Other sources cost about £60/MWh for nuclear, £50/MWh hydro and in the range £50 to £140/MWh for on and offshore wind and solar. Those are big differences.
The electricity we actually get delivered to our houses is from a mix of all these sources. It is total nonsense, for example, that anyone supplies pure renewable electricity. All electricity from all generating sources is mixed together when it goes down the wires to our houses.
Bizarrely, however, that’s not how the price is set. The wholesale price of electricity in the UK is set on what is called a ‘marginal costing’ basis. This is much beloved of economists, but is working against the interests of all consumers of fuel right now.
What it means is that the wholesale energy price is set so that the most expensive producer can make a profit from the sales they make into the wholesale energy market.
So, since gas produced electricity is the most expensive to produce right now (and is likely to be so for a long time to come) its cost of manufacture plus a fair profit margin sets the wholesale price for all electricity, however it is generated.
What that means is those producing electricity from gas can still make a profit and so stay in business at present. But it also means nuclear, hydro and renewables producers are being paid the price that the gas generators get. This makes no sense at all.
The result is obvious: the profit in the nuclear and renewable producing companies, who usually make more than half of UK electricity, increase dramatically, and wholly unnecessarily when a marginal costing price setting model is used to suit gas generators of electricity.
Well prices aren’t set so that gas producers can make a profit, no. They’re set so that enough people come forward to supply the energy desired at that price. There is no Fat Controller setting prices that is – there’s bidding for however much electricity people are willing to pay for. It’s an important difference. There is no price setter here, no planner.
But leave that aside. So, in a static system this might even seem a little odd. Now add in the idea that we’re in a dynamic system. Folk can go build more energy generation infrastructure. We’re in a game with repeat iterations here.
So, given that pricing, what’s going to happen? Folk will be falling over themselves to build wind, solar, nuclear, hydro, maybe tidal, wave and all the rest, power systems to get themselves a Great Big Bite of those luvverly profits. And so the electricity price will fall because that very expensive gas production is competed out of the market. Or maybe it still exists, but only at night, in still weather, in a drought, at neap tide and the Channel being mirrorpond.
That also explaining why we use marginal pricing – because it produces that pressure to expand lower cost production methods at the expense of higher cost. Because we are in a repeat game here, the universe is dynamic.