Windfall Profits For Generators Running At £43 Billion A Year
By Paul Homewood
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Although rising international prices for natural gas have triggered the massive rise in wholesale electricity prices in the last year or so, they are only directly responsible for part of that rise.
As I have explained before, it is usually gas-fired generation that sets the wholesale price of electricity, which in August averaged £382/MWh:
https://www.catalyst-commercial.co.uk/works/september-2022-energy-market-brief/
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As a result of this broken market, non-gas generators are making obscene windfall profits, with the exception of those on CfDs, which receive a fixed price. These generators produced 131 TWh last year, accounting for 45% of total generation:
| Type | Twh |
| Wind | 48 |
| Solar | 7 |
| Bio | 21 |
| Coal | 7 |
| Nuclear | 41 |
| Hydro | 7 |
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At a price of £382/MWh, compared to a historic price level of around £50/MWh, these generators are raking in an incredible £43 billion. It is true that some generators may have Power Purchase Agreements in place at less than current prices – but this simply means that the purchaser is making the windfall instead. Either way electricity consumers are paying the cost of this on their bills.
The second major issue is the Carbon Price, which has more than doubled since last year and continues to rise>
https://www.catalyst-commercial.co.uk/works/september-2022-energy-market-brief/
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The purpose of the Carbon Price is to increase the cost of fossil fuel generation, and thereby encourage the transition to renewables. However reports indicate that the wholesale price of natural gas will be capped, presumably at a much lower price than it is now. It is quite perverse therefore to then add back costs via the Carbon Price onto gas generators.
Based on my earlier calculations, the current Carbon Price of £92.65/tonne is adding £35/MWh to the cost of gas generation, and hence onto the wholesale electricity price. This translates to nearly £5 billion of windfall profit for non-gas generators.
The whole Carbon Pricing system should be suspended until further notice. As I understand it, that would need the unanimous agreement of devolved governments. Given the loons running Scotland and Wales, I would not hold my breath!
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NOT A LOT OF PEOPLE KNOW THAT 
I was only thinking today, Paul, would I be lucky and see a letter in the DT from you in the next few days. Someone needs to blow the whistle on this scam in public as the likes of BBC news are blaming it all on gas.
The BBC has raised this issue on ‘Panorama’ on Monday, so it has got a big push from them – obviously Justin Rowlat had nothing to do with this report.
https://www.bbc.co.uk/iplayer/episode/m001bv5w/panorama-the-energy-crisis-whos-cashing-in
“Wind energy is the cheapest energy available!”
Leave it to government to make it extremely expensive.
This question regarding Windfarm profits being multiplied unfairly by gas/oil pricing was actually one of the few questions put to Liz Truss at PMQ today, so I expect that it will be followed up. I wrote to my MP about it last week also, so your Forum and Net Zero forum are having an impact. Keep up the pressure!
“Given the loons running Scotland and Wales, I would not hold my breath!”
Obviously you are correct, Paul.
Truss needs to make it extremely clear to Sturgeon & Drakeford that failure to fall in line will lead to an immediate and extremely harsh response and an agit-prop blaming war! Could be fun.
Just tell them that the cost to English consumers of their refusal will be knocked off their Barnett formula entitlements, and that they may be on their own supporting their own consumers.
Given the loons running Scotland and Wales, I would not hold my breath!
If their hard-pressed voters were to find out their leaders were against power price cuts because of their climate obsessions, they might turn against them.
For ‘Climate obsessions’ I read, snouts in troughs.
I’ll look it up in a Thesaurus. 🙂
This is criminal. They close down utility sized gas-fired electrical generation, then base the price of electricity on the understandably higher “peaker plant” price. In America the electrical utility pricing structure is in a similar mess. The cost of “spinning reserves” alone drives up the price.
If TV has taught us anything it is when investigating any crime, the first step is follow the money. What ever happened to that scolding, petulant teenager, Gerta? Where is Gerta’s termagant tongue when you need a good scold?
Thank you for your excellent reporting.Wm G, La Porte, IN USA
“termagant”
Cool word, Richard.
An an encouraging article from up North mentioning Net Zero Watch:
The great wind farm rip off: greedy energy giants sell us wind electricity at wholesale gas price
https://www.scottishdailyexpress.co.uk/news/uk-news/great-wind-farm-rip-off-27889339
Remember that CFDs are RPI indexed, so the inflation consequent on higher energy prices boosts their margins too. However, they do only account for a rather small share of supply (5%-9%), mainly depending on how windy it is.
A common misdirection of the media is to assume that they are the only renewables supply, compounded by assuming that they all sell at 2012 prices for CFDs that have not been exercised. The cheapest wind is the two thirds of Triton Knoll that exercised its CFD now paying £94.81/MWh.
Great analysis Paul.
R4 PM had Evan Davies in fits with Ms Lucy’s because Moggy is in charge of BEIS (Hoo bloody Ray!) and Truss may be dropping hints to pare down NZ.
Things just might get interesting – but Sharma has to go.
Lucas.
Sharma has been pushed-off into a siding – a ‘Minister for COP26’, which has come and gone with no discernible impact. Bit like silly Alok himself really….
I see DA and the BBC are plugging another round of Frozen Planet climate propaganda, oh joy.
I’m wondering why Ch5 has chosen to do a program on the London Smog of 1952 now. Like their 1976 heatwave program, after starting out as an interesting documentary, what’s the betting there is an agenda and suddenly it will pivot.
For sure the windmill owners are making plenty of money out of the existing subsidies but many of the big ones like to brag, along with the recipients, that they have signed corporate PPAs green energy supply contracts at what price is never disclosed though. So I believe a fairly hefty proportion of the energy their selling is well below the system price you quote above. Its difficult to find specifics on PPAs but i looked at TRIG and they declare that 66% of the energy there selling is at a fixed rate with 34% at market rates and this ratio is roughly the same over the next 5-20 years. OK this is only one company with less than 10% of wind but means perhaps 15B is more windfall profit although Truss isn’t even interested in taking that from PMQs earlier.
We will have to put our faith in Rees Mogg forcing through a change to NETA to delink renewable generation from the gas price.
Calendar 23 power futures are quoted at £437/MWh for baseload and £548/MWh for peak. Peakload is 60 weekday daylight hours a week, as opposed to 24×7 for baseload. The average is going to be not far short of £500/MWh when allowing for higher peak demand. So the prospective price is rather higher.
A word on pricing. In a normal grid, plant is dispatched in merit order with the lowest cost operating as continuous baseload, and the more expensive options only called on to meet progressively higher levels of demand. Peaker plant may charge a highest price but it is cheaper to have low capital cost if lower fuel efficiency plant than to have expensive plant standing idle.
With renewables, merit order goes out of the window, as renewables get dispatched wherever possible, regardless of cost to consumers. So at present ROC generators will be dispatched ahead of gas, despite costing much more. When it gets windy we can still see marginal prices driven down to negative levels because of surplus wind since ROCs still leave a wind farm with positive revenues, yet CFDs carry on doling out full subsidies of the strke price: there will also be curtailment payments. When there is no wind, we depend on gas and in winter imports, which set the price way above gas cost in shortages.
Sorting this mess out is far from simple, especially since we can expect curtailment to rise as more wind comes on stream. I would caution against jumping too hard for changes that might solve today’s perceived problem but store up a bunch of trouble for the future when gas markets get back to normal. The danger is we lock in an expensive renewables dependent world that turns out to be much more costly because of rising curtailment and rising backup, grid and balancing costs.
Thats how it should work surely apart from renewables get first dibs whatever. So if you paid what it cost to generate, even expensive ROC rates, the overall generation cost would be lower than letting the last generator on the system set the price for everyone. But we know OFGEM are consulting on changes to get back part way to the way CEGB ran things but given the situation we haven’t got time to prevaricate and so wouldn’t be surprised to see Rees Mogg just tell them to do it. Yes your right that if gas prices changes then we could be locked in but given the probability of gas dropping back below £200/MWh anytime soon is pretty remote if ever im not sure its that much of the risk. The other crazy issue now is wind is allowed on the system first in the full knowledge the transmission system will become overloaded so is then paid to dial back and then the ESO have to hunt down replacement energy which comes at a higher cost and the generators know this and are gaming the market. This needs changing as well with the ESO remit to ensure no constraint costs are paid out of the balancing mechanism.
You are tempted to devise solutions without considering the scope of problems. It really isn’t easy, especially as we really need a pricing system that delivers a low cost of adequately diversified supply. That includes ensuring that capital costs are covered and not eroded by zero marginal cost pricing. It needs to be a whole system optimisation with the right additional price signals. There are many competing schemes.
Then you need to work out how to get there given the minefield of existing contracts and regulation.
My understanding of what Truss has just said is that NETA will be changed so gas doesn’t set the marginal price of all generation as well as lot more like green levies dropped. Anyhow plenty for all of us to get our heads around over the next days and months which will respond to many of the issues and concerns we’ve all been discussing on Pauls blog.
Something may be done about the rip-off:
https://www.telegraph.co.uk/business/2022/09/08/ftse-100-markets-live-news-energy-freeze-pound-cost-living/
Harry Passfield would have been pleasantly surprised – or maybe astounded – if he had listened to Radio 4’s Today this morning (September 8). For the first time that I have noticed, Justin Rowlatt actually mentioned that renewables companies were amongst those raking in excess profits. Has the BBC let its own cat out of the bag?
Sounds like Truss has just said gas will not set the market price along with increasing more oil and gas licences.
Theres going to be an energy taskforce and they will buy gas on long term contracts.
Anyhow plenty for Paul to get his teeth into im sure!
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