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Revisiting Electricity Prices - Barış Sanlı

As the world moves towards a cleaner energy system, electrification is at the heart of this transformation. Hydrogen is still a laggard, and carbon capture technologies may need higher prices or more innovation, which will take time. The easiest route to decarbonization looks like electrification.

The current electricity pricing mechanisms are archaic at their best. The capacity markets are forming a split between the baseload and the rest. Ever-increasing zero marginal cost resources are distorting the price signals. Electricity is a uniform product for some or a combination of different services for others. So what does that single kWh price means for the markets?

The main question for electricity prices is “If we had ten days of electricity storage capacity in our service, will the market design be the same?”. I may simplify the question further and ask if one day of storage will be enough to radically change the market structure. The main problem with electricity is you can not store it in scale. Interseasonal storage is a bigger problem. We designed the current market systems to cover up the shortage problem.

In contrast, the oil market does not have the capacity or balancing markets. In a mature commodity, market storage makes redundant all these market mechanisms. But storage technology is in between hydrogen and renewable electricity in terms of progress.

Most of the consultancy companies can’t run oil price or gas, price models. They are either pattern recognizing and repeating mathematical complexities which modelers hardly grasp how they work or simple trend-following forecasts. Electricity prices are determined by the fiction created by regulatory mechanisms. We do not really know what the real electricity prices will be if consumers and producers were to trade with each other freely.

Then there is the consumer price problem. Electricity infrastructure is more detailed and complex than natural gas or coal infrastructure. Therefore infrastructure costs, whether smart or digital, are clearly visible in the bills. But there are other levies on electricity costs. If electrification is the path forward, electricity bills should be simpler, and the natural gas bill should be more expensive. This is what some thinkers and policymakers around the world are discussing.

The consequences of lower electricity costs compared to natural gas will shift heating demand to electricity. EVs are not a big problem, but heating with electricity certainly requires firm electric power. If the discussions are leading us to electrification, practically a mini nuclear age is coming unless another nuclear accident happens.

The whole pricing structure of the electricity markets from wholesale to consumers is about to change. But it is too frightening to disturb the status quo for an essential commodity like electricity. Consumer expectations for electricity quality are very high. Our economy is centered around secure electricity. If electrification reaches 50% of total final consumption at some point, price stability will be the key. The stability requires new mechanisms from wholesale to final consumer prices. But price disparity between natural gas and electricity may reach its end of life.


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