing scheme which isn’t working well as gas becomes less desirable and renewables are a bigger part of the mix. What you describe as paying at the bid price sounds like a free market to me - if you’re going to have a market mechanism perhaps it should use the market to efficiently discover prices, not impose a very odd pricing structure - if imposing nationwide prices, why have a market at all? There are many possible alternatives: Allow prices to float in a completely free market, and force suppliers to hedge (which they do anyway to some extent, but they could be required to). Nationalise the national grid and energy production Build interconnects and hydro storage to reduce reliance on gas plants and reduce the problem. Set prices in regional markets to bring production closer to the areas with peak consumption. Set prices by energy type (separate markets per type like fusion solar etc taking into account externalities). Set prices by energy use (baseload, fluctuating, peak) Defining pricing mechanisms is not robbery it is why we have a regulator!
easytiger 4y ago
An article on how energy pricing from supplier>consumer is determined or created would be really interesting.

ta545 4y ago

My understanding is most wind was bought at a guarenteed price by the government at the time of construction, so a wind farm producing 1MWh gets paid say £40 regardless of the cost of electricity on the grid - even if marginal cost was £20/MWh As users are then paying £90/MWh for gas, does the excess £50 go to the government or to the wind far owner?

RobinL 4y ago
See here! https://news.ycombinator.com/item?id=33922390 https://news.ycombinator.com/item?id=33922390
tialaramex 4y ago
The government. The mechanism is called Contracts for Difference, and as the name implies they work by ensuring the difference between an agreed strike price and the actual price - in either direction is paid However, notice two further considerations: 1. Such contracts eventually expire. Exactly when varies. But the wind farm is still there, just now the energy price all goes to the operator. 2. Older government subsidies were not CfD. Ten years ago if you built a wind farm you got a direct subsidy. The CfD schemes come into existence from about 2014. They're one of a small number of good ideas the Tories had. They're in line with Tory ideology, but they also actually make sense in the world that actually exists.
- youngtaff 4y ago
  Even suppliers who sign CFDs can delay the start of the contract - Orsted are doing this for one of their recently commissioned wind farms
- midasuni 4y ago
  I think the cfds were a Lib Dem idea. Like other good things from the coalition (equal marriage, working people tax cuts etc)

luuurker 4y ago

[dead]

grey-area 4y ago

Is that a good idea? It doesn’t sound very sensible to price everything at the cost of the most expensive unit, why do they do that?

nawitus 4y ago
The reasoning is that it incentives electricity producers to offer max amount of electricity at low prices without speculating how to maximize profit (as their sell offer will practically speaking have zero effect on the spot price). Nuclear plants, wind power, solar can just offer to sell at everything at around 0c/kWh. It's claimed that another type of market would cause companies to speculate with their sell offers and thus generate less electricity. It would be interesting to see how this kind of market would work in reality, though.
tialaramex 4y ago
What price do you think we should pay for the electricity? Suppose we insist we'll pay less than the price you agree to sell for. Obviously that's not a sale, that's robbery. This problem arises even if we agree to pay everybody the average, because some suppliers didn't bid average, their bid was higher, but we still claimed their electricity, so we are stealing from them. OK, suppose we decide we'll pay all accepted bids at their bid price regardless of the marginal unit cost. If we do this the supplier is incentivised to guess the bid we will accept, so as to collect the difference between their actual price and the price we're willing to pay. If they're very good at this, we pay exactly the same as now, but, regardless of whether they're good at it the grid is significantly destabilized by the increased uncertainty due to lack of efficient price signals. What other ideas do you have ?
- grey-area 4y ago
  I don’t know much about it; that’s why I asked the question. So the short answer is I have no idea, but I doubt we currently live in the best of all possible worlds. It seems an odd pricing scheme which isn’t working well as gas becomes less desirable and renewables are a bigger part of the mix. What you describe as paying at the bid price sounds like a free market to me - if you’re going to have a market mechanism perhaps it should use the market to efficiently discover prices, not impose a very odd pricing structure - if imposing nationwide prices, why have a market at all? There are many possible alternatives: Allow prices to float in a completely free market, and force suppliers to hedge (which they do anyway to some extent, but they could be required to). Nationalise the national grid and energy production Build interconnects and hydro storage to reduce reliance on gas plants and reduce the problem. Set prices in regional markets to bring production closer to the areas with peak consumption. Set prices by energy type (separate markets per type like fusion solar etc taking into account externalities). Set prices by energy use (baseload, fluctuating, peak) Defining pricing mechanisms is not robbery it is why we have a regulator!

easytiger 4y ago

An article on how energy pricing from supplier>consumer is determined or created would be really interesting.