Benefits of Electricity Industry Switching from Fixed to Spot-Linked End-User Prices

Electricity prices in the wholesale market reflect the inherently volatile nature of electricity. The volatility is not expected to decrease in the future due to increased shares of intermittent resources such as wind and distributed generation. In efficient market, electricity price becomes the link that connects the necessary decisions of market participants and system operators, and makes the sector work with as little frictions as possible. One of the challenges is to organize market in which market players directly receive price signals and can react to them. The share of intermittent generation resources is steadily growing in the power system, and so is the demand for flexibility in the power system. Demand response is hugely untapped flexibility resource. This happens partially because price signals do not reach end-users, most of whom purchase electricity at a fixed price. In this paper, we present arguments, why end-users and electricity industry in general would gain significant economic benefits., if most of the end-users would switch from fixed price to dynamic, spot-linked electricity price. We analyze Nordic and Baltic market data to obtain deeper insight of end-users' price formation in fixed and spot-linked tariffs. The results show that spot-linked price contracts provide lower margins and lower end-user prices.