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Is Wind Power Reducing Our Bills?

January 24, 2022
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By Paul Homewood

h/t KB

There have been headlines that wind power has actually been reducing electricity prices lately, so it is worth taking a look at how the system works, specifically Contracts for Difference (CfDs).

In essence, CfDs are guaranteed, fixed prices, most notably for offshore wind and biomass. (The other energy sources covered are tiny in comparison). They are called Strike Prices.

As with any fixed price system, buyers lose when market prices are low, and win when they are high.

We can take a close look at December 2021, to see the system in operation.

CfD Generation 2.2 TWh
Av Strike Price £143.32/MWh
Av Market Price £184.10/MWh
CfD Subsidy/(Refund) £83.1 million

https://www.lowcarboncontracts.uk/data-portal/dataset/actual-cfd-generation-and-avoided-ghg-emissions

In other words, market prices have been about £40/MWh higher than the strike price, so the generators refund money to the government, which ultimately comes off our electricity bills.

It goes without saying that until the last few months, market prices have been well below that strike prices, and subsidies paid by energy consumers has been typically in the hundreds of millions every month.

It is a stretch, however, to claim that our electricity prices have been “reduced” because of wind and other renewable power. It would be more accurate to say that they have not gone up as much as they would have done otherwise.

Looked at another way, we have been paying a much higher price than we used to, £143.32/MWh, and will continue to carry on paying this ultra high price, index linked of course.

How long market prices stay at current levels is anybody’s guess, of course. But whether they do or not, energy consumers will suffer.

It should also be pointed out that this £83.1m is chicken feed against the renewable subsidies paid out via ROCs, which will cost £550m a month this year.

So our monthly electricity bills are inflated by £550m a month, against which the renewable lobby brags that it gives us £83m back!

30 Comments
  1. Coeur de Lion permalink
    January 24, 2022 4:35 pm

    As I write, demand is at 44GW and wind is providing about 2 per cent . Watching the kitchen light

  2. David permalink
    January 24, 2022 5:27 pm

    It’s 45GW now. Have they got anywhere to go? They are even squeezing 3GW out of coal!

    • January 24, 2022 6:01 pm

      24/1/2022 1745 Gridwatch: Demand 45.21 GW
      Source: (% supply)
      CCGT: 51.62
      Nuclear: 11.37
      Wind: 2.79
      Pumped storage: 4.47
      Hydro: 2.23
      Solar: 0.00
      Coal: 6.66
      Biomass: 6.90
      OCGT: 1.75
      ICTs:
      France: 3.32
      Holland: 2.32
      Ireland: 0.02
      E-W: 0.23
      Captain Nemo: 2.26
      Norway: 1.53
      ==

      We’re doomed, I tell you.

      • Julian Flood permalink
        January 24, 2022 6:37 pm

        Where did they find that much coal? Is Drax using the real stuff instead of wood dust pellets imported from lightly-felled forests in North America?

        JF

  3. Rasa permalink
    January 24, 2022 5:42 pm

    “renewables” is all about trying to bash square pegs into round holes. The problem for “renewables” is that Coal and Gas are just so damn good at doing what they do. For home in Australia I am going to fit solar panels supplemented by a diesel generator and go off the grid completely. My electricity will be cheap.

    • David Calder permalink
      January 25, 2022 1:38 am

      Excluding the capital cost (particularly for the solar component) of course….. hmmmmm

  4. January 24, 2022 6:14 pm

    Thanks for explaining this Paul.
    So it seems the strike price is not the minimum guaranteed price, it is the fixed price. I was under the impression that it was much worse than that, i.e the strike price is the minimum price and, if they can sell it for more than that, they got to keep it.

    • It doesn't add up... permalink
      January 24, 2022 11:46 pm

      You may want to check out the detailed answer I gave you on the thread about green levies if you’ve not seen it.

  5. Jordan permalink
    January 24, 2022 6:17 pm

    I imagine the real position will be worse than indicated above as comparing averages may hide a significant part of the story.
    These CfD’s have difference payments calculated per half-hour. When the wind blows, there is downward pressure on half-hourly market prices. When the wind doesn’t blow, half hourly market prices rise as the market turns to higher marginal cost generators to make up the supply not provided by wind. A wind producer earns most when the wind blows (but prices are lower) and earns less when the wind doesn’t blow (and prices are higher). The net effect is a “wind captured price” which is pretty-much guaranteed to be lower than the average market prices.
    The lower capture price (i.e. lower than “Av Market Price”) means more CfD cashflow to the producer for the same total electricity produced.

    • Phoenix44 permalink
      January 24, 2022 8:59 pm

      As I understand it, the wind producers are guaranteed a set price for their electricity. So if there’s lots of wind, the wind producers receive market or above essentially and if there’s little (but some) wind they receive below market. What I think that means (modelling in my head) is that the price will tend to be a flattish line with the possibility of a steep upward slope depending on things like gas price when there’s little wind. You are very unlikely to get a lower price than the wind strike price as that would require the replacement for the wind that’s not being provided bidding cheaply. There’s not much reason to ever do that. In other words the price to the consumer has a collar – the wind strike price – but no cap.

      Which is why fixed tariffs are a no brainer and price caps entirely stupid.

      • Jordan permalink
        January 24, 2022 11:52 pm

        Phoenix.
        Visualise a variable market price, rising and falling with market conditions, with an adjacent line for production volumes of assets supplying the market.
        Take the example of a single peaking plant which is not (itself) big enough to influence the market price. Its production line would only rise above zero at the highest prices and the average price achieved from its production (the “captured price”) would be well above the average market price.
        Now take the example of a flat-lining plant, like nuclear, likewise too small to influence the market price on its own. Its production line would be flat, and captured price would be around the simple average of all of the market prices in a given period of time.
        Now take the example of a wind generator which exists in a network with enough other wind generators to influence the market price. Completely different situation here, as all of the wind producers roughly follow the same pattern of output, and together they can influence market price (not in a controlled manner). So the output of one wind producer can be described as follows:
        (1) When the wind is blowing, market price is driven down by ample supply. The CfD volume maximises when the CfD price difference is relatively high (lots of subsidy).
        (2) When the wind is not blowing, market price will tend to rise due to relative shortage of supply (no wind volumes). CfD difference payment are small because there is little or no volume (not much happening), despite the CfD price difference being relatively low or even negative.
        The combination of “lots of subsidy” in (1) and “not much happening” in (2) is lots of subsidy.

    • It doesn't add up... permalink
      January 24, 2022 11:13 pm

      I’ve just been looking at precisely that question. Valuing each hour by the Nordpool day ahead price I come up with the following average values for December

      £249.00/MWh Biomass
      £280.95/MWh Fossil Gas
      £295.93/MWh Fossil Hard coal
      £339.84/MWh Hydro Pumped Storage
      £266.49/MWh Hydro Run-of-river and poundage
      £243.23/MWh Nuclear
      £308.54/MWh Other
      £244.01/MWh Solar
      £215.48/MWh Wind Offshore
      £215.33/MWh Wind Onshore
      £256.28/MWh Total

      Wind works out below the rest because it produces surpluses (there were some hours with negative prices in consequence), and it produces little when supply is tight and prices are high. The peakers are pumped storage, coal, and diesel (“other”), with gas as the main flex to cope with variable wind. Of course we can estimate the ROC subsidised wind to be earning £277/MWh onshore (allowing for £56 per ROC and £6 per REGO), and the offshore element to get £331/MWh, with the Hywind floating offshore farm getting an obscene £417/MWh thanks to its 3.5ROCs/MWh.

  6. Julian Flood permalink
    January 24, 2022 6:34 pm

    The reason CfDs are difficult to understand is that they were invented initially by the spivs in the City. Typically they allow someone to bleed someone else with minimal accountability.

    The most worrying bit about tonight’s numbers is that the Grid engineers are using pumped hydro, the stuff that is there to black start the Grid after total breakdown.

    Fingers crossed.

    JF

    • Phoenix44 permalink
      January 24, 2022 8:46 pm

      I’m not sure how you get to that position. CfDs are essentially a fixed return on the investment. Hardly spivvy & not too difficult to understand. The idea that a fixed peucecallows somebody to “bleed” somebody else is silly. Have you fixed your energy price? Are you therefore bleeding your provider?

      The problem with the CfD system is the intermittant nature of renewables ensures there’s arbitrage in the pricing.

      • It doesn't add up... permalink
        January 24, 2022 11:18 pm

        The problem is that it guarantees that the most expensive generation gets priority because the grid is only concerned with minimising the cost of curtailment, not with minimising the cost to consumers who get stuffed either way.

      • Mikehig permalink
        January 25, 2022 7:26 pm

        If “CfDs are essentially a fixed return on the investment.”, why are they 100% escalatable?
        The majority of the electricity cost is repayment of the capital and the financing cost thereof. Both are fixed for the contract life: the capital has been spent and the financing set up at a fixed rate (opting for variable rates seems very unlikely).
        I used to work in a business which installed and ran plants for customers. The contracts usually comprised a fixed facility charge to pay for the investment, etc together with an operating charge which was adjustable in line with the costs of labour, materials, etc..
        I do not understand why the whole strike price is escalatable given that a large part of the underlying costs are fixed.

  7. avro607 permalink
    January 24, 2022 7:00 pm

    If we had enough coal fired power stations in the UK to supply all needs does anyone have any idea of the cost per. Megawatt on our bills?

    • It doesn't add up... permalink
      January 24, 2022 11:26 pm

      If we exclude carbon taxes and green subsidies for insulation etc. that are part of our bills, then we could probably run a coal fired grid for £60/MWh even at current elevated coal prices, compared with ~£250/MWh in December. You still have to add on other costs for transmission and distribution and retailing etc. There are probably reasons why the Octopus Agile Tariff spends most of its time at 35p/kWh.

      • Gerry, England permalink
        January 25, 2022 12:26 pm

        Coal power stations were near the end users so transmission and distribution costs were lower. And of course the cost for grid balancing was much lower. Probably near the same for a year as the recent record cost for a day!

  8. Nicholas Lewis permalink
    January 24, 2022 8:26 pm

    Paul i feel your being a bit harsh here Hornsea 1 has paid back £14m over last few months to counterbalance its £440m subsidy payments to date!! Of course typically when the system price was high earlier in the evening there is no wind.

    • Phoenix44 permalink
      January 24, 2022 9:01 pm

      The price was high precisely because there’s no wind. The wind producers are very unlikely to lose out on upside in the price despite having a fixed price because it is their lack of availability that causes prices to rise.

      So they are not really capped at all.

  9. It doesn't add up... permalink
    January 25, 2022 12:31 am

    I posted this chart rather late on the previous thread, so many of you will not have seen it.

    In January to date we are already back to subsidising offshore wind via CFDs (and those on ROCs are coining it even more!), and we continue to subsidise Drax and Lynemouth, whose CFDs are priced off a forward baseload price that was set months ago.

  10. David Calder permalink
    January 25, 2022 1:41 am

    Won’t be long until I am living using my rather cool inverter petrol generator then …. splendid!

    • Ray Sanders permalink
      January 25, 2022 12:07 pm

      Mine is a dual fuel one that can run on Propane. The advantage is that you can run it almost continuously for the volume of your cylinder. 1 kg propane is 13.77kWh so a 47kg cylinder is just shy of 650kWh which is about the same as 50 litres of petrol. Propane also burns much more efficiently,
      Mind you there are small diesel generators that can run at a continuous 3kW consuming 1 litre per hour. Even at the current high prices, Red Diesel (legal to run through a genny) is about 71p per litre on a bulk order, so that equates to approx. 24p per kWh of generated electricity. Crazy that you can generate your own on such a small scale for pretty much the same price as the grid supply. It will likely be much cheaper to generate your own come April without some form of significant government intervention..

      • Gerry, England permalink
        January 25, 2022 12:38 pm

        I have always thought there would be a point where using your own generator was cheaper. And if it is true for us then what about industry? Projecting that forward, the grid demand would drop but as we saw at the height of Covid, that created problems. And a reduced number of users would mean lower contributions to maintaining the grid so standing charges would soar. But don’t expect any politician to grasp this.

      • Ray Sanders permalink
        January 25, 2022 2:29 pm

        Reply to Gerry….A lot of business is indeed moving toward an element of own generation and has been for quite a while. Combined Heat and Power (CHP) units are now common in new commercial builds and in places like Japan are even common on the domestic scale. These are now available in the UK for home use.
        https://www.viessmann.co.uk/products/combined-heat-and-power/fuel-cell/vitovalor
        CHP units burning gas are actually now considered “Low Carbon”

      • It doesn't add up... permalink
        January 25, 2022 3:09 pm

        The net zero fanatics are after your red diesel.

        https://www.gov.uk/government/publications/reform-of-red-diesel-entitlements/reform-of-red-diesel-and-other-rebated-fuels-entitlement

  11. Ray Sanders permalink
    January 25, 2022 11:36 am

    Go to this site https://www.lowcarboncontracts.uk/how-does-the-cfd-work thence open up the + sign for “How are generators paid?”
    A picture paints a thousand words.

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