The Widget Market

Posted in: Comment, News and Updates

Suppose you were in the market for 20 widgets.  You might put out a call for makers to submit prices.  So far so good.

Now suppose one maker offered you 19 at 2p per widget, but that was all they had, and you had to buy the 20th widget at 20p from somebody else.

You might think that this would cost you 58p for the lot, and you'd be right.

That might work for widgets but not for electricity in the UK.  If you were buying 19 MWh (at 2p per unit from a windfarm) and 1MWh (at 20p per unit from a gas generator), you'd have to pay 400p for it.  That is, you'd have to buy all 20 at the higher price.

This is the madness of the electricity market whose chief aim is to keep the lights on; it second aim seems to be to ensure prices are kept as high as possible.  Only expensively-educated other-worldly types could have devised a scheme like this.

Happily, the government has, nudged by Putin's adventures, woken up to this problem and has announced – you guessed it: a review. This is REMA: "a major review into Britain’s electricity market design, set to ensure cost benefits of cheaper energy trickle down to consumers in the long term."  Don't you just love "trickle down" and "long-term"?  Once again, customers, and their winter problems, seem an afterthought.

Some of the changes being consulted on include:

  • introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low or it’s particularly sunny and windy, saving households money with cheaper rates
  • reforming the capacity market so that it increases the participation of low carbon flexibility technologies, such as electricity storage, that enable a cleaner, lower cost system
  • de-coupling costly global fossil fuel prices from electricity produced by cheaper renewables, a step to help ensure consumers are seeing cheaper prices as a result of lower-cost clean energy sources

The government says:

"Under the current system, gas prices often end up setting the wholesale electricity price, because it is often the last source of supply to meet demand. The ever-increasing participation of renewables in the system means over time, cheaper electricity produced by renewables energy will determine the price more often. This consultation will explore ways of updating this pricing system to further reflect the rise in cheaper renewable electricity - something that could have a direct impact on reducing energy costs, ensuring consumers reap the full benefits of the UK’s world-leading and abundant supply of cheaper, cleaner energy."

It almost makes me think back with nostalgia to the Central Electricity Generating Board.  Almost.  Apparently one possible solution (rather radical it seems) is to pay producers the price they initially offer rather than 10 times as much.  Whatever next!


I am, of course, aware that the market for electricity is more complex than that for widgets (which can be piled into big heaps and stored more or less for ever).  There is a suggestion from a Cornwall-Insight that tax-payers (via the government) should subsidise the cost of gas-fired electricity production, thereby bring down the cost greatly with the subsidy cost falling on the broadest tax-shoulders.  This makes sense to me, but maybe that solution isn't complicated enough to be viable politics.

I'm also, sadly, very aware that electricity costs more than 20p/MWh (it was £845/MWh last week – about 16 times the long-run average).

Posted in: Comment, News and Updates


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