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One thing that I find hard to understand is how the electricity prices in the UK have gone up so dramatically (blaming gas prices) when a large amount of the el

One thing that I find hard to understand is how the electricity prices in the UK have gone up so dramatically (blaming gas prices) when a large amount of the electricity is not generated from gas. Is the price being artificially inflated?

cjcartlidge 4y ago
The price of electricity in the UK is linked to the most costly supply in the entire mix. So if gas is the most expensive then we pay all other power-producing suppliers, regardless of means of generating, the wholesale price we'd pay for gas. It's a strange system.
- ZeroGravitas 4y ago
  It makes sense to extract honest bids. The lower you bid, the more likely you are to be paid. So in the long term, it leads to cheaper prices. If for example you had a cheap source of gas when others put their price up, it would reward you making that info public. Short term global fuel price spikes are a weak point, though.
anamexis 4y ago
I would imagine that as gas prices shoot up, demand dramatically increases for electricity.
foota 4y ago
A couple possibilities. It could be competition from other countries with a different mix (e.g., the price in the UK has to compete with other countries or it'd be exported to the degree possible) Power is also sold (ok, not sure about the UK) at the market price. So the most expensive generation needed to meet demand determines the market price. So even if gas is a small portion of the generation it could still determine the price.
archydeb 4y ago
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]
bee_rider 4y ago
The whole system as detailed in the article seems pretty artificial and not great. For some reason prices appear to be set at the national level, ignoring the fact that Scotland has an excess of wind energy. If consumers could see that the price difference on their end, I guess there’d be more incentive to upgrade the infrastructure and get it down to England more efficiently.
- zdragnar 4y ago
  If gas is setting the price as the most expensive form of energy, then it acts as an incentive to build cheaper forms of energy because your margins are that much higher. Alas, England doesn't allow on-shore wind power, and there's not sufficient capacity (in terms of HVDC lines) to transfer enough power from Scotland down to England to move all of the excess energy.
  - bee_rider 4y ago
    That seems like a good way to spur early development. I wonder, though — if consumers could actually see the cost benefit of the wind power, might gas have been just priced out of the system by now? (Or relegated to some backup status). (Supposing the transmission infrastructure were upgraded to allow for the higher flow, or England changed its laws to be more in line with economic realities).
Analemma_ 4y ago
The marginal price of electricity (i.e. the price of the most expensive source) is what drives the retail cost, because it's a liquid commodity that can't (to a first approximation) be stored. Imagine 90% of your electricity comes from wind and the last 10% has from gas because there is nothing else - the price of electricity is going to equal the price of gas because the wind providers can raise prices until they're just under the price of gas, since there are no other options. The most expensive form of electricity sets the price until it isn't needed anymore and is booted off the grid entirely, but once you cover that last 10% with wind then the price falls dramatically. In theory this is what we want: the windfall profits on cheap power during periods of expensive energy are supposed to attract the market to build more of these plants and chase those profits, thereby accelerating the green transition. But it's possible what we saw last year was too much, and that the damage to the economy (nothing strangles economic growth like expensive energy) does more harm than this incentive does good. People are talking about renegotiating power agreements in Europe to pay fixed prices for renewables so this wouldn't happen again, but I haven't heard how likely this is to succeed.
- grey-area 4y ago
  Sounds like a dysfunctional market that would be better nationalised and run for the public good.
kspacewalk2 4y ago
You can't base your electricity prices solely or even mostly on an unpredictable source of generation, which is nearly absent one day and generates more power than is needed on another day. Efficient storage is a long-term fix for this, but it ain't here. Natural gas is the most flexible source of on-demand power, so it (disproportionately even to its share of 1/3rd of all generated power) affects consumer electricity rates.
simongray 4y ago
The way it works in the EU—not sure if the UK participates in this market still?— is that every energy source is priced according to the most expensive energy source until demand is covered by supply. So, for example, on particularly windy days here in Denmark, we pay almost nothing as our entire demand will be covered by wind energy. On other days we might pay a lot since we need to import energy produced from gas or other expensive sources.
walthamstow 4y ago
Funnily enough the price the consumer pays right now is much lower than the price of energy because of badly thought out government subsidies I am in the 95th percentile for income (though not wealth) in the UK and here's my energy bill for December: Daily grid charges £20 Energy used @ market price £315 Truss govt unit price subsidy -£98 Johnson govt flat subsidy -£67 Total bill before VAT £170
RobinL 4y ago
It's quite complicated, but there's a good explanation here: https://news.ycombinator.com/item?id=33922390 https://news.ycombinator.com/item?id=33922390 (I recently asked the same question!)
balderdash 4y ago
No, first understand the concept of market clearing auctions[1], then understand that the there is a dispatch stack (that looks like something like this [2]), and that gas plants are the marginal producer required to balance the market, as they are not baseload (nukes) and not intermittent (renewables) but are dispatchable (ramp up/down capacity as need to balance the market). [1]https://en.m.wikipedia.org/wiki/Market_clearing https://en.m.wikipedia.org/wiki/Market_clearing [2]https://www.sec.gov/Archives/edgar/data/1105055/000110465912045570/g153251bci061.jpg https://www.sec.gov/Archives/edgar/data/1105055/000110465912...
Manuel_D 4y ago
There's a couple reasons. A small amount of electricity may be generated from gas, but that small amount is often crucial and in a lot of demand. Furthermore, peaker plants will produce less and less electricity as more renewables reduced their duty cycle. But the overhead cost of maintenance remains: reducing a gas plant from running 10 hours a day to 2 hours a day does not result in a 5x reduction of cost.

cjcartlidge 4y ago

The price of electricity in the UK is linked to the most costly supply in the entire mix. So if gas is the most expensive then we pay all other power-producing suppliers, regardless of means of generating, the wholesale price we'd pay for gas. It's a strange system.

ZeroGravitas 4y ago
It makes sense to extract honest bids. The lower you bid, the more likely you are to be paid. So in the long term, it leads to cheaper prices. If for example you had a cheap source of gas when others put their price up, it would reward you making that info public. Short term global fuel price spikes are a weak point, though.

anamexis 4y ago

I would imagine that as gas prices shoot up, demand dramatically increases for electricity.

foota 4y ago

A couple possibilities. It could be competition from other countries with a different mix (e.g., the price in the UK has to compete with other countries or it'd be exported to the degree possible) Power is also sold (ok, not sure about the UK) at the market price. So the most expensive generation needed to meet demand determines the market price. So even if gas is a small portion of the generation it could still determine the price.

archydeb 4y ago

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]

bee_rider 4y ago

The whole system as detailed in the article seems pretty artificial and not great. For some reason prices appear to be set at the national level, ignoring the fact that Scotland has an excess of wind energy. If consumers could see that the price difference on their end, I guess there’d be more incentive to upgrade the infrastructure and get it down to England more efficiently.

zdragnar 4y ago
If gas is setting the price as the most expensive form of energy, then it acts as an incentive to build cheaper forms of energy because your margins are that much higher. Alas, England doesn't allow on-shore wind power, and there's not sufficient capacity (in terms of HVDC lines) to transfer enough power from Scotland down to England to move all of the excess energy.
- bee_rider 4y ago
  That seems like a good way to spur early development. I wonder, though — if consumers could actually see the cost benefit of the wind power, might gas have been just priced out of the system by now? (Or relegated to some backup status). (Supposing the transmission infrastructure were upgraded to allow for the higher flow, or England changed its laws to be more in line with economic realities).

Analemma_ 4y ago

The marginal price of electricity (i.e. the price of the most expensive source) is what drives the retail cost, because it's a liquid commodity that can't (to a first approximation) be stored. Imagine 90% of your electricity comes from wind and the last 10% has from gas because there is nothing else - the price of electricity is going to equal the price of gas because the wind providers can raise prices until they're just under the price of gas, since there are no other options. The most expensive form of electricity sets the price until it isn't needed anymore and is booted off the grid entirely, but once you cover that last 10% with wind then the price falls dramatically. In theory this is what we want: the windfall profits on cheap power during periods of expensive energy are supposed to attract the market to build more of these plants and chase those profits, thereby accelerating the green transition. But it's possible what we saw last year was too much, and that the damage to the economy (nothing strangles economic growth like expensive energy) does more harm than this incentive does good. People are talking about renegotiating power agreements in Europe to pay fixed prices for renewables so this wouldn't happen again, but I haven't heard how likely this is to succeed.

grey-area 4y ago
Sounds like a dysfunctional market that would be better nationalised and run for the public good.

kspacewalk2 4y ago

You can't base your electricity prices solely or even mostly on an unpredictable source of generation, which is nearly absent one day and generates more power than is needed on another day. Efficient storage is a long-term fix for this, but it ain't here. Natural gas is the most flexible source of on-demand power, so it (disproportionately even to its share of 1/3rd of all generated power) affects consumer electricity rates.

simongray 4y ago

The way it works in the EU—not sure if the UK participates in this market still?— is that every energy source is priced according to the most expensive energy source until demand is covered by supply. So, for example, on particularly windy days here in Denmark, we pay almost nothing as our entire demand will be covered by wind energy. On other days we might pay a lot since we need to import energy produced from gas or other expensive sources.

walthamstow 4y ago

Funnily enough the price the consumer pays right now is much lower than the price of energy because of badly thought out government subsidies I am in the 95th percentile for income (though not wealth) in the UK and here's my energy bill for December: Daily grid charges £20 Energy used @ market price £315 Truss govt unit price subsidy -£98 Johnson govt flat subsidy -£67 Total bill before VAT £170

RobinL 4y ago

It's quite complicated, but there's a good explanation here: https://news.ycombinator.com/item?id=33922390 https://news.ycombinator.com/item?id=33922390 (I recently asked the same question!)

balderdash 4y ago

No, first understand the concept of market clearing auctions[1], then understand that the there is a dispatch stack (that looks like something like this [2]), and that gas plants are the marginal producer required to balance the market, as they are not baseload (nukes) and not intermittent (renewables) but are dispatchable (ramp up/down capacity as need to balance the market). [1]https://en.m.wikipedia.org/wiki/Market_clearing https://en.m.wikipedia.org/wiki/Market_clearing [2]https://www.sec.gov/Archives/edgar/data/1105055/000110465912045570/g153251bci061.jpg https://www.sec.gov/Archives/edgar/data/1105055/000110465912...

Manuel_D 4y ago

There's a couple reasons. A small amount of electricity may be generated from gas, but that small amount is often crucial and in a lot of demand. Furthermore, peaker plants will produce less and less electricity as more renewables reduced their duty cycle. But the overhead cost of maintenance remains: reducing a gas plant from running 10 hours a day to 2 hours a day does not result in a 5x reduction of cost.