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European Tribune - Financing European energy infrastructure

My next step is to discuss the dispatch curve, remind everybody that market prices of electricity are driven by marginal costs which are low for nukes and wind, and high for gas-fired plants (and linked to the price of gas). I make two further points which set gas-fired plants from wind farms:

  • gas-fired power plants are largely price makers: it is their cost which drives market prices, and thus gas-fired power plants are pretty sure to always receive revenues close to what they need to cover their costs;
  • wind farms are price takers, but their effect on the system is to bring prices down, as they displace more expensive plants when wind blows (that's what is called the "merit-order effect", which I've discussed extensively in the past in my wind series);

I take this to the logical conclusion:

  • the more gas you have in the system, the higher the price of electricity on the market will be;
  • the more wind you have in the system, the lower the price of electricity on the market will be.

I have been thinking a bit about this and how to argue in Sweden (where gas is almost non-existent). What I wonder is how the picture changes if gas is replaced by hydro. Hydro shares the cost structure of wind and nuclear but the market making powers of a flexible power source.

Is it gas flexibility that allows them to charge rent or its high cost that drives high prices?

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by A swedish kind of death on Mon Mar 28th, 2011 at 04:09:43 PM EST

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