Orsted Mulling Private Power Deals For Hornsea
By Paul Homewood
h/t Ian Magness
The developer behind one of Britain’s largest offshore wind farms is exploring ditching state subsidies in favour of private power deals as it scrambles to boost the project’s finances.
Ørsted has confirmed it may give up some government support that would apply to Hornsea 3, off the coast of Yorkshire, amid concerns that the subsidies it has been awarded are too low.
Instead, a spokesman said the company may seek to sell 25pc of the scheme’s power on a so-called merchant basis – where it receives no state support but can potentially reap bigger returns.
This would amount to selling about 700 megawatts of the wind farm’s planned 2.8 gigawatt (GW) output, a total which is enough to power three million homes.
The move comes as Ørsted’s bosses scramble to boost the viability of the scheme ahead of a final investment decision, expected by the end of this year.
On Friday, bosses at Ørsted told financial analysts they were examining an option to pass over 25pc of the CfD contract so the company would instead be free to sell power from the scheme for a higher market rate.
This could potentially boost returns from the scheme – assuming the company can secure better prices for the power privately than what it is guaranteed under Hornsea 3’s CfD.
Ørsted, the world’s biggest offshore wind developer, has insisted it intends to press ahead with Hornsea 3 in “all scenarios” but has yet to take a final decision.
The project is scheduled to begin generating in 2026 and has been awarded a subsidy deal worth about £45 per megawatt hour in today’s prices – less than what was offered in the most recent subsidy auction.
The pool of potential buyers for the 700 megawatts of power on offer is likely to be confined to heavyweight companies with big electricity demands.
Kathryn Porter, an independent energy consultant and founder of Watt Logic, said Ørsted faced a difficult choice between “locking in at a really low level of return or taking bigger risks and being able to make more money”.
She added: “They may take a view that they can get the project over the line because electricity prices will be high enough that they can make a decent enough return.
“Experience to date, however, shows that UK power market investors do not have much appetite for risk.”
A key risk is whether the Government would extend the Electricity Generator Levy – which affects receipts from power sold at more than £75 per megawatt hour – beyond March 2028.
Ørsted was threatened with a credit downgrade by ratings agency S&P last week after taking huge writedowns on the value of its offshore wind projects in the US.
The terms of the CfD are quite clear – it is all or nothing. Orsted are under no legal obligation to trigger their contract, in other words take up their option to sell. However, if they do, they must sell all of the electricity they supply to the Grid under CfD terms. The only way to avoid this would be to transmit power direct to an end user, bypassing the Grid.
And, I suspect, the government will be loathe to amend the contract to allow what Orsted want.
With market prices as they are at the moment, there is no logical reason why Orsted should not sell all Hornsea’s power via PPA’s. But as Kathryn Porter points out, investors in offshore wind farms like certainty, not risk. And the Electricity Generator Levy, if extended past 2028, would take away a large chunk of any excess profits.
Work on installing the turbines is not expected to start till 2026. Despite Orsted’s protestations, there is an increasing likelihood that they will pull the plug on Hornsea.
But whether they do, or sell via PPAs, private consumers will not benefit from the low prices already contracted.
Dogger Bank
Meanwhile SSE’s Dogger Bank offshore wind farm, which began generating last month, has still not appeared to have triggered its CfD, currently priced at £49.77/MWh.
I’m waiting confirmation from the Low Carbon Contracts Company, but it seems that they too will sell at much higher market rates.
Comments are closed.
NOT A LOT OF PEOPLE KNOW THAT 
If market prices are over £100, why would anybody take £44?
What I’m not sure about is how windfarms not taking up CfDs and instead using market prices affects the market price?
That is a very good question – though I can’t say I actually know the answer – but surely if the CfD is not taken up, they also give up priority access to the market and that should make a big difference. Or perhaps it’s tails they win, heads we lose.
CFDs are purely financial transactions that operate outside the market. CFD holders are paid (or pay) the Low Carbon Contracts Company, who charge or eventually repay retailers the sums involved. Retailers also get to pay LCCC costs. CFD accounting for retailers is based on daily figures, so if a retailer happens to sell more than average during the peak price or peak revenue hours for CFD generators it gets to benefit if payments are being made to generators overall for that day because its payments will be based on the daily totals, not the settlement period detail.
Because CFD payments are calculated on day ahead prices for intermittent generators they have a strong incentive to make their physical sales on the same basis, so their CFD income is guaranteed and not subject to variations between day ahead prices and the price at which they sell into the market. They will still have some exposure to the Balancing Mechanism, in that their contractual sales volume will be compared with actual generation, and any difference invoiced at the System balancing price, which will be disadvantageous if their surplus or deficit is in the same direction as the general market. Contractual sales volume per settlement period is likely set on a day ahead basis (when they should have a reasonable forecast of wind), but in any event must be nominated to the central clearer (Elexon) ahead of Gate Closure, which is an hour before the start of the generation period. The buyer is fully protected on the volume of purchase, but retailers are exposed to variations between deemed metered offtake by customers and the sum of their purchases.
In normal circumstances CFDs have almost no effect on market outcomes compared with a straight market sale unsupported by a CFD. However, there are differences when the market is oversupplied, including just locally (not enough transmission from Scotland…). A CFD will mostly pay out its strike price when market prices go negative. For CFDs with high strike prices that is a very strong disincentive for offering to curtail, unless the degree of negative prices approaches or exceeds the strike price. However, low strike price CFDs will tend to find themselves more at risk. Those on market prices get no protection at all for low or negative prices, so they have a strong incentive to curtail. AR4 and AR5 wind farms also get no protection when prices go negative for any hour in the day ahead market, but are protected down to a zero price. At the moment, curtailment payments are dominated by onshore windfarms on about 1ROC/MWh, currently worth about £65/MWh, since they lose the subsidy if they do not generate. They tend to ask for a little extra for their trouble, with the result that the average payments, sometimes boosted by the need to curtail other wind farms, look like this:
https://www.ref.org.uk/constraints/index.php?tab=mt&yr=2023
Wind farms with inadequate or no CFD protection can secure curtailment payments by undercutting the ROC wind farms, leaving all the most costly still generating.
It is evident from the recently released accounts of Moray East (which has not take up its CFD) that they curtailed extensively. It generated 2563.8GWh in 2022 from 950MW, a capacity factor of just 30.8% which is very low for an offshore wind farm. Yet their revenue was £702m, an average of £273.91/MWh. Of course, the extreme market conditions of 2022 are not likely to be all that frequent in future. Perhaps Gordon Hughes has some data on how much they did curtail. I would guess at 25% of their output potential.
“This would amount to selling about 700 megawatts of the wind farm’s planned 2.8 gigawatt (GW) output, a total which is enough to power three million homes”.
…. to power three million homes Aye, as I keep asking: to power three million homes for HOW LONG? ….. 47 minutes or 53? of the week? … just saying because we NEVER get answers that STICK.
So does this likely mean that selling to the merchant market will give us cheap electricity as “everybody ” claims about windpower …. Ha ha hahahahahahahahhh…. . blah blalbla ….
….enough to power 3 million homes, when the wind blows…..
That was implied byme: but what you haven’t said/asked is for HOW LONG does that wind blow ! …. 🙂 (just saying)
This is the standard lie. When ‘Project Fortress’ (solar panels but the same lie nonetheless) was first proposed we were told it would power ‘150,000 homes’. Allowing for heating and EVs the true figure is about 11,000 (before the panels start degrading of course). How many of those homes will survive the 450 tons of TNT explosion of the 700 MWh battery (plus the hydrogen cyanide and hydrogen fluoride) is another matter of course.
You can’t power a home with wind.
You can’t power merchants, either.
“The pool of potential buyers for the 700 megawatts of power on offer is likely to be confined to heavyweight companies with big, intermittent electricity demands.”
Fixed it.
Yep just posted along the same lines before seeing your comment.
I would love to see wind farms commit (with typical financial penalties for non delivery) to year, month or even week ahead prices.
The “home” as an energy unit has been very variable. At one time it ran to as much as 3.6MWh per year (albeit with an absolute guarantee that output would not match the timing of demand). Now I think in some cases is is down to 2.7MWh/year – 25% less. Of course, if we do take up EVs and heat pumps suddenly the “home” will not look like a very attractive unit for measuring wind farms, because it will increase in size substantially.
“This would amount to selling about 700 megawatts of the wind farm’s planned 2.8 gigawatt (GW) output, a total which is enough to power three million homes.”
It is MWh (Megawatt Hours) on demand, not Megawatts that homes need. Potential of 700 MW means nothing. Nothing.
A point I keep making to others every time I see these ‘ capacity claims ‘. Every such claim should be accompanied with an explanatory note giving an estimated percentage of generating capacity over a 12 month period. The uncomfortable truth will be obvious, which is why such a suggestion will be rejected.
Yes n No or No n Yes, Exactly! – as you say, so we should LAUGH at them for these really Stupid stupid stupid comments.
It’s much the same for Cordless Tools.. Power ? 14V, 18V, 24V, 48V even or 6V …. is showing the level of modern intelligence – WAS Basic electrical education in our time.
They are struggling to come up with a viable financial plan, with the steep rise in costs, raw material and borrowing. Large users are arc furnaces (for scrap) and Aluminium refining and there are not many left and will need the grid when there is no wind. Orsted will pull out, it is the only obvious choice, they pulled out of US Ocean Wind 1 and 2 just last week. Basically they are going bust.
State ownership of power generation is surely the only way to avoid all these fiascos associated with trying to entice the private sector to provide reliable electricity, whilst not getting fleeced.
A means has to be found to keep unions out of it, such as the no-strike legislation that applies (one hopes) to the armed forces.
I’m unclear how state ownership means it’s cheaper to build and run? The private sector has incentives to do both as cheaply as possible and to keep driving down costs. The state does not. Nowhere, ever demonstrates that ownership means lower prices for consumers.
Surely the “market” has no interest in intermittency. The market likes to buy ahead. Coal, gas, nuclear, even oil based generation can all quote week, month year ahead prices. Wind can only quote in the here and now ‘cos you just don’t know when the wind is going to blow.
The only way wind can work is by having destroyed the real market first.
I’ve said this before, Ray: One wouldn’t buy a car on the off-chance that it might not start when you needed to go to work (say) – and also pay for a taxi to be on standby when that happened. When TPTB tell people that a windfarm can power 3 million homes they are lying. Windfarms have never, to my knowledge, ever delivered their peak-rated output for any length of time that would qualify that lie. Wind power is a bigger con than the South Sea bubble.
The ‘News’ has just been commenting on ‘British’ Steels decision to close down it’s Scunthorpe blast furnaces and build Electric Arc Furnaces instead !! Now, for starters, IIRC, blast furnaces are used in converting iron ore to iron whereas EAFs use scrap steel so two totally different processes and secondly, if I were operating EAFs the last thing I would want is an unreliable, intermittent electricity supply! Maybe I’m just an ignoramus in these matters.
You are absolutely right, Roy. Businesses have customer needs, production schedules, and a host of other time-related requirements.
It’s the same reason why demand management can’t work.
Just testing a change of image Harry, might make this a regular thing!
A WWI Tank?
A Tarkus, half armadillo, half tank.
Good one, Ray! Taurus – which I knew of – kind of passed me by when Nice became ELP…but I will add it to my Spotify list.
Strange, by the way, to think we were rebels 45 years ago. They say history repeats itself….I hope it’s not as tragedy.
It seems that national security is a thing of the past. We are apparently about to close our blast furnaces to replace with electrical furnaces that cannot make decent grades of steel. Then, wind companies expect to be bailed out after promising dirt cheap energy with no back-up cover. We could be brought to our knees in days by simply severing a few cables and pipes under the sea and preventing shipping for a few days.
Fortunately, Russia, the Middle East and the USA are so benevolent that we need not fear…………
Tata getting half a billion so they can switch to EAF and then bring in what they make now from Tata India, produced from coal. Government policy.
I’m sure I heard BBC news say that the Chinese had a big hand in TATA. That being the case, it seems to me that they would be more than happy to see PT go bust.
They are not selling power. Only energy. A potential rate of creating energy if the wind blows enough does not equate to energy that a customer will pay for, which is Watts x time, e.g. Killowatt hour or Joules in physics.. What is the point of reporting something you clearly the journalist does not have the first clue about?
Brian, I have had posters on here try to tell me kWh are units of power and then claim to be Chartered engineers!!
F** wit, know nowt, imbeciles. Too stupid to understand they may be wrong so to check facts, too stupid and/or ignorant to understand them if they do, and still believe they can tell other people the facts are what they unknowingly believe they are. https://www.youtube.com/watch?v=KHJbSvidohg
A classic Dunning Krger syndrome example. Too stupid to understand they can’t understand, y/know, morons. Humanity is doomed by this moronic stupidity of “experts”.
Have you ever seen this from Carl Sagan…. he was right! CEng, CPhys.
And I’ve had chartered engineers claiming to be Economists. Funny isn’t it?
From the Daily Telegraph, first two sentences say it all.
US offshore wind is holed and sinking
A costly solution to a non-existent problem
https://www.telegraph.co.uk/news/2023/11/06/green-energy-offshore-wind-power-orsted-new-jersey/
Oh….they will get plenty of “green” investment I’m sure…..or are they too smart..
How can a wind farm operator sell directly to a private company?
I assume at least some of the connection between the wind farm and a potential customer belongs to the National Grid, so they cannot directly connect to a private customer?
It’s not in the National Grid’s interest to ‘rent’ the transmission lines so to facilitate this idea?
Sales of electricity are bilateral contracts between any parties who register as a licensed trader. Contracts for electricity supply must be registered with Elexon, the registrar with details of the volumes and times agreed. Contracts that are purely financial, based merely on prices, such as CFDs are not contracts for electricity supply, and are not registered with Elexon. The requirement is therefore to become a licensed trader, which has a number of conditions attached.
https://www.ofgem.gov.uk/industry-licensing/how-become-licensed-gas-or-electricity-company
Licensed traders need not be generators or retailers or even large industrial companies (smaller ones would not tend to find it possible to gain a licence at sensible cost) – they can also be financial institutions and pure traders and service aggregators for grid batteries and demand side response.
Various charges for use of the system are levied separately for generators and retailers and direct customers. They include TNUoS, DNUos, and BSUoS charges for grid transmission, lower voltage distribution network, and the Balancing Mechanism.
The only electricity supply contracts that involve National Grid are the ones they enter into as part of the Balancing Mechanism, and as a result of their shareholdings in several of the interconnectors.
I strongly doubt that onshore wind estates ever produce more energy than they consume in manufacture, installation and maintenance, but I might be convinced otherwise. But as for offshore, like PV (in UK), I cannot believe it ever produces more energy out than it takes in.
The contractor / supplier should always be in fear of the customer. That doesn’t seem to apply to the wind power industry.
Micky R, but perhaps it should. Wind power, as we know, has no shelf life they either sell at at the price stipulated or they turn the fans off. They cannot hold out for a better price because the wind might drop. Needs someone to stand up to them with a few home truths.
Letter in the Telegraph some time ago.
Sir,
Matt Ridley’s article (Electricity from wind isn’t cheap and it never will be) is spot on. The problem is, many of our politicians and net-zero enthusiasts are confused about the “product”.
Comparing the MWh price of wind and solar with that of fossil fuel or nuclear electricity is like comparing a kilo apples with a kilo of oranges. Wind and solar are not the same product since they are intermittent. Until the purveyors of renewables are obliged to sell the same product (dispatchable electricity 24/7) there will always be problems and confusion.
The renewable providers should be obliged to sell the same product in competition with fossil fuel or nuclear providers which would mean that they would have to either invest in massive energy storage facilities, or to have a binding contract with a fossil fuel/nuclear provider to purchase electricity when the wind doesn’t blow and at night.
Yours etc.
“a binding contract with a fossil fuel/nuclear provider to purchase electricity when the wind doesn’t blow and at night”, so why even bother with the wind & solar! As they say, let’s cut out the middle-man.
I expect the Government will solve the problem by doublng or trebling the carbon tax on hydrocarbon generated electricity thus making £100/MWhr CfDs look competitive and allow the Government and the wind industry to say that offshore wind is cheaper than gas (as they already do falsely in their “Electricity Generating Costs Report 2023”). Together with regulating away nuclear (and thus frightening off any non-government backed development) enables the Government to accommodate any price asked by the renwable industry
Probably truer than you know. The EU is up to its usual tricks – see this story.
https://www.current-news.co.uk/energy-uk-eu-carbon-tax-detrimental-to-uk-renewables-unless-emission-trading-systems-linked/
They plan to levy border carbon tax on UK electricity exports based on any difference between UKA carbon prices and their own ETS prices – using the grid average carbon intensity as the basis. Of course, when we export it will be because we have a huge renewables generation and surplus, except perhaps for exports to Ireland, where we are supplier of last resort when their own renewables fail. The implications for Northern Ireland are probably even more complex. UKA prices have been falling because of the unanticipated destruction of demand and perhaps earlier than anticipated demise of coal capacity.
The rational response would be to build our own dispatchable generation and refuse to build any new interconnectors and threaten simply to cut them off unless they are offering cheap supply. Higher taxes are an impediment to trade. Of course, until now all interconnector supply has been rated as zero carbon, even when there is a coal fired station belching away right next to the other end of the line (as with BritNed). But I bet DESNZ cave in and rejoin the EU system – which will actually reduce our supply security.
The Generating Costs report is pure fantasy that would even shock Disney.
Click to access electricity-generation-costs-2023.pdf
69% capacity factor for offshore wind by 2035.
I think that Ørsted are looking at Clause 6 in Part 4 of the AR4 CFD terms
6.
ADJUSTMENT TO INSTALLED CAPACITY ESTIMATE: PERMITTED REDUCTION
6.2 The Revised ICE shall constitute the Installed Capacity Estimate with effect from the date of the ICE Adjustment Notice, provided that if an ICE Adjustment Notice specifies a Revised ICE which is less than seventy-five per cent. (75%) of the Initial Installed Capacity Estimate (or, if relevant, the RCE-Adjusted Installed Capacity Estimate), such ICE Adjustment Notice shall be invalid and of no effect.
6.3 Any ICE Adjustment Notice shall be irrevocable and the Generator may not subsequently increase the Installed Capacity Estimate.
6.4 The Generator may give an ICE Adjustment Notice on only one (1) occasion prior to the ICE Adjustment Deadline. Any ICE Adjustment Notice given to the CfD Counterparty after the ICE Adjustment Deadline shall be invalid and of no effect.
This then becomes the maximum power rating that the CFD will be applied to. I doubt it is enough to rescue the project.
Dogger Bank isn’t entitled to commence its CFD even if it wanted to until it has fulfilled all the Conditions Precedent which means that the whole phase has to have been commissioned. They’ve only hooked up a couple of turbines so far so they are a long way from that. All wind farms under construction only get market prices for whatever they manage to generate.