The COVID-19 pandemic has thrown energy markets around the world, including those for electricity, into turmoil. Despite, the current shock, however, a new proprietary model of the Great Britain power market suggests that a combination of technology evolution, changing patterns of supply and demand and, crucially, policy decisions could help to support and gradually increase wholesale power prices over the next three decades.
The EY Great Britain power market model forecasts that the combination of market dynamics, technology development and government policy will deliver a power price that gradually rises over the next three decades – from between around £40/MWh and £55/MWh by 2025 to between around £35/MWh and £70/MWh by 2050, in real 2020 terms. This price should support the UK’s decarbonization, while incentivizing and compensating sufficient low-carbon generation, and, at the same time, provide a clear incentive for corporate energy buyers to lock in forward power prices through PPAs.
Forecasting is a challenging, but vital, task
The effects of the pandemic on supply and demand will be temporary; developers of long-lived infrastructure – such as renewable energy generation – or corporates entering into multi-year power purchase agreements (PPAs) need to take the long view on power prices.
Long-term forecasting of power markets is challenging. It requires modeling of complex market dynamics on an hourly basis over a long horizon. It is particularly challenging in the context of the energy sector undergoing an unprecedented transition, impacted by continuous policy intervention, in the midst of a very uncertain global macroeconomic outlook.
However, it is also vital. Power price forecasts can dictate whether a developer goes ahead with an investment in a wind farm or solar park, or whether a corporate energy manager locks in the cost of buying power or takes a bet on a volatile wholesale market.
These decisions are particularly difficult in an era when some analysts believe the rapid increase in renewable energy capacity will push down wholesale power prices through a process known as “cannibalization.” This is where supply from power sources with an extremely low marginal cost of operation – such as wind turbines or solar panels – swamps demand for power, periodically pushing prices to zero or, in some cases, into negative territory.
As we note above, markets for power are some of the most regulated in the world. Policy decisions and changing policy priorities can have profound impacts on the price of electricity paid by consumers.
EY teams have developed a new model
Over the past six months, EY teams have developed a new, proprietary power market model for Great Britain (covering the wholesale power market for England, Scotland and Wales), while another model is in development for Ireland. It draws on factors including:
- Macroeconomic drivers, such as oil, gas and coal prices, and GDP growth
- Emissions, carbon prices and net-zero targets
- Demand forecasts, including the growth of electric vehicles (EVs) and behind-the-meter generation, energy efficiency improvements and the electrification of heating
- Commercial drivers, such as technology costs
- Dispatch decisions, including load factors and dispatch optimization
- Changes to the energy mix from plant retirements and new capacity
- Assessments of policy changes
The model then applies linear optimization techniques to forecast dispatch decisions and market prices over the short and long term. It assesses several scenarios, incorporating different assumptions around commodity prices, decarbonization trajectories and the regulatory framework, to generate central, low and high views of market power prices.