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 price at which suppliers buy the electricity they use to supply to end consumers.
It is the largest single component of a typical consumer bill. With the April 2022 price cap, wholesale electricity price makes up 50-60% of what consumers pay for their electricity. The rest is made up of other operational costs.
When it comes to calculating the wholesale electricity price, countries use three main pricing models. Each option has a different locational granularity, or how a country draws up its pricing regions. While some countries – like Great Britain – have a single national price, others divide their markets into “zones” or “nodes”, each with their own wholesale electricity price.
At the highest level, there is national pricing. We currently use national pricing in Great Britain. This means that the GB market consists of one ‘zone’ in which buyers and sellers are free to contract directly at a price agreed in private. Wholesale trading within the GB zone does not account for network constraints, when electricity cannot flow freely from where it is generated to where it is consumed. (There is some reflection of constraints through Transmission Network Use of System charges, but these are separate from the wholesale market).
France, Germany, Poland and Greece also use the national pricing model.
In zonal pricing – or regional pricing – the transmission system is split into several pre-determined zones, or geographical regions. In Italy, for example, there are six pricing zones.
For each settlement period in a zonal wholesale market, the wholesale price of electricity clears as a uniform, separate price for each zone. In each trading period, the wholesale price typically varies between each zone.
Countries usually draw the boundaries between zones at major transmission constraints, or where transmission links are most likely to become congested. Zone boundaries indicate where a different wholesale electricity price should apply at each side of the constraint.
Zonal pricing is used in Australia and several European countries, including Italy, Sweden, Norway and Denmark.
At the most granular end of the spectrum, there’s nodal pricing. Also called locational marginal pricing (LMP), this option divides the national network into hundreds or even thousands of nodes, each with their own unique wholesale electricity price.
The number of nodes a country has is influenced by a range of factors, including a nation’s geography or network characteristics. In California alone, there are over ten thousand nodes.
Nodes are associated with defined spots on the system. They can be where generation comes on to the system, or where demand takes from the grid.
Each node’s price represents the cost to serve one additional unit of energy at each specific point. The wholesale electricity price typically varies between each node for each trading period.
This option is used in New Zealand, Singapore and several United States markets.