How Can Offshore Wind Farms Afford To Sell At £37/MWh?
By Paul Homewood
Following yesterday’s post on the true costs of offshore wind, there have been comments asking how wind farms have been able to agree contracts for as low as £37/MWh, when the real cost appears to be in the region of £100/MWh or more.
For instance:
The first thing to note is that none of the wind farms who have agreed strike prices of £37/MWh have actually been built yet. Typically they wont be commissioned until 2027.
Below is the list of all the offshore wind farms currently producing and who are operating under CfDs. Most are well over £100/MWh, and the lowest is Triton at £94.81/MWh:
There are currently two wind farms which are producing, but have not taken up their option of a CfD:
Hornsea was commissioned in Dec 21, and Moray in June this year.
Instead of being paid £73.71/MWh under CfD, they are being paid market prices, currently around £300/MWh. The pair will generate about 5 TWh per year, so at today’s prices they are making about £1.1 billion a year more profit than if they had taken up their CfD options.
We can expect other wind farms coming on stream in the next few years to follow suit.
I don’t know all the legal niceties, but essentially CfDs are not legally enforceable contracts, as far as the wind farms are concerned, but options. It seems that the government has very little power to force them to be taken up.
It is obviously a gamble for the wind farm companies to build them in the hope of higher market prices. But, in a way, most businesses take a gamble on markets when they make investment decisions.
Given government climate policy, and in particular the declared intention to ratchet up carbon pricing in order to force out fossil fuels, it was always clear that market prices for electricity were not going to stay as low as they have been in the past. So to that extent the gamble was not a high risk one.
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NOT A LOT OF PEOPLE KNOW THAT 
You can understand the unpopularity of Windfall taxes amongst fossil fuel companies
Hartshead tipped to spend over £100m to get first gas from North Sea fields
A North Sea firm is anticipated to splash out upwards of £100 million in the next couple of years in order to bring a pair of gas fields online.
https://www.energyvoice.com/oilandgas/north-sea/469576/hartshead-tipped-to-spend-over-100m-to-get-first-gas-from-north-sea-fields/
I’m sure windfarm investors took a view on likely prices. If you can bid at any price to get the contract then simply take market, all you have to be is confident market will give you a return. Looking at existing windfarms, you would conclude market is going to be £100 or more.
Paul, CfDs are a giant scam, so far as I can see. As you say, they seem to be one-way options in favour of the energy companies, and not contracts in any meaningful sense of the word. When he was at BEIS, Kwarteng was more or less reduced to begging the companies to implement the CfDs at the strike prices they provided for. That didn’t go well. Here was my take on it, written back in February:
I think quite a bit more about the sorry CfD story has come to light since then.
Yes , the CFDs are a fake figure to try to fool the public that unreliable generation is not as ridiculously expensive as it really is .
And to try to hide the massive subsidies that it gets they changed the ETS from the start of 2021 . Carbon credits , which are given to wind/solar etc , have to be bought by fossil fuel generators , at 4 or 5 times the price that they were .
Which is one of the main reasons that energy prices have rocketed , and is a good way of hiding the subsidies to the unreliables so that they can pretend the cost is lower for wind/solar .
I read the CFD contracts through very carefully. Essentially, in order for CFD payments to commence a company must send a notice in a specific format to the Low Carbon Contracts Company, confirming it has fulfilled all the conditions precedent for commissioning the wind farm, sworn in blood by the directors, and begging for the CFD to be commenced. No notice – no commencement.
Many of the larger wind farms split into smaller units (phases) for the purposes of the CFD. So 2 out of 3 of the Triton Knoll phases had commenced their CFDs before prices went bananas. The third phase has not been commenced, and also gets market prices.
There is one feature to bear in mind over market prices compared with CFDs. Existing CFDs will pay out the strike price if market prices go negative, so long as the period of negative prices doesn’t last more than 6 contiguous hours. Farms on market prices have a strong incentive to curtail when prices go negative. Despite all the turmoil of our markets we have seen some periods in recent months when it was windier and prices did go negative overnight.
But once you have sent notice there is no escape, other than bankruptcy. Which is why Drax and Lynemouth prefer to shut down their CFD Biomass trains rather than pay out £280/MWh for generating over the winter – whatever the current market price (they are assessed against the Baseload Market Reference Price for the whole season, currently £405/MWh) . So far there is no sign of either even trying to take advantage of sky high balancing mechanism prices. So that’s 1,065MW of baseload capacity out of commission over the winter because of the silly operation of CFDs.
There is a way out if the strike price is low enough. Rather than bankruptcy you can terminate the contract by repaying the (net) sum of payments received. I have always thought that a change in the market – such as occurred last summer – would mean that it was worthwhile for a generator with a strike price of say £40 per MWh (at 2012 prices) to terminate its contract if it was able to sell forward a lot of output at the kind of prices that prevail in the futures market for 2023 onwards. If I were the owner of Triton Knoll I would be thinking very hard about terminating the CfD contracts for Phases 1 & 2. I doubt whether this would make sense for any of the earlier offshore projects.
However, there is one important constraint. The debt finance contracts may well be tied to the CfD contracts so that abrogating the CfD contract may force early repayment of the loans. Of course they could be re-financed but almost certainly at much higher rates.
The bigger point is that if you look into the financial structures of many of the offshore SPVs there is a spider’s web of complicated financial and tax arrangements which have been constructed on top of the CfD contracts. In addition, operators like Orsted have all kinds of Power Purchase Agreements and Orsted itself sells off 50% or more of its wind farms to passive investors.
IDAU, are you saying that the Drax Biomass units are turned off…?
Not as simple as that. Only Unit 1 of 4 Drax Biomass units is covered by a CfD. The Elexon data on individual generating units is only available up to 7-8 days ago. At that time Units 2-4 were running at full capacity, whereas Unit 1 was running at roughly 50% of capacity on average. The CfD strike price is ~£126 (today) for Unit 1, so if it is paying a lot for wood chips or is short on supply it would make sense for it to reduce output from Unit 1 and boost the other units to capacity. There is no obligation on it to run if the value of the fuel exceeds the strike price. The whole system is one of unintended or unconsidered consequences.
The CFD one is. Drax and Lynemouth power stations stopped running their CFD funded units when their subsidies turned into taxes.
The green line is the “market” price that their CFDs are benchmarked against. The CFD prices are the yellow and light blue lines. You can see that as the Baseload Market Reference Price got close to the CFD strike prices they started to cut running hours: the subsidy no longer covered costs unless actual market prices for power were high enough. This winter the BMRP is £405/MWh, based on forward trading for the winter conducted in the summer when we had a massive price spike. The result is that these plants have shut down. Only the extremely high peak prices during the cold snap got a small amount out of Drax earlier in the month.
The units that are subsidised via ROCs continue to operate normally, because the ROC subsidy on top of elevated market prices gives a very handsome profit. You can check that out here:
https://bmrs.elexon.co.uk/generation-by-fuel-type
The beta replacement version for BM Reports offers a number of big improvements. Worth a look. Also makes data download much less of a pain (although the underlying historical data can have some missing values).
Thank you both… that this sort of thing goes on could be described as a ****ing disgrace. Tis a pity that the machinations are so complicated that it’s hard to explain it to the average citizen in order to generate the warranted fury.
I have been meaning to put this chart together for a long time.
It looks at the average prices obtained by different categories of wind farm over the past few years compared with day ahead market prices. For those wind farms on ROCs, I had to research the full recycle value of ROCs from OFGEM (including the uplift from redistributing the cash-in-lieu fund and the late payment/mutualisation fund) to add to the market prices. The average number of ROCs per MWh was calculated from the detailed data on ROCs issued and generation. The CFD average strike prices can be calculated from LCCC data, and CFDs and ROCs averaged by weighting by MWh produced under each heading.
It remains the case that the average for wind across CFDs and ROCs is consistently above average market price. The small number of old onshore CFDs have turned out to be the bad deals. Those on ROCs are coining it. Especially Hywind, the floating offshore wind farm that gets 3.5ROCs/MWh, now worth over £200/MWh on top of market prices.
Some of the prices on the ROC side are not final: we await details of recycle values for recent months, and more ROCs may be claimed by the end of the financial year – they may have been sold, but not registered yet with OFGEM. Both are likely to increase ROC realisation values marginally.
Of course wind farms wouldn’t be selling at £37.35/MWh even if they took up their CFDs: that is a 2012 money base price. I have already berated the LCCC for failing to publish properly indexed prices for AR4, but they will stick doggedly to their schedule and not update until end March next year, when a further ~10% will be added for inflation on top of the current indexing.
If we look at Seagreen from AR3 it has a 2012 money base price of £41.611/MWh, which is currently worth £53.46/MWh and will be increasing by a further ~£5.35/MWh in April – almost £60/MWh. Pro-rating the AR4 price of £37.35/MWh for offshore wind gives us £43.30/MWh currently, rising to £47.63/MWh in April. Plus REGOs of course. These renewable guarantees of origin were auctioned for £6.90/MWh in November. I didn’t include REGO income in my price chart posted above because I found it too hard to get a reliable data history.
Nevertheless, unless there is a massive gas and coal glut or very cheap nuclear fusion it is very hard to see wind farms ever exercising these low strike CFDs. Especially with REMA on the horizon, which will re-cast the entire electricity market to ensure adequate subsidies for things like hydrogen.
REMA, you say you are a reamer
Ream ream, ream ream alot…
(apologies to Supertramp)
I have not heard about this 2012 base price. Are you saying that ALL the quoted bid prices are 2012 prices?
Didn’t you know that?
Click to access cfd-ar4-draft-budget-notice.pdf
By default, yes. Anyone who knows the market is aware of the price adjustment, most most journalists and lobbyists use the base year prices. Remember too that the price adjustments continue for 15 years of operation – i.e. to 2042 or after for the Round 4 bids whose prices are cited.
No I didn’t know that and I bet most people don’t either.
It’s no wonder wind keeps getting cheaper if inflation does not exist in their world !
So now you know that the media are not to be trusted with information about renewables. I made an official complaint to the BBC about Harrabin’s abuse of unindexed prices and passing them off in comparison with current electricity prices some years ago. I won my complaint, but it did not prevent further abuse by the BBC.
As others have written, the market for the supply of electricity in the UK has been designed by incompetents and is managed by incompetents.
In my view, the CfD floor price is one of the reasons why suppliers are not subject to the rigours of a free market, but then perhaps the supply of electricity is too important to allow spivs to have any influence.
Thanks Paul and others for attempting to shed light on this question. I ask these questions in a spirit of being helpful to the cause, not to try and rubbish it.
In discussions the first thing any alarmist will say is that wind and solar are getting cheaper all the time. Far cheaper than, say, nuclear.
We are told that solar will get to less than 1 cent per unit. It is already below the cost of transmitting power to your home via the grid.
You have got to answer these claim with credible arguments. They will also say that the GWPF are paid oil industry shills, so of course their reports are deliberately misleading. They will say their wind costings are based on cherry picked data and are basically lies.
On solar, the headline figures are for extremely favourable conditions – deserts in Mexico or the US South-West. Even then they are nonsense as they assume operating lives and performance levels which are never realised. In the UK, my estimates based on company accounts are 2-3 times the BEIS estimates which are fantasy. Levels of solar irradiation are too low for solar to be very cheap in the UK. Further, technical progress doesn’t have the effect that people imagine. The capital cost per MW of solar modules has fallen, but that has limited effect when modules account for little more than 20% of total capital cost. There is no improvement in load factors because that is determined by the amount of sunlight.
Re your final paragraph, my practice is to rephrase the Johnson quote to the effect that such slurs are the last refuge of a scoundrel. The more interesting point is that no-one has actually produced any substantial amount of evidence to demonstrate that my estimates and analysis are wrong. There are large variations across projects but the broad assessment remains unchallenged. In part this is because it requires a lot of work and, in part, few are interested in highlighting bad news. So the focus is always on how things are going to be different in future.
Unfortunately they don’t need to produce any substantial evidence that your analyses are wrong. They only need to say you are funded by the oil industry and that is sufficient.
Also they can point to the continually decreasing strike prices for new projects.
Which would be another lie:
Professor Hughes is a former Professor of Economics at the University of Edinburgh, and was a senior adviser on energy and environmental policy at the World Bank until 2001.
so are carbon credits the same as REGOs? How that work? It sounds like a hidden way of increasing the returns under CfDs and is presumably designed that way?
And when does the REMA process end? The consultation is closed so presumably in the Spring?
In the meantime the steady stream of major new wind farm schemes in the Borders and Dumfries and Galloway keep rolling on…. they can be seen on the Scottish Government ECU web site….and least the ones that have gone public. Others are coming forward.
REGOs are Renewable Energy Guarantees of Origin. They are not carbon credits but they are the pieces of paper that energy suppliers wave when they claim that they are supplying you with 100% renewable energy. Typically they are not worth much – £2-3 per MWh – so they haven’t been regarded as a major source of revenue for eligible generators.
But they are now coming into their own if they can earn £7/MWh. Potentially, they are a mechanism for increasing the subsidies to renewables. It would be a simple matter to make REGOs compulsory and in short supply in the same way as ROCs were: they can take over from ROCs and CFDs as a subsidy mechanism because there is no sunset date on claiming REGOs.
Thanks, Paul, well done. One question. What is the source of your graphic showing the actual price being paid for wind power?
w.
It’s my graph, put together from diverse official sources of information. The Low Carbon Contracts Company, which is a quango that looks after CFD contracts, reports detail contract by contract and day by day on the amount of generation, the CFD Strike Prices and the daily average market prices weighted by production by hour of all the CFD projects they look after. Data on the number of Renewables Obligations Certificates (subsidy entitlements) earned by wind farms entitled to them and the associated levels of generation are published by BEIS, a government department, in Energy Trends. Data on the unit value of ROCs financial year by financial year come from OFGEM the industry regulator, who oversees the ROC scheme.
The disparate sources have to be welded and weighted to produce the final result.
Thanks, Paul. Could you provide links to all the sources used? Replicability is crucial to science.
w.
Until roughly mid-2021 most of the data in the figure could be obtained from the Entsoe Transparency Platform; https://transparency.entsoe.eu/ which covers most European countries.
Unfortunately, National Grid decided to stop submitting data to Entsoe with effect from May 2021. Most of the same data, including on wind generation can be obtained from the replacement Elexon (BMRS) Transparency Platform –
https://www.bmreports.com/bmrs/?q=help/transparency
The non-matching element is the market price. Elexon provide what they call the Market Index Price, which is an IntraPeriod spot market price supplied by the APX/EEX power exchange. The data that other countries submit to Entsoe is the Day-Ahead Market price. The best source for that is Nordpool’s N2EX power exchange –
https://www.nordpoolgroup.com/en/Market-data1/#/nordic/table
However, they have started to restrict access to historical data unless you are willing to pay a subscription. The differences between day-ahead and intra-period prices reflect “market surprises” that occur in the time between day-ahead contracts and the actual settlement period.
All of this data is/was available for either 30 min or 1 hour settlement periods and can easily be aggregated using demand or generation weights.
The detailed data on ROCs and REGOs by generator is only available monthly from the Ofgem Renewables Register – https://renewablesandchp.ofgem.gov.uk/Public/ReportManager.aspx?ReportVisibility=1&ReportCategory=0
[that is the Public Reports section of the website]. This takes a fair bit of experience and computer skills to extract and manage because the raw data is messy and requires a lot of cleaning.
All of the sources cited rely on these original databases either directly or indirectly. This is not an area for the faint of heart. There are, of course, commercial sources for this data but this is a high value trading business so the price charged for commercial are correspondingly high.
Hi Willis
The Strike Prices currently being paid are here:
https://www.lowcarboncontracts.uk/data-portal/dataset/actual-cfd-generation-and-avoided-ghg-emissions
The two wind farms who have not yet taken up their CfD contracts are on the Low Carbon Contracts Company list here:
https://www.lowcarboncontracts.uk/cfd-register/
Current market prices, which obviously vary day by day are calculated by the Low Carbon Contracts Company here:
https://www.lowcarboncontracts.uk/data-portal/dataset/actual-cfd-generation-and-avoided-ghg-emissions (Option 2)
I’m not Paul!
The CFD related data come from here:
https://www.lowcarboncontracts.uk/data-portal/dataset/actual-cfd-generation-and-avoided-ghg-emissions
You need to work with pivot tables on the downloaded data.
The ROC issue and generation data come from here:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1122028/ROCs_Dec_2022.ods
The ROC value data come from these OFGEM press releases:
https://www.ofgem.gov.uk/search?keyword=%20Renewables%20Obligation%20Late%20Payment%20Distribution&sort=relevance
The total value of an ROC is the cashout price plus the recycle and late payment recycle values.
When looking at the LCCC data note there are two ways to get the market price revenue: either multiply the strike price by the daily MWh generated and subtract the CFD Payment (which becomes negative when market prices are higher than strike prices), or multiply the daily MWh generated by the weighted market reference price, which is calculated by LCCC based on the actual hourly prices and hourly generation. The first method is the strictly accurate to the penny version since the weighted prices are only quoted to 4 decimal places.
I calculated separate monthly weighted average market prices for onshore and offshore wind by summing the revenues and dividing by the generation. The difference on average was just £0.02/MWh. However, there are bigger differences if you compare with a straight arithmetic average of the market prices per hour – wind tends to produce less when prices are high, and more when they are low, and indeed causes much of the effect.
The actual hourly prices can be found here:
https://www.lowcarboncontracts.uk/data-portal/dataset/imrp-actuals
They are day ahead market prices hour by hour.
It is probably the case that deviations from day ahead forecast generation lead to penalty payments in the Balancing Mechanism or some exposure in trading between the day ahead price being set and Gate Closure (an hour before a half hourly settlement period commences) if the weather forecast changes. However, I have also not accounted for REGO income or constraint payments. All wind farms can get REGO income, but constraint payments will mainly go to onshore windfarms on lower levels of ROCs mostly in Scotland as these are “cheapest to constrain” if there is insufficient market price only generation prepared to constrain at near zero or negative prices. Market price generation will of course only need to bid slightly below the ROC remuneration to get first pick of constraint payments if they are being offered. But that only really applies at the moment to Moray East (which gets to take advantage being in Scotland where export capacity is constrained), Hornsea 2 and the third of Triton Knoll that didn’t commence its CFD, which are less likely to be asked to constrain, but will do so voluntarily without compensation when market prices are negative.
I am not sure if the detailed data from here
https://www.ref.org.uk/constraints/indexbymth.php
would allow constraint income and volumes to be allocated back to individual wind farms and on what time granularity.
Thanks much, guys, highly appreciated.
w.
My reading of these contracts is government agree to pay wind farm developers full open market value (ie the highest cost of generation per MWh by any means in the market at any time) but the CfD is a last resort optional safety net in case open market value drops so much it falls below their break-even operating costs.
Fat chance of that!
Wind farm operators won’t accept ‘competitive’ fixed payment T&C’s in case their operating costs rocket due to external influences, hence they demand full value with the only protection falling in their favour (not the UK’s) by guaranteeing their minimum demanded income.
In effect government has been so committed to Net Zero at all costs they’ve taken their eyes off the contract ball, locking UK into absurdly generous wind contracts just to get the sacred ‘renewable’ capacity up and running.
It wouldn’t surprise me if behind the scenes the unspoken position for all wind farm developers is to only accept this type of contract, knowing government isn’t prepared to walk away without securing a deal.
In short government has rushed in and hastily agreed over-generous T&C’s which have now set a precedent which none of the wind farm developers are in any rush to revisit and government daren’t withdraw.
All that and they STILL need back-up (which means costs for back-up, too) for when the weather isn’t just so. Honestly, at what point do we start locking these people up?
The end result is spectacularly bad value for money for British taxpayers, with the oft-quoted ‘9 times cheaper’ line being little more than a sick joke. History will laugh itself stupid at our current political class.
PS. If my reading of events is wrong could someone please let me know. Cheers.
Indeed, you are wrong. What you have described is a guaranteed *minimum* price, but that is not what CfDs offer. The intention is to provide a guaranteed fixed price adjusted each year for inflation – i.e. £94.81 in 2022-23 for Triton Knoll Phases 1 & 2. That why Triton Knoll are required to pay the difference between the market price of £429.86 on Dec 15th at 8 am and the guaranteed price of £94.81 back to the Low Carbon Contracts Company.
The whole CfD structure is a rather baroque arrangement designed to implement a scheme of guaranteed prices when there is a large market for trading power continuously. It could – probably should – have been done in a different way but that is history.
Your description of guaranteed minimum prices is the arrangement in various other countries – Germany, Netherlands, Denmark – but not in the UK. The details all differ slightly but in all cases the wind farms are betting on whether market prices will exceed the minimum that they have been guaranteed. In practice, this means that they lobby for measures that drive up the market price of EU-ETS carbon prices and thus the cost of gas/coal generation.
Thanks for the clarification Gordon. I suspected I was missing something, hence the PS.
The whole thing is ridiculously complex and opaque; almost as if it’s been designed to be complicated…
Ah! So the bird-killers become affordable in the Socialist Society that, Come The Revolution “we” shall erect on pyramids of severed heads. Nothing speculative about that.
“I don’t know all the legal niceties, but essentially CfDs are not legally enforceable contracts, as far as the wind farms are concerned, but options. It seems that the government has very little power to force them to be taken up”
Essentially the wind farms have been sold a put option (giving downside protection) , whilst holding a long position in the underlying(electricity generation).
Correct up to the point that the CfD contract is exercised (commenced). After that they have to repay any money they have received in order to get out of the contract.
The original rounds of CfD strike prices were so high that everyone assumed the options would be exercised. At that time no one foresaw that prices would remain at more than £200 per MWh for so long. On the other hand, I am almost certain that the R4 CfD bids (this summer) were nothing more than insurance contracts to keep lenders happy with no expectations that they will be exercised. I don’t know what was going on for R3 in 2019 as those bids were mad if anyone looked at contemporaneous costs. I suspect that the winners thought they would be bailed out by a probable increase in the carbon price and, again, viewed the CfDs as nothing more than insurance.