MM Tirion
Electricity providers like National Grid sell customers electricity at cost. NG buys their supply of electricity from the regional wholesale electricity market and charges customers exactly the same as what they paid for it, without profit (don’t worry, they make their profit from their Delivery Services!)
Who sets the price of electricity? The wholesale electricity market. How do they set it? Very pragmatically. Each day the wholesale market monitors the electricity demand within its jurisdiction and extrapolates the demand for the next day. Based on the anticipated demand, the wholesale market invites generators of electricity to contribute their commodity to the “electricity-pool” for the next day. The wholesale market accepts bids until the “electricity-holding-pool” is filled to meet the next day’s anticipated demand.
Which bids do they accept? They accept the cheapest. Bob, for example, may own three acres of solar panels, and anticipates that tomorrow’s sunny weather will generate 1 MWh during the day-light hours. He offers the wholesale market his 1 MWh of energy for $1, which the wholesale market must accept, as it’s very cheap. Windy Acres owns a field of wind turbines. Based on the anticipated wind patterns over the next 24 hours, they expect to have no less than 10 MWh available to sell tomorrow. They offer this energy to the wholesale market for $5.0 per MWh, which is still very cheap and the wholesale market accepts the full 10 MWh from Windy Acres. The wholesale market keeps accepting the cheapest bids and its “electricity-pool” for the next day continues to fill.
Let’s say the wholesale market expects tomorrow’s demand for electricity to be slightly in excess of 1000 MWh. All participating solar and wind farms together expect to contribute 300 MWh to this pool, not enough to meet tomorrow’s anticipated demand. So the wholesale market must continue to accept additional bids. Several hydroelectric facilities, having examined their water flow numbers, are able to offer an additional 200 MWh to tomorrow’s electricity-pool; they must charge $15 per MWh, as their maintenance costs are quite higher than for solar fields. The wholesale market accepts all 200 MWh bid by the hydroelectric power providers.
The wholesale electricity market still needs an additional 500 MWh to meet the anticipated electricity-demand for the following day. A nuclear plant offers the wholesale market 200 MWh of electricity at the cost of $50 per MWh. As this now represents the cheapest juice available, the wholesale market accepts all 200 MWh from the nuclear power plant. They still need to find those last 300 MWh.
And so the wholesale market looks at a bid of $75 per MWh for 200 MWh of electricity produced by FossilDudes who buy and burn natural gas to turn combustion turbines to generate electricity. As this offer is currently the cheapest, and since the wholesale market must fill the anticipated demand of 1000 MWh, they accept the full offer of 200 MWh from FossilDudes. For that last 100 MWh, the only supplier remaining is DirtyDan who continues to burn coal in a boiler to produce steam that turns turbines to generate electricity. DirtyDan has a lot of overhead costs associated with this form of energy production: digging for and transporting coal, operating aging and manpower-intensive equipment and as such, DirtyDan must charge $100 per kWh. DirtyDan offers the wholesale market 200 MWh of electricity for the next day. The wholesale market, looking at their expected demand of 1000 MWh and their current next-day “electricity pool” of 900 MWh, accepts only 100 MWh of juice from DirtyDan.
And now the punch line! DirtyDan’s bid, the last accepted by the wholesale electricity market, sets the price for everyone!! Everyone of the contributors to tomorrow’s pool: Bob, Windy Acres, FossilDudes, DirtyDan and everyone whose bids were accepted will receive $100 for every MWh that they contributed! Needless to point out, Bob and the others who own solar fields generate the highest profit margins, followed by wind turbine generators, then hydro and nuclear plant owners, while the smallest profit margins are generated by those generators who must first buy or extract fossil fuels from the ground. I suspect that Bob and WindyAcres and the nuclear and hydro facility operators are very relieved that DirtyDan continues to supply a modicum of dirty energy to wholesale market each day, to keep everyone’s else’s profit margins sky-high!
The next day National Grid buys the juice from the wholesale market at the market price of $100/MWh, and resells it to their customers, at cost, for 10c/kWh in this example. And that, more or less, is how the wholesale price of electricity is created each day! This description pertains to the wholesale market’s Day Ahead market, not to the Real Time market dealing with the last minute buying and selling of the electricity commodity. You can follow all the excitement at our very own wholesale electricity market, NYISO, every moment of every day, live: http://www.nyiso.com/real-time-dashboard
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