HOW THE ELECTRICITY MARKET PRICES ARE SET?

We constantly see how the electricity bill fluctuates, but this is nothing more than a reflection of the price of electricity. The question is: how the electricity market prices are set? How is the price of electricity decided? In our country this is done through a formula known as a marginalist market.

THE FORMULA OF THE MARGINALIST MARKET

The way in which electricity market prices are decided is simple. The highest price is chosen. The last plant that is needed to satisfy the demand is the one that establishes how much will be paid to the others.

Nuclear power and hydro power are the first to enter the daily electricity market, also known as pool, and offer zero to have their investment virtually amortized. Then the renewable energies come, which also bid at zero for not having fuel costs. The system of premiums for renewables was designed precisely with the aim of offsetting the costs of developing and installing these technologies.

Then the rest of the plants, especially those of gas and coal, are entering, since the use of fuel oil plants is already residual in the Spanish electrical system. It is these latter plants that set the price for all the others.

Let’s look at an example: on any given day, a nuclear, a hydropower or a wind farm will offer zero, but if the last gas plant needed to meet the supply demand at 50 euros per Megawatt hour (€ / Mwh), nuclear, Hydro and wind will also receive € 50 / Mwh.

 

ALTERNATIVES TO SET THE ELECTRICITY MARKET PRICES

For Jorge Fabra Utray, President of Economistas Frente a la Crisis and former president of Red Eléctrica de España, this marginalist price system has no meaning and advocates a model based on the acquisition of blocks of energy for its real price.

Jorge Morales de Labra, member of the Plataforma por un Nuevo Modelo Energético, is committed to an energy services market in which self-consumption is a fundamental part of production and a gradual closure of coal and nuclear power plants is planned. In this system, it would be necessary to request a series of services to cover the moments in which the renewable ones could not handle all the demand.

Mario Sánchez-Herrero, a professor of economics at the Universidad Complutense de Madrid, believes that we must remove the amortized technologies, such as nuclear and hydroelectric from the market and pay them only to satisfy their amortization. And the same account for the renewables, which would charge based on the investment made. Thus, fossil technologies would remain to cover demand peaks and would work in a marginal market.

In contrast, Natalia Fabra, Professor of Economics at the Carlos III University and member of Economistas Frente a la Crisis, suggests maintaining the marginalist system but with a different formula. Setting the right price for each technology and forcing them to return the difference when they offer higher prices.

In Aleasoft we have developed a model for forecasting energy prices, take a look.