Is it expensive? is it cheap?
This post is not as much about leadership or project management as the previous ones, but it is a topic I hear about, and I am tired of it. The famous “price of electricity“.
I’m going to start by describing how it works and go into details little by little. To summarise. the price of electricity is determined by:
1. The cost of wholesale electricity,
2. the costs of the generation source
3. and taxes (of course).
Within part 3) taxes, apart from the famous ‘Value Added Tax’ and other taxes that different governments have been including or removing to bet on renewables, to penalise CO2 emissions, to subsidise nuclear… there are the taxes that cover the costs of transport and distribution of electricity, which are fully regulated and try to give a constant margin to the companies that own the electricity grids. Basically, being regulated, the principle is that they calculate the cost of all investments and operation and maintenance costs over the lifetime and pay these companies for those costs plus a margin. (This could be the subject of many blogs, but it is not the intention).
These costs are more or less fixed, although in many tariffs, they can have a variable component depending on the volume of electricity consumed.
In part 2) generation costs, we have that the cost of generation can be considered more or less stable for generation sources such as nuclear, hydro, wind or solar and is quite variable for generation sources such as gas, coal or oil. The reason, quite simply, is that the latter energy sources depend on the volatility of their fuels (the price of oil, gas, coal…).
In other words, in theory, a market (country) with only nuclear, hydro, wind and/or solar could have a completely stable electricity price.
At this point, we could talk about the need to overcapacitate the system and have emergency systems that can quickly come in to support the electricity system when there is sudden demand, or in case there is a failure, using gas turbines…and blah, blah blah blah. That is true, and it depends on the specific case and country. To put it in context, a country like Norway, a famous oil seller, produces 100% of its energy with hydropower.
But if we extract those moments that are exceptional rather than the norm, it is a good assumption to assume that there are countries that have a more fixed cost of generation, and others that have a more variable cost.
Here I have touched on an issue that is very important, each country has its own generation system based on its peculiarities, and historical decisions. As I have said, countries like the Nordic countries have an important hydro base, which can allow for sudden variations, and countries like Germany have more coal and gas, now that they have shut down nuclear.
If we look at markets (countries) that depend on gas or oil to produce part or a large part of their production, these countries have high price volatility, since the cost of generation depends on the price of the raw material they use, which is subject to global wholesale markets. That is to say, if the demand for electricity goes up, the price of gas goes up, the price of electricity goes up….
Now let’s look at 1) wholesale electricity costs. What is the relationship between wholesale costs and generation costs and taxes?
NOTHING.
The price of electricity is given by the ultimate price that covers the demand. That is, if you produce with renewables at 50€/MW, with nuclear (let’s say) at 125€/MW and with gas at 200€/MWh, the consumer will have to pay the cost of MWh at 200€/MWh.
Why do I say nothing? Because energy sources such as nuclear have to have priority since they cannot be switched on and off whenever we want. In other words, in the electricity market, they enter at ‘zero’ euros, they cost ‘x’ (and I say ‘x’ or “125€/MWh” because I have never seen a realistic number for something that has a life of 100 000 years) but they will take 200€/MWh, following the example above.
Now, if you look at the global level, (an interconnected system of electricity markets), the price is set by whoever has the greatest need. I mean, if you have a country like Germany that needs electricity, and gas prices are expensive, a guy in the north of Sweden who has a river producing super cheap electricity next to his house, will have to pay the cost of what the Germans are willing to pay.
Why am I writing all this nonsense?
Because I am sick and tired of seeing in forums, ‘interested parties’ commenting on the price of electricity when it is too high, or when it is in negative, or how the lack of nuclear energy makes prices not more stable, or how the massive penetration of renewables creates a discrepancy in prices….
I am tired!
And I am tired, because all opinions are biased and manipulated and the truth as always lies in the middle ground.
Nuclear, without going into ethical issues, can be the most efficient solution in one market (local) and it can be the most stupid solution (in another local market).
Renewables, yes, they are variable, but today they have the lowest impact on nature that exists, and please, don’t let the typical subnormal come out saying that his cousin had an electric car and it caught fire…
The problem that nobody talks about is why are prices subject to a market when generation costs have no direct relation to that market?
Here, I am sure that more than one clever person will jump out with the typical comment that the market has to dictate the prices, that it should not be intervened… Bullshit!
The electricity market has always been intervened. Always! And it still is.
In fact, the rules of the electricity market are not representative of reality and far away of a fari market (since this is an extremelly difficult topic to achieve), they are superimposed patches trying to adapt the electricity reality. You don’t have to look far back to remember that generation was a game of nationalised electricity companies that were producers, distributors and sellers on the one hand. In fact, at that time, there were not the interconnections between countries that we have today.
That markets have local peculiarities, but that they are integrated into an interconnected market… may make sense from an electricity point of view, but it does not make sense from the current market rules point of view. Because we are comparing the sheep with the goats.
The solution?
1) either we change the rules of the game to reflect the peculiarities of the countries and the past decisions of the countries, or
2) we wait for China to produce cheaper batteries that allow continuous arbitrage of electricity, or
3) we continue to post on social media to argue for our interests…
But this situation is not going to change. Because we focus our attention on the outcome instead of the process.
