W Whitbread retweetledi
Right now, British electricity pricing is bonkers. Prices are disconnected the from the underlying reality in several very important ways.
1. The costs of keeping the grid going, like transmission and balancing, are spread over every unit of electricity sold. This means the price of an extra unit of electricity is vastly higher than the social cost of providing that unit. The cost of having a grid connection at all is, conversely, much lower than it actually costs society to provide you one.
Economically, this amounts to a crippling price cap on grid connections, which is part of why we can't expand infrastructure to plug people in: they don't pay for it. It also amounts to an enormous tax, over 2/3 of the price of electricity, on using an extra unit of it.
Which is presumably why electricity use has cratered since 2003, when we started driving up the cost of our grid like this.
Note how perverse the incentive is here. We are heading into a situation where electricity is extremely expensive because the ratio of grid costs to the amount of electricity put through that grid. Our high prices incentivise everyone to have a connection, but then to use it as little as possible, the EXACT opposite of what we need. We charge the most tax on people use their connection most intensively (i.e., efficiently) and the least on those who use it the least intensively!
2. We impose carbon taxes on electricity produced through gas that we don't impose on gas used directly. This is part of why electricity is so expensive, and means people electrify less than we would like, which leads to less decarbonisation overall. A child, with a basic understanding of supply and demand, would see how perverse this is.
3. We charge the same price for electricity nationwide, and pay the same amount, in a single market, even though electricity is worth more and less at different places. This is part of why people are building solar farms in Scotland, where it is not only less sunny, but which is on the other side of massive grid congestion that we are paying BILLIONS of pounds to relieve. Yet we keep paying people to make the problem worse.
4. We keep buying Contracts for Difference off electricity generators. CfDs say 'we will pay you X for every unit of electricity you produce, whenever you produce it'. (Recent iterations have cut off these payments when prices go negative, but they will still pay them £90 per megawatt hour when the megawatts they are producing are worth 1p each!)
Renewables Obligations Certificates were a lot more honest. They just paid producers a top up on what they got on the open market: a straightforward subsidy. CfDs are a totally hidden subsidy. The amount of subsidy is set by the market trajectory after today. So, for example, every time we sign a new wind CfD we increase the subsidy for past tranches.
The really messed up thing is that CfD recipients do not cover for when they don't provide any power. If the CfD was set on quantity as well, so generators had to pay back money when they didn't produce, to cover the cost of running the grid to accommodate them, and for the gas needed to keep the lights on, then we would get a good sense of how much we were actually paying. Buying a CfD would be buying new electricity at its going rate. Instead, practically all the important pricing functions are hidden.
The result of all these broken pricing systems is poor coordination. Everyone is working exactly as the price system tells them to: plug in but only use your grid connection when the grid is having trouble, use less electricity, don't electrify, add generation far away from where it is consumed, and produce the most electricity possible whenever and wherever you like, not when or where it's rare and expensive. The ultimate result is expensive electricity, industrial decline, and economic stagnation.
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