CfD Indexation To Cost Energy Users £360 Million This Year
By Paul Homewood
The Contracts for Difference introduced by Ed Davey were poorly designed from the start, and are now costing energy users a fortune.
We already know that the contracts place no obligation whatsoever on generators to actually take up their options, enabling them to take advantage of much higher market prices as a result.
But just as costly has been the decision to index link strike prices each year for inflation. Given that most of the cost of a wind or solar farm is the capital cost, the indexation should only have applied to the operational cost.
This year’s price rise took effect at the beginning of April, and for offshore wind farms averages 11.9%. (For some reason I have not got to the bottom of, the increases vary slightly between generators).
This will cost energy users about an extra £360 million a year, based on last year’s outputs for all CfD generators. It puts the average cost of offshore wind up to about £175/MWh, compared to the current market price of around £100/MWh.
Since 2019, prices have risen by about 23%, costing consumers around £700 million a year now in total.
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NOT A LOT OF PEOPLE KNOW THAT 
Ed Davey – UK’s answer (?!) to Al Gore; shining example of the special relationship such he would slot into Biden’s administration without a struggle?
‘UK’s answer’? Then it must have been a very, very stupid question.
I was merely “lighting the blue touch paper”…..I am no fan or indeed any fan of any politician of whom Davey is a very egregious example…..I was merely trying to align the similarity of a hypocrite to the class leading example set by Gore.
186…Then very well done. Davey is a particular bete noir of mine – mainly because he abused his minority status and pulled the wool over Cameron’s eyes (not difficult I think you will agree).
Quite so; Clegg, Cameron, Gove, Davey, BJ, Starmer…..Tempted to ask “does it get any worse” than these, but I think I can answer my own rhetorical poser…”we” are in a mess “Royale” if they are exemplars……self interested slobs of the First Degree.
and then there is John Selwyn Gummer….how can I forget him?
No, 186, Gummer should never be forgotten. I hope my grandson gets to see him and his like stand trial in a future court – a new Nuremberg – where the likes of him and Mann et al can be held responsible for the potage of geld they sold us out to the WEF and their fellow-travellers.
(Apologies….I get rather emotional when I think of the Asses who are ruining this world for their own enrichment).
Rule 1: don’t hand minority coalition parties 100% control over some departments. If they get 10% of the vote they should only get 10% control, so “greens” could only close 10% of fossil fuel power stations.
But it was a 100% Liberal government where Call Me Dave rejoiced in being able to sidestep any conservative policies by saying the LimpDumbs blocked them, and then shrugging his shoulders. He was looking forward to leading the Liberal government for a second term when disaster struck – the Tories won the election.
‘The Contracts for Difference introduced by Ed Davey were poorly designed from the start, and are now costing energy users a fortune.’
But not the investors in solar farms, have I got that correct ?
If so it would explain Davey’s behaviour :-
A Liberal Democrats spokesperson confirmed Davey had resigned from his role at HSF and has also quit as a member of the advisory board at asset managers NextEnergy Capital.
Given that most of the cost of a wind or solar farm is the capital cost, the indexation should only have applied to the operational cost.
NextEnergy Capital secures £595 million for fund dedicated to subsidy-free solar
Published: 22 Feb 2023, 12:05
By George Heynes
“NextEnergy Capital secures £595 million for fund dedicated to subsidy-free solar | Solar Power Portal” https://www.solarpowerportal.co.uk/news/amp/nextenergy_capital_secures_595_million_for_fund_dedicated_to_subsidy_free_s
“Lib Dem leader Ed Davey quits HSF advisory role amid MPs second jobs row – Legal Cheek” https://www.legalcheek.com/2021/11/lib-dem-leader-ed-davey-quits-hsf-advisory-role-amid-mps-second-jobs-row/amp/
“Ed Davey’s outside work as consultant is potential ‘conflict of interest’, Lib Dem MP admits | The Independent” https://www.independent.co.uk/news/uk/politics/sleaze-owen-paterson-ed-davey-consultant-b1953482.html?amp
Modern-day robber barons on the rampage.
Doesn’t nuclear attract the same CfD indexation? Hinkley point!
It will do in due course, which will be equally wrong
The Hinkley Point index price is now £128.09/MWh on the assumption that the base price of £89.50/MWh will apply, but that supposedly depends on a go-ahead for another EPR at Sizewell C. The LCCC say:
If Sizewell C does not go ahead on or before the Reactor One Start Date, then the Strike Price shall be increased with effect from the Reactor One Start Date by £3 MWh to £92.50 MWh. Regarding the Generator’s Expected Start Dates, please note that, as per EDF SA’s press release on 19/05/2022, there is a risk of COD delay of Unit 1 and Unit 2 of 15 months. Certain contractual dates have been reviewed and extended by LCCC in accordance with the terms of the contract.
That would mean another £4.29/MWh with no EPR at Sizewell C.
Until carbon taxes are abolished all renewables that are part or wholly dependent on “market” prices are subsidised. There has been very little solar built on CFD terms (most of it in fact got lucrative feed in tariffs instead). As you can see solar on CFD has effectively been subsidised most of the time.
Another money making scheme
Revealed: Trees planted to help achieve net zero are adding to Scotland’s carbon emissions
Millions of pounds are being spent carpeting thousands of acres of land with conifers on the basis they will lock up CO2 from the atmosphere.
But a new report shows that many of the forests springing up around the country likely add to the risk of climate change.
Vast tracts of peaty soil are being dug up and drained in order to plant trees, unleashing a torrent of stored carbon into the environment.
https://www.sundaypost.com/fp/scotland-carbon-emissions-trees/
As we say in Forestry: the right tree, in the right place…..and for the right reason.
That’s rich seeing as how they cut down almost 14m trees to make way for the turbines in the first place!
I did find out the reason for the differences in the amounts of indexation: some contracts incorporate a clawback on balancing costs and network location charges. Details of the different terms can be found here:
https://www.lowcarboncontracts.uk/publications/strike-price-adjustment-guidance
The calculations can be found here:
https://www.emrsettlement.co.uk/document/settlement-data/strike-price-adjustment-calculation-2023/
AR4 wind farms do relatively badly, with just over 20% indexation uplift, compared with Hornsea 1 which gets almost 46% on top of a much higher 2012 base price. The indexation terms for AR4 are so unfavourable that it is surely certain these contracts will need to be sweetened substantially if they are ever to move off market pricing.
On AR4 all five are getting on with construction although several years away from completion but for sure can’t see any of them actualising their CfDs but not sure at current market prices they will even cover their costs. Going to be interesting to see the outcome on AR5 at the end of the month.
Reading up about AR5 I was reminded that OFGEM decided that all Balancing Mechanism (BM) charges would be added to consumer bills, whereas previously generators were expected to pick up a share of the costs. This decisions was some time in the making, so it got incorporated into the contracts that there would be an adjustment when the charges no longer applied to generators.
Click to access CMP308%20Decision_0.pdf
I would argue that the decision has deleterious results for consumers, because there is no incentive for generators to reduce balancing mechanism costs, and indeed there is an incentive to increase them if you own an asset that benefits from operating in the BM. The only incentive that remains is not to get caught out with imbalance prices for shortfalls or excesses against contracted generation. Having said that, it appears that the adjustment formula has worked against some of the generators, being caught by the effects of extreme market price volatility in the BM pushing up the “cost” to be clawed back.
“The Contracts for Difference introduced by Ed Davey were poorly designed from the start” I’m willing to bet they weren’t for Ed Davey and his mates. The whole renewables program stinks of cronyism and graft.
She hasn’t been out without crutches yet
Sent from Outlook for Androidhttps://aka.ms/AAb9ysg ________________________________
“Given that most of the cost of a wind or solar farm is the capital cost, the indexation should only have applied to the operational cost.”
The capital cost is paid back using an annuity over the life of the CfD. The developer will determine its price using a real discount rate if the annuity payments are indexed to inflation.
An alternative would be for the developer to use a (higher) nominal discount rate if the annuity payments have no indexation to inflation. The developer decides the “premium” price to be submitted to the auction, and competitive pressures are expected to keep this at some “competitive level” (assuming lots of competing developers).
The alternative assumes developers (and their financiers) will be prepared to accept 15 years’ inflation risk on their investment (35 years for nuclear IIRC). Their corporate governance rules almost certainly puts this into “walk away” territory, so the prospects of some competitive allocation of inflation risk to developers is fanciful.
There is no reason to suggest developers are better at managing inflation than the Government. For good reason. Today, the Government talks about five priorities, one of which is halving inflation. This suggests the Government perceives itself as having some capacity to manage general UK inflation. We won’t hear any such claim from power generators, whether that’s wind or nuclear.
If the cost increase is £360M, that’s the cost of holding developers whole against abysmal Government performance, where y-o-y inflation has increased to over 10%.
Maybe the Government will achieve it’s priority and next year’s rise will be halved to £180M change. Maybe the Government will not achieve its priority, and next year’s rise will be £360M or more. That’s the Government’s risk of its own inflation performance. Either way, the developer should not better or worse off due to index linking of the capital cost contribution to the CfD price.
Paul is right. There is no inflation risk on the capital assets. The terms of borrowing to finance them are known, including due repayment dates, and the sums due are also known. Only the interest rate may be variable, but most wind farms remove that risk by buying interest rate derivatives that give them a guaranteed fixed interest rate over the period of any financing in an exact tailored hedge. So there is no risk at all on the financing of capital assets – the sums are known precisely.
There are risks concerning the actual performance of the wind farm according to winds experienced and for variations in maintenance cost and downtime (e.g. Rampion being without a cable to shore for many months). Maintenance costs can be expected to increase with inflation. Another risk concerns tax rates – mitigated for CFDs as evidenced by their exemption from the Generator Levy. Inflation indexation risk is more about a lack of inflation or worse still, falling prices, constraining revenue growth. Until the recent surge in inflation there would have been every incentive to assume inflation would remain low in assessing how to bid. That would produce higher bids, not lower ones. Betting on high inflation continuing in order to lower your bid is not a risk that many would take, given the potential for net zero to produce economic collapse. Of course, you might then end up with hyperinflation, but that is a very different ballgame with risks that your assets become moribund because no-one can afford your output. That risk is really for consumers.
Yes, no sensible investor would allow a government to inflate away its revenues. Without indexation and a few years of 10% inflation, businesses would be losing money. And debt is priced in nominal terms so investors need to cover nominal interest rates, not real interest rates.
IDAU
I challenged Paul’s complaint that index linking is poor value for consumers. The question is therefore whether a fixed nominal price might be better or worse than an index linked price. You drift off into various tangents which I will not respond to, but I will respond to press my position as follows.
(To clarify one thing, the Government sees itself as representing the consumer. I use “Government” and “consumer” interchangeably.)
You challenge there is “no risk at all on the financing of capital assets – the sums are known precisely”. I believe this is quite wrong.
It suggests a failure to appreciate the significance of asset performance and what is better to maintain high levels of availability (key to security of supply).
The Government sees itself in a position of securing power supplies through the CFD allocation and Capacity Market mechanisms. When they award 15 year contracts (35 years for nuclear IIRC), they will be concerned to ensure there is a positive incentive to perform for the full duration of the contract. If this doesn’t work well, assets will withdraw from service more quickly than planned and it pushes the Government back into the market for replacement capacity (which, again, shows who has the inflation risk).
The shortening remaining life of a contract will always have a disincentive effect for making repairs. If there is a failure with 10 remaining years, there could be a good chance of getting payback for the repair costs. At only (say) 2 remaining years, it’s probably a dud. As private operators need to demonstrate shareholder value for sizeable expenditure, there will be some unavoidable attrition rate of asset withdrawal/closure due to operators’ maintenance standards and failures (which may be mitigated by good maintenance, but never completely avoidable).
If this is accepted, we can turn to the question of what pricing mechanism works best to reduce that unavoidable rate of asset reduction.
A fixed nominal price equates to a falling price in real money terms over the contract period. It is most profitable in the earliest years of the CfD, but that’s sunk income to be forgotten as soon as it’s trousered. But profitability declines year-on-year as the fixed nominal price sinks in comparison to the inflating world around it, and in the latter part of the contract that fixed price would not justify new assets.
This makes the fixed nominal price an inferior choice as a performance incentive. If there is a need for significant repair, the case faces the double whammy of reduced period for payback, and reduced later life profitability. As mentioned above, this increases the rate of decline of total operating assets and the Government need to go back to market for replacements.
And it is worth repeating: if all of the above can be said for a 15 year wind CfD, consider what a fixed nominal price does for a 35 year nuclear CfD. I don’t think there is anybody who would expect a nuclear operator to take multi-decadal inflation risk on its investment. But then, how could it be good for one and not the other?
You suggest inflation risk can be removed by buying interest rate derivatives. Maybe it can, but don’t forget the cost of asking somebody to take your risk away. If we accept a little bit of efficient market theory, it should push the fixed nominal price up to the level of no-free-lunch for the developer. Fixed nominal price is the more expensive, and I still haven’t heard a reason why the developer of generating assets are better at managing inflation risk compared to the Government.
Government is not a representative of the consumer. It is just legislating to remove the last vestiges of any consumer responsibility at OFGEM, whose objective will now be to meet net zero, whatever the cost to consumers, which will be both financial and in reduced and interrupted energy availability.
Your argument only really works to the extent that if you offer an inflation indexed price you can expect the initial price will be lower and the price later on will be higher than if you offer a fixed price for a term. The extent of the differential will be governed by inflation expectations in cost elements, discounted back to equate returns. Since most of the cost of a wind farm is the cost of building it, that is not subject to inflation once it is complete or the build is fully contracted and priced. Only the costs of repair and maintenance and connection and insurance, and any decommissioning costs are going to go up with rising inflation. The financing cost can be fixed, and is dominated by the amortisation of capital. That in turn dominates the desire for a predictable revenue stream, rather than depending on market prices that may take no notice of wind farm economics (or worse are driven lower by excess wind farm output when it’s windy). Lower risk projects are cheaper to finance, but usually offer lower returns.
If we look at the history, early wind farms were given relatively small subsidies on top of market prices before the decision to expand wind saw 2 ROCs/MWh doled out to offshore wind (and 3.5ROCs/MWh to Hywind). Oddly (Hywind aside) those deals worked out cheaper than CFDs until market prices started climbing in 2021 on the back of rising carbon taxes and rising gas prices.
Now of course they not only have a premium to the market, but a substantial premium to CFDs, having taken market price risk (which was not much risk given the government intention to raise carbon taxes). Meanwhile each new round of CFDs has produced lower prices being taken up, although we have now reached the point at which AR3 and AR4 prices at below market levels are revealing the option nature of the contract and the fact that the low bids became merely about securing the right to build, rather than to sell at index linked CFD prices, with market prices boosted by green levies being the much better option. AR5 will fail because it removes that option: it may attract no bids at all like the Spanish auction in October/November because the maximum bid price is not investible.
You raise the idea that an inflation linked contract preserves asset life in the event of expensive maintenance requirements before its life expectancy is up. Leave aside that CFDs only cover the first 15 years and thus offer no protection after that, so those decisions come in the 10 years afterwards. Some assets might do better than the expected life without large maintenance bills. If it turns out that wind farms generally really only do have a life of 15 years it makes them a bad investment. It does not justify bailing them out. From the consumer point of view it would be better to replace them with something cheaper that worked and lasted longer: they should not get a revenue premium over the then current market. For investors, the idea that a bum investment will be protected even if it fails may be attractive, but the effect of that attitude on the economy is malinvestment that results in decline. Your coal example is dominated by the government interference that insisted that a) coal running hours should be minimised, b) ended altogether come 2024 and c) subjected to outrageous levels of green taxes: with a free decision on whether to run as baseload, and when to retire the plant, and absent green taxes a much more rational decision could have been taken about the existing plants – and indeed the possibility of new ones, with HELE plant being potentially quite competitive, as our interconnector imports on BritNed have demonstrated.
Should they not submit a claim to a pay review body? That way they can argue for 11%, but the reply will be it is unaffordable, and we do not wish to add to inflation. Or: they can have the pay rise, but only if they agree to improving their performance.
That mechanism wasn’t proposed at the time of the investment, and an indeterminate mechanism wouldn’t have secured financing.
On operational performance, the CfD allocates performance risk to the developer. If the plant is not available or doesn’t produce due to lack of primary resource (whether that’s wind or nuclear fuel), these events will
result in reduced or zero output. The CfD makes no difference payments.
So we can say something about risk allocation: inflation risk to Government; performance/volume risk to developer.
There could be a more appropriate risk allocation and mechanism which could reduce the CfD strike price compared to alternatives. So long as it is investable.
Up to AR5 there has been the option not to commence a CFD and no curtailment risk: curtailment incurs full strike price compensation. The risk of CFDs not being exercised has been with consumers. It was of course small when strike prices were very high and above market levels. AR5 sees compulsory uptake of the CFD and no compensation any time market prices go negative: the curtailment risks are potentially huge.
A small number of CFDs have been terminated. The first was Netley Solar Farm, which was unable to secure a grid connection in 2016. Most of the others are Advanced Conversion Technology (evidently too advanced to be feasible) or CHP fuelled by biomass or waste. That may also be due to the way the baseload market reference price works – it makes these projects uninvestible, and has seen Drax CFD and Lynemouth close down for many months. Already an AR4 CFD has joined the list of terminations. We could well see other AR4 CFDs being terminated because of delays to grid connections and financial infeasibility on CFD terms. It is interesting that Moray West only took an AR4 CFD for 297MW out of 882MW it is building, securing the rest against PPAs with Amazon and Google – of course, it may not exercise the CFD and can likely get a more favourable contract elsewhere. CFDs have just become licences to build for wind farms. The strike prices are way below investible levels. There is no point other than political grandstanding in trying to get them lower, because they will have to be fattened up with subsidies to make projects work, which is exactly why DESNZ has a consultation on how to do just that.
Inflation risk is to consumers, not government. We pay the bills.
Yes, government takes no risk as it can’t. All “government risk” is taxpayer or consumer risk. And since inflation is in the hands of government and can destroy a business, it is right that investors do not take inflation risk. What we have is government negotiating on our behalf with objectives not just not aligned with ours but largely in opppsition to them. We want cheap, secure electricity, government wants lower emissions. But unlike real markets, we have no choice – Greens can pretend to take 100% renewable electricity but I can’t choose 100% non-renewable. And this is entirely the problem with government. If it simply tried to get the cheapest price, it would have no role – private investors would do a better job. So it interposes its own objectives and so always makes everything more expensive.
But it is affordable because it is inflation. Inflation is the devaluation of money caused by having more money relative to the amount of production. Its overly simple but the value of a £ is total value of production divided by total number of £s in circulation. Decrease the former (because of lockdowns) and increase the latter (because of money printing) and the value of each £ decreases. So you need more to buy your electricity. A price rise of a single thing such as gas cannot cause inflation because it does not devalue money – we can only pay the higher prices by buying less of other stuff which reduces the price of that stuff.
More do as I say……
Council officers admit driving to a meeting to discuss how to encourage cycling and walking
“I used my preferred method of driving by vehicle” said one Torfaen official, while another added that cycling or walking was “not practical”
https://road.cc/content/news/council-officers-drove-cycling-and-walking-meeting-300953
Surely this is a comedy scetch ? If not then it should be. Here in a nutshell is the very reason not to pay local authorities any more council tax.
Do as I tell you not as I do !
It is the reason why political satire has died as you can’t make up anything more ridiculous than what actually happens.
Underlying all this is a totally flawed electricity market. With a rational market, we would only build power stations with the lowest total cost of generation. Like coal, gas and nuclear.
https://www.thegwpf.org/publications/power-systems-expert-calls-for-a-new-electricity-market/
It’s a lie versus wishful thinking problem. Those with the government’s ear are liars, those in government simply hope its true. Radical Greens don’t care about cost, they don’t really believe in “cost” or fantasise that when they take over costs will fall because capitalism is evil. High costs now simply hasten the revolution.
Net zero is pure evil. Not burning fossil fuels will take many lives.
People need to hear this before it is too late.
“‘Net Zero is taking the world’s population backwards’ | Neil Oliver issues grave Ulez warning”
This was wrong last tone and remains wrong. You don’t get repaid capital cost, you get repaid replacement capital cost. We can think of this in simple terms. Let’s say I have the money to buy a nice car. Instead I decide to invest the money. Ten years later when the project is finished, I should have the money to buy a nice car AT THE NEW PRICE. If I don’t, I’m poorer. That’s not the return on my capital, that’s the return of capital. If we look at a rental car business, every 3 years I replace the fleet. I have to have had the new, inflated capital cost returned to me (less sale price), not the original cost, otherwise I keep needing to put new capital in. So renters need to repay the inflated capital cost
And if real interest rates stay at 1% but nominal interest rates go to 11%, I have to pay 11%, nor 1%.
Wrong analysis. If you decide to do without a car for 10 years you will incur alternative transport costs, which may or may not be lower than if you had opted to buy the car, use it and trade it in, depending on how much travel you do etc. You have no right to expect that those costs will be covered by your investment return on cash you didn’t tie up in the car, a chunk of which you will spend on alternative transport along with your savings on fuel, tax, insurance etc.. You will have also benefited from the convenience of not having to order a taxi, wait hours for buses and trains, or cycle in pouring rain and gales. At the end of 10 years you have the same decision to make: do you want the car with its convenience, or the costs of not having it? In figuring your costs you (or the lease company) will make an assessment of the trade in value, likely maintenance costs, fuel costs etc. and compare with your alternative.
Mostly, technology has in any case lowered real replacement costs. It is only now that we are banning technological improvement selectively that we find some costs are increasing. We will of course also see increases due to resource constraints. In normal markets they promote the use of substitutes, and technological improvement in efficient resource use. 11mpg gas guzzlers from the 1950s have been replace by frugal 60mpg vehicles with vastly superior performance.
A project is evaluated over its life, and needs to show a return in that period: if the return is positive it adds to societal well being. Future projects will need to show a return over their lives too. It is when we force through uneconomic projects that we destroy value. Think HS2, or wind turbines.
I’m with Phoenix on this, but I would go further.
You don’t get paid [book] capital cost, you get paid replacement capital cost, plus all expenses incurred, plus a reward for taking risk plus enough to pay your taxes.
If you go into the CEO’s office with any less, you might find the door hitting you on the way out.
Since you have no idea what replacement capital cost will be in 25 years time that is simply not possible. Besides, as I have pointed out real costs have been falling as technology improves. If you were only to pay for the next investment at say 50% of the cost of the first one, you would be broke. Each project should be self-financing and show a return above costs. I’ve worked on financial evaluations of projects ranging from a few tens of thousands to millions to billions. If when it comes time for project end of life it can’t be profitably replaced then the activity ceases. Unless you are government, when the ability to waste as much money as possible is highly prized.
Assuming the market has entry and exit, the market price has to cover the Cost of Entry to support investment decisions for the natural turnover of the asset base, or perhaps growth.
It is the replacement cost of capital which should be setting the market price of a commodity, accepting this is not deterministic, and market price will under- and overshoot this as supply/demand vary in the short-term.
The answer we should be gravitating towards is replacement cost of capital. Book cost is sunk and irrelevant.
To cover the question of closure decisions, assets tend to close on avoidable costs around end of their life. Typically a big fault or the next major maintenance will do the deed.
Those coal fired units will need several £10M for a major maintenance inspection, and the Government has told them to close within a couple of years. There is no point in major costs which might be needed for a few more year when closure is sooner anyway.
At the time a contract like a CfD is entered into, it is marginal replacement cost at that time that will drive the cleared price. An FT article today claims a 30% rise in the replacement cost of capital for wind generation:
https://www.ft.com/content/80dee308-a564-4ee4-b1f2-ab7dbed643cd
Efficient markets should always test the marginal benefit of demand versus the marginal cost of supply. Right now, it appears Cost of Entry for wind generation has increased a lot (as have other technologies). That’s the market saying: cough up if you want more of this stuff.
This isn’t a reason to suggest that investments with depreciated book value should lower their price to below the market. For one thing, who gets the cheaper supply? For another, as I have run through elsewhere, what happens if these depreciated assets fail or need big maintenance. Do we force the into a position where the only answer is early closure? This just leads to more replacement assets at Cost of Entry.
I’ve too have worked on many things IDAU, but I cannot offer up my CV on these threads for a few reasons. The most we can do here is to put forward our best views and let them stand on their merits.
I’m touched that you think that cost has been driving CFD bid prices. A look at the accounts of wind farms should disabuse you of that rapidly: they have been coining it, because they pulled the wool over the eyes of government which really had no clue. Government continued to have no clue when they thought that they were driving costs down and seeing lower bids that are simply being bypassed because strike prices are optional, and carbon taxes and gas shortage are providing healthy market price support. It continues to have no clue in assuming that it will attract bids at prices that are not investible, with no alternative under AR5. The government will pay dearly on our behalf to rescue the capacity shortage it is creating. The government keeps trying to buck the market and substitute for it. It should try letting a more real market operate sometime. It should ask itself why the French have just seen an FID on a wind farm at €5m/MW, and whether that really is value for consumers.
Markets only set prices based on costs for new capacity rarely. Supply curves give healthy profits to lower cost producers, with the marginal producer earning little return normally, and perhaps a negative return if capacity outruns demand. Higher demand will see profits for marginal producers, and may encourage more investment, which will typically be lower cost than most existing producers by virtue of technical progress. They will get the market price, and perhaps a handsome early return if they are first to market. But if too much capacity is added, prices will fall and the weaker, higher cost producers will close. The canniest investors understand the investment cycle, and invest to bring on capacity in the cycle upswing in prices, giving a maximum early return. By investing countercyclically they also benefit from sharper pricing from their suppliers of plant, and better contracts for site works etc.. I have seen that in operation in a very well run company that also managed to bring on its projects on time and on budget.
If there is a real supply crisis then it is not the cost of new capacity that sets the price, but what buyers will pay to keep supplied, as we have just seen with gas markets. If there is a glut, then no-one is investing (see gas in 2020).
“I’m touched that you think that cost has been driving CFD bid prices.”
I’m pleased for you.
“they pulled the wool over the eyes of government which really had no clue”
This must surely be a complaint that the CfD ARs are not effective as competitive processes, driving prices towards the competitive cost level (that is, including a fair minimum return which has been tested in the competition).
I see inconsistences in these discussions. Complaints include: operators are “coining it in” (Strike Prices too high); Strike Prices are insufficient to cover cost of delivery; and the CfD is in reality an option contract (so why does the Strike Price need to have anything to do with cost).
I’m agnostic about all of the above. The government wanted some investment in wind generation and was ready to support the industry when it was immature. The government got what it wanted. I would now like to see the government backing off and letting wind stand on its own, without support. Many brag that it can do so already as it’s by far the cheapest source, so I’d be happy enough if we give that argument a run.
I don’t think all the reasoning about what a market should or should not achieve is well placed in the context of the GB power market. As I have repeated often here, the GB power industry is a government outsourced service.
I think it has to be. As I commented elsewhere, if GB expects security at the level of a loss of load expectation (LOLE) in the region of a few hours per year, the industry must cover a significant supply overhang of around 23% over peak demand (collectively across the industry). A free market would not sustain this.
This may be where you are making the mistake of assuming price only rarely matches Cost of Entry. An investor cannot accept Cost of Entry occasionally: it has to be confident Cost of Entry will be achieved over its investment period of 10-20 years (much longer for nuclear).
A free market model might have a chance of operating if consumers committed their supply contracts and price, to match investments.
The Electricity Act doesn’t get in the way of this happening, if like minded generators and consumers come together and wish to operate wholly outside the licensed arrangements. The Class C Supply License Exemption has been there from the outset to allow them to do so, if that’s what they want.
Nobody has a clear measure of the size of this unlicensed segment of GB electricity supply, but it is believed to be quite small.
worthy of a separate post?
I think this comes from the recent discovery that planckton create the gas. Another discovery in the world of settled science. There were some recent posts on WUWT looking at AR6 and the increase in uncertainties – again, a bit odd if the science is settled.
Carbon dioxide is well-mixed VERTICALLY, and persists in the upper atmosphere, as opposed to water vapour which condenses at height and is rained out.
It is true that measurements of carbon dioxide at a given location sometimes show rapid and quite large fluctuations.
Net carbon dioxide is released from the sea surface near the Equator as upwelling, deep-water warms from 2 C to 30 C. Net carbon dioxide is absorbed from the air into cooling water as it nears the Poles, in currents such as the Gulf Stream, and sinks to the bottom. Aspects of the thermohaline circulation.
Ed Davey had considerable experience in the porkies indistry.
During his adolescence, he worked at Pork Farms pork pie factory. (Wikipedia)