Principles for the formulation of policy for the Electricity System

DONG Energy offshore wind farm

Cost of electricity

Higher prices of electricity to households causes social deprivation and prices that are relatively greater than in other countries will cause UK industry to be less competitive. Ther risk of increases in the cost of electricity should thereforebe reduced where possible.

It has been assumed by others that competition in the electricity market controls the price to customers in their favour. There is a great deal of uncertainty about this.

The cost of production of electricity is often assessed using the levelised cost method. This method involves considering each generation type separately by summing values of contributing cost items and discounting them to present value. The present valued cost is then divided by the discounted energy output to give a cost per MWh. It was devised to inform long-term policy and not as a planning tool for individual decision taking.

There are limitations to the levelised cost approach regarding interaction with other generators. Certain types of intermittent generation can incur extra system costs to integrate them into the system. Whilst these extra costs can be accommodated within a levelised cost calculation as externalities (though they seldom are), a more reliable solution would be to use a Total System Cost approach. This is a more appropriate method to use for supporting decisions about the provision of generation and transmission facilities. It uses a model of the grid system that takes account of the interaction among all the generators. It gives results that are significantly more reliable than levelised cost. It would include the extra system costs for integrating wind power into the grid system - about which there is a great deal of uncertainty. For information about this see Section 3 of this document.