Occasionally, when we’re chatting with folks about the Flick model and 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 your power or the cost of buying it directly from the wholesale market.
How does spot pricing work?
It’s a fairly involved process but the gist of it is that spot prices change every half hour, shifting up or down depending on market influences. Spot prices transition through four different stages - starting at the forecast price and ending with the final price - before we know the actual cost that our customers will be charged on their Flick bill (have a read of our blog, ’From forecast to final prices’, for a detailed explanation of the process).
Why do spot prices change?
Lots of reasons! As with most markets, spot prices are at the mercy of 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 source of electricity. If our clean generators can’t produce enough electricity to meet demand, backup generators, fuelled by gas and coal, are used. They’re much more expensive to run (and they produce a heap more carbon emissions) - and that means more expensive spot prices.
- Weather conditions: not enough rain in our hydro dams or too little wind for our wind farms can influence the availability of our renewable generation, and push spot prices up. A severely cold snap can increase demand (when everyone starts blasting their heaters!) and influence higher spot prices, while the warmer months can see our power usage - and the wholesale cost of power - 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 if, thanks to the outages, your local lines company is unable to get cheaper generation to the area.
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 48.57% of the time, and fall between 6-12 cents per kWh 46.06% of the time. From January 2014 through to September 2017, the average spot price was 6.54 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 with Flick as you would with a 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, and, thankfully, this happens pretty rarely (you can read more about price spikes here).
When are spot prices usually higher?
In general, the rise or drop in spot prices here in NZ 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 of the day). 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.
But - and here’s the confusing part - we often see spot prices drop right down in the winter months due to a plentiful supply of renewable generation: 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 right during the middle of the day when lots of people are out and about or at work, 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 (if we’re lucky!) of line-dried washing, barbecued food, and refreshingly luke-warm showers.
But (you guessed there was one coming, right?!), occasionally spot prices can creep upwards in the summer months, 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.
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 (also known as a GXP), where electricity flows out of the National Grid and into your local power lines (there are around 174 GXPs throughout NZ). 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 blog ’The Dial Guide - What’s Driving Your Price’ to see the pieces that make up your power bill puzzle.
So how does spot pricing work under the Flick model?
Unlike traditional power companies who sell power to their customers at a set rate, Flick offers its Flicksters access to spot prices. We pass those prices directly on to our customers with zero mark-ups. It’s a pricing system that’s fair and transparent, and one that puts you in control of your power bill.
If you’re curious about how Flick make its money, well - that part’s easy. We charge a Flick fee, which covers the cost of our retailer service. If you’re a standard user, we charge you 40¢ per day, and 1.5¢ per kWh you use. If you’re a low user, we charge you 3.0¢ - 3.75¢ per kWh (depending on where you are), and there are no daily charges (your daily fixed charge is made up of Network and Metering charges only). Our fee is separated out on your bill, so you’ll always know exactly who you’re paying, for what. Check out the pricing page of our website for more information.
Am I better off with fixed prices?
That’s down to personal opinion and individual circumstances - but, on the whole, we think not! If you’re buying electricity at a flat rate, one of the big pros is that you’re safeguarded from high spot prices. But you can expect to pay a premium for that privilege. You’re likely paying a much higher flat rate for your power (check out the donut above again - prices on the wholesale market are ’low’ much more than they are ’high’!). Flat rates also mean that you can’t make the most of really low spot prices at off-peak times of the day and night because your per kWh rate is the same 24 hours a day. And, significantly, it also means you’re much less aware of the high demand periods when we’re having to use our dirty, carbon-spewing backup generators. Food for thought… (and there’s more where that came from in our post: There’s certainty in fixed rates - but at what cost?).
What are your thoughts on the spot price model of buying power? Love it? Hate it? Leave your comments below or join in the discussion over on our Facebook page!