Occasionally, when we’re chatting with folks about Flick’s spot price product, Freestyle, and about buying power at the spot price, we’re met with a puzzled expression and the question, “Ummmm, what the heck’s a ‘spot price’?”.
We’re not surprised - after all, a few of our own Flick staff would have given the same response prior to delving deep into the world of electricity. So here ya go, Flicksters - your overview on spot pricing on the wholesale electricity market. Happy learning!
What’s spot pricing?
Well, just like a number of other products and services we consume, electricity is bought and sold on a wholesale market. The ‘spot price’ of electricity is the wholesale price of power, or the cost of buying it directly from the wholesale market. Spot prices change every half hour, shifting up or down depending on market influences, and transition through four different stages before we know the final price.
Why do spot prices change?
Lots of reasons! As with most markets, spot prices are related to supply and demand. When demand is high and the supply of electricity available is stretched to meet it, spot prices are higher, and when demand drops, spot prices tend to drop too.
But there are also a number of other factors that can push prices up or down, including:
- The availability of renewable generation, like hydro and wind power, which is a cheaper, cleaner source of electricity. If our renewable generators can’t produce enough electricity to meet demand, then gas, coal or diesel generators are turned on. They’re much more expensive to run (and they produce lots more carbon emissions) and that means more expensive spot prices.
- Weather conditions. The supply of our renewable, cheaper generation is influenced by the weather, including rainfall in and around our hydro dams and windspeed at our wind farms. Likewise, temperatures can influence demand too; a cold snap will push demand and spot prices up, while warmer weather can see demand (and spot prices) drop right down.
- Any outages or problems with our electricity infrastructure. Outages at generation plants result in less available power, which makes it more likely that higher cost backup generation will need to be used. Infrastructure outages can also cause localised high spot prices.
When are spot prices higher?
In general, the movement of spot prices mirrors the daily and seasonal changes in supply and demand. We tend to use most of our electricity first thing in the morning before school and work, and again in the early evening when we’re all home (these are known as ’peak’ times). This increase in demand naturally reduces available supply and pushes up spot prices. We also use more power during the colder months, thanks to those slow-cooked roasts, toasty electric blankets, and heat pumps running round the clock.
Sometimes, though, we see spot prices drop right down in the winter months. Why? Lots of wind and rain means lots of cheap, renewable energy generation, and nice, low spot prices!
And when are they usually lower?
As you’d expect, our collective power use tends to drop off during the middle of the day when folks are out and about, as well as the middle of the night when we’re all in bed catching some zeds. These times are known as ’off-peak’ hours. You’ll also find that power use is lower during the summertime, thanks to those long, warm days of line-dried washing, barbecued food, and refreshingly luke-warm showers.
But occasionally spot prices can creep upwards in the summer months, too, especially if there’s little in the way of wind and rain. Low hydro lakes, in particular, can see our spot prices shift up a gear because the supply of renewable generation that we rely on most drops away.
What’s an ‘average’ spot price?
Take a look at the donut below and you’ll see that spot prices tend to sit below 6 cents per kWh a whopping 40.51% of the time, and fall between 6-12 cents per kWh 41.58% of the time. From March 2016 through to 28 February 2019, the average spot price was 8.53 cents per kWh (to put this into perspective, we reckon the spot price needs to hit 11 cents before you might start paying the same on Freestyle as you would with a traditional fixed rate retailer).
Prices are considered high when they’re between 12-30 cents per kWh, or spiking when they’re over 30 cents per kWh.
So customers shouldn’t stress about price spikes?
We don’t think so! It’s understandable to feel a little concerned when a price spike is happening, but spot prices can go up and down quite quickly, and they’ll usually only remain at sustained high levels, or spike, for around 30 minutes. Over the course of a year, price spikes aren’t likely to have a huge impact on the cost of your power if you’re on Freestyle; in fact, the bigger picture view is that spot price plans offer significant long-term savings. Yippee!
Why are spot prices different around the country?
That’s a veeeery good question. Spot prices will be the same for all customers on each Grid Exit Point (or GXP), where electricity flows out of the National Grid and into your local power lines. As a rule of thumb, spot prices at GXPs get higher the further away they are from the site of generation, and that’s all down to the cost of transferring power from the generation site to each individual GXP. Generally, because the majority of hydro lakes are in the South Island, spot prices tend to be lower for our southern Flicksters compared with, say, those living in the balmy climes of Auckland.
It does pay to remember that the spot price of electricity only makes up a portion of your power bill. On top of that, you’ve also got costs for things like transmission, distribution, and metering. Head over to our Dial Guide blog to see the pieces that make up your power bill puzzle.
So how does spot pricing work with Flick?
We offer our Freestyle customers direct access to spot prices, and we pass them on with zero mark-ups and the benefit of clear, unbundled bills. We reckon it’s a pricing system that’s fair and transparent, and one that puts you in control of your power bill.
Flick customers have all the power at their fingertips, with access to smart tools that provide half-hourly spot price updates, forecast prices and consumption information. And because our customers are more informed, they can choose how to use their power best, in response to peak and off-peak times and changes in spot prices.
That choice is not only better for customers, it’s better for our environment too. Reducing demand also reduces the likelihood that we’ll need to top up our cleaner, renewable electricity with more carbon-intensive generation, like diesel and coal. Winning!
Neat! But be honest with me - is it risky being on a spot price plan?
As with any sort of wholesale market, there will be times when you’ll need to sit tight through higher prices in order to make the most of the low prices. That’s just an aspect of being being on a spot price plan! But, for Flicksters who’ve been with us for the long haul, the rewards speak for themselves. That’s because our Freestylin’ Flicksters have saved an average $500 in the past two years (as at November 2018). Not too shabby, huh!
Would I be better off with fixed prices?
We reckon that’s down to personal perspective and individual circumstances - and it also depends who you’re buying your power from, and how. If you’re buying electricity from a traditional retailer at a flat rate, you might be safeguarded from high spot prices but you can also expect to pay a much higher flat rate for your power, too - and that just ain’t fair!
And fairness is what underpins our business here at Flick. So, after listening to feedback from Flicksters who love what Flick’s about, but aren’t so into the ups and downs of the spot market, we’ve been making magic in the product development department. We’re super chuffed to introduce the new way of doing Flick - FIXIE! It’s a pricing product that lets you fix your generation price - the part that’s currently the moving spot price - for 6 months at a time. You’ll still get all the costs of supply passed through without any margin and our Flick charges are still completely separate and transparent.
Plus, if you’re on a network plan where you pay a different price for getting power to your place depending on the time of day, week, or season, you’ll still get these different prices. So, you know when to move your energy use around to take advantage of lower price times. And we’ll still let you know when it’s the best time to use power in your Flick app. Whoop whoop!
FIXIE’s underpinned by our values of fairness, transparency, honesty and choice - it’s all about having power over your power. If this sounds like a bit of you, give us a bell on 0800 4 FLICK (0800 435 425), or head over to the website for more info. #FlickYeah!