Q2 2020: Electricity prices plummet

by Dr Iain Staffell – Imperial College London 

Power prices have fallen to their lowest in nearly two decades. 

Prices are down by two-thirds over the last two years, reaching a minimum of just £22/MWh over the month of May. Britain spent £1.3 billion less on electricity supply over the second quarter of this year compared to last year. The total cost of generation (based on wholesale prices plus balancing charges) fell from £3.0 to £1.7 billion over the three months.

Oil prices halved over the last year, going from $60 a barrel during Q2 of 2019 down to just $28 averaged over the last quarter. Gas prices fell 58% over the same period, but while a third of Britain’s electricity comes from natural gas, fuel isn’t the only thing to affect power prices.

Lower demand for electricity drives its price lower. When fewer power stations are needed, only the most efficient (and cheapest) ones stay online. When pushed to the extreme, National Grid must ask renewables and even nuclear reactors to reduce their output to avoid instability. And just as US oil prices turned negative briefly in April due to excess production, oversupply of electricity routinely forces power prices below zero.

The chart below-right illustrates this effect. At times when less than 10 GW of conventional, dispatchable generators were needed, prices plummeted below zero. There is of course a lot of scatter (in some hours prices went negative at 14 GW, sometimes they were still positive at 7 GW), but the trend is clear.

Monthly average power prices over the last two decades, adjusted for inflation (presented in 2020 GBP)

The relationship between ‘net demand’ (demand minus wind and solar output) and power prices over Quarter 2 of 2020

COVID has resulted in demand being around 4 GW lower across this quarter than we would expect without lockdown. This has a relatively small effect on prices when demand less renewable output is moderate. Moving from a net demand of 22 to 18 GW lowers prices by around £6/MWh. But when demand is low and renewable output is high (e.g. a windy Sunday evening, or a sunny weekend at midday), it has a much more pronounced effect. Moving from a net demand of 12 to 8 GW instead lowers prices by more than £40/MWh.

Using this trend, we model that if demand had not been suppressed by COVID restrictions, power stations would have earned 35% more for each MWh they generated. Prices would have still fallen from last year, because of movements in fossil fuel and carbon prices. This is seen in the charts above as the trend in 2020 is lower than that of 2019 (i.e. lower prices for the same level of demand). But still, if demand were not greatly reduced, we estimate prices would have only fallen from £42 to £32/MWh, rather than down to £23/MWh. The direct impact of reduced demand (reduced sales) meant power stations sold £320m less electricity during the last quarter than the same quarter last year. However, the effect of lower demand pushing down prices had a larger impact, cutting their market value by £450m.

This reduced value of generation amounts to around £50 per household over the last three months. But who actually sees those savings? Very few people have electricity tariffs that change every half hour to track the wholesale market, so households are not benefitting from lower prices yet. The kind of hedging offered by having a fixed tariff means consumers are paying more at the moment than they could be, but on the flipside they pay less per unit of electricity when prices are higher, such as during harsh winters. Electricity suppliers typically also buy their power in advance at fixed rates, so they will not be seeing much of the saving either. If prices continue to stay low, new contracts will be signed at lower rates, and the savings will begin to pass through.