Power, gas and the energy transition

Flip a switch and a power station somewhere makes that electricity right then, because very little can be stored. So power is priced for each half-hour or hour, and prices can swing between a windy night and a still, cold evening.

Each plant has a cost to make one more MWh (megawatt-hour, a unit of energy). Wind and solar cost almost nothing to run, nuclear little, gas more, and old oil-fired plants most. Plants are switched on from the cheapest up until demand is met. This ranking is the merit order.

Every plant running receives the same price: the cost of the last, most expensive plant needed. If demand needs some gas plants, every generator, wind farms included, is paid what the gas plant needs. In Britain the last plant needed is usually gas-fired, so power prices follow gas prices.

British gas is priced at the NBP in pence per therm, an older unit of energy; continental Europe’s at the Dutch TTF in euros per MWh. To compare them: 1 MWh = 34.12 therms, so 100p a therm is £34.12 per MWh.

A 50% efficient gas plant burns 2 MWh of gas for each MWh of power it sells, so its margin is power − 2 × gas. This is its spark spread. With power at £90 and gas at £35 per MWh: £90 − £70 = £20 per MWh.

In the UK and the EU, power plants must hand in an allowance for every tonne of CO₂ they emit, under an emissions trading scheme. A gas plant emits about 0.4 tonnes per MWh of power, so at £50 a tonne carbon costs it £20 per MWh. The spark spread after carbon is the clean spark spread.

Coal plants emit roughly twice as much CO₂ per MWh as gas plants. So a higher carbon price raises coal’s costs more, pushing coal behind gas in the merit order. Wind, solar and nuclear pay nothing, so when a fossil plant sets the price, a higher carbon price widens their margins.

In 2022, as Russian gas deliveries to Europe fell, Europe bid for shipped gas (LNG) against Asia, and TTF set all-time highs in August. Because gas plants were still the last plants needed, power prices soared with gas, even though much power came from cheaper sources.

On windy, sunny days renewables cover more of demand, a cheaper plant becomes the last one needed, and prices fall, sometimes below zero. Because wind farms all produce at the same time, they tend to sell when prices are lowest, so they earn less than the average price.