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Everything you always wanted to know about electricity (but were afraid to ask)

Claude Crampes and Thomas-Olivier Léautier

Electricity is the product of an industrial transformation. It therefore has a cost. It also has a price, or rather prices. But most consumers only know one, which is the retail price shown on their bill. They can, however, easily access a large variety of information describing the physical side of the electricity system. Why provide consumers with detailed physical information and leave them to their own when it comes to finding out the value of the electricity they consume?

To find out more about the French electricity system: eco2mix

The French electricity system is atypical due to the important role that nuclear energy plays. But as a whole, it follows the same organisational principles as those which other countries apply. As electricity cannot be stored on a large scale, and as demand must be satisfied under all circumstances although it is not responsive to price variations, operators must stack production capacities with complementary technical specifications, i.e. basic power plants (high construction cost / low operating cost) which will function throughout all 8,760 hours of the year, and semi-peak, peak and super peak plants (low construction cost / high operating cost) which will only be called on according to the cyclical and random variations of demand.

Knowing it is good, seeing it is better. Today, everyone can view the French electrical mix in real time on http://www.rte-france.com/en/eco2mix/eco2mix which was created and is maintained by Réseau de Transport d’Electricité (click on “Power Generation by Energy Source”). On the site, we can also see national and regional electricity consumption, exchanges with bordering countries and the CO2 emissions per day, per week and per month since January 2012. For those who love figures, it is possible to download data sheets, and for roaming users, there is a smartphone app to install. Astronomy enthusiasts can even see the effects the solar eclipse of 20 March 2015 had on photovoltaic electricity production. Overall, eco2mix is a site which teaches us a lot about an industry on which our entire economy depends.

And prices?

Until the beginning of this year, eco2mix’s main weakness was that it was exclusively dedicated to physical information (electricity megawatts, tonnes of C02) without the slightest reference to installed capacity costs or the value of the energy produced. To obtain data in euros, one had, for example, to go to the Commission de Régulation de l’Energie website and to the EPEX SPOT market platform. This separation between physical data and monetary data is revealing in terms of the progress which remains to be made before market mechanisms totally penetrate the electricity industry. To the engineers, whose voice carries weight in the design of the energy mix, the same goes for electricity as for healthcare: it doesn’t have a price. Balancing supply and demand then becomes just a policy choice which has to be made at any cost (literally), and balancing the accounts will be done afterwards. Prices therefore don’t really matter.

Reducing the bill

Since the beginning of 2015, with the online publication of “Market Data” concerning France and eight neighbouring countries under two formats (curves and hourly spot price charts), eco2mix offers a decision-support tool which consumers and suppliers will be able to use.[1] It will be easier for retailers to offer contracts indexed on market prices in addition to the current uniform average price contracts. If consumers agree to pay for their energy at the market price, they can make two types of saving. On one hand, by postponing consumption which can be controlled (washing machine and dishwashers, energy and heat accumulators), to times of the day when the wholesale price is at its lowest, the energy bill should fall for an unchanged quantity of kilowatt hours consumed. On the other hand, the risk premium currently charged by suppliers to transfer variable wholesale prices into invariable retail prices is no longer justifiable; it can be reduced through competition between retailers.

From knowledge to action

It is necessary to know the prices in order to decide on consumption. Being able to take advantage of this knowledge also is necessary. In its current state, eco2mix only offers French consumer same-day prices, not day-ahead prices. So, on June 18, one had to get up early (or have gone to bed late on June 17) to find out that the megawatt hour was priced at €18 at 4am and €50 at 10am on the French market. Even if it is very likely to observe wholesale prices lower during night time than during the day, the extent of the difference may be an important decisive factor, in particular for industrial consumers. In order to properly benefit from price differentials, for example by alternating energy storage and destocking, one must have IT programmes capable of commanding consumer devices to switch on by using the market data information, or one need to know the day-ahead prices to organise one’s consumption from the day before. For readers who are not very familiar with market mechanisms in the electricity industry, suffice it to say that you do not need a crystal ball or tea leaves to find out the day-ahead prices. The day-ahead markets are the centrepiece of liberalised industry. On most electricity exchanges, the megawatt hour price is known at the latest in the middle of the afternoon for each of the 24 hours of the next day.

In any case, to become responsive to the wholesale price is not free. One must either monitor the markets oneself, or have them monitored by automatic devices or specialist operators. But this is no more complicated than finding out about traffic jams and weather conditions at the beginning of the day.

Price of energy and price of the remainder

With consumption organised on the basis of energy wholesale prices, the macroeconomic gains would be considerable. As the balance between energy supply and demand is based on prices, producers would no longer be required to install and maintain peak and super peak capacity used only for a few tens of hours a year to satisfy peak demand. But individuals should not hope for large savings. First of all because not all consumption can be stopped or moved to another time of day; as a result, at least for residential consumers, the volumes concerned are not that large.[2] Secondly, because the price of energy negotiated on wholesale markets is only one of the components of the bill presented to the consumer. To obtain the full retail price, one must add the transport price (TURPE in France), the unnamed taxes (CSPE for France) and the explicit taxes, not forgetting the operating cost and margin of suppliers.

Consequently, one must not be surprised if the retail price paid in Germany is much higher than the retail price billed in France, although the German wholesale price is quite regularly no higher than the French wholesale price (see for example the day of 18 June). This example shows the limits of only knowing wholesale prices. With the development of renewable energies encouraged by the European governments, the electricity wholesale price is progressively decreasing (because the operating cost for renewable energy sources is very low, or even nil) and the equipment is financed by indirect methods: purchasing prices, green premiums or certificates are all added in to the consumer bill.[3] The more renewable sources there are in the production of electricity, the wider the gap between the wholesale and retail prices.

***

By publishing hourly electricity wholesale prices for the current day, eco2mix is providing a precious tool to modify consumers’ behaviour, helped by suppliers who are likely to offer contracts indexed on the market prices. This is an initiative which should be applauded, but it would be advisable to go further and display the wholesale day-ahead prices. It would also be good to display the retail price breakdown. In this way, one would see the decreasing share of the energy price in the bill issued by retailers, in particular due to the regular increase in taxes which pays for supporting renewable energies, and soon the capacity mechanism.

Making the end consumer pay a price varying with the hourly wholesale price is a radical change which requires an adaptation in behaviour. It will be instructive to observe the effects of the pricing reform which is beginning in Spain.[4] Some 15 million residential customers who are still at the regulated rate (compared with 11 million who have switched over to a market offer) will pay a price indexed on electricity wholesale prices, therefore changing from hour to hour. For consumers billed according to a combination of the hourly wholesale price and their hourly consumption (which means having a new consumption meter) it will be advantageous to keep an eye on the Spanish wholesale market prices, at least at peak and super peak periods.


[1] In addition to France, the countries concerned are Belgium, Germany, Italy, the Netherlands, Portugal, Spain, Switzerland and the UK. Price data are taken from the ENTSO-E Transparency platform (https://transparency.entsoe.eu), which is fed with data from each country’s electricity exchange.

[2] See T.O. Léautier (2014) “Is mandating smart meters smart?”, The Energy Journal, vol. 35, no. 4, October, p. 135–158.

[3] We have addressed the “Contribution au Service Public de l’Electricité” (CSPE – Contribution to the Public Electricity Service) in this blog on several occasions.

[4] Royal decree 216/2014 dated 28 March 2014 (www.boe.es/boe/dias/2014/03/29/pdfs/BOE-A-2014-3376.pdf) and Resolution of 2 June 2015 of the Secretary of State for Energy (www.boe.es/boe/dias/2015/06/04/pdfs/BOE-A-2015-6203.pdf). For information in French, please see www.fr.capgemini-consulting.com/changement-paradigme-prix-electricite-espagne.