Energy Institute

How is the price for our electricity decided each day?

Electricity prices to end-users are set by the electricity suppliers in tariffs which may be either fixed or variable and adjusted from time to time but never retrospectively.

The suppliers buy their electricity on the wholesale electricity market at the ruling prices which fluctuate throughout the day and night. Suppliers can also purchase electricity through a variety of fixed and variable priced “directed contracts” which are set for a certain period of time. Suppliers carry the risk of not recovering their costs including the wholesale cost of the electricity they retail. Retail prices have to be above wholesale prices to fund the suppliers’ costs and provide a margin for profit.

Figure 10. The Single Electricity Market (SEM Annual report – 2012)

Wholesale electricity prices are set every half hour in accordance with bidding rules set down by the CER. Electricity suppliers base their tarriffs on what they expect will be the average wholesale price.

As we saw earlier for small business customers the wholesale price accounts for 60% of the bill; network charges for 30%; and supplier charges for 5%.

The Irish electricity market is designed to ensure that the electricity supply is reliable, competitive, and responsive to environmental signals1. The CER is responsible for the market design which must be in line with EU norms and Directives. In the All-island Single Electricity Market (SEM/Figure 10) all electricity generators are obliged to sell their output into the “pool” and all electricity suppliers buy their electricity from the pool at the “pool” or wholesale price2.

The market operates to establish a new wholesale price for electricity every half hour of the day, 24 hours a day. The wholesale price is based on the last bid (offer) by a generator that is accepted by the Market Operator to meet the demand for electricity at that time.

Generators are required to bid in at their marginal cost of generating electricity, which includes fuel, and other operating costs including the costs of emissions (Figure 11).

The market operator accepts all the available renewable power and any other power source that has priority and then accepts the lowest bid followed by the next lowest and so on until the demand for electricity is matched by supply3. The last bid required to meet demand sets the wholesale price for electricity for that half hour.

The lowest-cost plant runs most of the time and is referred to as base-load plant. Mid-merit plant is more expensive and runs for less time while peaking plant, the most expensive to run, is only required for short periods in the day when electricity demand peaks (morning and evening).

Our electricity suppliers buy their power at the variable wholesale price, add their costs and any levies they are required to collect (like the PSO) and offer it to customers at prices that are either fixed or variable according to contract. They manage the price risk that comes with the variable wholesale price and they compete with one another for customers on price and service4.

Figure 11. SEMO market overview

EirGrid/SONI (2013) SEMO Market Overview presentation. Available Online

The wholesale electricity price varies with international gas prices i.e. when gas prices rise electricity prices rise and when they fall electricity prices fall. Electricity prices that respond to the cost of fuel inputs, as they do in Ireland, are one sign of properly functioning market 56