Decouple electricity price from gas

Currently the price on electric is based on the price of gas.

Even though only 40% of electricity is produced by gas (~15% in Scotland) the price we pay per unit is based on the price of gas.

This link needs to be broken. All this means is that extra profits are being created for those large companies who receive more than they predicted for when building wind farms. They were making a healthy profit at the rates the agreed - the excess now is morally indefensible.

Perhaps it is time for a windfall tax on windfarms.

Why the contribution is important

Setting prices on a marginalised rate does nothing but increase prices for the poorest in society.

It's a flawed approach which should have been addressed when this was first flagged up in 2007ish.

Yet governments did nothing about it and this is why we are in the situation we are now.

by Tony on August 26, 2022 at 09:36AM

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Based on: 20 votes

Comments

  • Posted by ErikDalhuijsen August 29, 2022 at 17:34

    This price-setting mechanism is a market regulatory choice, and while it had value to begin with, it no longer does. Best explained in a note by a former colleague of mine who is more literate w.r.t. the detail of alternative solutions. Happy to introduce government interested parties to the person in question.

     QUOTE BEGINS:
    "Of course this market design is a choice, not a natural occurrence. Coincidentally this pricing mechanism has in the past fulfilled two functions reasonably well: short term allocation (which power plants should run this hour) and long term allocation (which new power plants should be built). With an increasing proportion of power plants with zero marginal cost and more and more power plants that run only rarely this model does not work that well anymore

    An alternative design:
    - a mechanism for power plants with zero marginal costs (PV, wind, hydro, wave and tidal) that provides a sufficient return on investment (but not more) to investors. Feed in tariffs and contracts for difference are good mechanisms here. The volume is set by political choice.
    - an energy only market with merit order pricing providing the bulk of the residual load with a maximum price which is set by political choice
    - a capacity market for rarely used reserves paid for power availability (and marginal costs in case of activation), and activated at the maximum price in the energy only market. The amount of reserve to be held is a political choice.

    This way the most efficient market mechanism is used for each purpose."

  • Posted by AlasdairPhilips September 07, 2022 at 14:48

    It is a long overdue change. It is crazy to base the price of wholesale electrcity on the cast of gas in the age of increasing renewables.

  • Posted by RoseLady September 08, 2022 at 11:43

    We in the Northern Isles, have never had the benefit of cheap gas. We have accepted the change to our landscape with the addition of uncountable wind turbines, producing enough to allow us to be self-sufficient, yet we've had to pay exorbitant electricity tariffs. Now we're being penalised again with high tariffs linked to gas prices. We already had high fuel poverty before this crisis, yet we're staring out our windows at the wind turbines! High gas prices should remain with gas users who've had ultra cheap heating for years.
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