A new report on the variability in electricity market prices linked to increasing reliance on solar and wind generation by Professor Gordon Hughes, School of Economics, University of Edinburgh is published today by the Renewable Energy Foundation.
Market prices for electricity have always fluctuated because of within-day and across-season variations in demand for electricity. However, from 2010 to 2024 the monthly variability in market electricity prices doubled. This increase was directly linked to the decline in the amount of market, i.e. non-subsidised, generation due to the growth in the amount of subsidised renewable generation.
Since the current UK government is committed to accelerating the switch to reliance upon subsidised renewable generation, the inevitable consequence will be a further increase in the variability of market prices. This change will destabilize the wholesale market and undermine the basis on which retail electricity prices are regulated.
In the past, monopoly electricity utilities were expected to absorb variations in the cost of meeting electricity, charging fixed prices to retail and business customers. This was no longer possible after the industry was split up. Electricity suppliers do not have the resources to protect retail customers from medium term changes in the level of market electricity prices.
To address widespread discontent over the impact of variable energy pricing, the government imposed regulated price caps by which electricity tariffs were adjusted every 6 months and now every 3 months. Electricity suppliers are expected to insure (hedge) the prices at which they buy electricity within each 3-month period. That only works if the cost of insurance is not too high, which depends on the monthly variability of electricity prices.
Experience in other European countries suggest that a fixed price cap is unlikely to be viable in the longer term if the government’s renewable generation targets are met. Two kinds of retail tariff may dominate in future, though both depend on the availability of smart meters. These tariffs are:
- Multiperiod tariffs – these are usually linked to a monthly market price index with different multipliers for, often, off-peak, standard, and peak hours.
- Dynamic tariffs – these are based on hourly or half-hourly market price with a fixed multiplier or add-ons to cover levies, transport and other costs. The tariff is usually capped to reduce the impact of extreme market prices.
What is presented as “protecting” retail customers from variations in market electricity prices seems designed to hide the extent to which retail prices have become divorced from market prices. Increased variability of market prices is likely to stimulate and even force a shift away from price caps to explicit acknowledgement of market price variability.
 Variability in Electricity Market Prices |