I should not write about this area since it is not the main area where I have deep knowledge. In Plexigrid, we focus in attacking the technical problem behind the distribution and the consumption. Generation or trading is not our focus area. However, sometimes I get a bit surprised about some events. One of them, is the continuous high prices of electricity and that regulators try not to do anything to change it.
Guessing how the price of oil and gas is going to evolve is a crystal ball. None knows, but let me give my view with some background, independently of the unfortunate situation we are living today…
If we look from a macro perspective, the situation that we have during the last years globally, could be summarized as some countries that want to become greener, but until they arrive to that situation, they need to negotiate with countries that sell oil. Basically, these countries want to buy cheap oil and gas, with the expectation that in some years they will not need to buy oil and gas… This is a very difficult situation to negotiate anything with countries that know their income will be cut in some years. In this scenario, I am kind of inclined to think that high oil and gas prices may not be temporary.
With this global context situation, let´s look how electricity markets work. The electricity market follows the typical economic curve of offer-demand. It is all about matching supply and demand and the price of electricity is fixed by the last match. This means:
- If I need to buy 100 electricity units, and the markets says that 99 units of electricity produced wind and nuclear are sold to 1€, and 1 unit of electricity produced with gas is sold to 100€, I will pay for my 100 electricity units 10 000€.
- If I don’t need any electricity units, and the market still offers 100 electricity units, I will still buy 100 electricity units that are available in the market with a negative price of -10€. This means that in a situation where the offer is bigger than the demand, I will “buy“ 100 units with a negative price of -1 000€. (This is what has happened not long ago in markets like Denmark or Germany in days with excess of wind as an incentive to shut down generation)
As a short summary this is how electricity market prices are calculated. This design of the market was supposed to be a competitive market that could secure long term competitiveness…
In my view, the main problem with the electricity markets is that they have not evolved with the changes that happened during the last years. Electricity markets were designed in other completely different environment where oil prices where skyrocketing but most of the electricity generation at the time was based in coal, oil and gas. At that point in time, it made some kind of sense (given the environmental awareness of the time) bet for the cheaper technology to produce electricity in market conditions. However, that old scenario didn´t consider large penetration of renewables.
In any normal situation in life, if you see situations that are not the scenarios you forecasted when you drafted your plan, you usually reconsider your plans. I think many people agree that there is a need for a reform in the electricity markets, specially if, adding up to more large generation of renewables, we want to include massive amounts of distributed resources in low voltage.
It is not an easy task. An idea, as an inspiration, could be to look how judges evaluate gymnastics. In gymnastics championships, it is common to remove the highest and the lowest bid to remove some potential human bias. If you think about the electricity price, and we look at the previous example. What would happen if the highest bid were treated like in gymnastics?
- If we need to buy the previous 100 units, I pay 99€, and then there is 1 unit that it would not be sold… but it is needed. Ok, what about “a third party” pays 100€ to this guy and I will pay later on to this “third party” afterwards 100€. My total cost of the 100 units would be 199€ instead of the previous 10 000€.
- If I don´t need any unit, the price should be zero.
Some can say that it is not fair to change the rules of the game for those that made an investment in market conditions… and I agree, but this is not completely true.
If we look to the last decade, most investments done in generation of electricity have been in renewables, and none has been so bold (or stupid) that has assumed in their business cases, these high prices that we see today in their future prices crystal ball when they decided to make investments.
I have seen several of the crystal ball prices predictions during the last years, and none reflected this scenario, not even in the optimistic case. Most of the renewable investments have tried to hedge the price of electricity with PPAs to reduce the volatility exposure. It is clear, that they definitely are profiting of this unexpected situation with better prices than anticipated, but this is not market fairness, this is called lottery. The ones that are profiting are traders and governments. Yes, the first ones for obvious reasons, the second ones for taxes to the oil, gas and electricity that are usually a percentage % of the consumption.
It is a bit sad that everybody talks about Corporate Social Responsibility, fair trade… and all this BS, but when it comes to truth, we are incapable of doing what we need to do. Why should not act when it comes to a situation that affects inflation of countries, welfare of the low-level income citizens, and stability of economies?