On the European market, the price of electricity is “determined” by the marginal cost of the “last” kWh that is produced to fulfil the “immediate” demand (making abstraction of the grid latency).
In practice, our national grid is supplied by large nuclear power plants producing the 6GWe base load, with an all-time, all-included production cost of a few cents per kWh. Today, you and I pay EURO’s per kWh.
And prices increase fast as the demand rises.
Ever wondered why this is?
Surprise #1! It’s not a physics law.
INTERMEZZO #1: Physics laws may not be the real world, but they are darn close to describing and predicting reality. You do not trifle with physics laws. You cannot vote against them.
Surprise #2! It’s not even an economical law.
INTERMEZZO #2: Economic laws are academic summaries of accountancy rules mixed and stirred with a pinch of psychological behaviour. They are nowhere close to describing and predicting reality. They are only valid under extremely simplified assumptions. And you can choose to implement them in society, or not.
So what’s the case in the electricity market?
The reason is for the current price inflation is that the “last” produced kWh has a production cost of EURO’s per kWh. And that determines the price.
Surprise #3! It’s determined by Law.
INTERMEZZO 3: Laws are made by Parliament. But that’s just theory. Many Laws are voted into effect by Parliament, but de facto designed by companies.
So, why was that “Law” ever established, as at this point in time, it doesn’t seem like the brightest idea, … except for the electricity providers?
Here’s why. When you produce a product, you may think that your total profit goes up with the quantities you produce, as long as you fill the market needs.
This is not always true.
Stepping up production comes with an increased cost. This is called the “economic law” of diminishing returns.
This “economic law” states that after some optimal level of capacity is reached, adding an additional production factor may result in smaller increases in output. Actually, this is a reasonable summary of a situation that is often observed in many production processes.
Modelling this “economic law” leads to a marginal cost function containing a buckling. Typically a 3rd order polynomial function is used to fit or model production reality.
There is this well known “economic law” in the books that states that, in a perfect competition, where many providers produce the same good, and assuming the marginal cost function is indeed buckled, the profit is maximal if and only if the selling price is equal to the marginal production cost of the “last” produced item.
Here’s the theory: https://en.wikipedia.org/wiki/Profit_maximization
And this mechanism has been established in a governmental Law that determines our electricity invoice. On a European level.
So read this again: the goal of this mechanism is to OPTIMISE THE PROFIT of the electricity producers. Not of the suppliers. Not to the benefit of the consumers. Of the producers.
Remember we are not talking about luxury goods or shoe laces here, but about electricity. A Safety-Of-Life system rather than a consumer goodie.
When on Earth became this economic “law” a “Law”?
And as a final teaser: the CRM system is based on this very Law… So this deserves a closer look. More on this topic later…