National Grid ESO - electricity margins - flow
How is electricity priced?
There are three main models that determine the price of electricity. What do we use in GB and around the world?

The electricity market in Great Britain is a complex intersection of engineering and economics. Generators supply the electricity that consumers demand. The physical connections between demand and supply make up the electricity grid, and the most important part of the price that consumers pay is the wholesale electricity price.

What is the wholesale electricity price?

The wholesale electricity price is the price at which suppliers buy the electricity they use to supply to end consumers.

It is the largest single component of a typical consumer bill. With the April 2022 price cap, wholesale electricity price makes up 50-60% of what consumers pay for their electricity. The rest is made up of other operational costs.

When it comes to calculating wholesale electricity price, countries use three main pricing models. Each option has a different locational granularity, or how a country draws up its pricing regions. While some countries – like Great Britain – have a single national price, others divide their markets into “zones” or “nodes”, each with their own wholesale electricity price.

National pricing

At the highest level, there is national pricing. This is where there’s one price for electricity across the country at any given moment.

For each settlement period in a national wholesale market, the wholesale price of electricity clears as a uniform price across the market’s entire geographical area. In each trading period, this provides a single wholesale price to all market participants – both demand and supply – regardless of their location on the network.

We currently use national pricing in Great Britain. In 2005, the British Electricity Transmission and Trading Arrangements (BETTA) introduced a GB-wide electricity market, setting one price for electricity in each trading period.

France, Germany, Poland and Greece also use the national pricing model.

Zonal pricing

In zonal pricing – or regional pricing – the transmission system is split into several pre-determined zones, or geographical regions. In Italy, for example, there are six pricing zones.  

For each settlement period in a zonal wholesale market, the wholesale price of electricity clears as a uniform, separate price for each zone. In each trading period, the wholesale price typically varies between each zone.

Countries usually draw the boundaries between zones at major transmission constraints, or where transmission links are most likely to become congested. Zone boundaries indicate where a different wholesale electricity price should apply at each side of the constraint.

Zonal pricing is used in Australia and several European countries, including Italy, Sweden, Norway and Denmark.

Nodal pricing

At the most granular end of the spectrum, there’s nodal pricing. Also called locational marginal pricing (LMP), this option divides the national network into hundreds or even thousands of nodes, each with their own unique wholesale electricity price.

The number of nodes a country has is influenced by a range of factors, including a nation’s geography or network characteristics. In California alone, there are over ten thousand nodes.

Nodes are associated with defined spots on the system. They can be where generation comes on to the system, or where demand takes from the grid.

Each node’s price represents the cost to serve one additional unit of energy at each specific point. The wholesale electricity price typically varies between each node for each trading period.

This option is used in New Zealand, Singapore and several United States markets.