Why are electricity prices not coming down?

Why hasn’t a drop in demand brought about a price cut?

Since the Covid-19 lockdown began the demand for electricity is estimated to have been between 10 – 15%. As businesses are reaching the renewal for their electricity supplies we are constantly being asked why electricity prices have not reduced in line with consumption. After all that is how economics works, isn’t it?

To further defy the law of economics the price of electricity is on the rise. This trend is expected to continue for some time yet. There are a number of reasons for these increases.

Reasons to be Fearful Part 3

Even though electricity is seen as a commodity only approximately 40% of your electricity price is made up of the wholesale price of electricity. The remainder is third-party costs (TPC) which pay to keep the energy supply safe and secure.

The split between wholesale electricity prices and the TPC is such that a drop in wholesale prices can have little effect on the price that you pay. The increases that have been seen over the past few years have been down to an increase in TPC. The bad news is that these charges are static and if anything will only ever increase.

What a Waste

There are several charges within the TPC levied on electricity tariffs. Some cover the transport of energy to your premises, others are due to renewable energy generation and paying for the incentives for that type of energy.

The two main charges that have been affected by the pandemic and resulting shut down are in respect of balancing the network and the payment of feed-in-tariff subsidies.

Balancing the network means ensuring that there is enough energy in the grid to meet demand without there being an oversupply. Generated electricity cannot be stored in huge quantities if it is not used. Therefore the generation has to be reduced to mirror consumption to avoid a huge waste. There is a cost to balancing the system and, yes you’ve guessed it, it is the consumer who pays.

Feed-in-tariff subsidies are payments made to generators of renewable energy. As the weather improves this type of generation increases and subsidies go up. The unusually good weather at the outset of the lockdown meant that renewable energy made up a large part of the total energy in the grid. The good news was that less clean generation such as coal reduced. The bad news was the payments to the renewable producers went up.

So, no good news to report here. Just a warning to maybe renew your supplies sooner rather than later and to consider longer term contracts when renewing.