Spot (time differentiated) pricing

The major concern of electric utilities all over the world is very large demand during peak load conditions and surplus energy during off-peak load conditions. The utilities face the dilemma of capacity shortages during pick load period and large surplus during off peak period. The concept of spot pricing is introduced to offset this dilemma. In spot pricing,  the price of electricity based on the time at which consumption occurs and It’s sold in half-hour blocks. The price can change from block to block depending on the cost of generating the electricity, the distance from the power station where the electricity is generated to your local network, and the level of demand for electricity at the time. Spot prices are generally higher when demand increases and lower when demand reduces. They vary much more by the time of day - usually lower at night when electricity usage is reduced and rise during the day when electricity usage increases, especially during the morning and evening peaks. 

The availability of different ways of generating electricity can also cause spot prices to change. Spot prices are usually much higher during periods of low inflow to hydro lakes or catchment areas, reflecting the reduction in hydro generation (the cheapest way to generate electricity) and the need to turn to more expensive generation sources such as coal and gas. Conversely, spot prices are relatively low during wet periods when the hydro lakes are full. Changes in the availability and cost of coal and gas can also push up generation cost, and therefore affect the spot price. In dry conditions and in periods of high fuel costs spot prices may be high for several months. 

 

What are the benefits of going on a spot price contract?

The benefit of going on to a spot-price contract is the chance to get cheaper power. The average spot price is lower than a fixed contract price and the retailer margin is smaller because the price risk has been passed through to the consumer. Also at off-peak times the spot price can drop to very low value – so if we can shift a reasonable amount of our electricity use to off-peak times, in particular during the night,  our costs can be even lower.