Lesson 03 · 4 min · 6 things to do
Why a windy day changes the price
Work out an electricity price from the last generator needed.
Generators are called on cheapest first, until demand is met. Who sets the price everyone is paid?
- Yes.This is called marginal pricing. It is deliberate: it pays cheap plants a margin while giving every plant a reason to bid at its true cost, because bidding higher risks not being called at all.
- Not quite.Some markets do work that way, and most large wholesale markets settle at the marginal price. Under pay-as-bid, generators simply guess the clearing price and bid that, which is why the difference is smaller than it sounds.
- Not quite.An average would pay some plants less than their fuel cost, and they would stop bidding.
Cheapest first, until demand is met. The last one needed sets the price — so the price is decided by the most expensive plant running, not the average one.
The same demand, on days with different amounts of wind. Slide and watch which plant ends up last in the queue.
StillBreezyVery windy- Wind (near-zero cost)2 GW · 5%
- Mid-cost plants26 GW · 65%
- Expensive peaking plants12 GW · 30%
StillWind contributes little. The queue reaches the expensive peaking plant, and it sets the price.
- Wind (near-zero cost)12 GW · 30%
- Mid-cost plants26 GW · 65%
- Expensive peaking plants2 GW · 5%
BreezyWind displaces the top of the queue. The last plant needed is a cheaper one, and the price falls for everyone.
- Wind (near-zero cost)26 GW · 65%
- Mid-cost plants14 GW · 35%
Very windyWind covers most of it. Even some mid-cost plants are not needed, and prices can approach zero.
The wind is free in all three frames. Why does the price change so much?
- Yes.Wind lowers the price by changing WHO is marginal. It is also why a windy day cuts bills that were set by gas: the gas plant is no longer the last one needed.
- Not quite.Everyone is paid the same clearing price. What changed is which plant sets it.
- Not quite.Demand is held constant at 40 GW across all three frames. What moved was which plant ended up last in the queue.
Move the control to see what changes.
Which of these plants have near-zero cost once built, and which pay for fuel every hour?
Wind turbines.
A gas turbine.
Solar panels.
A coal plant.
A run-of-river hydro plant.
Yes.The left column bids near zero because running costs almost nothing, so it is called first whenever it is available. That is not a subsidy — it is what having no fuel bill does to your place in the queue.Demand is 40 GW. Wind supplies 12 GW at near-zero cost, mid-cost plants supply 24 GW at £60/MWh, and the rest comes from peakers at £180/MWh. What price does everyone receive, in £/MWh?
£/MWhYes.The peaker is the last plant needed, so it sets the clearing price — and every generator, including the wind farm, is paid £180. This is exactly why a gas price spike raises the whole electricity bill even where gas is a minority of supply.Gas is 20% of generation and its price triples. Electricity bills roughly double. Is that a market failure?
- Yes.The mechanism is doing what it was built to do. The debate over whether cheap generators should keep a windfall from an expensive one's fuel bill is a policy question, and it starts by understanding that the price comes from the last plant.
- Not quite.Average pricing removes the signal that gets the cheapest plants called first. It is proposed seriously, and it has costs of its own.
- Not quite.The effect appears without anyone doing anything unusual. It falls straight out of the queue.
Prices go negative for a few hours. What is happening?
- Yes.Turning a large thermal plant off and on costs money and time, and some contracts pay per unit generated. For a few hours, paying to keep running beats stopping.
- Not quite.It is an intended outcome — the negative price is the system asking, in the only language it has, for somebody to stop.
- Not quite.Large industrial buyers on wholesale prices effectively are. Household tariffs almost never pass it through.
Lesson complete
The last generator needed sets the price everyone is paid.
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