UK is legally required to set the price of electricity to whichever generator has the highest cost - which is natural gas. Its called marginal cost pricing.
That's how all commodity markets works. All of Europe runs on the same scheme.
Do you think the Saudi's price their $10 per barrel oil at $10? The average price? Median? Or marginal?
They price at at the marginal price.
In the UK what this means is that cheap production like renewables and storage are incentivized to get built while the most expensive fossil production is shutting down.
Then at some point renewables start to become to marginal producer and prices crater. Which is already happening.
Saudi's use the government to price their oil internally low... on the free market they sell it at the price dictated by supply and demand. Renewables and storage are disincentivized because oil and gas is legally blocked from ever taking a loss. Whats stopping O&G from raising prices to keep their marginal producer status and ensuring a race to the bottom?
How can they be legally blocked from ever taking a loss? It is a market. They bid.
There's a plethora of producers with varying equipment, startup times, ramp times, costs and so on.
As renewable penetration expands the most expensive, or least flexible ones are called in fewer and fewer hours until they shut down. If one oil and gas producer tries to raise prices a competitor steps in and fills the demand.
Did you think there was this one monopoly oil and gas power producing able to dictate prices at will?
> How can they be legally blocked from ever taking a loss? It is a market. They bid.
I don't know enough about oil & gas to tell you what is happening there, but not every market truly operates as a free market.
For example, nuclear power plants almost always have a contract with the government for a specific electricity price: if the market pays more the profits will go to the government, if the market pays less the government subsidizes production. Something similar happened with early wind power.
It's worth thinking how this would work if it didn't work like this though? Nearly all 'commodity' markets clear this way.
If you switched to 'people get paid what they bid' it's almost certain the market would just converge back to this anyway - but with a lot more gaming and guesswork (wind guessing the gas marginal price to try and get the highest price).
Unregulated free markets optimizing for the least efficient, and highest possible price to the consumer? That's interesting, because its 100% the opposite of what I've been told my whole life.
It floats oil and gas profits with huge public subsidy while ensuring nobody in the market realizes benefits from alternate sources. It slows/blocks the transition.
The idea behind the regulation is that it's providing the maximum incentive to bring cheaper electricity to market.
If you try to mandate that high cost producers charge less, they will do what makes sense to control costs and then quit altogether once they are losing money.
Yes of course but the spot market and associated futures has a very big impact on any "OTC" deal that a supplier and generator does.
Like you are not going to agree a eg 3 year supply deal with $SUPPLYCO at a significantly lower price than what you could get on the spot market for it (or what you could hedge out on futures).
Why should they? It's not the right time for that yet. Letting the price stay high despite renewable prices being lower means it's tremendously profitable to build new renewable sources, so there's lots of incentive for it to be done.
There's no incentive... Why invest in a less reliable source if you could endlessly purchase gas power for the same price? It slows the transition from fossil fuels and ensures that oil and gas never takes a loss.
I believe that no governing party has attempted to fix this. Generally - this set up benefits the oil/gas lobby, so efforts to change it will butt heads with them. UK also trades energy with mainland Europe, which can add a complication with how prices are set.