Molly Ayala
Wholesale electricity prices are influenced by a variety of factors, including supply and demand, fuel costs, and market dynamics. In recent years, wholesale electricity prices have fluctuated, with a significant drop in 2020 due to decreased demand during the pandemic, followed by a steady increase in late 2021 and 2022. While wholesale prices in 2024 were lower and less volatile than in 2023, they began to rise again in 2025. The price of natural gas plays a crucial role in determining wholesale electricity prices, as it often sets the marginal price of electricity in regional markets. Renewable energy sources, such as solar and wind power, also impact wholesale electricity prices, but their intermittent nature and dependence on weather conditions can limit their ability to meet demand.
| Characteristics | Values |
|---|---|
| Year | 2024 |
| Region | Lower 48 states in the U.S. |
| Factors | Low natural gas prices, increased generation of lower-cost renewable energy, new battery storage capacity |
| Exception | Prices were highest in January due to cold weather |
| Natural gas consumption | Increased in most regions except California and the Southwest |
| Coal-fired generation | Decreased in most regions |
| Marginal price | Set by natural gas prices during most hours in most regional markets |
| Wholesale price | Reflects the real-time cost of supplying electricity |
| Electricity generation | Increased by 3% or 121.2 billion kilowatthours (kWh) |
| Solar generation | Increased by 37% (55.5 billion kWh) |
| Wind generation | Increased by 8% (31.9 billion kWh) |
| Wholesale prices | Increased in much of 2024 and early 2025 |
| Wholesale price forecast | Expected to be higher in 2025 than in 2024, except in Texas and the Northwest |
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What You'll Learn
Natural gas prices
In the UK, natural gas is almost always part of the energy mix, even if it is a small proportion. Therefore, the price of natural gas usually determines the wholesale price of electricity. For example, in 2021, gas was the marginal source 98% of the time, despite only producing 40% of the UK's electricity.
In the US, natural gas prices were lower in 2024 than in 2023, contributing to lower wholesale electricity prices. In 2024, natural gas prices were also lower than coal prices in some months, making natural gas-fired generation the cheaper option in most regions. Additionally, natural gas-fired generation increased by 4% in the Lower 48 states, while coal-fired generation decreased in most regions.
The UK government has recognized the link between electricity prices and natural gas prices and is investigating ways to separate the two through its Review of Electricity Market Arrangements (REMA).
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Renewable energy generation
The UK, for example, utilizes a 'merit order' system, where the cheapest sources of electricity are prioritized to meet demand. Renewable energy sources typically come first in this system, followed by nuclear and natural gas. However, the final electricity price on the market is determined by the most expensive source required to meet the demand, known as the 'marginal cost'. This dynamic can lead to a disconnect between the low costs of renewable energy generation and the higher prices paid on the wholesale market.
The intermittent nature of renewable energy sources, such as solar and wind power, poses challenges in meeting demand. Their output depends on favorable weather conditions, and they cannot always be scaled up on short notice. In contrast, gas generators can quickly adjust their output to match temporary spikes in electricity demand. This flexibility influences the pricing dynamics, as the ability to respond to demand fluctuations is a critical factor in the energy market.
To address the impact of gas prices on renewable electricity pricing, the UK government has proposed reforms through the Review of Electricity Market Arrangements (REMA). These reforms aim to separate electricity prices from gas prices, creating independent markets for renewable and fossil-fuel-generated electricity. Additionally, the government is considering incentives for consumers to draw electricity from the grid when demand is low or when more renewable energy is available, promoting a better alignment between renewable energy generation and consumer usage.
In the United States, wholesale electricity prices exhibited a downward trend in 2024 compared to 2023, influenced by factors such as low natural gas prices and increased generation from lower-cost renewable energy sources. The U.S. Energy Information Administration (EIA) expects wholesale power prices to rise modestly in 2025, but they are still anticipated to be lower than the 2022 average.
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Marginal pricing
The marginal price is calculated based on the bids submitted by generators, who offer their price for generating power in 30-minute intervals throughout the day. These bids take into account the operating costs of each generator, including the costs of starting up and shutting down generation. The highest bid, or marginal generator, becomes the clearing price, which is the price paid to all generators. This incentivizes investment in generating capacity, as most generators will earn more than their operating costs.
In the context of wholesale electricity markets, the marginal cost of meeting the next increment of demand sets the price at a given location. This is known as the locational marginal price (LMP) and is calculated in real-time to reflect the specific system needs and generation resources at that location. The LMP is designed to optimize the dispatch of generation resources, taking into account generator limitations, transmission constraints, and reliability standards. While the LMP aims to ensure a reliable supply of electricity, critics argue that it can lead to price volatility and distort market signals for more expensive resources.
The UK's electricity market has undergone significant changes since the early 1990s, with a shift from predominantly large thermal power plants to a mix that includes a large number of small renewable energy plants. This transition has resulted in a decrease in the operating costs of renewable sources, making them more competitive in the marginal pricing system. However, the intermittent nature of renewables, such as solar and wind power, means that natural gas continues to play a significant role in determining the marginal price of electricity.
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Demand and supply
The price of wholesale electricity is determined by the most expensive source of energy generation required to meet demand, known as the "marginal cost" or "marginal price." This means that even if renewable sources like solar and wind power are cheaper and available, if natural gas is needed to fulfill the demand, the price of electricity will be set by the cost of natural gas generation. This dynamic is referred to as "marginal pricing" or "marginal sourcing."
In 2024, wholesale electricity prices in the United States were lower and less volatile compared to previous years. This decrease in prices was driven by several factors, including low natural gas prices, increased generation from lower-cost renewable energy sources, and new battery storage capacity. Natural gas-fired generation became a more economical option than coal-fired generation in most regions, as natural gas units are more efficient and require less fuel to produce the same amount of energy.
However, it's important to note that wholesale electricity prices can also be influenced by factors beyond the basic principles of demand and supply. For example, government interventions, such as the Electricity Generator Levy introduced in the UK, can impact prices. This levy imposes a 45% charge on exceptional profits from low-carbon electricity generators, affecting the overall pricing dynamics in the wholesale market.
Additionally, the availability of renewable energy sources can influence wholesale prices. In the UK, for instance, low winds and outages at nuclear power stations have led to a higher reliance on natural gas for electricity generation, which can drive up prices due to the marginal pricing structure. The intermittent nature of renewables like solar and wind power, which are dependent on favorable weather conditions, also affects their ability to respond to spikes in demand, further influencing wholesale prices.
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Energy efficiency
The UK government has acknowledged the need to separate electricity prices from gas prices, as currently, the price of electricity is often determined by the marginal cost of generating electricity with gas. This is because gas generators can quickly respond to spikes in demand, while most renewables are intermittent and weather-dependent.
The UK's commitment to increasing low-carbon flexibility technologies and electricity storage capacity through the Review of Electricity Market Arrangements (REMA) is a step towards decoupling electricity prices from gas prices. By improving the ability of the energy system to respond to changes in demand and supply, the UK can reduce its reliance on gas, which has volatile prices.
Additionally, the UK has introduced incentives for consumers to draw electricity from the grid during periods of low demand or when more renewable energy is available. These incentives aim to encourage consumers to shift their electricity usage, reducing the need to turn to gas during peak hours.
Furthermore, the UK has implemented a 45% levy on exceptional profits from low-carbon electricity generators to fund renewable energy initiatives. This levy addresses the issue of renewable generators selling electricity at a loss or receiving lower profits due to the marginal pricing system.
By focusing on energy efficiency and decoupling electricity prices from gas, the UK can reduce its exposure to volatile gas prices and encourage the adoption of renewable energy sources, contributing to lower wholesale electricity prices.
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Frequently asked questions
Wholesale electricity prices are low due to a combination of factors, including low natural gas prices, increased generation of lower-cost renewable energy, and new battery storage capacity. In 2024, natural gas prices were lower than coal prices in some months, making natural gas-fired generation a cheaper option. Additionally, solar and wind generation increased, contributing to a more diverse energy mix.
Wholesale electricity prices impact the rates that energy suppliers charge their customers. When wholesale prices increase, suppliers pass on the higher costs to consumers, resulting in higher energy bills. However, there may be a lag before consumers see the effects of changing wholesale prices, as suppliers may have purchased energy in advance at lower rates.
Wholesale electricity prices are influenced by supply and demand dynamics, fuel costs, and the mix of energy sources used for generation. Natural gas prices have a significant impact on wholesale electricity prices, as they often set the marginal price of electricity in regional markets. Additionally, renewable energy prices can be influenced by the weather and other intermittent factors.
