Q4 2020: Flexible fossil rewarded with premium prices

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As Britain moves towards more renewable power, the value of having control over the timing of output is coming into sharp relief.  

During 2020, fossil fuelled power stations earned 25% more than wind and solar farms per unit of output, and this gap has quadrupled in the last two years.

During 2020, the average power price was £36/MWh, its lowest in over a decade as fuel prices fell and lockdowns suppressed demand. But not all technologies earn this average, as power prices vary from hour to hour and so does their output.

Nuclear reactors aim to run at full power throughout the year (except for outages), and so they consistently earn close to the average price. While biomass stations do run flexibly when required, they tend to operate year-round with high utilisation, and so also earn close to the average. 

During the first half of the 2010s coal was also a baseload fuel, operating around the clock. Coal power stations earned near enough the annual average price each year, just as nuclear and biomass do today.  From 2016 onwards, coal became restricted to the winter months, then to winter daytimes, then to only selected few days when the system was especially tight.  

As coal increasingly became a peak-only fuel, the relative earnings have crept up to 20% above average prices (a premium of £7/MWh). Although gas still supplies the largest share of Britain’s electricity, it appears to be moving in the same direction. In 2020, gas power stations earned almost 10% (£3.50/MWh) above the average market price.

The ‘capture value’ of different technologies over the past decade, showing the average power price received (weighted by the technology’s output) relative to the average power price across each year (weighted by demand)

Because wind and solar farms have no fuel costs, they generate whenever possible. When their output is high they can push down power prices, and even send them negative when output has to be curtailed.  At the start of the decade, solar farms earned above the average price, as they operate during daylight hours when prices were higher. Now sunny afternoons often see negative prices as solar output is so high (e.g. last Easter), and average power prices throughout the summer are now £10-15 lower than they were ten years ago. Averaged over the whole of 2020, solar energy earned 18% (£6/MWh) less than the average price, and wind farms now earn 12% (£4/MWh) less than average.  

Wholesale power prices versus time of day during the summer months, showing how prices are depressed during daylight hours in 2020 compared to 2009 (before any solar PV was operating)

Coal and solar represent two extremes, and the difference in their output timings can be seen in the chart below. One-sixth of solar energy was produced at times when power prices were below £20/MWh, and one-sixth when they were above £40/MWh.  In contrast, coal power stations produced eight times more electricity when prices were above £40/MWh than when they were below £20/MWh.  Power prices were negative during 2% of hours in 2020.  Virtually no coal stations operated during these negative price periods (0.1% of their yearly output), versus 3% of output from solar farms.

The range of wholesale prices earned by solar farms and coal power stations across all hours in 2020

None of this means that coal power stations are suddenly a great investment or that solar farms are a bad one. The higher prices that coal earns coincide with rapidly shrinking market share.  Although average power prices are pushed down by growing shares of renewables, dispatchable and flexible generators may continue to earn a reasonable rate. Weather-driven renewables may suffer further as their shares grow, so the business case for integrated renewables with storage projects may strengthen. Any projects that improve flexibility, including pumped hydro, interconnection, battery storage or vehicle-to-grid will all help to rebalance prices.

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