| ▲ | Havoc 4 hours ago |
| Now if only the UK didn't have an insane system where all electricity is purchased at the highest cost in the mix. i.e. if you're buy 99% cheap RE, 1% expensive gas then you're paying for 100% at the higher gas price. |
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| ▲ | bryanlarsen 4 hours ago | parent | next [-] |
| That's also how a pure commodity market works. The price is the marginal cost. That's how commodity producers like farmers can be profitable. The marginal producer makes no profit, but every producer who can get their costs below the marginal producer makes a profit. If farmers didn't make any money, they'd stop farming and we'd have no food. |
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| ▲ | QuantumGood 3 hours ago | parent [-] | | "Make any money" is not clear enough. Providers of input and purchasers of output have each become monopolies and have squeezed the profit out of smaller providers. They borrow to survive, government pays those that loaned the money, then the cycle continues. Farmer suicide has become a very popular way out of the cycle, which is one indicator that the money isn't really there any more. | | |
| ▲ | bryanlarsen 3 hours ago | parent [-] | | Saskatchewan farmers have done very well since ~2000 or so. The 80's and 90's were very rough. Yes, costs have skyrocketed -- combine harvesters start at about a million now. But wheat prices and yields have been high enough to more than compensate. But Saskatchewan farmers are a great example of a low cost producer. A Saskatchewan farm usually runs about 10,000 acres per operator. UK farms with a couple hundred acres can't compete. |
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| ▲ | tialaramex 4 hours ago | parent | prev | next [-] |
| We recognise that "I decided your kilo of gold is worth $50 so here's the $50 and now the gold is mine" isn't a purchase, that's theft. I'm going to assume you don't think it's insane for us to pay what the owner asked here (If I'm wrong, do let us know). So, OK, clearly this CCGT electricity here (made with gas) offered for £85 per MWh we're going to buy that, for £85 per MWh. Now, we also needed all this wind power which bids £5 per MWh. Presumably you'd want to pay them less than £85 per MWh. So, too bad, they bid too low, they get punished right? But since you aren't OK with paying less than the bid price, doubtless if they had bid £84 you'd pay that right? Notice that the incentive in your model is for everybody to guess what you'll pay and bid just barely below that, whereupon you've wasted a lot of resources, your strategy no longer has any price discovery value, and you're paying almost as much as before. A triumph of... rationality? How much do you reckon you can save the average household if you do this? £50 per year? Twice that? |
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| ▲ | hkt 3 hours ago | parent [-] | | I suspect GP actually wants an end to market pricing of energy and a move to a renewables-opex type of pricing, presumably with state financing and even operation. It isn't an insane idea: if it could be done cheaply enough and run well enough. |
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| ▲ | _fizz_buzz_ 4 hours ago | parent | prev | next [-] |
| > Now if only the UK didn't have an insane system where all electricity is purchased at the highest cost in the mix. That isn’t a “system”. It’s just what happens. Why would the 99% RE be forced to sell at a lower price? They will sell at whatever the market value is. Which is determined by supply and demand. And the gas turbines will only turn on if it becomes profitable for them to turn on at that price. So the causality actually is the other way around. Lots of demand increases electricity prices, higher electricity prices make it profitable for more expensive means of production to be powered up. |
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| ▲ | KptMarchewa 3 hours ago | parent [-] | | That's why "market" isn't a good approach for electricity. | | |
| ▲ | _fizz_buzz_ 3 hours ago | parent | next [-] | | It is exactly why the market is the best approach for electricity. Everyone is incentivized to produce electricity as cheap as they can. Otherwise it doesn’t pay off to produce cheaper because one gets punished by having to sell for less anyway. | |
| ▲ | mr_00ff00 3 hours ago | parent | prev [-] | | Can you give an example of a better method? The one that I can think of is the government sets the amount of electricity produced, and then it’s rationed. But I doubt the UK would be happy with rationed electricity where your power shuts off the second it’s over. That would be essentially mandatory blackouts all the time. Not to mention the cost would be held by the government, so you end up paying it in taxes anyway. | | |
| ▲ | hkt 2 hours ago | parent [-] | | Rationed electricity might also come in the form of a universal basic entitlement, followed by market price for higher usage. One assumes under such a system that the state would own and operate energy production and that they would, for instance, increase the ration over time, leaving the remaining needed capacity to be fulfilled by the market. Honestly, pricing based on the cost of financing and operation isn't a terrible idea. | | |
| ▲ | mr_00ff00 2 hours ago | parent [-] | | Sure much you will end up with more energy consumed. If it’s a free ration, almost everyone will consume all that they are given up to the limit. Under the current system, when energy becomes hard to produce or more people need it, rising prices means people will reduce. So pricing for cost of financing, sure, but it might be a higher cost because people will consume more. |
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| ▲ | cbmuser 4 hours ago | parent | prev | next [-] |
| Electricty is a homogeneous good which is traded at one price independent of origin. Why should an operator of wind turbine sell their kWh for less if the current price is high? That would be stupid. |
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| ▲ | zingar 3 hours ago | parent [-] | | The non renewable operator would be free to sell at a competitive price or not at all. Perhaps on nights when there’s no wind at sea they might be able to make their obsolete infrastructure pay for itself briefly. | | |
| ▲ | _fizz_buzz_ 3 hours ago | parent [-] | | But that is exactly what is happening. Each seller can offer their price and each bidder can also offer their price. And since running a gas turbine is more expensive than wind power they are forced by the market to turn their gas turbines off when there is wind. However when there is only a little wind they can power up their gas turbines and sell to the highest bidder. But since there is also a little bit wind, the wind power people can also sell to that highest bidder. That is how it happens that suddenly wind power is just as expensive as the gas turbines, because there is simply not as much wind power to go around for all the people that need electricity. |
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| ▲ | otherme123 4 hours ago | parent | prev | next [-] |
| That's the same insane system used in the rest of Europe, at least in Germany, France, Italy and Spain. The key is that in the UK gas sets the price almost 100% of the time, vs 25% in Germany or less than 10% in France. The fix: build more of the cheap sources. A patch: cap what gas can bid. |
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| ▲ | CursedSilicon 4 hours ago | parent | prev | next [-] |
| Does that mean the 99% RE gets paid at the same rate as the 1% of gas? Like if gas is $5 and RE is $1 the RE folks get $5 instead? Devils advocate would say that might work out in RE's favor. Lower production costs mean more profit and therefore more incentive to build more RE |
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| ▲ | MakersF 4 hours ago | parent | next [-] | | It's an auction, it's called marginal pricing. Every producer bids for x KWh at a certain price (for each time slot), and the cheapest y KWh to cover all demand are taken, and all are paid at the price of the most expensive KWh bought. There is plenty of economic research on auctions and why this system is optimal: this system incentives to bid at the actual marginal cost of producing electricity, and thus allows to discover the optimal price. EU has been discussing about changing it, but there hasn't been a better system proposed yet.
If you change to pay at the bid price, you'll have companies build teams of analysts to predict the market price and bit at that, they're not just going to accept being paid much less of what they could. Instead of focusing on this, here a few more impactful things that would help: 1. Zonal pricing, so that there is an aligned incentive to build production where demand is (connection to the grid is a big limiting factor) 2. Stop providing contracts to renewable where curtailed production gets paid (curtailed energy is paid by consumers as taxes on bills normally) 3. Start allowing to build more renewable so that renewable are setting the marginal price 4. Push utilities to do PPA (power purchase agreements) with producers of RE so they can agree to a fixed price, and a smaller slice of electricity is bought at the auction There are a few more, but these are the most important. Regarding your edit: the gas plant is not subsidizing, the customers are paying. But of course at the moment building renewable is so lucrative thanks to this setup, that there is a big incentive to build them. Of course they need to plan for 20-30 years, and the risk of getting to big periods at 0 marginal pricing is real, so builders need to evaluate well the risk (and PPAs can help) In a non-competitive world what you say would be true (you'd avoid filling in the remaining 1%), but there are a large number of power producers that a cartel is unlikely | |
| ▲ | boothby 4 hours ago | parent | prev | next [-] | | It still looks like a perverse incentive to me. If I were operating a gas plant and charging too much, and also building out renewables, it naively seems that I should be able to continue overcharging for gas, lining somebody's pocket to maintain the contract, and building out more renewables for ever more profit. I'm not in the UK so I'm only passingly familiar with the existence of this policy; I do hope that it's got an offramp. Edit to answer my own concern: But, reading this article, it does seem like the auction is the offramp. The government takes bids for enough power to supply the country, and once the auction is settled the worst-case cost is paid to all winners. So there's a hope that gas will eventually subsidize its replacement with renewables. | | |
| ▲ | tialaramex 4 hours ago | parent | next [-] | | So, what's auctioned here isn't power. What they're auctioning are what's called "Contracts for Difference". The contract has a "Strike price" which is in essence the price the government (via a for-purpose company) agrees you will be paid regardless of what happens for electricity sold to the system. Now as the word "difference" might suggest there will be a difference between the market price at any particular moment and this strike price. The CfD works by the government paying you the difference when the market price was lower, and you pay the government the difference when it's higher. You can definitely afford to pay them 'cos you just got to sell power for $$$$ Why do this? Well, the trick is that a government (even if politicians don't always act like it) is here for the long haul. So for them guaranteeing how much you'll be paid for energy you're not going to make for ten years is fine. Tax will still exist in ten years, houses with electric light will still exist in ten years, this is an easy bet. But for a wind farm company, a commercial undertaking, such guarantees are incredibly valuable and would be unaffordable from elsewhere. So this is (relatively) a very cheap subsidy. When there was a gas price spike because Russia invaded Ukraine the contracted wind farms paid a whole lot of money because of that difference I talked about, if you'd gone freelance, no CfD subsidy well, you're printing cash, 'cos at those prices you probably made back your whole install costs in a year of trading. | | |
| ▲ | laurencerowe 4 hours ago | parent | next [-] | | Some wind farms intentionally delayed their entry into the CfD system to profit from this (though contract terms may have been tightened since.) https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind... | |
| ▲ | zingar 3 hours ago | parent | prev [-] | | I’m missing something. Is the operator paying actual cash money if the market price goes up? It’s not just that they’re forced to produce electricity at a rate that’s possibly less than what it cost to buy fuel? (Or in the case of renewables: producing for less profit than they would if they made their contract later) | | |
| ▲ | tialaramex an hour ago | parent | next [-] | | > at a rate that’s possibly less than what it cost to buy fuel? You might need to sit down for this. The wind farms don't use fuel. Wind just happens, it's a natural phenomenon that has no real regard for our stupid "wind farm" even as we're harvesting gigawatts of power the wind doesn't ccare. If you were thinking "Wait I thought all the providers have these contracts, not just renewables" then er no, they're a subsidy, the CfD is a subsidy scheme. That cheap to make, expensive to run open cycle gas turbine some asshole put on a local industrial estate doesn't get a CfD, it can offer to sell the resulting electricity at market prices, and really the big problem is as you observed, that's possibly less than what it costs to buy fuel. Yeah, it is, bad idea to keep building Open Cycle Gas Turbines I reckon. Sure enough the UK almostly exclusively has more expensive to build but cheaper to run Combined Cycle plants. CfDs are used to subsidise renewable future power. A long term energy independence strategy. Even if you don't care about the planet warming and the sea levels rising you won't be burning all this gas in a thousand years 'cos there's not enough gas. Whereas the sun will shine until long after we're gone, and the accompanying winds won't stop either. The size of the subsidy varies, if you're building a pilot plant of a new technology that you're sure will revolutionize clean energy but, alas, no-one ever made one that worked before, the government might be willing to pay you four or five times as much money for your energy, partly because they're not expecting you to actually make any energy because you will likely fail. If your plan's big problem is that it's way less mechanically reliable than you'd like, this is a big incentive to incrementally improve that reliability. If your device that involves being in and out of an incredibly powerful tidal stream of corrosive sea water at freezing temperatures makes power but doesn't crack, tear, fall to pieces or explode in the scheduled period of operation you're that much closer to actually having a useful technology and paying you five times over the odds for the MWh you did make is a reasonable price. | |
| ▲ | hnaccount_rng 3 hours ago | parent | prev [-] | | Think of it this way: as a windfarm operator you know your costs and you know your expected amount of energy produced. But you don’t know the precise timing and therefore the market value at generation time. From the first two you can calculate what you need in terms of £/MWh (include whatever profit you want in there). Now you can go to the government and bid that price in the auction. If you win, you have a safe profit and all risk (and upside potential) now lies with the government.
As GP said, in the case of 2022 you would have lost out on revenue. But that’s the price foe guaranteed margins The CfD part is a technical detail. It ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale. What I’m not sufficiently familiar with is whether you _have_ to go to such an auction (i.e. whether the auction also is the mechanism of capacity planning) or whether you are free to bypass this system and just hook up your wind park and carry the risk yourself. But functionally this is an insurance scheme for profits, with a market based pricing system |
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| ▲ | 4 hours ago | parent | prev | next [-] | | [deleted] | |
| ▲ | 0cf8612b2e1e 4 hours ago | parent | prev [-] | | I wonder, what’s to stop an energy company with a mixture of RE and gas from disabling X% of their RE infrastructure, forcing gas to come online and the higher rate? Only the biggest producers control enough of the market to do it, but it seems plausible for the company to find specific demand scenarios where they could tip the price in their favor. | | |
| ▲ | SoftTalker 3 hours ago | parent [-] | | There's a big wind farm I drive by occasionally and sometimes most of the windmills are feathered. Some are turning, so there's clearly wind. I have assumed this is when the demand is low (or maybe negative). | | |
| ▲ | hnaccount_rng 3 hours ago | parent [-] | | That’s not necessarily true. In general a single windmill is more efficient at pulling energy out of the wind than two are. And the marginal costs of windmills are not zero. I.e. their maintenance cadence (also) scales with active hours. So it might be a “at this price-wind point it’s not profitable for us to run a second mill” |
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| ▲ | blibble 4 hours ago | parent | prev [-] | | > Like if gas is $5 and RE is $1 the RE folks get $5 instead? yes if there's 1mW of gas in the grid then everyone gets paid the gas price this is called pay-as-clear, and has some positives (strongly encourages RE construction), and some disadvantages (zero long term planning, paying gas generators absurd rates if they can squeeze in at the top of the auction) UK government is consulting on changes to this system at present | | |
| ▲ | cbmuser 4 hours ago | parent [-] | | There is no way of changing this. It’s how commodity markets work. | | |
| ▲ | otherme123 3 hours ago | parent | next [-] | | There are alternatives, like "pay as bid", which heavily incentives the best price guesser instead of the cheapest producers. And is a system more fragile against collusions in concentrated markets (i.e. a handful of big producers that agree on high bids). | |
| ▲ | blibble 3 hours ago | parent | prev [-] | | of course there is this is not the global oil market the UK electricity market is a government creation, highly regulated, and only accessible to limited participants 30 minutely, day ahead, pay-by-clear auction markets are not a property of the universe |
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| ▲ | 4 hours ago | parent | prev | next [-] |
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| ▲ | Moldoteck 2 hours ago | parent | prev | next [-] |
| All countries have merit order and it's not insane |
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| ▲ | chippiewill 2 hours ago | parent | prev | next [-] |
| This line of chatter has been going around UK-centric online discussions and it's such a braindead line of thinking. Marginal pricing is used in a gazillion countries and is tried and tested. You do marginal pricing because otherwise providers will simply bid what they think the crossover price will be - marginal prices lower prices in the long run because providers try to improve their margins and lower their bids. Also renewables bid on the spot and day ahead markets really low because their cost is almost entirely capex (and also most are under CfD anyway so may as well bid 0) - the spread isn't nearly as good as the data would imply. If you didn't use marginal pricing you'd have them bidding higher to cover their capex. |
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| ▲ | Analemma_ 4 hours ago | parent | prev | next [-] |
| That's not really "a system", that's how marginal pricing always works for fungible goods. If you need to buy 100 units of something, and the guy selling next to me can't go any lower than $10 without selling at a loss, I'm going to sell at $9.99 every time. Why would I do otherwise? The point of this is that it's supposed to guarantee windfall profits for wind operators, to make it attractive to keep building out wind until all the marginal gas is pushed out of the market mix. The price being set by the highest-cost source in the mix is a feature for incentivizing buildout, not a bug. |
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| ▲ | benj111 3 hours ago | parent | prev [-] |
| You're kind of missing the point. Renewables use contracts for difference. The article we are discussing is the level of that CFD. So what ever the market price, renewables either give or receive money in line with the CFD. |
