How is electricity priced?
The electricity market in Great Britain is a complex intersection of engineering and economics. Generators supply the electricity that consumers demand. The physical connections between demand and supply make up the electricity grid, and the most important part of the price that consumers pay is the wholesale electricity price.
What is the wholesale electricity price?
The wholesale electricity price is the amount suppliers pay to buy the electricity they use to supply end consumers. It’s the most significant single component of a typical consumer bill. With the July 2024 price cap, wholesale electricity price makes up 39% of what consumers pay for their electricity. The operational costs account for the rest.
There are three main models in use when it comes to calculating the wholesale electricity price around the world. Some countries, like Great Britain, do not vary prices by location. Others divide their markets into regional price “zones”, and some price electricity at more granular “nodes”.
My electricity consumption
Is it the kettle, the old school light bulbs, the tumble dryer? And did you check the power consumption on that new outdoor heater you bought for your garden makeover?
Understanding your electricity bill
Comparison sites, direct mail, someone vying for your attention as you leave the supermarket – you will, at some point, have been encouraged by money saving claims…
National pricing
Great Britain's currently uses the national pricing model. This model has a single market zone where buyers and sellers can contract directly at a price agreed in private. However, this pricing system does not take network constraints into consideration, whereby electricity cannot flow freely from where it is generated to where it is consumed. There is some reflection of constraints through the Transmission Network Use of System charges, but these are separate from the wholesale market.
This can result in market inefficiencies, meaning the price may not reflect the actual cost of delivering electricity to different locations.
France, Germany, Poland and Greece also use the national pricing model.
Zonal pricing
Zonal, or regional pricing is a method of dividing the transmission system into several pre-determined zones or geographical regions. Each zone has uniform electricity prices separate from other zones in each settlement period. However, wholesale prices usually vary between zones in each trading period.
The boundary is typically set at key transmission constraints or areas where transmission links are most likely to become congested. A different wholesale electricity price should apply on either side of the boundary.
Australia, Italy, Sweden, Norway, and Denmark use this pricing method.
Nodal pricing
Nodal or locational marginal pricing (LMP) markets divide the national network into hundreds or thousands of nodes with unique wholesale electricity prices. Each node’s price represents the cost to serve one additional unit of energy at each specific point. Nodes relate to defined positions on the system, where electricity generation enters the network or where the demand takes from the grid.
The number of nodes a country has is influenced by a range of factors, including a nation’s geography or network characteristics. For example, the state of California alone has over ten thousand nodes.
New Zealand, Singapore, and some markets in the United States use this pricing option.