Good for the Germans, in the UK we use marginal cost pricing, so consumers pay for the highest costing output regardless of how much if any they use. Means even if we get gas down to 1% well still be paying gas prices.
The reason why power prices can still decouple: Because there are more and more quarter-hours where gas plants are NOT setting the price and the marginal cost is set by renewables.
The same is happening in the UK.
> , so consumers pay for the highest costing output regardless of how much if any they use.
No, if no Gas is needed (!) for power production in any quarter-hour, the price is not set by gas.
PS: Emphasis on needed. Gas plants may still be running at a loss for whatever reason (heat coupling, special contracts), but if they are not needed to provide the power, they will have to bid at a loss, and then they will not be able to drive the price.
> Gas plants may still be running at a loss for whatever reason
My assumption, given how the UK numbers look when there are negative prices but still a little bit of gas running, is that shut down/ start up for a CCGT is so undesirable (expensive maybe?) that a 100MW plant which can say throttle to 5MW would rather pay to give you 5MW of electricity for the next half hour than switch off the plant and provide nothing then need to start it back up in a few hours.
I don't know what "throttling" looks like for this equipment. It seems implausible that these units have no ability to control their fuel usage/ power output at all, just binary on or off, but on the other hand presumably in practice it's far from infinitely variable.
I imagine it's just be keeping the equipment warm and moving, especially for something like a steam turbine. Partial output sounds like a reasonable guess to me.
But IIRC, in Belgium at least, these plants are also remunerated on "secondary" markets for non-productive tasks. These secondary markets are mostly for grid balancing.
It's true that even 2% of usage being gas, means 100% of the demand pays the gas price.
But (!) that's only true for the spot market at that particular point in the day. And that changes all the time.
Example: if you use zero gas for 80% of the day, and use just 10% gas for remaining 20% of the day, then that day gas was just 2% of total demand, like we said earlier. But it's not true that gas prices dictated 100% of the price that day.
After all, gas prices dictated only 20% of the day's prices. The remaining part of the day there was no gas demand, and thus it did not dictate the price. And that happens more and more often.
The more renewables + storage are built out, the more time of the day that gas is displaced, not used and thus not part of the price mechanism.
Second, if the market pays at the gas price, the renewables reap all the profits (because their costs are far below the gas price). This incentivizes further renewable capacity build-out, eventually displacing gas entirely. This incentive structure pushes the market the fastest towards lowest-cost generation, which is renewable nowadays.
It's the same in Belgium, and I believe for the majority if not all of Europe.
What I never understood from this arrangement: can a renewable provider legally refuse to accept the gas-price (either by charging less, or simply refunding a large chunk of the difference?
I understand growth may appear to suffer if renewables refunded the difference between gas prices and renewable prices+profit+moderate-growth-expenses; but it would also mean the public would flock massively to that provider, which may allow for faster growth under certain conditions.
Are renewable bound by law to accept the instantaneous peak-demand-electricity-prices (typically gas peaker prices)? And even if they were forced to accept that payment, are they explicitly forbidden to return a large chunk of the extortionate difference to their customers, in order to comply with acceptance of the price while reimbursing their customers?
This may sound contradictory, but if a major expense for renewables is the siting and commissioning of a renewable wind/solar farm, it may be possible to rake in more profit by growing customer base instead, and then use that money to outcompete the competitors in the siting and commissioning landscape?
A bureaucrat can dictate that x Euro's correspond to y Dollars, but the free market tends to find a price rediscovery mechanism returning closer to true rates. Do we really believe that of the huge search space of all possible policies that this pricing strategy (of forcing everyone to sell at the instantaneously most expensively generated energy) happens to be the most optimal trajectory at a fundamental level? Or do we believe some undiscovered or unused known policy could actually grow renewables faster? If the real world differs from fiat, the market will find a way to bypass fiat and unmask its weak points, at the end of the day money talks.
Furthermore the current setup may result in unintended consequences: at a certain point renewables may be disincentivized to expand capacity, as it would decrease the percentage of time the peakers are needed, and thus decrease their income! It's almost a politically introduced stranglehold, to prevent gas peakers from being displaced.
As others have pointed out the electricity price is only set by gas when gas is needed, but that's only part of your bill. Renewables now make up over half of UK electricity generation and they are financed through Contracts for Difference which are ultimately paid for by a supplier obligation levy on electricity bills.
When market electricity prices are lower than the strike price for a CfD, electricity users end up paying the difference through the levy and when the market price is higher it reduces the amount levied. So for the renewable portion of UK electricity generation we effectively pay the fixed strike price of the CfD whatever the market price.
CfDs only cover about 15% of renewables, though it's increasing.
When the Ukraine invasion spiked prices one suggestion was to offer the non CfD renewables a chance to enrol for CfDs, which would reduce their short term profits but guarantee long term predictable profit. I don't think it was actually done though.
My understanding is that it's the same here in Germany. From the website
> What does "decoupled" mean? In a gas-dominated electricity market, the marginal generator setting the price is almost always a gas-fired power plant (CCGT). That means electricity prices are structurally linked to gas prices — when gas rises, electricity rises with it. Decoupling happens when enough zero-marginal-cost renewable generation (wind, solar) pushes gas off the margin for enough hours that the annual average electricity price no longer tracks gas.
Marginal pricing is not specific to electricity in UK, that's just how commodities end up priced.
Saudis pump oil at cost of $10 per barrel. Will they sell it to you at $10? Nope. The average oil price? Nope.
Saudis will sell the barrel at the highest price people are willing to pay - the marginal price. So if the most expensive oil needed to match the global oil demand is some super expensive arctic oil project, the oil will be priced according the marginal cost of that project even if only 1% is needed.
Indeed. For others who may wonder why this is the case, a simple example will explain it:
Suppose Saudi can produce 100 barrels at $10 (cost+profit) each, and Brazil can produce 100 barrels at a price of $50 (cost+profit) each, and John wants to buy 120 barrels.
- John will pay what is necessary for his Oil, but seeks out the cheapest price available.
- Sellers Brazil and Saudi will accept a sale of their own production if their minimum price of $50 and $10 is met respectively, but will sell to the highest bidder for their supply.
You'd think John will go to to Brazil to buy 100 barrels at $50, and then buy 20 barrels in Saudi at $10.
But guess what, Brazil could simply go to Saudi and buy their 100 barrels for $10, and then sell them to you for $50.
So now Saudi has demand from both John and Brazil at a $10 price. Who gets to buy? Well whoever decides to bid more to convince Saudi to sell their oil.
If John increases his bid to $15, Saudi will prefer that to Brazil's $10 bid. But Brazil would then increase its bid to $20, knowing they can sell it to John for $50.
This bidding keeps going up until the $50 point. For Brazil there is no longer any profit in buying Saudi Oil at $50, and selling it to John for the same price. For John there is no point in bidding more than $50 for Saudi Oil, because he can get a $50 price from Brazil.
Any point below $50 means a bidding war starts between John and Brazil, because at less than $50, Brazil has a cheaper source of oil (Saudi) than their own production cost.
And this is true for every commodity in a free market. It's not some 'UK system', it's just the consequence of free trade.
Of course in reality it's trading intermediaries that do the bidding, it's not Brazil buying from Saudi, but traders jumping in to arbitrage. But this is a simplified example.
The irony is at the time of me writing this; gas is down to 4.6%[^1] and renewables are a whopping 88.5% and yep - the cost is based on the 4.6% of gas.
Exactly. That's clearly not a price dictated by gas. That's an example where CCGT generators were willing to pay you to take away their electricity. Obviously the gas they bought to do this cost money and so they're making a small loss when this happens and it would be good to understand why and how this makes sense for them in order to develop policies which get us the outcomes we want.
I'm far from an expert here but isn't that spot price rather than future deliveries? Few people pay for actual spot pricing because it can go the other way, and you want known pricing. You would have a forward contract to delivery gas at say 20p. This is a known price for operation and likely has profit baked in anyway. The excess is what we see now. They can't just switch off as they have a contract to fulfill, but the grid doesn't need the excess, therefore priced at a negative.
In https://commonslibrary.parliament.uk/research-briefings/cbp-... under
"Why does the price of gas drive electricity prices?" it suggests that, at the time the CMA report linked was written (now over 10 years ago) the CMA thought as much as 40% of electricity is traded at spot prices.
Now, the CMA report that's linking is talking about a world we no longer live in, in that world the UK burns coal, Russia hasn't invaded Ukraine and so on, and thus the numbers might be entirely different now, but that's the best I could find.
The how and why is that gas takes up space, cutting usage to zero when your site storage is full can cause issues (you can do this short term and get a bit of line pack going but it all eventually has to go somewhere).
I think gas turbines can turn off completely without issue (unlike coal) but there may also be situations where it costs more money to restart the generation process completely than to idle it at low capacity for a few hours when there is no demand for gas generation.
The reason why power prices can still decouple: Because there are more and more quarter-hours where gas plants are NOT setting the price and the marginal cost is set by renewables.
The same is happening in the UK.
> , so consumers pay for the highest costing output regardless of how much if any they use.
No, if no Gas is needed (!) for power production in any quarter-hour, the price is not set by gas.
PS: Emphasis on needed. Gas plants may still be running at a loss for whatever reason (heat coupling, special contracts), but if they are not needed to provide the power, they will have to bid at a loss, and then they will not be able to drive the price.