April 10, 2024

The leading cause of electricity price rises is linked to the marginal system, which decides the cost of electricity every day.

As we are all looking for better solutions with solar energy and other natural options, it is essential to understand why electricity prices keep rising!

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The energy market in brief

Let’s start by saying that the market defines the price of electricity, the power exchange. For insiders, this price is called the PUN—Single National Price. The next day’s price is negotiated by crossing supply and demand for each hour and zone. In other words, the PUN is nothing more than the average of these prices weighted by the volumes of energy traded and is measured in euros per megawatt hour.


Why is the electricity price rising?

One of the main culprits for this increase lies in the marginal system, which determines the cost of electricity. The main consequence of the marginal system for calculating energy cost is the close correlation between the price development of natural gas and that of electricity. In a period such as the one we are currently experiencing, war in Ukraine and shortages of natural gas, an increase in energy price is, therefore, expected.

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Let us explain this in more detail. If one compares the trend in the price of natural gas on the relevant trading market, the PSV (Virtual Trading Point, also managed by the GME), one can see how the curves have a very similar trend. The natural gas curve influences the electricity curve.


In other words, on the electricity exchange, all producers declare, the day before, how much electricity they could produce on the following day, hour by hour, and the relative selling price on the market, regardless of the source of production, whether renewable or not. The power exchange operator holds the forecast of the demand for the following day, which Terna provided. This market operator, in response, starts ‘harvesting’ electricity from the producers that have offered the lowest price until demand is met.


This explains the escalation of electricity prices: to cover demand during peak hours, the price rises as power stations with the highest production costs are used. The protagonists of this escalation are gas-fired thermal power stations.


The different sources of electricity production

In today’s energy context, understanding different sources of electricity production is crucial. This is especially true given the relentless increase in electricity prices and the resulting hikes that hit the bills of entrepreneurs and citizens. The rise in electricity prices and the prospects of energy price increases until the end of 2023 makes it even more urgent to turn to sustainable and economical energy sources.

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Renewable energy power plants have the lowest production costs, to give a qualitative order of magnitude. In other words, these power plants will always come into production to cover primary demand. Their cost-effectiveness is one: they do not have to buy the primary energy from which they obtain electricity, making them particularly profitable.


In ascending order of cost, the energy sources are as follows:

  • Solar
  • Hydroelectric
  • Wind
  • Coal (with limited production in Italy)
  • Nuclear (imported energy)
  • Gas power stations (methane and LPG)


As can easily be guessed, gas or fossil-fired power stations are the most expensive. These are subject to operating costs and gas purchases from the market, which has seen a considerable price increase since March 2021.


This panorama leads to the peculiarity of the power exchange’s market mechanism: the hourly price is set by the most expensive power plant called upon to produce at a given time.


The reasons for adopting the ‘marginal price’ model

But why was the marginal price model adopted if it has significant economic inefficiencies, such as the recent increase in electricity prices?

If you have reached this point, ask yourself this question. Let us try to answer it briefly. The reason for adopting this system is to favour power plants that use renewables. In fact, at the same price of selling energy, the latter undoubtedly has higher revenues since the cost of producing it is practically zero compared to fossil fuel power plants. In this way, governments have tried to incentivise investment in renewables in recent years.

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However, today’s geopolitical and economic context has changed radically compared to the past. Many denounce the inefficiency of this method of setting energy prices, but few propose changing it and adopting a new economic model. In other words, the issue today is political rather than financial.


How to defend against rising electricity prices

With the continuous increase in electricity prices, the current energy landscape poses a significant challenge for entrepreneurs and private citizens. In this scenario, renewable energy emerges as the optimal solution, with photovoltaics, particularly, proving to be a powerful ally.

While waiting for this mechanism to be revised (hopefully) as soon as possible, how can we act to defend ourselves against the new energy price in the meantime?


Here is a list of helpful tips:

  • Replace all conventional light bulbs with more efficient LED lamps.
  • Conscious saving: switch lights on only when necessary and switch them off when not needed.
  • Avoid stand-by mode by switching off appliances entirely and removing the plug.
  • Set heat pumps or air conditioning to moderate temperatures without running them at full power all the time.


Don’t worry—you now have a few options to fight the expensive price. If you need to relax and fight your anxiety, head to JustBob.shop to find the best natural CDB products online.

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