CfD Indexation
November 25, 2023
By Paul Homewood
I asked DESNZ to clarify what the current indexation is on CfDS. They say it is 1.3736:
This means that the Administrative Strike Price for offshore wind, £73.00 at 2012 prices, is £100.27 at 2023 levels.
They have also published the full list of strike prices for next year’s auction:
As all of the attention was on offshore wind, I did not notice the price for onshore. £64 of course equates to £87.91/MWh at current prices.
This gives the lie to the much touted claim that onshore wind is the cheapest source of electricity. As I reported the other day, the wholesale price in the last few months has ranged from about £80 to £100, whilst the DSENZ levelised costings of CCGT power work out at about £80/MWh.
23 Comments
Comments are closed.
NOT A LOT OF PEOPLE KNOW THAT 
The government, the greens and the ruinable energy industry have consistently lied about the cost of unreliable energy. There ought to be some way that the consumer can be compensated for the resulting cost to them of those lies.
Compensated by whom? Taxpayers?
By the ruinables industry.
But, as you often remark Paul, the strike price doesn’t include all the infrastructure costs. Could you perhaps enlighten us with some up-to-date figures for offshore wind?
Nor the cost of back-up generation, load balancing etc. And is the gas price inclusive of carbon tax?
Using 2012 prices is a briliant way to hide the actual prices being paid today.
Exactly!
Are oil and gas and coal companies allowed to raise their prices via indexation? Not a subsidy, surely?
Oh, and I’m so glad the government has moved in step with the IPCC in issuing AR6 – makes life so much simpler.
Very good!
Not the same thing. Lots of regulated infrastructure raises prices via indices. Look up Regulated Asset Bases for example.
Sorry to be such a bore, but let’s not forget the enormous additional cost of getting most of these bogus, poor apologies for “energy” to where it is needed and converting it to a state compatible with the Grid.
Let alone the real costs of using ever fluctuating and weather dependent energy, including obvious damage to the system’s resilience.
Also remember that the last dregs of the Coal Industry were lucky on occasions when they received £35/MWh (2012 prices).
I’ve always thought that the “Dept for Energy Security and Net Zero” is an oxymoron. The Minister for this Dept needs to be schizophrenic.
In practice the LCCC adjust strike prices annually from April, and the current adjustment factor is 1.33756613756613 (taken from their spreadsheet!) if you want to compare with existing operational CFDs and their current strike prices. Meanwhile, the LCCC has published the AR5 CFDs – but has not provided an up to date strike price for them, and will not do so until next April. Cue journalistic confusion.
Several CFDs have seen other downward adjustments since April. This is because OFGEM have ruled that all BSUoS charges under the Balancing Mechanism are to be charged directly to demand, and this had been anticipated at the time the CFDs were signed. These CFDs have a clawback provision that if BSUoS charges were no longer levied from generators the CFD would be adjusted down to compensate. There are nice arguments about how much was baked in to the CFD price bids and whether they really anticipated BSUoS charges getting to £4bn p.a., so there has been some haggling before agreement was reached: there may be more still to come, with adjustment backdated to April. Older CFDs don’t have the clause, and so they’re creaming it through not having to pay BSUoS charges.
The deductions run as high as £9.55/MWh for Drax, Bad A Cheo (onshore) Wind Farm, Dudgeon Offshore and EA 1, and £9.37/MWh for Triton Knoll. Bear in mind that only 50% of BSUoS charges were being levied against generators.
When I contacted LCCC about this they were not very informative. However, there will be no adjustments applied to later CFDs since the switch to charging BSUoS to demand only was already baked in – but it does perhaps shed some light on trying to compare CFDs across different allocation rounds, and why the bids were apparently so much more aggressive.
And it’s not clear that the real counterfactual for gas is £80. If we had allowed fracking and development of CCGTs its likely the price would be lower.
Paul; Thanks for this post. It answers something which has been puzzling me.
Every time I read about inflation causing problems for wind farm economics, it made me wonder why because I assumed that their costs would use indices that reflected their cost components.
Now I learn that the CPI is used. Aiui that covers the whole of the economy – bread, fuel, broadband, groceries, etc..
That is just bizarre! Why not use a formula which is specific to this business?
I have worked in industries – petrochem, nuclear, turnkey equipment, etc – where contracts included provisions for escalation based on relevant indices: steel pipe; cabling; rates for skilled trades and the like.
Maybe I’m misunderstanding something?
I think general inflation is the better index to use. Otherwise an industry can crank up its own inflation rate with no regard to the market.
It would actually make more sense to stop using 2012 prices altogether, Mike
Do them at current prices and let the wind farms either build their own estimate in for the years of construction, or hedge the cost.
Once constructed, the only indexation should be for running costs, which RPI should be perfectly adequate
Paul; Quite agree with stopping the 2012 base nonsense which seems to be mainly a ruse to keep the perception of prices low as shown by how they are so often reported without the baseline date.
There’s always a choice wrt costs through the project period of who carries the inflation risk: client or contractor. Where that goes depends on multiple factors specific to the industry/project.
However using RPI for indexation is not the best choice when well-established indices exist for the mix of materials and trades that would be used.
Anyhow, thanks for clarifying what is going on.
I expect the prices of major cost components like steel, copper, skilled trades, etc have increased by more than CPI over recent years, adding to the wind industy’s woes.
The risk is mainly in the interval between commitment and installation. Once operational, only things like replacement blades and maintenance services are liable to increase during the years of operation. Financing cost is largely hedgeable at the decision point. Some things that can really balloon are costs for chartering installation vessels, but you have to suspect that the hiatus in building at the moment will see those rates fall back unless you are installing the largest turbines where there is a vessel shortage.
The CFD provides indexation throughout construction and for the 15 years of operational validity. After that, income reverts to market prices.
N.B. I note that Hunt has removed the windfall tax from wind farms in construction – which do not get CFD terms, but just market prices for their output.
The pricing policy is a joke anyhow. As wind and solar become an ever greater proportion of the generation, the price needs to be the price for supplying us 24/7, 365 days a year.
They need to provide us with electricity at OUR convenience, not theirs.
That would mean they would have to price energy storage into their quotes. Either that, or the capacity built per MW quoted needs to be many times what it is now.
Either way, the quoted price would be way above what they are quoting for these CfD auctions. The whole thing is a fantasy.
Just heard of this on BBC radio 4.
It seems to me the UAE have got the right idea.
By Justin Rowlatt
Climate editor, BBC News
The United Arab Emirates planned to use its role as the host of UN climate talks as an opportunity to strike oil and gas deals, the BBC has learned.
Leaked briefing documents reveal plans to discuss fossil fuel deals with 15 nations.
The UN body responsible for the COP28 summit told the BBC hosts were expected to act without bias or self-interest.
The UAE team did not deny using COP28 meetings for business talks, and said “private meetings are private”.
https://www.bbc.co.uk/news/science-environment-67508331
There’s some ambiguity there. Does:
“The UN body responsible for the COP28 summit told the BBC hosts were expected to act without bias or self-interest.”
mean… “The UN body responsible for the COP28 summit told the BBC [that the] hosts were expected to act without bias or self-interest.”
or… “The UN body responsible for the COP28 summit told ‘the BBC hosts’ were expected to act without bias or self-interest.”?
Preferably the latter, not that the BBC will act without bias of course.
Justin Rowlatt Climate editor, unbias ? Surely not ! Anyway China looks set to buy up the gas and King Chump will be there to pocket a profit regardless.
COP is purely to pacify Greta’s death cult minions.