Also known as “if renewables are so cheap, why is my energy bill so high?”
So why does my electricity bill still say I’m being charged 6.8 cents per kWh? Well in Alberta that’s mostly due to the government capping what residents have to pay for electricity in 2017 until 2021. But 6.8 cents is still higher than what we keep hearing about for renewables prices. And that is due to the almost hilariously rigged method of how System Marginal Prices (SMP) and Pool Pricing work.
So what is a SMP and a pool price? Well the easiest way to describe it is with an example. Say there are 4 suppliers, wind, solar, gas, and nuclear. Solar bids to supply the grid at 4 c/kWh, Wind bids to supply at 2.5c/kWh, gas bids at 6.2c/kWh and nuclear bids at 6.4c/kWh. What the grid operator does is constantly picks from each possible supplier in terms of lowest cost, until they can fill up the entire demand of the grid they control. First they will obviously pick wind because it’s so cheap, then solar, gas, and finally nuclear. But here’s where the interesting part comes in. If gas is enough to fill the demand then the operator doesn’t even need to include nuclear since it is 0.2 c/kWh more expensive than gas it is given the lowest priority for supply. This makes the bid price of Gas the SMP for the grid. The SMP is calculated minute by minute and over the course of an hour the average value of the SMP is what is called the Pool Price. Which means that if gas stays as the SMP, then wind, solar, and gas All get paid at gas’s bid of 6.2c/kWh for that hour.
Sounds like a pretty sweet deal to the lowest cost producers right? Get extra profit for being such a low cost provider so that you don’t have to worry about cutting margins too close to maintain that competitive edge. And I mean there’s no way that there could be any kind of cooperative work between different types of energy providers that say, might make it easy for those groups to game the SMP to maximize their profits by subverting the competition a healthy market requires right?
Now of course this example is highly simplified. In reality there are multiple providers of every kind bidding for their generating stations/farms, but it does highlight a very specific problem with this model of energy markets. It purposefully gives more money to low cost providers at the expense of the end users.
By determining the pool price by the highest bid needed to fill capacity, the end user is being forced to pay more for no reason. And don’t tell me that a grid operator can’t tell how much energy is going to each place and figure out either an average value for their consumption based on the current bids, or even more complicated processes like charging users based on ranked systems of demand for stability and price. We have more computing power in our pockets than we did to send people to the moon and Alberta is becoming a surprising hotbed for AI research so I’m pretty sure this would be a piece of cake.
So what does this have to do with nuclear? I’ve barely mentioned it this entire article. Well if we go back to my earlier example, nuclear is priced out of the market with this current model. Not just because it is more expensive than gas currently, but also because of the massive build of renewables due to the huge profit margin on them from pool pricing. So long as they ensure that they never can supply the entire market demand (a very important caveat). If that happens then all of a sudden their profits are cut at least in half, and they could end up owing money if the pool price goes negative due to over production (a really sunny and windy day).
This sounds great for us and our wallets, but it’s bad in the long run. This amount of excess generation leads to wear and increased maintenance on the grid infrastructure and our other generation capacity as they are spun down during these gluts. Plus it ends up costing the actual renewable generators money. This disincentives them from actually reaching large market penetrations, as they need massive overbuilds of production to produce the same energy as higher capacity factor generators like nuclear or coal. Even at a mere 30% market share they run the risk of overproducing the entirety of the market demand and pushing prices negative, not just for that provider but for everyone on the grid.
Also, doesn’t it seem odd that we are using a system that actively, negatively reinforces an attempt by low carbon technologies to reach higher market shares? Maybe someone with more economic insight might find this an interesting thread to pull on?
There was talk of turning Alberta into a Capacity market rather than it’s current Electricity market model. The difference being that providers would bid not only their prices but also the amount of grid demand they are able to supply. Whether this model would be more amenable to high production technologies like nuclear or low production such as wind or solar is not something I am qualified to talk about. I’m sure much more learned people with more expertise have examined the benefits and downsides to such a shift to death already. All I’m interested in is getting every provider on an even, competitive footing that maximizes the benefit to the consumer. You know, like capitalism is meant to do.