I have heard energy is generated from solar/wind/coal in the UK and this is where the most profit comes from but due to privatisation rules, companies cannot use this money to help consumer bills. Is this correct. I heard there is also a lot of energy piped in?
In: Economics
Hello, I work in energy research non-profit.
First; [here’s a breakdown](https://grid.iamkate.com/) of where the UK is getting it’s energy from. This is a live view.
As you can see, right now, it’s about 84% generated here in the UK and 16% coming from cables from Europe.
Of that 84% that’s being generated in the UK, you can see that 28% is fossil fuel from gas, 36% from wind and solar, and 20% from nuclear and biomass. This will change throughout the day and week – it fluctuates depending on what’s going on with solar/wind.
This is very interesting, but it doesn’t tell you much about why the prices are so high. There are two major factors to this. But first, we need to talk about how energy costs are determined.
Your energy bill is made up of about 70% wholesale price of energy, and 30% fees from your energy company. The 30% is just covering the company’s costs and profit etc. So let’s talk about the wholesale price.
Your energy company has to purchase energy from the national grid. How much it costs to buy from national grid is based on a rather unusual tiered pricing system.
The UK energy stem is designed to prioritise using renewables, and only switch on gas power plants when absolutely necessary. So, national grid are actively managing the country’s power use throughout the day and actively turning power plants on and off and re-routing power around to meet the country’s power needs. You can’t leave everything on all the time, or you generate power that has nowhere to go, and things start overloading and exploding.
If demand is low, and the UK’s demand for energy can be met by just nuclear and renewables, the price is relatively low. If demand is high, and national grid have had to turn on more power plants and generally do more work, the price goes up. This means the price changes constantly throughout the day.
So, what price should your energy company charge you for that wholesale power, if the price fluctuates throughout the day? Well, traditionally (I’ll get to it, reader who already knows where this is going), they use an estimate.
The energy company makes an estimate for how much it thinks power might cost you on an average day. Each energy company does their estimate differently (though all are overseen by OFGEM), but is generally based on historic rates and energy availability forecasting (e.g. do they expect to price to hike up soon?). This is how they get the rate for how much they’ll charge you per Wh – this is called a tariff.
So, your energy company is now charging you an averaged amount per Wh you use, which is based on an averaged/forecasted view of the *average* wholesale price of energy.
Complicated enough yet? I’ll respond to this comment with more info for the information-hungry…
Latest Answers