How can you take advantage of the times when energy costs less in order to consolidate your consumption and therefore save?
In this post we answer all those questions and, in addition, we explain time discrimination and how hourly electricity rates can increase your energy efficiency.
How are energy prices set?
In Spain there is a wholesale energy market, the so-called pool. Every day the companies that generate energy (the owners of the power plants) use this market to sell energy to the retailers.
The independent electricity market operator (OMIE, in Spanish)
is responsible for regulating the market to match the most expensive and the cheapest bids and the last price bid. Thanks to this process, the price of a kWh is set for each hour of the day. This is the price at which the generating companies sell the power to the retailers.
This price is only valid for the specific time that has been set and it is what is called the marginal price. The entire pricing process takes place a day in advance; the prices for the electricity purchased tomorrow are set today.
Why do prices vary? These are some of the factors that influence the price per kWh.
- The bid price: is the price for which the generating companies offer energy in the wholesale market. If the OMIE use these offers as a reference, these prices have a direct effect on the final price per kWh.
- The purchase price: is the price for which the retailers acquire the energy. This is what it costs your electric company for every kWh it offers you.
- Consumer demand: the higher the demand, the more the price of energy rises. For this reason, the price of electricity tends to rise the most in the coldest and hottest months of the year, which is when most heating and air conditioning are used. The retailers are forced to buy more kWh to satisfy all the demand from their customers. Therefore, when bidding on the price per kWh, the retailers take the forecast demand into account.
- The cost of energy production: there are cheaper energies, such as nuclear and hydroelectric power, and more expensive ones, such as thermal power and gas, which hugely depend on fluctuations in the price of raw materials. The cost of renewable energies, such as wind or solar thermal, is also highly variable and we will see why below.
- Meteorology: meteorological phenomena determine the amount of electricity that is produced. When there is no wind, wind turbines do not produce any electricity. When there is no sun, solar panels do not produce any electricity. When there is a drought, hydroelectric plants do not produce any electricity. With less energy being produced, there is less kWh on the wholesale market... and this shortage drives up prices.
What about the final price that we pay as consumers?
The final price that we pay on our bills depends on the retailer. However, it must be taken into account that your bill doesn't just include what it cost the retailer to buy the energy. Fees and taxes are also included, in addition to the tolls charged by distribution companies for getting energy from the generation plants to your home.
The price you pay on your bill also includes the rental of the meters and, finally, the profit that the retailer makes in exchange for managing your bills and contracts, providing customer service and finding a tariff that suits your consumption profile.
Why does the price that we consumers pay vary?
In Spain, there are two major markets for energy:
The rates here are the Voluntary Price for the Small Consumer, the VPSC, also known as the hourly electricity rate, which used to be known as the Last Resort Tariff.
The model for the VPSC is the hourly electricity rate. With that rate, you will have a different price per kWh for each hour of the day, varying from day to day. It can only be requested if the contracted power is less than 10kW. The price is set by the wholesale market and you can check it from 8:00 p.m. the previous day on the Red Eléctrica de España website.
Off-peak hours are the ones when electricity is cheaper. However, you have little advance warning of the price of electricity and it can vary, disrupting your plans and upsetting your organisation and your savings plan. In other words, you cannot be sure how much you will end up paying on your bill at the end of the month.
The free market has 13 million users in Spain. In this case, the price is set by the retailer and users know exactly what they are going to pay for their electricity every minute of the day.