Comment by tialaramex
3 years ago
What price do you think we should pay for the electricity?
Suppose we insist we'll pay less than the price you agree to sell for. Obviously that's not a sale, that's robbery. This problem arises even if we agree to pay everybody the average, because some suppliers didn't bid average, their bid was higher, but we still claimed their electricity, so we are stealing from them.
OK, suppose we decide we'll pay all accepted bids at their bid price regardless of the marginal unit cost. If we do this the supplier is incentivised to guess the bid we will accept, so as to collect the difference between their actual price and the price we're willing to pay. If they're very good at this, we pay exactly the same as now, but, regardless of whether they're good at it the grid is significantly destabilized by the increased uncertainty due to lack of efficient price signals.
What other ideas do you have ?
I don’t know much about it; that’s why I asked the question.
So the short answer is I have no idea, but I doubt we currently live in the best of all possible worlds.
It seems an odd pricing scheme which isn’t working well as gas becomes less desirable and renewables are a bigger part of the mix.
What you describe as paying at the bid price sounds like a free market to me - if you’re going to have a market mechanism perhaps it should use the market to efficiently discover prices, not impose a very odd pricing structure - if imposing nationwide prices, why have a market at all?
There are many possible alternatives:
Allow prices to float in a completely free market, and force suppliers to hedge (which they do anyway to some extent, but they could be required to).
Nationalise the national grid and energy production
Build interconnects and hydro storage to reduce reliance on gas plants and reduce the problem.
Set prices in regional markets to bring production closer to the areas with peak consumption.
Set prices by energy type (separate markets per type like fusion solar etc taking into account externalities).
Set prices by energy use (baseload, fluctuating, peak)
Defining pricing mechanisms is not robbery it is why we have a regulator!