A better explanation of our recent price rise
You may remember a post I wrote entitled “Why green electricity prices go up when brown prices do” in which I first attempted to explain this seemingly counter-intuitive situation.
I also recently wrote to all of our customers explaining that we needed to follow the recent price rises (of the Big Six) and why. In it I tried to provide a simple explanation of why green electricity prices go up when brown electricity prices do. I received a number of e-mails and letters from customers who had further questions about that and related issues.
I’ve spent the last few nights considering how best to approach this and writing what follows below – it’s a more detailed explanation of why our prices need to follow the market (for now). I hope in the process to better explain the way the electricity market works, how this affects what we do and at the same time cover the majority of questions asked.
Here we go…
Perhaps a bit too simple
In my letter I gave a simplified version of why we had to put our prices up to match the Big Six, which focussed on the fact that green and brown prices go up together. A number of our customers pointed out that they accepted this for energy from the market but Ecotricity self-generates 30% of its own energy from windmills. A good point.
The letter required a simplified explanation of things because for one thing most people don’t want the nth degree of detail and for another we had just the one sheet of paper to work with (ideally) and a lot of other information to include. All letters require some form of compromise on detail.
Here, I’ve no such constraints. Best be seated with a cup of tea when you tackle this…
Types of questions asked
I had e-mails from both New Energy and New Energy Plus customers, with the same question at their heart.
A number of our New Energy customers read the price rise letter and said ‘OK we get that green and brown electricity prices go up together, but 30% of our electricity (the green part) is self-generated from the wind, why has the price of that gone up?” and that’s a very fair question (the answer to which is coming).
Other customers said “I’m on your 100% tariff (New Energy Plus) so why are my prices going up at all?” I tried to be clear about this in the price rise letter – basically green and brown prices go up together, just because it’s green doesn’t make it immune to price rises – if it comes from the market it’s linked to the price of brown. And for our 100% tariff – 70% of the green comes from the market. That’s further explained below.
In the market – there’s only one price for electricity
For both of our tariffs, 70% of the electricity we supply to you comes from the market – with New Energy, the 70% is brown electricity and with New Energy Plus the 70% is green electricity.
The first thing I want to try and make clear is that this 70% – in both cases – goes up and down with the market price. It absolutely does, there’s nothing we can do about that – and the reasons are that the market sets the price for electricity at one level – green or brown, coal, gas, oil or nuclear – it doesn’t matter where it comes from or what it costs to produce (and they all have different costs to produce) – there’s only one price to buy.
When you buy green electricity what you actually do is buy non-descript (brown in reality) electricity from the market and you buy something called a REGO to go with it. A REGO is Renewable Energy Guarantee of Origin certificate – something that is issued to generators for each unit of green they produce and which is used to ensure that greenness is only sold once – it’s a European-wide standard. And it works.
This is important to understand. The market sets one price for electricity, be it from coal, oil, gas, nuclear or green – there’s one price only. To buy green, you buy electricity and add a REGO, or you buy electricity with a REGO – either way you pay a brown price for the electricity and a price for the REGO – it’s the same end result.
So for the 70% that we top up our New Energy tariff from the brown market, we pay the market price and for the 70% we top up New Energy Plus from the ‘green market’ we pay the market price – and there’s nothing we can do about it. With New Energy Plus we also pay 0.5p per unit, which is the premium on this tariff – for the REGO. This makes the 70% top up green.
That’s my first point. 70% of our power, whichever tariff you may be on with us, is linked absolutely to market prices.
What about the electricity we generate ourselves?
Leaving the very good question that a number of customers have asked “so what about the 30% green electricity that Ecotricity generates itself, why does that become more expensive?” It’s an excellent question.
And this is where the simplified explanation in my letter (the O level version?) falls over – we need the A level version. For that we have to dive into the complexities of energy trading. Here we go –
Our price policy and promise is to match the price of brown energy from the Big Six. In that we think we’ve got a simple and fair position. Green for the price of brown and our total commitment to new build thrown in. We also assume that we can operate within the margins the Big Six set for themselves, we set ourselves the goal to do that, and invest those record amounts in new build at the same time.
But there are several costs that we bear that the Big Six don’t, because of their size and their purchasing power. There are other costs we bear when supplying our own green electricity, that are additional to the cost of supplying brown electricity. Two basic areas where we lose out when matching their price.
Hedging
The first is about ability to purchase power ahead of time – it’s called hedging. We reckon most of the Big Six are hedged between six and twelve months forwards. This means that when the market price for electricity goes up, they are largely unaffected for a period of time – I’d guess a good six months. And this is bourne out to some degree by the delays we see between wholesale (market) prices going up and then retail (Big Six) prices following. I think they move while they still have some hedged myself, and this may be supported by the reported rise in profits that often accompany a rise in retail prices – that the Big Six say are ‘only’ to match their purchasing costs – there’s an overlap basically.
But there’s a lag too, from our point of view.
To buy energy on the forward market and therefore fix the price you need large sums of cash unless you have a top credit rating (which all the Big Six have). As a small independent you need cash. You also need cash to pay security deposits for the costs of transmission and distribution and for the costs of balancing (more on that in the second category here) – in short you need a lot of cash tied up. The fact is small independents cannot hedge to the extent that the Big Six can and do. So when market prices rise our costs rise more quickly, because we buy from the market much more immediately than the Big Six do. Six months later maybe, the Big Six put their prices up and we follow. Our costs are now better matched by our sales prices but for six months we’ve been losing significantly.
That’s how it works in a rising market. Our prices, because of our policy to match the Big Six, only go up months after our costs have done so, and when I said in that letter that we would have had to put our prices up soon if the Big Six hadn’t – I absolutely meant it.
The need to balance
The second category of costs we absorb, that don’t exist for the Big Six and their brown tariffs (the prices of which we match) are the costs of supplying green electricity. These are essentially costs of balancing.
The wind of course blows when it does, and stops when it stops. That’s the nature of wind energy. Across the whole grid it’s no big deal, there’s plenty of supply and demand movement to smooth things out. But as a supplier we have to balance what our customers take from the grid, with what we put into the grid – every half hour of every day of the year.
When we fail to balance, and it’s inevitable for all suppliers but more so for small ones (that’s due to statistics and the error probabilities of large and small data sets – plus the added issue of variable wind), we find ourselves in the ‘balancing market’ which is the market of last resort – it’s also a penalty market. You either buy (if you have too little) or sell (if you have too much) at very bad prices.
We all take electricity when we want it, night or day, whatever the weather. We take that for granted. But wind energy is intermittent and is far harder to match to customer demand – almost impossible. So we buy and sell (our wind and our imbalance) through the short term (or ‘prompt’) market and through the balancing market. When our electricity goes through either market like this two things happen – suddenly there’s a link to the market price (from something we generated ourselves and should in simple theory be immune to that) and there’s a ‘buy sell spread’ that we are exposed to (like when you buy or sell currency for your holiday) as well as the balancing penalty which can be very significant. And the higher the market price the higher the penalties, they travel together. And therefore the ‘price’ of our own green electricity is suddenly hitched to the market price. And we have increased costs.
So, there’s two areas where our costs are bigger than the Big Six and both impact our ability to separate the price of our own green electricity from the market price.
The absolute truth
This is the best I can do to explain how things work. I’ve been in electricity for over ten years. It’s the most complex thing I’ve ever been involved in and I’m not sure I fully get it yet.
But I promise you all when I say we need to match Big Six prices to carry on doing what we do. I’m telling you the absolute truth. We’re not profiteering in any way whatsoever. Our margins this year will be worse than last for sure, we currently estimate 30% lower. But we will carry on, matching the brown price, working within (and below) the margins the Big Six get – and spending record amounts building new sources of green electricity. I still think that’s a great achievement.
And one day, when we have sufficient of our own green electricity (a much higher proportion) and when we have a way to better handle balancing costs (we have plans for generation side management to smooth the peaks and troughs) – we will be able to detach ourselves from the brown prices of the Big Six and from the market and give our customers a discount for their green electricity. That’s our intention. We will at that time be cheaper than the Big Six.
I hope this explanation gives a better insight into the many factors we wrestle with every day to bring you green electricity and continual investment in new green sources – and of course electricity when you want it. And a better insight into our plans for the future.
I hope this explanation won’t be taken as overly complex – I’ve tried to be thorough. To nail this issue.
Cheers.
Thanks for this Dale. It is something I have wondered myself, but I think I’m getting it now…
Inevitable question: – can you expand on your comment, ‘we have plans for generation side management to smooth the peaks and troughs’ – are you talking of trialing some sort of storage technology? – or am I barking up the wrong tree?
Very good, thank you.
I’ve being trying to understand the balancing market a little and it’s hard to get into inspite of the numbers published by NETA, etc…
Rgds
Damon
Dale,
have you looked at Vanadium Redox Batteries to help smooth wind power supply and demand? They have been used in Tasmania to very good effect. They are expensive though.
Hi Martin, what we have in mind does indeed involve some form of storage, but that’s only part of it – kind of the ‘how’ not the ‘what’ we’re going to do. Can’t say too much right now, but will as soon as I can.
Cheers.
Hi Ted, thanks for this, I’ve been keeping a bit of an eye on all sorts of flow batteries and stuff. Looks like real potential there.
Wasn’t aware of the Tasmanian project though. It is expensive stuff that I know, costs will fall though, that’s how it works. Meanwhile grid costs will rise and that helps too.
Cheers.
Correct me if I’m wrong but I’m taking from all this that in years to come green prices will be a lot more stable and maybe someday a lot cheaper than brown prices. If this is true, do you have any predictions as to when approx. this transition may take place in the UK?
Hi Chris, I believe that the day will come when green electricity sources dominate the UK market and therefore set the price, at which point we will be disconnected from the availability and price of fossil fuels – largely. To get there we need the majority of our power from renewables, I can’t offer a better informed answer than that right now.
I also think we need to see market changes, to take the speculators out of the physical market – so that the only players are the producers and suppliers, and not the people trying to make money from volatility which they tend to cause.
No different to recent short selling of bank shares really, the UK electricity market is very illiquid and it doesn’t take much speculation to drive prices against realities. Un-fettered capitalism is what it is.
Also we’ll need to see energy storage and energy demand management to the fore in this new world, to enable the majority of our power to come from renewables. All entirely feasible though, in fact I would say inevitable – it’s just a question of how fast we get there and how much pain we endure before we realise we need to.
Cheers.
Dale
I read your piece with interest. One point – as you say wind varies and there will be times, for instance, during cold anticyclone periods in the winter, when the only available wind is likely to be a long way away, creating a need for expensive transmission. So, wind energy will always only be part of the solution, albeit hopefully an important part. I wonder what your ideas are on how we should aim to produce the remaining ‘base’ load. Pumped storage might be one option but probably not possible on the scale needed.
Read the “Without Hot Air” book online at the link in the Blogroll for a much clearer idea of how much of Scotland and Wales would have to be flooded to carry on with current energy consumption patterns just replacing fossil fuel generation with wind.
Rgds
Damon
Hi Kevin, I think large scale energy storage will be a big part of the solution along with energy demand management – to smooth out the massive peaks and troughs of our energy usage (we all want it at once or don’t want it) which is expensive to cater for in terms of money and CO2. Intelligent demand is how I like to describe it.
It’s not widely understood that demand for energy is anything but constant or flat and the grid we have copes with spectacular swings – from 30% load factor in the summer to 80% in the winter.
I also think it’s possible we could ‘go long’ in wind energy and have overcapacity – this would increase the likelihood that we had some/enough all the time, and increase the times when we had too much of course – but there are other things we could do with that – export to Europe for example, or use in heat loads.
Lots of scope, and lots of time before we get there, for new technologies and new ways to do things to make what looks difficult today a breeze.
Cheers.
Read all this with great interest. It does seem to me though that there is a fundamental problem with the way that the ‘markets’ operate. Is there any political preasure underway that would enable the system to work more in favour of Green prducers?
Thank you for the detailed explanation. Confirms my own suspicions that “Comptetion” only really applied around the edges – differing buying power, credit rating, how many / few people to fend customer enquiries, having one system do the work of two for dual fuel deals and so forth, and despite the various names which could head a bill, it all comes out of the same pot.
Storage and demand management will play a very important part. I built the PV system for my batchelor flat around storage rather than grid connection, Watching demand and the storage means I go off the grid entirely for around eight months of the year.
Hi Bob, sorry to say there isn’t anything going on as far as I know.
Nor do I think the government would be receptive to anything anyway.
They have their minds set towards big companies, the Renewables Obligation as delivered by those same big companies – and not more, Offshore wind and a new round of nuclear technology. Mindset well within the box. Cheers
Hi Dale,
with recent news about recession and oil prices coming down, I now have a couple of new questions. First, if wholesale electricity prices come down, does that benefit ecotricity? And will the big six lose out having hedged at a higher price? Second, have you noticed a drop in demand for electricity (if you are indeed in a position to notice) given that businesses are closing down and people are tightening their belts. I suppose you really supply to the grid, so perhaps it is only the price of electricity that you would notice.
Hi Jeffrey, it’s all in the timing.
The Big Six hedge up to one year ahead and so will not have been buying at the crazy prices that kicked off at the end of this summer. The price rises for customers that we saw then were to reflect the more normal prices that the big six had already bought at.
Wholesale prices coming down to a more normal level now won’t hurt the big six, it will help us though, as we hedge far less fwds.
We’ve not noticed a drop in consumption of electricity, but we have noticed a drop in the number of people looking to switch to green, a bit like the drop off in Organic food sales – when times are tight…
We don’t supply to the grid by the way, we supply to our customers. We use the grid for transport of power and we pay for that use – like a toll road. But we supply ‘direct’ (as direct as you can) to our customers. Hope that helps.
Cheers.
Further to Damon Hart-Davis’ comment above, I would be interested to know how many turbines Dale thinks would be required to generate all the energy we need, and what area they might cover.
Also, is it possible to elaborate on ‘(direct as you can)’, above ?
Anthony
@ Anthony,
probably faster if you work it out yourself. Google (or other search engine) “uk electric power consumption”, I’ve got a couple of figures: 346 billion kWh (2003, from MSN) and 400,160 GWh (2007, from stats.berr.gov.uk). A gigawatt-hour is a million kilowatt-hour so these two values are similar.
One of ecotricity’s (current) turbines is 2MW. There are on average 8766 hours in a year so a turbine running at full capacity produces 17,532 MWh, or 17.532 GWh. Divide 400,160 by 17.532 and you get 22,825 rounded up to the nearest whole turbine. But this assumes they all run full capacity all-year round. Multiply by an average factor (ecotricity or some expert needs to supply this) and you’ll get the right figure, but it should be in the tens-of-thousands.
Working out the area of a turbine is easy enough (rotor diameter of 82m: pi*d squared/4=5281 sq metres), but I don’t know how far turbines should be from each other. Again we’ll need an expert/ecotricity to enlighten us…
Thanks Jeffrey
It was a slightly leading question. I’m reading the ‘Without Hot Air’ book that Damon mentions, which raises questions about whether we really could meet all our electricity needs using wind – see http://www.inference.phy.cam.ac.uk/withouthotair/c4/page_32.shtml
I was wondering whether Dale, or Ecotricity, had a counter argument, given their claims elsewhere.
Hi Anthony, yes I’ve just realised what I’ve come up with is the number of turbines I think we need, rather than the number “Dale thinks”, which is what you’ve asked.
Still, I found it good to do a few estimates based on publicly-available data in order to understand the issues a bit better.
I can’t help myself. I’ve looked up the area of the UK on wikipedia: 243,820 square kilometres. I think d squared (6724 squre metres) is easier to work with as a required area rather than pi*d squared/4 as I don’t have to work out how many circles fit into a certain area. That means there is room for over 36 million 2MW turbines if we covered all the UK.
Obviously we wouldn’t do that, but 10% of this allows 3.6 million turbines, and 1% is 360,000 turbines. This still assumes they are placed just far enough away from each other to not touch, and that they run on full capacity all year round.
It’s a good question though. I’d like to know how Dale/ecotricity came to their conclusions too.
I can’t speak for Dale (I bet he’s grateful for small mercies!) but I think that 100% wind power is impractical for the foreseeable future because we can’t store enough to cover (say) a 5-day lull of low wind even if we overbuilt to cover peak demand many times over and dumped a huge excess most of the time. (Hopefully we’d ship it by interconnectors to our neighbours and/or smelt lots of Aluminium and steel, etc, etc…)
But wind could and probably should be a big part of the mix IMHO (maybe 25%–50%?) along with some solar and tidal and baseload (eg nuclear) and dynamic demand or ‘intelligent demand’ to move as much consumption as possible to times when the power *is* available and away from where it isn’t.
Rgds
Damon
Being the simpleton I am, I raised a question with David MacKay, the author of ‘Without Hot Air’, which received the following response:
http://beta.metafaq.com/action/answer?id=S34SJPVB9F8L3TJQKB1EARG1AU&ref=http%3a%2f%2fapi.transversal.com%2fmfapi%2fobjectref%2fEntryStore%2fEntry%2fhttp%3a%2f%2fwww.metafaq.com%2fmfapi%2fMetafaq%2fClients%2fmackay%2fModules%2fwha%3a154771%3a0&visitorNonce=40
Dale speaks elsewhere about the planning difficulties inherent in this kind of activity, so I’m wondering how Ecotricity rate their chances of building on an area the size of Wales in order to fulfil current electricity demand.
In case I come across as someone trying to take a cheap swipe just for the sake of it, I should say that we currently buy from Good Energy, that we Do Our Bit etc, am simply intrigued by these numbers.
I like the idea of wind providing 25-50% of our needs, but living fairly near to a proposed redevelopment of an existing farm, and witnessing the fervent protest against, can’t help wonder if this is a realistic prospect.
@ Anthony Manning
I think Dale talks about planning difficulties in several different publications etc to raise awareness that the planning process is not fit for purpose. Planning permission for Wind Turbines is in the hands of local councils when it should be for government to decide.
On another note the “doing your bit” by being with Good Energy. Good Energy do not build their own renewable energy sources, rather buy renewable electricity from other suppliers (such as ecotricity). While your own carbon emissions will drop as a result of being on supply with Good Energy the carbon emissions of the country as a whole does not change. What is happening in the simplest sense is you are using green electricity at the expense of someone else, great for flying the green banner but unfortunately useless in the bigger picture. Ecotricity build wind turbines therebye replacing units of “brown” energy that would be otherwise used. Ecotricity are also cheaper than Good Energy aswell just so you know ;D.
Hi Anthony,
I retreat lawyer-like to my careful use of the word ‘should’ above.
IMHO, one of Prof MacKay’s main points is that to sustain our current energy ‘gluttony’ entirely with RE would require such intrustive vast building works appart from anything else that reducing demand surely has to be part of the story.
Rgds
Damon
Yes I think 100% isn’t practical either. Also, whichever direction the UK takes (coal, nuclear, renewable) there will always be a need for gas spinning reserve (or pumped storage) because of the way the nation puts the kettle on during the Coronation Street ad break (does this still happen?) The power companies could pay even more industrial companies to switch off at peaks I suppose, but I don’t know if that would be enough. (I got this info from George Monbiot’s book)
Anthony, I don’t know why David McKay does it per person either, when statistics for total UK usage is available.
From what I can gather, ecotricity put in the planning application, if the local council don’t accept the application, then ecotricity act on any issues addressed. If the application is still not accepted, ecotricity appeal. Most appeals are upheld, and so most applications go ahead, but only after a long delay and a lot of money spent.
I guess even then the economics still stack up, because ecotricity are still operational.
@ Matt
One of the reasons I came to this forum and have been reading with interest is because I was / am considering switching from Good Energy to Ecotricity.
However, Dale’s comment in the article above,
‘When you buy green electricity what you actually do is buy non-descript (brown in reality) electricity from the market and you buy something called a REGO to go with it.’
made me hesitate, and spend some time trying to find out the difference between ROCs and REGOs, with not a huge amount of success. The main difference, as far as I was able to fathom, is that ROCs are tradeable, and REGOs are not.
Good Energy, when I spoke with them, said that they buy ROCs directly from the generating companies that they deal with, retiring around 15% of them annually to help boost the market price of renewables ( they also said that they are in the planning stages of building their own wind farms which, when activated, would account for about 30% of the energy that they supply ).
Dale’s comment above seems to suggest that Ecotricity buy brown electricity on top of what they produce themselves, and REGOs as a side order to that main purchase, if you like.
If this is the case, why do Ecotricity not buy ROCs direct from producers and retire them ? Or am I reading things incorrectly ?
Anthony
Now before i try to give my understanding i would like it to be known that i am not sure about the technicalities of the ROC/REGO system so i’m sure someone else or Dale will have to correct any omissions i make.
I think the way it works is ROCs are generated for every 1MW of renewable electricity generated you are awarded 1 ROC which is associated with the generation and is tradeable amongst suppliers that do not meet their renewable obligation.
Now this is where my understanding gets dodgy. I THINK the REGO is also attached to the generation but is only “proof” that the electricity was generated from a renewable source.
I am of course, as always, open to correction.
Ecotricity have 2 tariff options. One is around 37% renewable (generated by the company’s own turbines) and the rest topped up fro electricity purchased from the grid (effectively brown energy).
The other option is again 37% generated by ecotricity but the rest is bought from existing green supply (so 63% is provided similarly to Good Energy’s means). I don’t know if this means ecotricity buy ROCs because they’ve already far exceeded the government set renewable obligation and can then sell off their excess ROCs.
Maybe the purchase of electricity (the 63% i previously mentioned in this case) is separate from ROCs or maybe they are part of the same thing ie ROCs come with the electricity, i dont know. I am inclined to think it is the former.
Does that sound about right?
@ Anthony
I think the reason ecotricity don’t buy ROCS and retire them is that it allows them to match the regional electricity supplier on price, and it’s cheaper for ecotricity, leaving more money to plan and build turbines.
Or if you go for their 100% renewable tariff, the premium covers the price of the ROCS, I believe.
Thanks Matt
Your explanation sort of helps, but I have to admit to still being a little in the dark.
It helps, in as much as you are saying that the remaining 63% on the New Energy Plus tariff is definately sourced from renewable supplies, but I’m still unclear about why that 63% is not bought in such a way as to allow ROCs to be retired.
I’m also still keen to have some clarification on the ‘(as direct as you can)’ point.
Ta
Anthony.
My guess is that Good Energy are able to retire a percentage of their ROCs because their outgoings are less than ecotricity’s. They don’t build and at a hefty £2 million (ish) per turbine, ecotricity have to sell off their excess ROCs to go towards this where as Good Energy do not.
I suppose this is a way of Good Energy lessening the blow that they dont build by doing something which appears selfless by retiring the ROCs instead of not making money from them.
Im still holding out for a post from Dale about this though…
Cheers
Matt, Anthony,
Dale made a post about Good Energy dated May 2008 (if you click the ‘Energy’ link under Categories, that’ll narrow down the number of posts). And somewhere there is a discussion between Dale and Adi about Good Energy’s v ecotricity’s approach, but I can’t remember where it is.
Jeff
Hi all, I was going to reply in here – but it is too big to post as blog comment, so I have turned it into a new post – ROCs, REGOs and wind-powering GB
Let’s carry on the discussion over there…
Cheers.