[archydeb]

Author of the article here

Electricity prices in the UK (and most other places) are set by the marginal unit, which is the most expensive unit that needs to be turned on to meet demand. All other generation for that time period gets paid the same price. The marginal unit in the UK is usually gas, hence the sensitivity to gas prices

[grey-area]

Is that a good idea? It doesn’t sound very sensible to price everything at the cost of the most expensive unit, why do they do that?

[tialaramex]

What price do you think we should pay for the electricity?

Suppose we insist we'll pay less than the price you agree to sell for. Obviously that's not a sale, that's robbery. This problem arises even if we agree to pay everybody the average, because some suppliers didn't bid average, their bid was higher, but we still claimed their electricity, so we are stealing from them.

OK, suppose we decide we'll pay all accepted bids at their bid price regardless of the marginal unit cost. If we do this the supplier is incentivised to guess the bid we will accept, so as to collect the difference between their actual price and the price we're willing to pay. If they're very good at this, we pay exactly the same as now, but, regardless of whether they're good at it the grid is significantly destabilized by the increased uncertainty due to lack of efficient price signals.

What other ideas do you have ?

[nawitus]

The reasoning is that it incentives electricity producers to offer max amount of electricity at low prices without speculating how to maximize profit (as their sell offer will practically speaking have zero effect on the spot price). Nuclear plants, wind power, solar can just offer to sell at everything at around 0c/kWh.

It's claimed that another type of market would cause companies to speculate with their sell offers and thus generate less electricity. It would be interesting to see how this kind of market would work in reality, though.

[sampo]

How would you decide, who has the right to pay at the cheap price, and who has to pay the expensive price?

[easytiger]

An article on how energy pricing from supplier>consumer is determined or created would be really interesting.

[ta545]

My understanding is most wind was bought at a guarenteed price by the government at the time of construction, so a wind farm producing 1MWh gets paid say £40 regardless of the cost of electricity on the grid - even if marginal cost was £20/MWh

As users are then paying £90/MWh for gas, does the excess £50 go to the government or to the wind far owner?

[tialaramex]

The government. The mechanism is called Contracts for Difference, and as the name implies they work by ensuring the difference between an agreed strike price and the actual price - in either direction is paid

However, notice two further considerations:

1. Such contracts eventually expire. Exactly when varies. But the wind farm is still there, just now the energy price all goes to the operator.

2. Older government subsidies were not CfD. Ten years ago if you built a wind farm you got a direct subsidy. The CfD schemes come into existence from about 2014. They're one of a small number of good ideas the Tories had. They're in line with Tory ideology, but they also actually make sense in the world that actually exists.

[RobinL]

See here! https://news.ycombinator.com/item?id=33922390