Why are electricity prices falling?

Why are electricity prices falling?

Why Have UK Wholesale Electricity Prices Have Halved in 3 Years?

Wholesale electricity prices are down from £60/MWh a few year ago to approximately £30/MWh today. But why have wholesale electricity prices fallen so much?

The downward trend in wholesale electricity prices has continued unabated over the last few years:

UK Wholesale Electricity Prices (£/MWh)

Source: http://www.energybrokers.co.uk/electricity/historic-price-data-graph.htm

Part of the reason for this is the fall in the price of natural gas and oil. Oil prices have slid from their highs of over $110/bbl in 2014 to lows of below $30/bbl. Oil prices affect electricity prices via an indexing mechanism in some gas contracts. Oil experts claim the fall in oil prices is in part due to an increase in supply from countries like Iran and Libya who have recently had their export sanctions lifted at a time when global demand is falling, particularly in Asia.

In the gas market, prices have followed a similar pattern, with global production increasing while demand falls. Across Europe, the milder winters of the past few years have meant less demand for gas, keeping prices low.

Natural Gas Prices (pence per therm)

Source: http://www.energybrokers.co.uk/gas/historic-price-data-graph.htm

In addition to the fall in oil and gas prices, the increase in the amount of low cost renewable energy has also increased downward pressure on UK electricity prices.

Despite these downward pressures, the excess capacity in the UK electricity system is at its lowest for over a decade at just 1.2% which has meant electricity prices have not fallen as far as gas or oil prices. http://www.bbc.co.uk/news/business-33527967

Pressures leading to downward electricity prices seem unlikely to abate soon. DECC have recently revised down their long term forecasts for UK electricity prices. The have recently revised their 2020 price forecast down from over £70/MWh in 2013 to c.£50/MWh today:

The falling UK wholesale electricity prices then seem to be a combination of falling oil and gas prices and an increase in the supply of cheap, zero marginal cost renewable energy.

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