The cost of peak-demand electricity

Marginal production of electricity is charged to suppliers at about £10/MWh. This is the additional electricity needed beyond contracted-for generation because of short-term variability in electricity usage across the country.

This will soon increase to more realistic pricing, capped at £6,000/MWh.

Modelling by Cornwall Energy suggests that peak marginal prices will realistically reach £2,000/MWh.

Customers are currently charged £0 for marginal energy use, although large industrial customers can enter into capacity auctions by promising to reduce consumption, and they also reduce consumption at peak times because of transmission pricing rules, which are not specifically the cost of electricity.

          Households use an average of 4,192 KWh/year (DECC, 2013 figures) or maybe 4,600 KWh/year (Shrinkthatfootprint.com). This is different from typical energy usage because, as with many things, some large users distort the average. Typical usage figures are currently set by Ofgem at 2,500 KWh/year.

          I haven’t found data on average electricity usage in W or KW, but this can be calculated from power ratings of typical household appliances. Peak energy usage happens between 4.30 and 7pm in the evening, usually in winters when people have their heating going and maybe use some additional heating to warm the house further just after getting in.

          At peak periods, above normal usage from fridges etc., a person might have a dishwasher and washing machine going, at 1.5KW and 2.5KW respectively, and might even have an electric fire on whilst also taking a shower in an electric shower (2KW and 8KW respectively). Other possibilities include a towel rail, at 250W, a tumble dryer at 3KW, a hoover at 1KW, a kettle at 2.2KW and an oven or hob at 2KW.

          But let’s stick with the person having a shower and doing the washing at peak period. That’s 14KW of demand that could be moved to a different time, but we don’t price in KW; we price in the amount of time for which KW are being delivered, or KWh. Let’s assume that the shower lasts 15 minutes but the rest go on for one pricing period of 30 minutes.

          That’s 10KW for 30 minutes, or 5KWh. At marginal prices of £2,000/MWH that’s only £10. At normal electricity prices it would cost 75p. That’s how much it costs to turn extra power stations on; we are charged 56p to run the washing machine, 30p to run an average fridge for a day (over £100/yr; fridges vary from £50/yr to over £150/yr) and 30p for a shower. Of course, that doesn’t include water costs, or washing  materials and so on.

          It’s £10 extra that person doesn’t pay. His neighbour doing cooking, cleaning and ironing after coming home might only incur a £5 cost for 5 extra KW over an hour, at lower peak prices. It would probably be even less; maybe only £1, as the £2,000/MWh figure is a peak price, only applicable for one 30-minute period during the day. £400/MWh is likely to be the marginal price for a longer period, such as 3.5hrs in the evening.

          You might well be willing to pay £1 to be able to cook and clean when you want to, but that cost isn’t paid by the customer making that decision. The millions of people choosing to live such routinized lives incur a cost which is spread across everyone equally.

          As a final example, let’s think of someone putting the kettle on during an ad break on television. It’s only a bit of hot water, so it’s not worth much. At peak periods, 2KW for a minute is 1/500^th of a MW for 1/60^th of an hour, which sounds like a small amount, but at predicted peak marginal prices it’s about 7p extra on top of the ‘normal’ price (about 15p/KWh, or 0.5p). Tea bags range a lot in price, but Google just turned up some that cost less than £1 for 20 at a big supermarket. The hot water can cost twice as much as some tea.

          Electricity demand fluctuates by almost 20GW during the day, reaching a total of just over 55GW on a typical day. Variable demand is an essential feature of our lives, but it needs consideration separately from providing sufficient aggregate demand.

          It’s hard to judge how much electricity is peak demand; by eyeballing the national demand curve I can guess the area under the curve as about 10GWh per day above the typical daytime demand levels (probably an underestimate). That’s almost 0.4KWh per household, which gives us a good idea of how easy it would be to fix this problem. On average, we need to move 8 minutes of tumble drying to be after 10pm or at weekends.

          The cost of this peak demand is big. 10GWh at marginal prices of £400/MWh is £4m; for 365 days it’s £1,460m, or roughly 10% of household expenditure on electricity bills. Yet households have no incentive to change their behaviour, because that 10% is added to everyone’s bill, no matter what they do. For the average person with a bill of £600, it’s only £60. Yet all the fuss over the last few years about energy bills suggests that people regard this as a big issue.

          If we accurately priced carbon emission (noting that we have very little pumped storage and marginal prices are therefore often dictated by gas power stations) the price of peak demand would be a lot higher, reflecting the true cost. As we move to more renewable energy, with unreliable generation, we will need storage anyway, and storage would remove much of the problem of peak demand. If we had many reservoirs of the sort we already have, at a cost of a few billion pounds each, we could save the billions of pounds we spend each year adjusting electricity generation to demand. Early investment will create jobs and benefit industry in the long term.

          From a right-wing perspective, the poor market in which consumers subsidize each other and don’t pay the cost of what they’re using is distortionary and inefficient. We should let people see the costs and decide for themselves. From a left-wing perspective, the cross-subsidy between consumers destroys any incentive to behave well, reducing environmental behaviour and distorting investment decisions in electricity storage.

          I don’t know if people will voluntarily pay more for the convenience; after all, people pay over twice the price for a packet of crisps from a shelf by the till when they’re hungry, but rarely buy a multipack and save the other 5 packs for later. On the other hand, people have been outraged that energy bills are so high, and this convenience is worth 10% of our total bill. What I do know is that people should pay for their own convenience, or that we as a society should act in a coherent way to support our need for convenience by building energy storage.