Electricity pricing, stuck in the past and unfit for the future.

First let me say that I am paying in Euros, but it doesn’t matter if you pay in $ or £ or any other currency, the numbers are the same.

My bill reveals that 78% of the power I use is provided by hydro-power. As far as I can see, the rivers still flow, the rain still falls so, in theory 78% of the electricity I use should only cost a little more this year than it did last year. For the other 22%, which is coming from gas the cost is currently a shocking 210% greater (and set to go much higher) than it was a year ago. Last year I was paying about 6.3 cents per kilowatt before tax and distribution costs. So 78% at 6.3 cents per kilo watt and 22% which is 210% more expensive at 13.22 cents per kilowatt should give me the following: 78% costing 4.914 cents plus 22% at 2.9 cents per kilowatt hour so a total of 7.82 cents per kilowatt hour. 

So why then, you might ask, am I being billed at 18.62 cents?

The answer can be found in the difference between the flows of things like water or gas, and the flow of electricity and the way the market was set up.

Water flow can be fast or slow or can be easily stopped.  Electricity doesn’t work that way at all. It is produced at exactly the time it is needed so if a lot of people want to use electricity somebody must produce it at that exact moment. If that were not the case, if there wasn’t enough being produced then the delivery system would be overloaded and fail resulting in blackouts. The same thing would happen if there were too much electricity being produced. So for electricity, demand and supply must be almost completely balanced and this means that the flow of electricity must be managed so that the frequency – not something I want to look at here, is kept at 50 hertz though a little bit of deviation from this permitted. A hertz is a pulse every second so 50 hertz is 50 pulses of alternating current every second. 

The big question is, how do you maintain a constant frequency when customers are turning electrical appliances and machines on an off all the time?

A simple case looks like this:

Demand, 100 megawatts.  Total supply from a river dam, 100 megawatts. Result, complete happiness and low price electricity- as we have seen from my bill, 6 cents per kilowatt.

But what happens if consumers want more electricity? Let us say a further 10 megawatts. If there is no way to produce this, then the whole system will overload and fail. Blackouts everywhere and this is common, particularly in the summer in the USA when everybody wants air conditioning. To avoid this the electricity supplier will turn on other ways to make the 10 megawatts and this way is normally to use gas to boil water to make steam to drive a generator. Gas has been cheap for a long time but now it is expensive, very expensive, and this means that the company with the gas powered generator will charge a high price for their electricity, maybe 20 cents per kilowatt.

And here is the catch. As if by magic, the company which owns the river dam now gets 20 cents per kilowatt for its electricity. Before, it made a profit producing electricity at 6 cents and now it is getting paid 20 cents. A high sale price but with the same costs. And it’s the same for solar power plants or windfarms. 

100 megawatts at 6 cents gives an income of 6000 per hour but at 20 cents its 20,000 per hour. That’s an extra 14,000 per hour. In a year that’s 175,200,000 instead of 52,560,000. Let me say that again, an extra 122 million 640 thousand What, I hear you say, an extra one hundred and 22million, 640 thousand. For nothing? And the short answer is YES.

Now I have to say that, in past times this arrangement for paying producers of electricity seems to have worked ok. But to quote L.P.Hartley, “The past is a foreign country: they do things differently there,”

What worked then is certainly not working now. Under this arrangement, the consumer becomes the victim. 

So, if you are wondering just how it is that your government can afford to give you some money towards your electricity bill, just remember that, just as the prices go up, so does the amount of tax the government gets. So they give you a little back. Whoopee!