However, a discussion of electricity prices is incomplete without considering price volatility, that is, how electricity prices vary over time.
Electrification of our energy systems is an essential step towards decarbonisation, with the added benefit of providing energy security as we reduce our dependence on fossil fuels. Electrification will primarily rely on renewable sources, such as wind and solar, which are intermittent by nature. Reliance on these weather-dependent energy sources could expose a system to large price fluctuations if care is not taken in its design. See our recent post on the impact of extreme weather events!
Electricity price volatility affects everyone: from industrial leaders planning future projects, to consumers paying their electricity bill. It is important to understand the public perception of electricity prices, as this can dictate attitudes towards climate policy, and even disincentivise vital green investments.
We interviewed Dr. Tim Mullett, Associate Professor in the Behavioural Science group at Warwick Business School to expand our horizons. According to Dr. Tim Mullett, customers exposed to volatile prices will be inclined to remember the highest price they have had to pay. This may even be “compounded by those most extreme prices often coming at the time when they have the greatest need, e.g. for heating during unusually cold periods”.
And domestic consumers are not alone in their aversion to price spikes, with industrial actors’ tendency to avoid risk being exacerbated “when designing plans for long terms with unknown volatility”.
Human biases can be difficult to gauge. For example, perceived “cliff edges” may arise near numbers like €1000/MWh. We need to carefully consider how we quantify price volatility, based on the impact on producers and consumers.
In the wake of difficulties caused by extreme electricity prices, those affected may blame new technologies such as sustainable energy sources, with Dr. Mullett pointing to the public and political response in Texas following winter storm Uri in 2021 as a recent example. While industrial actors are likely to have pre-defined policies to protect them against unfavourable prices, the fact that such systems are designed by humans means that they are not immune to the aforementioned biases.
Clearly, understanding of the volatility of prices for a proposed energy system is very important. Such predictions can help us to design a more flexible system with appropriate buffers against price spikes (see our recent study with Future Cleantech Architects, including Thermal Energy Storage as an option for Germany).
As for quantifying this volatility - this is an art in and of itself. Counting number of hours with negative prices or prices over a threshold value, looking at the distribution of average prices modelled over historic weather data… there are different metrics and timescales to consider for each concerned party. This is a topic that we will cover in upcoming posts, but we would be very interested to hear your opinion!
