Renewables -shifting the balance of wholesale pricing?

Renewables -shifting the balance of wholesale pricing?

The growing use of wind and solar energy on the grid, and by businesses and homes, is changing the way the UK energy industry operates in many ways. Utilitywise assess the impact it is having on the shape of wholesale prices over the day.

There is already a link between electricity prices for delivery the next day and forecast renewable output: when strong wind output is expected, it reduces the need for fossil-fuel based generation to meet demand, putting pressure on wholesale power prices.

However, recent trading has highlighted the impact of renewables on within-day pricing. Specifically, renewable generation appears to be breaking the historic relationship between Peak prices and Baseload prices.

Baseload power prices cover each hour of a day, while the Peak prices apply to just the period between 7am and 7pm. This is the period when demand is generally higher, resulting in Peak prices being stronger than Baseload. In the last year, this has been the case for 95% of the weekdays traded. The other 5% of cases when Baseload is above Peak occur during the months which tend to have more daylight hours.

Peak prices 1

How is solar energy affecting peak prices?

The increasing use of solar may be a factor contributing to this divergence. The highest level of solar generation will generally occur during the spring and summer and within the middle of the Peak time period when the sun is at its highest. This increases renewable generation output, improving overall electricity supply. In addition, those homes and business with solar panels will be using more of their own generation, reducing their need to take electricity from the grid.

Last week, when Day-ahead Peak prices were below the value of Baseload on more than one occasion, solar generation was also strong. Looking at prices over the course of the day, it is also clear that the fall in the electricity price coincides with a rise in solar output, and vice versa. Notably though, the swing in prices became even more pronounced on the Wednesday and Thursday last week, as wind generation declined.

Peak prices 2

The implication is that solar is affecting prices and this phenomenon should only get stronger as we head further into summer. However, the data also highlights that solar alone is not the main driver. Government figures put installed solar generation last year at just over 10TWh compared to 37TWh for wind generation, with the influence of the latter remaining more dominant. This can be seen last week when the general price increase over the week correlated with the decline in wind output over this period.

At present, the forward curve shows no real indication of this potential price volatility. Peak prices for next summer remain solidly above the Baseload. Day-to-day forward electricity prices remain largely tied to movements in the gas market. Gas still remains the main generation driver for the power market, but this could change if renewable output increases further in the coming years.

Ross Moffat

Posted by on Thursday, the 13. April at 12.32

Ross Moffat has been a part of the Market Intelligence team at Utilitywise since early 2014. His responsibilities include delivering Market Intelligence reports to clients and managing the Utility Insights Twitter account. Ross has a first class Honours degree in Business and Marketing from the University of Stirling.