Offshore Wind Demands £95/MWh

The £44/MWh price is in 2012 money. It is indexed by consumer inflation, and would be worth £58.85/MWh currently. The way it works is that the government has set up a special intermediary company called the Low Carbon Contracts Company that handles the money flows. CFD contracts pay or receive the difference between the CFD strike price and the market reference price, for which they use hourly prices from the day ahead market, multiplied by the metered generation for each wind farm for each hour. For wind farms in operation currently, the average strike price is about £170/MWh, so with market prices being rather lower (below £100/MWh), the LCCC are paying out to wind farms. They collect the money in advance from electricity retailers by having a reserve that they charge and a daily “interim levy”. Every quarter they true up the account and pay out any refund due if it turns out they overcharged on the interim levy. If the interim levy looks like being too low, they will increase it mid period. But always they hang on to a healthy cash pool. Retailers count the costs of these payments in billing customers. The government guarantees that this will happen, but is not formally an intermediary. If Hinkley Point nuclear power station comes on stream it will also be subject to the CFD system, with a small twist: it is considered baseload, and therefore its CFD will be benchmarked on a different basis supposedly suited to baseload operation, but in practice baseload pricing has been very problematic.

The actual electricity produced by any generator is sold on the open market, and can be sold at any time in advance. A wind farm might choose to sell on a fixed price PPA for example. However, sales contracts have to be registered centrally and create a supply obligation. A sale of 20MW over a year is divided up into 17,520 half hour blocks of 10MWh each, day and night 48×365. A gas generator will be prepared to sell power in advance if they can buy gas to match at a price that yields a profit, and because their equipment is reasonably reliable they can be confident of being able to supply from their own generation. But a wind generator has little guarantee that a forward sale will be matched by windy weather until quite close to the event, so wind farms tend not to commit until the day ahead market. Because that matches the basis for the CFD they are also not at risk for any difference between a sales price and the market reference price, so their effective income becomes the Strike Price for the CFD.

If any generator (wind, gas, nuclear…) takes no corrective action in the market then any difference between its contracted supply via sales contracts and what it actually supplies is charged or credited at the System balancing price. That will typically be very disadvantageous compared with taking corrective market action, because balancing market prices reflect the incentives necessary to get other generators to do something that would be unprofitable – and often some of them hold a very strong position as being essential to providing the correction needed. Note that this only applies to contracted sales: all CFD payments are calculated on actual generation.

Corrective action for wind farms may entail buying supply from other generators – typically gas/CCGT – in order to make good potential shortfall in their own output. If they anticipate a surplus then they will likely need to sell at a discount that compensates a CCGT plant for loss of profit if it lowers its own output and has to resell the gas it bought or pay a penalty for not taking it. When it’s really windy there may not be enough other generation that they can back out, and market prices will go negative, encouraging those with the smallest subsidies to curtail: usually they will hope to be paid to curtail in the balancing mechanism. This ensures that the most expensive subsidised renewables keep generating if they can, in a perversion of normal merit order economics, because their subsidies will outweigh the negative prices.

Consumers get saddled with the market prices paid by retailers, plus all the subsidies paid out under the CFD and ROC schemes (the latter adds over £6bn a year to bills, and is also an index linked scheme), anythig suppliers pay for REGO greenwash certificates, charges in the Balancing Mechanism (which have rocketed from about £500m to £4bn a year because of the difficulties of dealing with renewables), and for the high voltage transmission system (a cost escalating rapidly with all the extra pylons and interconnectors needed for high renewables output), and the low voltage regional and local distribution systems (a cost that is about to go through the roof as everythig is recabled to cope with EVs and heat pumps), plus other assorted green charges including carbon taxes that actually are collected by fossil fuel generators in the prices they charge, and including smart meters, social discounts for the impoverished, a programme of green insulation works (EcoHomes), and the costs of actually running their business including unprofitable hedges and perhaps a tiny profit. Now also being loaded onto bills are the costs of the myriad bankruptcies of small and not so small retailers who were caught out unhedged by the supply crisis, and some clawback of the consumer subsidies paid out by government last winter. The result is some of the most expensive electricity anywhere in the world – particularly if you have the misfortune to be a small business like an independent shop.