I recently started digging into electricity prices and how electricity price is in Sweden, I wrote an article on how I built a data pipeline to get an email report sent to me daily with the latest hourly electricity price. The article #datapipeline the hourly electricity rate shows you how the data pipeline was built.
In this article, I will explain from what I learnt how the electricity pricing is set. As the demand for electricity will only increase with us shifting from fossil fuel to electricity, it is important to know how electricity is priced.
In 2011 Sweden was divided into four price areas, the electricity price is basically determined by the electricity exchange for northern Europe – Nord Pool.
At Nord Pool exchange, energy producers and electricity suppliers meet to find out what electricity is worth hour by hour. This controls the electricity bill, the electricity price from your electricity supplier will always be higher than Nord Pool’s so-called spot price.
Noord Pool exchange is not about people standing and screaming on a stock exchange floor. At the Nord Pool marketplace, producers and suppliers meet digitally and set prices. Everything is based on a constant flow of information about electricity production and consumption in the Nordic countries, the Baltics and large parts of the rest of Europe, such as Germany, France and Poland.
Supply and Demand
The Swedish interests in Nord Pool are taken care of by state-owned Svenska Kraftnät together with corresponding state institutions in Denmark, Norway, Finland and the Baltic countries.
Via Nord Pool, it is therefore market forces that set the price of electricity, but political decisions have a very large impact on what you as a consumer have to pay. Partly in the form of various levies such as VAT and energy tax, partly because electricity production depends on which types of energy a country has chosen to invest in.
What affects the daily electricity price?
The prices on the Nord Pool electricity exchange are affected by several factors, including:
- The level of electricity production in Sweden
- The level of electricity production in the partner countries within Nord Pool
- The level of electricity production in the rest of Europe
- Global demand
- Electricity consumption
- The amount of electricity we export
- The dollar exchange rate
- The price of climate emissions
- Transmission capacity
The map below shows how electricity purchases flow from one country to another in the Noord Pool exchange, you can visit this map at the electrictyMap
How price varies
If you have a spot price agreement, you will notice that electricity prices can vary, especially between the seasons. It is important to note that spot price agreements are generally the cheapest types of agreements when calculating averages per year.
Like the stock market, it is important to have ice in your stomach and not forget that even though there will be price peaks, there will also be really low dips. Some spot price agreements are based on the average electricity price per day, others are based on the actual electricity price per hour, so-called hourly price agreements.
This is what a new type of digital electricity supplier offer. If you use a service like Tibber the advantage of the hourly price is that you can take advantage of the variation in the electricity price by moving the electricity consumption to times when the electricity price is at its lowest.
How price is affected
Electricity production in Sweden is affected, for example, by how full the hydro reservoirs are in the north and how much the wind blows. Silence and drought mean that less electricity is produced via hydropower and wind power, and if the nuclear power plants are not enough to compensate for this if Sweden does not produce enough electricity, Sweden must import electricity from neighbouring countries. This is the very basic idea of Nord Pool, to connect Europe’s energy supply to make better use of electricity production.
Who pays the most
However, this also means that the one who pays the most gets the electricity. Thus, surplus electricity from Norwegian hydropower can go to the UK if they pay more. Sweden must then buy electricity from, for example, Polish coal power if the Swedish own production is not enough. Since hydropower and wind power are major types of power in Europe as well, shortages often occur everywhere at the same time. Then the price of electricity at Nord Pool will rise and the electricity bill will be significantly more expensive.
Different electricity areas in Sweden
Sweden consists of four electricity areas that have been named after the largest city in the area: Luleå (SE 1), Sundsvall(SE 2), Stockholm(SE 3) and Malmö(SE 4).
In the northern rivers in Sweden, lots of electricity is produced from hydropower, but it is difficult to transfer the electricity as far as southern Sweden, where the need for electricity is great. There is therefore a shortage of electricity in the south and this is reflected in the pricing at Nord Pool. In the electricity price area SE 4 in southern Sweden, the electricity price is usually much higher than in SE 1 in the north.
The daily pricing
Every day, the Nord Pool electricity exchange receives information from the electricity producers about how much they estimate they will be able to produce the next day. The wind power companies, for example, look at the weather forecast when they make their estimates. At the same time, the electricity suppliers assess what electricity consumption is to be expected the next day.
To calculate the daily price for different electricity areas, the starting point is an electricity network without transmission restrictions and it is determined by:
- The price the producer wants to sell the electricity to.
- The price electricity trading companies are willing to pay.
Why is prices high
The reasons for the high electricity prices are complex. Abruptly falling temperatures increase the need for heating and put pressure on the balance between supply and demand in the electricity market, which causes the price of electricity to rise.
It can be expected that the price of electricity will remain high and intertwined with price levels in continental Europe when Sweden must reduce exports / increase imports from our neighbouring countries.
This is a major challenge on the entire continent and the expectations of the price level in the future are very uncertain, high electricity prices with large price variations over the hours of the day can also be expected during the winter. Electricity prices have been recording high due to the following factors
- Cold temperatures
- Little wind
- Limited flexibility in hydropower since the end of November due to the icing process
- The high price level in the rest of Europe
- Increased cable capacities between the Nordic countries and continental Europe and England contribute to prices becoming more intertwined, especially in strained situations with us.
- A very dry summer and the beginning of autumn led to historically low levels in the water reservoirs.
- An unusually wet October partially restored the hydrological deficit in the Nordic countries, especially in the northern parts.
- However, there is still a significant deficit in southern Norway, which contributes to keeping the price level up in the market.
- Record-high natural gas and coal prices due to supply constraints all over the world at the same time as there have been record-high coal prices and demand increases when the economy starts up after the corona.
- High price levels for emission rights in Europe, which increases the cost of electricity production in fossil power plants.
Why are gas and fuel prices important?
Because the electricity price is determined by the most expensive power plant that delivers at a specific time. Continued high prices in mainland Germany / Europe. This in turn drives Nordic prices because we are linked to Europe.
There is uncertainty about the Nord Stream 2 gas pipeline (Russia to Germany) and whether increased Russian gas exports will come.
As you read over the years we have created a very complex system to determine the electricity price and the setting of the price. In my view it is time for an energy revolution, bring the power to the house owners to generate and store electricity on their own – we need a system that allows for storing electricity from solar panels and wind, we are in luck there is some new development.
Research at Chalmers has shown that electricity can be stored in a molecule for 18 years, that is what we need for the #electricity revolution.
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