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What drives the price of electricity?

16th May 2019

The wholesale price of electricity depends on several factors, including the:

  • price of the raw materials / commodities used in its production
  • exchange rates (affecting the price of raw materials)
  • weather
  • current price of carbon

Read more on each below:

The price of raw materials

The electricity market fluctuates along with the rise and fall in the price of the commodities used to produce it. These include coal, oil and – for the majority of current UK electricity generation – natural gas. When demand for these raw materials increases, their cost rises (as the law of supply and demand would suggest) and this can increase the price of electricity.

Exchange rates

Changes in a variety of exchange rates can affect the cost of imported commodities (e.g. dollars for coal and oil, euros for carbon) and the profitability of generation. When the pound depreciates in value against these currencies, imports become more expensive – including the raw materials required for thermal power generation. In turn, this causes wholesale power prices to rise – an additional cost that suppliers initially have to pay, but which they may then pass on to customers.

The weather

If the weather gets colder, demand for electricity will rise and the price of the commodities used in thermal generation will increase. As a result, prices – particularly on the day-ahead market – will go up too.

As we decarbonise the Grid, cold weather can also deliver good news – if it’s accompanied by high winds. When it’s windier, there’s a rise in carbon-free electricity generation from wind turbines, which can then reduce the wholesale price of electricity.

Carbon credits

The UK Government is committed to decarbonising the electricity industry as part of the Climate Change Act. It introduced the Carbon Price Support (CPS) as an additional carbon tax, to speed up the phasing out of coal from the UK energy mix. Continental Europe lags behind this country’s progress towards a coal-free future; the lack of a CPS-style scheme may help explain this.

Wherever those generating thermal electricity and producing carbon emissions are based in Europe, they must buy carbon credits (or European Union Allowances, EUAs). Naturally, the price of these credits also affects the price of power – and carbon prices have been rising.

To find out how Haven Power can help your business reduce the price of the electricity you use, please get in touch using our contact form.

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