27 Feb 2024
Zach Jennings

Wholesale power prices: Why were daily spreads so low this winter?

Wholesale day-ahead price spreads averaged £62/MWh between November and February. This is less than a third of those seen in the winter of 2021-22 and half of last winter. This has contributed to falling battery energy storage revenues, with the GB BESS Index down 70% this winter.

So why have spreads been so low and what could change this next year?

  • Falling gas and carbon prices mean base wholesale price spreads are lower than the previous 2 years, but volatility outside this has fallen too.
  • Wholesale prices in the previous three winters have reached up to £1500/MWh, however this winter has seen no prices above £232/MWh.
  • Increased wind generation and interconnector capacity have contributed to high margins, meaning prices did not spike even on the highest demand days.
  • Next winter new reserve services and coal retirement could mean 3 GW less generation taking part in the day-ahead market.

Falling commodity prices have contributed to a £80/MWh reduction in wholesale spreads

Throughout the two previous winters, gas prices were exceptionally high. Gas prices averaged £72/MWh in the winter of 2021-22 and £60/MWh in 2022-23. This winter gas prices have averaged £29/MWh. Meanwhile, the UK ETS carbon price has dropped to record lows, with recent auctions clearing at £32/tCO2. Carbon prices in the previous two winters averaged £70/tCO2.

These commodity prices determine the run cost of gas generators. Differences in efficiency between gas plants create spreads in the wholesale market even when CCGTs are the marginal unit for the entire day. This results in a base price spread directly linked to commodity prices.

Base spreads have dropped below £30/MWh this winter, £20/MWh lower than the minimum of the last two years. This has contributed to wholesale spreads falling by 57% this winter.

However, base spreads were lower in the winter of 2020-21. Despite this, the average wholesale spread during this period was £119/MWh, double this winter.

Infrequent price spikes are the biggest influence on seasonal price spreads

There have been no prices in the N2EX day-ahead market above £232/MWh this winter. Peak prices have largely been set by CCGTs, with lower-efficiency gas peakers running just 3% of the time, compared to between 7-10% during the last three winters.

In contrast, the three previous winters have each seen wholesale price spikes of up to £1,500/MWh. Prices spiked on seven different days in January 2021, contributing 50% of the £119/MWh average spread that winter.

So what caused these price spikes, and why haven't we seen any this year?

Peak demand has increased slightly this winter

This winter peak demand has averaged 40 GW, slightly higher than the previous two years. However, the average of 42 GW in January was the highest level since January 2021.

This winter, peak demand exceeded 44 GW 10% of the time, compared to 33% in 2020-21. Peak demand reached a maximum of 47 GW on January 18th, the same level seen as in January 2021. But despite this, wholesale prices remained low.

Wind generation and Interconnector capacity have increased this winter

Wind generation during peak demand periods has been at an all-time high this winter, averaging 10.2 GW across the four months, 3 GW higher than the 2020-21 average. This increase follows increasing wind capacity. Transmission-connected wind capacity is now 28 GW, an increase of 1.8 GW from last winter and 7 GW from 2020-21.