Prices for renewables are fixed CFD or FIT contract prices, the only generators that get the market price are gas fired generators. It should not come as a surprise that market prices for electricity correlate with the price of gas
Its still strikes me as odd that we import so much from Europe given the usage charges for the i/c are upwards of E10/MWhr. I can understand it from France given its low cost of production and big nuclear plants up on the Channel seems reasonable and even Norway albeit their exports create a problem on pricing in South Norway but the other countries?
The other thing not made clear is day ahead pricing is c60-70% of volume the remainder either comes from forward contracts or in day adjustments. OK its the dominant element but not the full picture.
On prices, I don't think volumes are all that matter. Forward contracts are financial instruments, i.e. settled by financial payments rather than physical delivery. There are lots of long term contracts between generators and traders/trading arm of the operator - look at Orsted or SSE or Octopus SPVs - in which the generator receives either a guaranteed price (to keep lenders happy) or a price linked to the day-ahead market. So, even when physical volumes aren't traded the day-ahead price acts as a reference for a range of transactions outside the market.
When I have looked at it the spot price - what Elexon calls the market index price - tracks the day-ahead price pretty closely. Of course they diverge in conditions of market stress but I see the spot market as allowing parties to adjust commitments made in the day-ahead market when circumstances change in the period between day-ahead closure and gate closure.
It is a complicated jigsaw of moving parts. Because capacity on the key interconnectors is traded over different time periods, in my view the day-ahead or spot price for capacity simply absorbs the price differences between the markets at either end of each link. The NEMO link is effectively French power travelling to GB but recorded as exports from France to Belgium and then Belgium to GB. Similarly, for the Viking link from Denmark which is either Norwegian or German power (depending on how windy or sunny it is in Germany) travelling via Denmark. Britned is even messier, but again much of it is either FR -> BE -> NL -> GB or DE -> NL -> GB or even FR -> DE -> NL -> GB.
France and Norway drive almost everything because they are the two countries in Western with large amounts of reliable surplus generating capacity from nuclear and hydro. In addition, Germany is the source of great instability because it switches from surplus (negative or very low prices) to deficit (high prices) depending on the amount of generation from solar and wind. When there is surplus, this spills over to all of its neighbours but especially DK and NL. Then Denmark exports to Norway (cutting hydro production there) and also to GB. Similarly, NL exports to GB and cuts its own gas generation. Flows reverse into Germany when its intermittent output is low. That pushes up offer prices for exports to GB and pushes down prices for interconnector capacity.
Thank you Gordon, superb as always. One lesson from your analyses is how little chance the average layperson would have, with limited time, knowledge of data sources and how to process the data, in the face of doctrines and dogmas issued by government and parroted by traditional media.
On a point of detail, to my eyes your second graph of Import share and electricity-gas price ratio is a repeat of the first, and not a window on April 2022 to March 2023 as per the text.
This is the overriding problem of modern politics and public discourse. I have pretty much given up dealing with both politicians, newspapers and broadcast media because they are obsessed with 30-second soundbites and clickbait headlines. But who expects that designing nuclear reactors or space rockets should be simple? Why should markets spanning many countries and thousands of agents be any less complicated. The broad principles may be simple but the details are not. Few journalists expect to understand the details of how rockets work, so why should they believe that simple fairy stories capture the operation of complex markets?
On your second point, I have rewritten the text in an attempt to make what I have done clearer. My purpose was to identify whether data during the period of the nuclear outages in France affected the conclusion that the UK market was becoming more dependent on imports and less dependent on gas prices.
Thank you for both points, and I apologise for what I suspect was sloppy reading on my part, but on re-reading it is all abundantly clear.
As to complexity, there is an additional twist: I've observed even folk very knowledgeable in one discipline assume that other disciplines couldn't possibly be as complex and demanding as theirs!
There is, it seems, always a ready market for over-simplification. Thanks again.
Am I right in thinking the French electricity prices correlate more strongly to gas prices than the U.K.? Is so, why would that be?
At the time when the French nuclear stations were out, wasn’t the U.K. importing gas, and due to limits on the gas interconnectors, essentially “burning it for Europe” and exporting electricity? And also burning coal?
On your first question: The problem in summarising this is that all of the markets are closely interconnected. Currently UK power prices are most closely linked to French (and German) power prices, while French power prices are highly correlated with European gas prices. Why? Because prices in France are set by demand from countries like Benelux, Italy, Spain and, of course, GB where gas generation is relatively more important than in France. The goal of independence from gas prices is illusory when you rely heavily on imports or exports and your trading partners are shifting between gas generation and imports/exports. This is what DESNZ doesn't understand!
Your second para is partly correct. The UK had more LNG import capacity than neighbouring countries but I don't think there was a serious constraint on the gas interconnectors from GB to Europe. I think the issue was that very high prices constrained industrial demand in the UK which freed up generation to reverse the usual flow from Europe to GB. The main countries burning coal rather than gas were Germany, Netherlands, Denmark. However, I will look at this in more detail.
It’s all a fascinating dynamic. Am I right in thinking that domestic tariffs in France are not low (or lower than the U.K.) because of all the nuclear they have, as some claim, as gas elsewhere in Europe is still setting the price
As we know for the UK, market prices have a distant relationship with domestic tariffs. Eurostat figures show that French domestic tariffs are slightly higher than the EU average - see https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:F1Electricity_prices_for_household_consumers,_second_half_2024_.png . A large part of the differences are due to both different VAT rates on domestic supplies of electricity and special taxes. The countries with the lowest pre-tax domestic prices tend to be those with low charges for transmission & distribution, many of them in Eastern Europe. However, you are correct that the wholesale cost element of domestic tariffs in France is higher than it would be if France as a purely isolated system with no large amounts of trade with neighbouring countries.
Actually no. Imagine what would happen if EDF were to deliberately cut production - a deliberate rather than accidental version of 2022-23. Prices in surrounding areas would be much higher. Because all of the connections between France and other countries, demand from those countries would push up market prices in France.
What I was referring to was if France operated as a pure island system with no trade in either direction. With large price differences an interconnections that is no longer a feasible option. That is why customers in Norway are annoyed that European demand is pushing up prices in Norway - it is a genie that has escaped the bottle and can't be put back.
Prices for renewables are fixed CFD or FIT contract prices, the only generators that get the market price are gas fired generators. It should not come as a surprise that market prices for electricity correlate with the price of gas
Its still strikes me as odd that we import so much from Europe given the usage charges for the i/c are upwards of E10/MWhr. I can understand it from France given its low cost of production and big nuclear plants up on the Channel seems reasonable and even Norway albeit their exports create a problem on pricing in South Norway but the other countries?
The other thing not made clear is day ahead pricing is c60-70% of volume the remainder either comes from forward contracts or in day adjustments. OK its the dominant element but not the full picture.
On prices, I don't think volumes are all that matter. Forward contracts are financial instruments, i.e. settled by financial payments rather than physical delivery. There are lots of long term contracts between generators and traders/trading arm of the operator - look at Orsted or SSE or Octopus SPVs - in which the generator receives either a guaranteed price (to keep lenders happy) or a price linked to the day-ahead market. So, even when physical volumes aren't traded the day-ahead price acts as a reference for a range of transactions outside the market.
When I have looked at it the spot price - what Elexon calls the market index price - tracks the day-ahead price pretty closely. Of course they diverge in conditions of market stress but I see the spot market as allowing parties to adjust commitments made in the day-ahead market when circumstances change in the period between day-ahead closure and gate closure.
It is a complicated jigsaw of moving parts. Because capacity on the key interconnectors is traded over different time periods, in my view the day-ahead or spot price for capacity simply absorbs the price differences between the markets at either end of each link. The NEMO link is effectively French power travelling to GB but recorded as exports from France to Belgium and then Belgium to GB. Similarly, for the Viking link from Denmark which is either Norwegian or German power (depending on how windy or sunny it is in Germany) travelling via Denmark. Britned is even messier, but again much of it is either FR -> BE -> NL -> GB or DE -> NL -> GB or even FR -> DE -> NL -> GB.
France and Norway drive almost everything because they are the two countries in Western with large amounts of reliable surplus generating capacity from nuclear and hydro. In addition, Germany is the source of great instability because it switches from surplus (negative or very low prices) to deficit (high prices) depending on the amount of generation from solar and wind. When there is surplus, this spills over to all of its neighbours but especially DK and NL. Then Denmark exports to Norway (cutting hydro production there) and also to GB. Similarly, NL exports to GB and cuts its own gas generation. Flows reverse into Germany when its intermittent output is low. That pushes up offer prices for exports to GB and pushes down prices for interconnector capacity.
Thank you Gordon, superb as always. One lesson from your analyses is how little chance the average layperson would have, with limited time, knowledge of data sources and how to process the data, in the face of doctrines and dogmas issued by government and parroted by traditional media.
On a point of detail, to my eyes your second graph of Import share and electricity-gas price ratio is a repeat of the first, and not a window on April 2022 to March 2023 as per the text.
This is the overriding problem of modern politics and public discourse. I have pretty much given up dealing with both politicians, newspapers and broadcast media because they are obsessed with 30-second soundbites and clickbait headlines. But who expects that designing nuclear reactors or space rockets should be simple? Why should markets spanning many countries and thousands of agents be any less complicated. The broad principles may be simple but the details are not. Few journalists expect to understand the details of how rockets work, so why should they believe that simple fairy stories capture the operation of complex markets?
On your second point, I have rewritten the text in an attempt to make what I have done clearer. My purpose was to identify whether data during the period of the nuclear outages in France affected the conclusion that the UK market was becoming more dependent on imports and less dependent on gas prices.
Thank you for both points, and I apologise for what I suspect was sloppy reading on my part, but on re-reading it is all abundantly clear.
As to complexity, there is an additional twist: I've observed even folk very knowledgeable in one discipline assume that other disciplines couldn't possibly be as complex and demanding as theirs!
There is, it seems, always a ready market for over-simplification. Thanks again.
Am I right in thinking the French electricity prices correlate more strongly to gas prices than the U.K.? Is so, why would that be?
At the time when the French nuclear stations were out, wasn’t the U.K. importing gas, and due to limits on the gas interconnectors, essentially “burning it for Europe” and exporting electricity? And also burning coal?
On your first question: The problem in summarising this is that all of the markets are closely interconnected. Currently UK power prices are most closely linked to French (and German) power prices, while French power prices are highly correlated with European gas prices. Why? Because prices in France are set by demand from countries like Benelux, Italy, Spain and, of course, GB where gas generation is relatively more important than in France. The goal of independence from gas prices is illusory when you rely heavily on imports or exports and your trading partners are shifting between gas generation and imports/exports. This is what DESNZ doesn't understand!
Your second para is partly correct. The UK had more LNG import capacity than neighbouring countries but I don't think there was a serious constraint on the gas interconnectors from GB to Europe. I think the issue was that very high prices constrained industrial demand in the UK which freed up generation to reverse the usual flow from Europe to GB. The main countries burning coal rather than gas were Germany, Netherlands, Denmark. However, I will look at this in more detail.
Thanks
It’s all a fascinating dynamic. Am I right in thinking that domestic tariffs in France are not low (or lower than the U.K.) because of all the nuclear they have, as some claim, as gas elsewhere in Europe is still setting the price
As we know for the UK, market prices have a distant relationship with domestic tariffs. Eurostat figures show that French domestic tariffs are slightly higher than the EU average - see https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:F1Electricity_prices_for_household_consumers,_second_half_2024_.png . A large part of the differences are due to both different VAT rates on domestic supplies of electricity and special taxes. The countries with the lowest pre-tax domestic prices tend to be those with low charges for transmission & distribution, many of them in Eastern Europe. However, you are correct that the wholesale cost element of domestic tariffs in France is higher than it would be if France as a purely isolated system with no large amounts of trade with neighbouring countries.
So France is making the wholesale price higher than it could be by “over producing” and selling to neighbours?
Actually no. Imagine what would happen if EDF were to deliberately cut production - a deliberate rather than accidental version of 2022-23. Prices in surrounding areas would be much higher. Because all of the connections between France and other countries, demand from those countries would push up market prices in France.
What I was referring to was if France operated as a pure island system with no trade in either direction. With large price differences an interconnections that is no longer a feasible option. That is why customers in Norway are annoyed that European demand is pushing up prices in Norway - it is a genie that has escaped the bottle and can't be put back.