The article talks about strike prices but doesn't provide much context.
The context: this is about bids from wind farm operators to win "contracts for difference" with the Low Carbon Contracts Company, an entity owned by the UK government. It's essentially a subsidy scheme where the wind farms can lock in a specific price per MWh for all the electricity they will produce over a certain period. But only if they bid low enough to be among the winners of the auction.
This is an extremely misleading way to report the cost of energy. It’s almost meaningless to compare the cost of wind to the cost of gas because more wind does not reduce the need for gas plant. It may reduce gas utilization, but it will increase the cost of gas on a MWh basis by increasing capacity prices.
Yes, more wind will reduce emissions, but these prices don’t mean they will reduce total system cost.
Not only do the existing wind farms reduce the price of electricity by saving gas, they have had much larger effect on reducing the price households pay for gas itself, by reducing demand for that commodity.
Over the period 2010 to 2023 they reduced electric bills in the UK by about 14 billion, but reduced gas bills by about 140 billion!
Absolutely, as long as a the energy of a wind farm displaces enough MWh of gas to cover its capital costs (incl. network costs) at the marginal price of gas it should reduce system costs. But wind energy output across an area the size of the UK is so highly correlated that additional wind capacity has diminishing returns. I suspect that the UK is already beyond the point by which additional wind is economically beneficial, but I’m not certain about that.
Also, if gas utilization falls dramatically capital costs will come to dominate. It’s not just the turbines, the gas network is costly.
Capital costs starting to dominate doesn't mean that they increase.
If capital costs are 10 and operating costs are 90, but later operating costs become 1, the capital costs remain 10 and the price to recover the capital costs is the same.
Of course the capital costs need to be spread over less kwh, so the kwh will become more expensive, but what matters is the avg (and thus total) cost paid, and that would be lower.
E.g.
5B in capital cost for 25MW (amortized in 25 years), and 30 per MWh in gas cost.
If you produce 180TWh (20h daily of production) the average price cost will be (5'000'000'000/25 + 180'000'000*30)/180'000'000 = 31 per mwh.
If you produce 36TWh (5h a day) the average cost is 35, but the total cost is significantly lower.
At the limit, if the power plant produces 1MWh in the whole year, it will cost 200'000, but paying that MWh that high enabled the system to pay for all the rest of the year the electricity at less than 31.
You need to look at the total cost paid in the end by users, not at the marginal costs in some situations.
> I suspect that the UK is already beyond the point by which additional wind is economically beneficial, but I’m not certain about that.
I don't buy it. Just before Xmas the grid managed to move about 23GW of wind and it was a record. 23GW is lots but there was peak demand at that time, about 14GW of gas was still running when they hit that record. How can it be of no benefit to expand beyond that ?
I don't expect to even start worrying about the factor that's got you scared until we have a whole day when the CCGTs aren't running.
UK is currently limited by transmission. Gas can only be displaced by wind if the energy can be transported to the location where it is being consumed.
You very well may be correct, but it’s really not about how much it displaces at demand peaks (BESS is more likely to displace gas peaking). It matters how much it displaces over years and how often the additional output is surplus to demand. Long past uneconomical wind expansion you’d expect to still be running CCGTs over winter.
Finding economically viable uses for intermittently cheap energy has proven to be quite difficult. Most energy intensive industries require high capacity factors to cover capital costs.
£90 wind energy does not make for a low cost energy environment. And if spot prices dropped substantially the UK government is going to be taking a massive loss on these contracts.
I’m coming across as very negative in this thread, but I do really want renewable energy to succeed. I just work in the industry so I’m very aware of how challenging it is to make the economics stack up, so I find these puff pieces a bit exasperating.
1) Introduce a lot of intermittent generation into energy grid without sufficient amount of storage capacity.
2) Use marginal pricing model which effectively guarantees windfall profits for those sources.
3) Utilization of peaking power plants falls, but you still have to keep them because there is not enough storage capacity.
4) Peaking power plants rise generation costs to offset the lower utilization, further adding to the windfall profits.
5) You need more grid capacity to handle energy transfers from distributed generation sources.
5) ????
6) Act surprised when people loudly complain about electricity bills despite abundant "cheap" generation.
Intermittency of generation is an externality (same as CO2 emissions) and should be priced accordingly. People are willing to pay premium for supply stability, but the current pricing model does no account for that. Trying to change consumption habits (like smart grids, dynamic pricing, etc.) works poorly, especially for such vital resource as electricity.
I think there should be some kind of price penalty for intermittent sources dependent on total ratio of intermittent generation in the mix. At least until grid-scale energy storage technology will be advanced enough to store approximately week of total energy consumption.
For 5, add in that the new grid capacity is years behind schedule, and the existing grid capacity needs to come offline because it's decrepit, and you also have a policy to connect new sources immediately
It leads to a lot of telling new sources to dump their energy, and paying them to dump their energy, while simultaneously paying old gas generators (nearer the demand) to fire up. All for the want of more grid capacity.
> Trying to change consumption habits (like smart grids, dynamic pricing, etc.) works poorly, especially for such vital resource as electricity.
Why? Has the UK started trying recently? When I lived there nobody gave a hoot about fluctuating prices. It would have been hard to even know when electricity was expensive or not. Has it changed?
Meanwhile >three decades ago my grandparents in rural France had a big red lamp on the kitchen wall that would light up when energy was expensive. It was a part of their life and they had no problem with it. They chose that plan deliberately because it ended up cheaper.
If you’re saying that even with adaptive behavior , it’s all a wash because the constant cost of peakers is so high that you lose all savings when they kick in , no matter how little you use; ok, I believe you did the math.
But if the claim is “it’s impossible for humans to adapt their energy consumption depending on the current price of electricity”, I have seen first hand that is not true. For sure when I lived in Britain nobody did this at all, but that would be at best a British limitation, not a human one.
I'd suggest first measuring how much single load uses. In my case it's 1KWh and 0.4KWh. Daily load would save perhaps 4-5 GBP per month or 5% off an average bill.
The vast majority of UK consumers have a pretty simple plan where they're not demand responsive. If it's pitch black and dead calm one Winter's night they pay the exact same price as midday in the summer if it's blazing sunshine and simultaneously blowing a gale across the whole country. Their retailler has done some estimates and figured on average they can sell power for, say, 25p per kWh all day, every day. Some days they're raking it in 'cos they paid a lot less than that, other days they wish the day would end, but if their team did the sums right it comes out profitable at year end.
There are people, especially people with EVs and who can do that sort of "turn on a dime" lifestyle where you do laundry when it's cheaper not because it's Thursday who pay 0p per kWh some hours and 45p per kWh for that bleak winter's night.
For now that second group are a minority but they do exist.
The enabling technology is a bit more sophisticated than your French red lamp. "Smart" meters relay your usage constantly so you can be charged in 30 minute chunks, the same way the wholesale electricity market works. This also means you can see at a glance what's going on. So that's nice. The usual conspiracy people insist this is a future tool of control by government, just like almost everything that has ever been invented, bar codes on groceries, mobile phones, newspapers, parking tickets, everything.
This does not work at scale. Sure, there is plenty of anecdotes how you can successfully play this game as a consumer living in a rural house with electric car, power wall, and rooftop solar, but try to telling about it to someone living in a high-rise apartment or to a heavy industry business. Your preaching will fall on deaf ears.
IIRC there are several utilities in the UK which provide option to price electricity dynamically, but they are not popular because people do not want to play this game. They want reliable supply of electricity for reasonable prices. Trying to mold consumption to satisfy intermittency of generation is nothing more than shifting the externality akin to telling people "you must plant trees to offset CO2 emissions!".
The most popular UK electricity retailer is Octopus Energy which is specifically focused on variable prices and flexible consumer demand. By what metric do you mean variable rate retailers are not popular?
Intermittency is already handled by the price mechanisms, they are set quarter-hourly; if you’re not available when there is high demand you don’t get paid.
The marginal price windfalls happen specifically when you’re able to deliver at a low cost when demand is high in the same ISP.
The article quotes £147/MWh for CCGTs. These look to come from the Electricity Generation Costs 2025 [0] released on the same day as the CfD results. However there is no £147/MWh in Annex A [1]. There is a £145/MWh for CCGT delivered in 2030, but the way this was arrived at is interesting.
a) A load factor of 30% (which seems pretty low for a CCGT), that is actually ~28% (per Annex A [1] "Technical Costs and Assumptions" sheet);
b) fuel efficiency is set to be 54%, which is far lower than BAT CCGT of around 64%, which affects fuel and CO2 emissions costs;
c) the analysis missed out capacity market payments that one gets for having dispatchable power stations;
d) the analysis presumes £41/MWh of carbon costs.
The key drivers of the price are load factor (so amortised construction costs), conversion efficiency (fuel costs and carbon costs) and carbon costs themselves. These make up 90% of the LCOE.
This is poor reporting by Elektrek. The article compares wind and gas costs but completely fails to explain:
* the gas price in the article includes the government’s self-imposed carbon tax. The actual cost of gas (£55) is FAR lower than the £91.20 strike price Milibad has set for wind. And Miliband has locked in this terrible pricing for 20 years!
* there are huge extra costs for wind power that are not accounted for in this quoted strike price. The grid must be upgraded. Expensive new power generation capability will need to be built to compensate for the intermittency of wind
* the stated power capacity of wind generation is a theoretical maximum, and the actual capacity will be much lower in practice.
> The actual cost has to price in the impact of using it.
Is there real evidence the collected tax revenue is actually offsetting carbon emissions?
There's a lot of fraud in carbon credit systems - where often the sole benefit is feeling and/or looking good.
Is this self-imposed tax actually having a real result - or is it just artificially increasing the price of energy? If the latter, then it's not really fair to claim it's the actual cost.
.. you are commenting on an article about how non-carbon-emitting energy options are beating out polluting alternatives, aided by exactly these taxes, so obviously yes, they are working exactly as intended: price signals for the market to get carbon out of the energy system
The purpose of the tax is not to raise money to plant trees, it’s to raise the cost of emissions so that markets
move away from them
TFA's claim is offshore wind prices are 40% cheaper than gas.
The parent comment stated "actual cost has to price in the impact of using it". Most people would agree on this. However, for both claims to be true, the collected tax revenue must be spent offsetting the impact of that gas usage - not simply reducing gas usage (ie. that consumed gas isn't being compensated for).
If the UK government is spending that tax revenue on anything it wants, then it's not the actual cost, is it?
Sorry I don’t follow. Why would the taxes need to be spent offsetting anything? The carbon reduction already happened, because the taxes made this auction choose lower emission alternatives.
If you then also spend the taxes on some form of offsets (if we pretend for the sake of argument that those work) you would have reduced emissions twice. One time seems plenty to say they are doing their job.
>* the gas price in the article includes the government’s self-imposed carbon tax. The actual cost of gas (£55) is FAR lower than the £91.20 strike price Milibad has set for wind.
Is that unreasonable? Carbon dioxide is an externality, and it needs to be accounted for accordingly. Suppose the government is tendering contracts for milk for school lunches. One farm runs a CAFO[1] that pollutes the local river. The other has cows on a pasture that doesn't. Is it that unreasonable for the government to be like "well hang on, the CAFO farm might be cheaper the grass fed farm, but it'll cost us money to clean up all the shit they're dumping into the river, so we're going to impose a tax on the CAFO farm for their pollution"?
When your country emits more CO2 there’s more CO2 in the atmosphere independent of what anyone else does.
So it’s true each individual country only receives a fraction of the negative impact of their own emissions, but that fraction isn’t zero and therefore should be taxed to maximize economic efficiency. Further joining international treaties to agree to collectively tax carbon at a higher rate representing the harm across all those countries is even more economically efficient.
The government is literally comparing a raw price with a price+tax … and what makes this even more disingenuous is that the government themselves applied this tax. AND the tax is absurdly high!
> new power generation capability will need to be built to compensate for the intermittency of wind
The new wind power is mostly idling natural gas power plants, which can spin up on the rare occasions there's no wind in the North Sea. Then the UK only uses the expensive shipped LNG a few days a year. The much cheaper piped natural gas is already allocated.
Are you maybe comparing cost of gas as fuel with total cost? We will have a short period of low gas prices because there is oversupply of LNG projects coming online but that can turnaround easily. Flips in geo politics and crisis are popping up all the time.
The government is turning a £55 gas price into £147 by adding an arbitrary carbon tax, and therefore making it look artificially more expensive than wind.
If we wanted to make an honest analysis here, we would say "gas is significantly less than expensive than the strike price agreed for wind, but some believe the externalities of gas generation could be signficant"
> the stated power capacity of wind generation is a theoretical maximum, and the actual capacity will be much lower in practice.
Capacity is constant. You're talking about capacity factor, i.e., average utilization. Numbers from 2018 for Danish offshore wind farms show capacity factors approaching 50%. These brand-new turbines mounted on 150 meters+ towers in the middle of the North Sea will absofuckinglutely beat that.
That's also how a pure commodity market works. The price is the marginal cost.
That's how commodity producers like farmers can be profitable. The marginal producer makes no profit, but every producer who can get their costs below the marginal producer makes a profit.
If farmers didn't make any money, they'd stop farming and we'd have no food.
"Make any money" is not clear enough. Providers of input and purchasers of output have each become monopolies and have squeezed the profit out of smaller providers. They borrow to survive, government pays those that loaned the money, then the cycle continues. Farmer suicide has become a very popular way out of the cycle, which is one indicator that the money isn't really there any more.
Saskatchewan farmers have done very well since ~2000 or so. The 80's and 90's were very rough.
Yes, costs have skyrocketed -- combine harvesters start at about a million now. But wheat prices and yields have been high enough to more than compensate.
But Saskatchewan farmers are a great example of a low cost producer. A Saskatchewan farm usually runs about 10,000 acres per operator. UK farms with a couple hundred acres can't compete.
This isn’t a farmers market where individual actors can swiftly respond to supply and demand. This stuff has decades of lead time, is full of regulations and thus long term imbalances.
Nor is this a case of marginal anything. Gas is almost TRIPLE the price [0]. A normal functional efficient market like you have in mind would adjust to that sort of enormous profitability differential, the uk market has not.
We recognise that "I decided your kilo of gold is worth $50 so here's the $50 and now the gold is mine" isn't a purchase, that's theft. I'm going to assume you don't think it's insane for us to pay what the owner asked here (If I'm wrong, do let us know).
So, OK, clearly this CCGT electricity here (made with gas) offered for £85 per MWh we're going to buy that, for £85 per MWh.
Now, we also needed all this wind power which bids £5 per MWh. Presumably you'd want to pay them less than £85 per MWh. So, too bad, they bid too low, they get punished right? But since you aren't OK with paying less than the bid price, doubtless if they had bid £84 you'd pay that right?
Notice that the incentive in your model is for everybody to guess what you'll pay and bid just barely below that, whereupon you've wasted a lot of resources, your strategy no longer has any price discovery value, and you're paying almost as much as before. A triumph of... rationality?
How much do you reckon you can save the average household if you do this? £50 per year? Twice that?
I suspect GP actually wants an end to market pricing of energy and a move to a renewables-opex type of pricing, presumably with state financing and even operation. It isn't an insane idea: if it could be done cheaply enough and run well enough.
> Now if only the UK didn't have an insane system where all electricity is purchased at the highest cost in the mix.
That isn’t a “system”. It’s just what happens. Why would the 99% RE be forced to sell at a lower price? They will sell at whatever the market value is. Which is determined by supply and demand. And the gas turbines will only turn on if it becomes profitable for them to turn on at that price. So the causality actually is the other way around. Lots of demand increases electricity prices, higher electricity prices make it profitable for more expensive means of production to be powered up.
It is exactly why the market is the best approach for electricity. Everyone is incentivized to produce electricity as cheap as they can. Otherwise it doesn’t pay off to produce cheaper because one gets punished by having to sell for less anyway.
The one that I can think of is the government sets the amount of electricity produced, and then it’s rationed. But I doubt the UK would be happy with rationed electricity where your power shuts off the second it’s over. That would be essentially mandatory blackouts all the time.
Not to mention the cost would be held by the government, so you end up paying it in taxes anyway.
Rationed electricity might also come in the form of a universal basic entitlement, followed by market price for higher usage. One assumes under such a system that the state would own and operate energy production and that they would, for instance, increase the ration over time, leaving the remaining needed capacity to be fulfilled by the market.
Honestly, pricing based on the cost of financing and operation isn't a terrible idea.
Sure much you will end up with more energy consumed. If it’s a free ration, almost everyone will consume all that they are given up to the limit.
Under the current system, when energy becomes hard to produce or more people need it, rising prices means people will reduce. So pricing for cost of financing, sure, but it might be a higher cost because people will consume more.
That's the same insane system used in the rest of Europe, at least in Germany, France, Italy and Spain.
The key is that in the UK gas sets the price almost 100% of the time, vs 25% in Germany or less than 10% in France. The fix: build more of the cheap sources. A patch: cap what gas can bid.
It's an auction, it's called marginal pricing. Every producer bids for x KWh at a certain price (for each time slot), and the cheapest y KWh to cover all demand are taken, and all are paid at the price of the most expensive KWh bought. There is plenty of economic research on auctions and why this system is optimal: this system incentives to bid at the actual marginal cost of producing electricity, and thus allows to discover the optimal price. EU has been discussing about changing it, but there hasn't been a better system proposed yet.
If you change to pay at the bid price, you'll have companies build teams of analysts to predict the market price and bit at that, they're not just going to accept being paid much less of what they could.
Instead of focusing on this, here a few more impactful things that would help: 1. Zonal pricing, so that there is an aligned incentive to build production where demand is (connection to the grid is a big limiting factor) 2. Stop providing contracts to renewable where curtailed production gets paid (curtailed energy is paid by consumers as taxes on bills normally) 3. Start allowing to build more renewable so that renewable are setting the marginal price 4. Push utilities to do PPA (power purchase agreements) with producers of RE so they can agree to a fixed price, and a smaller slice of electricity is bought at the auction
There are a few more, but these are the most important.
Regarding your edit: the gas plant is not subsidizing, the customers are paying. But of course at the moment building renewable is so lucrative thanks to this setup, that there is a big incentive to build them. Of course they need to plan for 20-30 years, and the risk of getting to big periods at 0 marginal pricing is real, so builders need to evaluate well the risk (and PPAs can help)
In a non-competitive world what you say would be true (you'd avoid filling in the remaining 1%), but there are a large number of power producers that a cartel is unlikely
It still looks like a perverse incentive to me. If I were operating a gas plant and charging too much, and also building out renewables, it naively seems that I should be able to continue overcharging for gas, lining somebody's pocket to maintain the contract, and building out more renewables for ever more profit. I'm not in the UK so I'm only passingly familiar with the existence of this policy; I do hope that it's got an offramp.
Edit to answer my own concern: But, reading this article, it does seem like the auction is the offramp. The government takes bids for enough power to supply the country, and once the auction is settled the worst-case cost is paid to all winners. So there's a hope that gas will eventually subsidize its replacement with renewables.
What they're auctioning are what's called "Contracts for Difference". The contract has a "Strike price" which is in essence the price the government (via a for-purpose company) agrees you will be paid regardless of what happens for electricity sold to the system.
Now as the word "difference" might suggest there will be a difference between the market price at any particular moment and this strike price. The CfD works by the government paying you the difference when the market price was lower, and you pay the government the difference when it's higher. You can definitely afford to pay them 'cos you just got to sell power for $$$$
Why do this? Well, the trick is that a government (even if politicians don't always act like it) is here for the long haul. So for them guaranteeing how much you'll be paid for energy you're not going to make for ten years is fine. Tax will still exist in ten years, houses with electric light will still exist in ten years, this is an easy bet. But for a wind farm company, a commercial undertaking, such guarantees are incredibly valuable and would be unaffordable from elsewhere. So this is (relatively) a very cheap subsidy.
When there was a gas price spike because Russia invaded Ukraine the contracted wind farms paid a whole lot of money because of that difference I talked about, if you'd gone freelance, no CfD subsidy well, you're printing cash, 'cos at those prices you probably made back your whole install costs in a year of trading.
I’m missing something. Is the operator paying actual cash money if the market price goes up? It’s not just that they’re forced to produce electricity at a rate that’s possibly less than what it cost to buy fuel?
(Or in the case of renewables: producing for less profit than they would if they made their contract later)
Think of it this way: as a windfarm operator you know your costs and you know your expected amount of energy produced. But you don’t know the precise timing and therefore the market value at generation time.
From the first two you can calculate what you need in terms of £/MWh (include whatever profit you want in there). Now you can go to the government and bid that price in the auction. If you win, you have a safe profit and all risk (and upside potential) now lies with the government.
As GP said, in the case of 2022 you would have lost out on revenue. But that’s the price foe guaranteed margins
The CfD part is a technical detail. It ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale.
What I’m not sufficiently familiar with is whether you _have_ to go to such an auction (i.e. whether the auction also is the mechanism of capacity planning) or whether you are free to bypass this system and just hook up your wind park and carry the risk yourself. But functionally this is an insurance scheme for profits, with a market based pricing system
> ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale
Still missing something in relation to a point above. Does one of these scenarios involve the operator “paying” or “giving back” actual money when the market price is higher than agreed? As opposed to just operating at a loss or less profit?
If you are willing to ignore the mechanics, then the result rounds to: The operator will receive the auctioned value of x £/MWh for each MWh delivered to the grid
If you are interested in the mechanics, then _I think_ (i.e. not first hand knowledge) the operator will join each auction (once per day for each 15 min interval of the next day) and offer his energy amount there. He will then receive the integral of (auction price) times (volume) from “the grid”. If that is too little money he then goes to the government and asks for a top up to (contract price) times (volume). If that was too much he has to pay the government the difference.
But again. That is purely mechanical. The end effect of the contracts is you will always receive say 80£ per MWh delivered. Independent of the MWh was worth 500£ in that 15 min interval or -50£. It’s “just” a risk transfer
Ah I’m seeing a possible confusion. There are two different auctions in the description. The first one is for the CfD price and happens (for each project) once. The second one is the daily-price-discovery one and happens daily
> at a rate that’s possibly less than what it cost to buy fuel?
You might need to sit down for this. The wind farms don't use fuel. Wind just happens, it's a natural phenomenon that has no real regard for our stupid "wind farm" even as we're harvesting gigawatts of power the wind doesn't ccare.
If you were thinking "Wait I thought all the providers have these contracts, not just renewables" then er no, they're a subsidy, the CfD is a subsidy scheme. That cheap to make, expensive to run open cycle gas turbine some asshole put on a local industrial estate doesn't get a CfD, it can offer to sell the resulting electricity at market prices, and really the big problem is as you observed, that's possibly less than what it costs to buy fuel. Yeah, it is, bad idea to keep building Open Cycle Gas Turbines I reckon. Sure enough the UK almostly exclusively has more expensive to build but cheaper to run Combined Cycle plants.
CfDs are used to subsidise renewable future power. A long term energy independence strategy. Even if you don't care about the planet warming and the sea levels rising you won't be burning all this gas in a thousand years 'cos there's not enough gas. Whereas the sun will shine until long after we're gone, and the accompanying winds won't stop either.
The size of the subsidy varies, if you're building a pilot plant of a new technology that you're sure will revolutionize clean energy but, alas, no-one ever made one that worked before, the government might be willing to pay you four or five times as much money for your energy, partly because they're not expecting you to actually make any energy because you will likely fail. If your plan's big problem is that it's way less mechanically reliable than you'd like, this is a big incentive to incrementally improve that reliability. If your device that involves being in and out of an incredibly powerful tidal stream of corrosive sea water at freezing temperatures makes power but doesn't crack, tear, fall to pieces or explode in the scheduled period of operation you're that much closer to actually having a useful technology and paying you five times over the odds for the MWh you did make is a reasonable price.
I wonder, what’s to stop an energy company with a mixture of RE and gas from disabling X% of their RE infrastructure, forcing gas to come online and the higher rate? Only the biggest producers control enough of the market to do it, but it seems plausible for the company to find specific demand scenarios where they could tip the price in their favor.
There's a big wind farm I drive by occasionally and sometimes most of the windmills are feathered. Some are turning, so there's clearly wind. I have assumed this is when the demand is low (or maybe negative).
That’s not necessarily true. In general a single windmill is more efficient at pulling energy out of the wind than two are. And the marginal costs of windmills are not zero. I.e. their maintenance cadence (also) scales with active hours. So it might be a “at this price-wind point it’s not profitable for us to run a second mill”
> Like if gas is $5 and RE is $1 the RE folks get $5 instead?
yes
if there's 1mW of gas in the grid then everyone gets paid the gas price
this is called pay-as-clear, and has some positives (strongly encourages RE construction), and some disadvantages (zero long term planning, paying gas generators absurd rates if they can squeeze in at the top of the auction)
UK government is consulting on changes to this system at present
There are alternatives, like "pay as bid", which heavily incentives the best price guesser instead of the cheapest producers. And is a system more fragile against collusions in concentrated markets (i.e. a handful of big producers that agree on high bids).
The non renewable operator would be free to sell at a competitive price or not at all. Perhaps on nights when there’s no wind at sea they might be able to make their obsolete infrastructure pay for itself briefly.
But that is exactly what is happening. Each seller can offer their price and each bidder can also offer their price. And since running a gas turbine is more expensive than wind power they are forced by the market to turn their gas turbines off when there is wind. However when there is only a little wind they can power up their gas turbines and sell to the highest bidder. But since there is also a little bit wind, the wind power people can also sell to that highest bidder. That is how it happens that suddenly wind power is just as expensive as the gas turbines, because there is simply not as much wind power to go around for all the people that need electricity.
This line of chatter has been going around UK-centric online discussions and it's such a braindead line of thinking. Marginal pricing is used in a gazillion countries and is tried and tested.
You do marginal pricing because otherwise providers will simply bid what they think the crossover price will be - marginal prices lower prices in the long run because providers try to improve their margins and lower their bids.
Also renewables bid on the spot and day ahead markets really low because their cost is almost entirely capex (and also most are under CfD anyway so may as well bid 0) - the spread isn't nearly as good as the data would imply. If you didn't use marginal pricing you'd have them bidding higher to cover their capex.
That's not really "a system", that's how marginal pricing always works for fungible goods. If you need to buy 100 units of something, and the guy selling next to me can't go any lower than $10 without selling at a loss, I'm going to sell at $9.99 every time. Why would I do otherwise?
The point of this is that it's supposed to guarantee windfall profits for wind operators, to make it attractive to keep building out wind until all the marginal gas is pushed out of the market mix. The price being set by the highest-cost source in the mix is a feature for incentivizing buildout, not a bug.
You're kind of missing the point. Renewables use contracts for difference. The article we are discussing is the level of that CFD. So what ever the market price, renewables either give or receive money in line with the CFD.
The article talks about strike prices but doesn't provide much context.
The context: this is about bids from wind farm operators to win "contracts for difference" with the Low Carbon Contracts Company, an entity owned by the UK government. It's essentially a subsidy scheme where the wind farms can lock in a specific price per MWh for all the electricity they will produce over a certain period. But only if they bid low enough to be among the winners of the auction.
https://en.wikipedia.org/wiki/Contracts_for_Difference_(UK_e...
This is an extremely misleading way to report the cost of energy. It’s almost meaningless to compare the cost of wind to the cost of gas because more wind does not reduce the need for gas plant. It may reduce gas utilization, but it will increase the cost of gas on a MWh basis by increasing capacity prices.
Yes, more wind will reduce emissions, but these prices don’t mean they will reduce total system cost.
Not only do the existing wind farms reduce the price of electricity by saving gas, they have had much larger effect on reducing the price households pay for gas itself, by reducing demand for that commodity.
Over the period 2010 to 2023 they reduced electric bills in the UK by about 14 billion, but reduced gas bills by about 140 billion!
Operating costs dominate the cost of natural gas electricity, not the capital costs. An idled gas plant does save considerable money.
Absolutely, as long as a the energy of a wind farm displaces enough MWh of gas to cover its capital costs (incl. network costs) at the marginal price of gas it should reduce system costs. But wind energy output across an area the size of the UK is so highly correlated that additional wind capacity has diminishing returns. I suspect that the UK is already beyond the point by which additional wind is economically beneficial, but I’m not certain about that.
Also, if gas utilization falls dramatically capital costs will come to dominate. It’s not just the turbines, the gas network is costly.
Capital costs starting to dominate doesn't mean that they increase.
If capital costs are 10 and operating costs are 90, but later operating costs become 1, the capital costs remain 10 and the price to recover the capital costs is the same.
Of course the capital costs need to be spread over less kwh, so the kwh will become more expensive, but what matters is the avg (and thus total) cost paid, and that would be lower.
E.g.
5B in capital cost for 25MW (amortized in 25 years), and 30 per MWh in gas cost.
If you produce 180TWh (20h daily of production) the average price cost will be (5'000'000'000/25 + 180'000'000*30)/180'000'000 = 31 per mwh.
If you produce 36TWh (5h a day) the average cost is 35, but the total cost is significantly lower.
At the limit, if the power plant produces 1MWh in the whole year, it will cost 200'000, but paying that MWh that high enabled the system to pay for all the rest of the year the electricity at less than 31. You need to look at the total cost paid in the end by users, not at the marginal costs in some situations.
> I suspect that the UK is already beyond the point by which additional wind is economically beneficial, but I’m not certain about that.
I don't buy it. Just before Xmas the grid managed to move about 23GW of wind and it was a record. 23GW is lots but there was peak demand at that time, about 14GW of gas was still running when they hit that record. How can it be of no benefit to expand beyond that ?
I don't expect to even start worrying about the factor that's got you scared until we have a whole day when the CCGTs aren't running.
UK is currently limited by transmission. Gas can only be displaced by wind if the energy can be transported to the location where it is being consumed.
You very well may be correct, but it’s really not about how much it displaces at demand peaks (BESS is more likely to displace gas peaking). It matters how much it displaces over years and how often the additional output is surplus to demand. Long past uneconomical wind expansion you’d expect to still be running CCGTs over winter.
If electricity spot prices is cheap enough (when available), then people will eventually find uses for it. This will drive economic development.
Finding economically viable uses for intermittently cheap energy has proven to be quite difficult. Most energy intensive industries require high capacity factors to cover capital costs.
£90 wind energy does not make for a low cost energy environment. And if spot prices dropped substantially the UK government is going to be taking a massive loss on these contracts.
I’m coming across as very negative in this thread, but I do really want renewable energy to succeed. I just work in the industry so I’m very aware of how challenging it is to make the economics stack up, so I find these puff pieces a bit exasperating.
Life will find a way!
Is that why corporations bid to build wind power in the UK EEZ at record-low prices? :)
1) Introduce a lot of intermittent generation into energy grid without sufficient amount of storage capacity.
2) Use marginal pricing model which effectively guarantees windfall profits for those sources.
3) Utilization of peaking power plants falls, but you still have to keep them because there is not enough storage capacity.
4) Peaking power plants rise generation costs to offset the lower utilization, further adding to the windfall profits.
5) You need more grid capacity to handle energy transfers from distributed generation sources.
5) ????
6) Act surprised when people loudly complain about electricity bills despite abundant "cheap" generation.
Intermittency of generation is an externality (same as CO2 emissions) and should be priced accordingly. People are willing to pay premium for supply stability, but the current pricing model does no account for that. Trying to change consumption habits (like smart grids, dynamic pricing, etc.) works poorly, especially for such vital resource as electricity.
I think there should be some kind of price penalty for intermittent sources dependent on total ratio of intermittent generation in the mix. At least until grid-scale energy storage technology will be advanced enough to store approximately week of total energy consumption.
For 5, add in that the new grid capacity is years behind schedule, and the existing grid capacity needs to come offline because it's decrepit, and you also have a policy to connect new sources immediately
It leads to a lot of telling new sources to dump their energy, and paying them to dump their energy, while simultaneously paying old gas generators (nearer the demand) to fire up. All for the want of more grid capacity.
https://ukerc.ac.uk/news/transmission-network-unavailability...
> Trying to change consumption habits (like smart grids, dynamic pricing, etc.) works poorly, especially for such vital resource as electricity.
Why? Has the UK started trying recently? When I lived there nobody gave a hoot about fluctuating prices. It would have been hard to even know when electricity was expensive or not. Has it changed?
Meanwhile >three decades ago my grandparents in rural France had a big red lamp on the kitchen wall that would light up when energy was expensive. It was a part of their life and they had no problem with it. They chose that plan deliberately because it ended up cheaper.
If you’re saying that even with adaptive behavior , it’s all a wash because the constant cost of peakers is so high that you lose all savings when they kick in , no matter how little you use; ok, I believe you did the math.
But if the claim is “it’s impossible for humans to adapt their energy consumption depending on the current price of electricity”, I have seen first hand that is not true. For sure when I lived in Britain nobody did this at all, but that would be at best a British limitation, not a human one.
I've never seen a red light, but the UK has had multiple electricity rates for households since the 1980s.
https://en.wikipedia.org/wiki/Economy_7
My parents would set timers on the dishwasher, washing machine etc too run at night.
> My parents would set timers
I'd suggest first measuring how much single load uses. In my case it's 1KWh and 0.4KWh. Daily load would save perhaps 4-5 GBP per month or 5% off an average bill.
All EV chargers sold in the UK are now smart, and adjust charging schedule according to price.
The vast majority of UK consumers have a pretty simple plan where they're not demand responsive. If it's pitch black and dead calm one Winter's night they pay the exact same price as midday in the summer if it's blazing sunshine and simultaneously blowing a gale across the whole country. Their retailler has done some estimates and figured on average they can sell power for, say, 25p per kWh all day, every day. Some days they're raking it in 'cos they paid a lot less than that, other days they wish the day would end, but if their team did the sums right it comes out profitable at year end.
There are people, especially people with EVs and who can do that sort of "turn on a dime" lifestyle where you do laundry when it's cheaper not because it's Thursday who pay 0p per kWh some hours and 45p per kWh for that bleak winter's night.
For now that second group are a minority but they do exist.
The enabling technology is a bit more sophisticated than your French red lamp. "Smart" meters relay your usage constantly so you can be charged in 30 minute chunks, the same way the wholesale electricity market works. This also means you can see at a glance what's going on. So that's nice. The usual conspiracy people insist this is a future tool of control by government, just like almost everything that has ever been invented, bar codes on groceries, mobile phones, newspapers, parking tickets, everything.
This does not work at scale. Sure, there is plenty of anecdotes how you can successfully play this game as a consumer living in a rural house with electric car, power wall, and rooftop solar, but try to telling about it to someone living in a high-rise apartment or to a heavy industry business. Your preaching will fall on deaf ears.
IIRC there are several utilities in the UK which provide option to price electricity dynamically, but they are not popular because people do not want to play this game. They want reliable supply of electricity for reasonable prices. Trying to mold consumption to satisfy intermittency of generation is nothing more than shifting the externality akin to telling people "you must plant trees to offset CO2 emissions!".
The most popular UK electricity retailer is Octopus Energy which is specifically focused on variable prices and flexible consumer demand. By what metric do you mean variable rate retailers are not popular?
3.3 million households in England were on Economy 7 tariffs in 2021 - around 14% of households
This is addressed by the capacity market mechanism.
Intermittency is already handled by the price mechanisms, they are set quarter-hourly; if you’re not available when there is high demand you don’t get paid.
The marginal price windfalls happen specifically when you’re able to deliver at a low cost when demand is high in the same ISP.
This just seems like data-free fear mongering.
Do you understand how the CFDs for these wind farms work?
When the wholesale prices is about the CFD strike price then the excess funds are paid to the Low Carbon Company and used to reduce electricity bills
Storage capacity is being build out - it's one of the prime uses of old power station sites (because they already have grid connectivity)
Grid capacity is being built out e.g. the Eastern Green links to allow transfer of power from Scotland to England and reduce curtailment payments
The article quotes £147/MWh for CCGTs. These look to come from the Electricity Generation Costs 2025 [0] released on the same day as the CfD results. However there is no £147/MWh in Annex A [1]. There is a £145/MWh for CCGT delivered in 2030, but the way this was arrived at is interesting.
a) A load factor of 30% (which seems pretty low for a CCGT), that is actually ~28% (per Annex A [1] "Technical Costs and Assumptions" sheet);
b) fuel efficiency is set to be 54%, which is far lower than BAT CCGT of around 64%, which affects fuel and CO2 emissions costs;
c) the analysis missed out capacity market payments that one gets for having dispatchable power stations;
d) the analysis presumes £41/MWh of carbon costs.
The key drivers of the price are load factor (so amortised construction costs), conversion efficiency (fuel costs and carbon costs) and carbon costs themselves. These make up 90% of the LCOE.
[0] https://www.gov.uk/government/publications/electricity-gener... [1] https://assets.publishing.service.gov.uk/media/6967b0c806fab...
This is poor reporting by Elektrek. The article compares wind and gas costs but completely fails to explain:
* the gas price in the article includes the government’s self-imposed carbon tax. The actual cost of gas (£55) is FAR lower than the £91.20 strike price Milibad has set for wind. And Miliband has locked in this terrible pricing for 20 years!
* there are huge extra costs for wind power that are not accounted for in this quoted strike price. The grid must be upgraded. Expensive new power generation capability will need to be built to compensate for the intermittency of wind
* the stated power capacity of wind generation is a theoretical maximum, and the actual capacity will be much lower in practice.
> The actual cost of gas
The actual cost has to price in the impact of using it.
For example, it's cheaper for UK water companies to pump sewage into rivers and onto beaches:
https://www.bbc.com/news/articles/cz9kz8ydjpno
https://www.bbc.com/news/uk-england-london-67357566
https://www.bbc.com/news/articles/c5yprnd848ko
https://www.theguardian.com/environment/2025/sep/16/sewage-o...
But maybe it's a nice idea to force them to deal with sewage properly so you don't have to live in rivers of shit.
The "actual cost" is a loaded term and probably cannot be known without putting reasonable bounds on it.
Nonetheless, two thoughts come to mind:
1) we don't know the "actual cost" of offshore wind
2) we may not be able to afford even the "market cost" of offshore wind without the natgas tax subsidy
> The actual cost has to price in the impact of using it.
Is there real evidence the collected tax revenue is actually offsetting carbon emissions?
There's a lot of fraud in carbon credit systems - where often the sole benefit is feeling and/or looking good.
Is this self-imposed tax actually having a real result - or is it just artificially increasing the price of energy? If the latter, then it's not really fair to claim it's the actual cost.
Carbon tax is not about offsetting emissions, it's about disincentivising fossil fuels.
It is about disincentivizing fossil fuels because there are negative externalities which are not priced-in absent the carbon tax.
.. you are commenting on an article about how non-carbon-emitting energy options are beating out polluting alternatives, aided by exactly these taxes, so obviously yes, they are working exactly as intended: price signals for the market to get carbon out of the energy system
The purpose of the tax is not to raise money to plant trees, it’s to raise the cost of emissions so that markets move away from them
TFA's claim is offshore wind prices are 40% cheaper than gas.
The parent comment stated "actual cost has to price in the impact of using it". Most people would agree on this. However, for both claims to be true, the collected tax revenue must be spent offsetting the impact of that gas usage - not simply reducing gas usage (ie. that consumed gas isn't being compensated for).
If the UK government is spending that tax revenue on anything it wants, then it's not the actual cost, is it?
Sorry I don’t follow. Why would the taxes need to be spent offsetting anything? The carbon reduction already happened, because the taxes made this auction choose lower emission alternatives.
If you then also spend the taxes on some form of offsets (if we pretend for the sake of argument that those work) you would have reduced emissions twice. One time seems plenty to say they are doing their job.
>* the gas price in the article includes the government’s self-imposed carbon tax. The actual cost of gas (£55) is FAR lower than the £91.20 strike price Milibad has set for wind.
Is that unreasonable? Carbon dioxide is an externality, and it needs to be accounted for accordingly. Suppose the government is tendering contracts for milk for school lunches. One farm runs a CAFO[1] that pollutes the local river. The other has cows on a pasture that doesn't. Is it that unreasonable for the government to be like "well hang on, the CAFO farm might be cheaper the grass fed farm, but it'll cost us money to clean up all the shit they're dumping into the river, so we're going to impose a tax on the CAFO farm for their pollution"?
[1] https://en.wikipedia.org/wiki/Concentrated_animal_feeding_op...
Yes, it is completely reasonable if you understand the concept of externalities.
People motivated exclusively by personal profit are systematically disincentivized from understanding the concept of externalities.
> Is that unreasonable? Carbon dioxide is an externality, and it needs to be accounted for accordingly.
Yes it is unreasonable. Spending money to reduce carbon is just a subsidy for other countries who DGAF and will emit both theirs and yours.
When your country emits more CO2 there’s more CO2 in the atmosphere independent of what anyone else does.
So it’s true each individual country only receives a fraction of the negative impact of their own emissions, but that fraction isn’t zero and therefore should be taxed to maximize economic efficiency. Further joining international treaties to agree to collectively tax carbon at a higher rate representing the harm across all those countries is even more economically efficient.
Do you apply this logic for everything?
Dumping your waste, others be damned, is a hell of a way to live.
>>Is that unreasonable
It’s not unreasonable to report the facts and let the reader decide. The carbon tax is a readily available fact where in your example is subjective.
Nothing you've said actually means anything.
The self-imposed tax is there and isn't going anywhere, so it's included in the price.
The other two points are accounted for in the strike price, because this capacity came into being and is now offering electricity at the strike price.
>isn't going anywhere
That's not true at all, Reform could get in and remove it day 1!
The government is literally comparing a raw price with a price+tax … and what makes this even more disingenuous is that the government themselves applied this tax. AND the tax is absurdly high!
> new power generation capability will need to be built to compensate for the intermittency of wind
The new wind power is mostly idling natural gas power plants, which can spin up on the rare occasions there's no wind in the North Sea. Then the UK only uses the expensive shipped LNG a few days a year. The much cheaper piped natural gas is already allocated.
Are you maybe comparing cost of gas as fuel with total cost? We will have a short period of low gas prices because there is oversupply of LNG projects coming online but that can turnaround easily. Flips in geo politics and crisis are popping up all the time.
Would you choose a 5.5% tracker mortgage, or a mortgage fixed at 9.1% for 20 years?
That's not the choice here though as the tracker mortgage (gas) is more expensive the the fixed on (Wind)
but it's not, though, is it?
The government is turning a £55 gas price into £147 by adding an arbitrary carbon tax, and therefore making it look artificially more expensive than wind.
If we wanted to make an honest analysis here, we would say "gas is significantly less than expensive than the strike price agreed for wind, but some believe the externalities of gas generation could be signficant"
The CPS charge is £18 per tonne of CO2, and all emitters pay for the CO2 they emit
The CPS charge isn't going away so it's not making gas look artificially more expensive than wind
> the stated power capacity of wind generation is a theoretical maximum, and the actual capacity will be much lower in practice.
Capacity is constant. You're talking about capacity factor, i.e., average utilization. Numbers from 2018 for Danish offshore wind farms show capacity factors approaching 50%. These brand-new turbines mounted on 150 meters+ towers in the middle of the North Sea will absofuckinglutely beat that.
https://www.modernpowersystems.com/news/eight-new-uk-wind-fa...
Related:
UK secures record supply of offshore wind projects
https://news.ycombinator.com/item?id=46614777
Thank fuck I am 100% off grid.
Now if only the UK didn't have an insane system where all electricity is purchased at the highest cost in the mix.
i.e. if you're buy 99% cheap RE, 1% expensive gas then you're paying for 100% at the higher gas price.
That's also how a pure commodity market works. The price is the marginal cost.
That's how commodity producers like farmers can be profitable. The marginal producer makes no profit, but every producer who can get their costs below the marginal producer makes a profit.
If farmers didn't make any money, they'd stop farming and we'd have no food.
"Make any money" is not clear enough. Providers of input and purchasers of output have each become monopolies and have squeezed the profit out of smaller providers. They borrow to survive, government pays those that loaned the money, then the cycle continues. Farmer suicide has become a very popular way out of the cycle, which is one indicator that the money isn't really there any more.
Saskatchewan farmers have done very well since ~2000 or so. The 80's and 90's were very rough.
Yes, costs have skyrocketed -- combine harvesters start at about a million now. But wheat prices and yields have been high enough to more than compensate.
But Saskatchewan farmers are a great example of a low cost producer. A Saskatchewan farm usually runs about 10,000 acres per operator. UK farms with a couple hundred acres can't compete.
> The marginal producer makes no profit
This isn’t a farmers market where individual actors can swiftly respond to supply and demand. This stuff has decades of lead time, is full of regulations and thus long term imbalances.
Nor is this a case of marginal anything. Gas is almost TRIPLE the price [0]. A normal functional efficient market like you have in mind would adjust to that sort of enormous profitability differential, the uk market has not.
https://www.nationalgrid.com/the-great-grid-upgrade/fact-or-...
We recognise that "I decided your kilo of gold is worth $50 so here's the $50 and now the gold is mine" isn't a purchase, that's theft. I'm going to assume you don't think it's insane for us to pay what the owner asked here (If I'm wrong, do let us know).
So, OK, clearly this CCGT electricity here (made with gas) offered for £85 per MWh we're going to buy that, for £85 per MWh.
Now, we also needed all this wind power which bids £5 per MWh. Presumably you'd want to pay them less than £85 per MWh. So, too bad, they bid too low, they get punished right? But since you aren't OK with paying less than the bid price, doubtless if they had bid £84 you'd pay that right?
Notice that the incentive in your model is for everybody to guess what you'll pay and bid just barely below that, whereupon you've wasted a lot of resources, your strategy no longer has any price discovery value, and you're paying almost as much as before. A triumph of... rationality?
How much do you reckon you can save the average household if you do this? £50 per year? Twice that?
I suspect GP actually wants an end to market pricing of energy and a move to a renewables-opex type of pricing, presumably with state financing and even operation. It isn't an insane idea: if it could be done cheaply enough and run well enough.
> Now if only the UK didn't have an insane system where all electricity is purchased at the highest cost in the mix.
That isn’t a “system”. It’s just what happens. Why would the 99% RE be forced to sell at a lower price? They will sell at whatever the market value is. Which is determined by supply and demand. And the gas turbines will only turn on if it becomes profitable for them to turn on at that price. So the causality actually is the other way around. Lots of demand increases electricity prices, higher electricity prices make it profitable for more expensive means of production to be powered up.
> Why would the 99% RE be forced to sell at a lower price?
You can just as easily flip that around: Why should the consumer pay a price that is entirely disconnected from the actual cost of production?
That's why "market" isn't a good approach for electricity.
It is exactly why the market is the best approach for electricity. Everyone is incentivized to produce electricity as cheap as they can. Otherwise it doesn’t pay off to produce cheaper because one gets punished by having to sell for less anyway.
Can you give an example of a better method?
The one that I can think of is the government sets the amount of electricity produced, and then it’s rationed. But I doubt the UK would be happy with rationed electricity where your power shuts off the second it’s over. That would be essentially mandatory blackouts all the time.
Not to mention the cost would be held by the government, so you end up paying it in taxes anyway.
Rationed electricity might also come in the form of a universal basic entitlement, followed by market price for higher usage. One assumes under such a system that the state would own and operate energy production and that they would, for instance, increase the ration over time, leaving the remaining needed capacity to be fulfilled by the market.
Honestly, pricing based on the cost of financing and operation isn't a terrible idea.
Sure much you will end up with more energy consumed. If it’s a free ration, almost everyone will consume all that they are given up to the limit.
Under the current system, when energy becomes hard to produce or more people need it, rising prices means people will reduce. So pricing for cost of financing, sure, but it might be a higher cost because people will consume more.
That's the same insane system used in the rest of Europe, at least in Germany, France, Italy and Spain.
The key is that in the UK gas sets the price almost 100% of the time, vs 25% in Germany or less than 10% in France. The fix: build more of the cheap sources. A patch: cap what gas can bid.
Does that mean the 99% RE gets paid at the same rate as the 1% of gas?
Like if gas is $5 and RE is $1 the RE folks get $5 instead?
Devils advocate would say that might work out in RE's favor. Lower production costs mean more profit and therefore more incentive to build more RE
It's an auction, it's called marginal pricing. Every producer bids for x KWh at a certain price (for each time slot), and the cheapest y KWh to cover all demand are taken, and all are paid at the price of the most expensive KWh bought. There is plenty of economic research on auctions and why this system is optimal: this system incentives to bid at the actual marginal cost of producing electricity, and thus allows to discover the optimal price. EU has been discussing about changing it, but there hasn't been a better system proposed yet. If you change to pay at the bid price, you'll have companies build teams of analysts to predict the market price and bit at that, they're not just going to accept being paid much less of what they could.
Instead of focusing on this, here a few more impactful things that would help: 1. Zonal pricing, so that there is an aligned incentive to build production where demand is (connection to the grid is a big limiting factor) 2. Stop providing contracts to renewable where curtailed production gets paid (curtailed energy is paid by consumers as taxes on bills normally) 3. Start allowing to build more renewable so that renewable are setting the marginal price 4. Push utilities to do PPA (power purchase agreements) with producers of RE so they can agree to a fixed price, and a smaller slice of electricity is bought at the auction
There are a few more, but these are the most important.
Regarding your edit: the gas plant is not subsidizing, the customers are paying. But of course at the moment building renewable is so lucrative thanks to this setup, that there is a big incentive to build them. Of course they need to plan for 20-30 years, and the risk of getting to big periods at 0 marginal pricing is real, so builders need to evaluate well the risk (and PPAs can help)
In a non-competitive world what you say would be true (you'd avoid filling in the remaining 1%), but there are a large number of power producers that a cartel is unlikely
It still looks like a perverse incentive to me. If I were operating a gas plant and charging too much, and also building out renewables, it naively seems that I should be able to continue overcharging for gas, lining somebody's pocket to maintain the contract, and building out more renewables for ever more profit. I'm not in the UK so I'm only passingly familiar with the existence of this policy; I do hope that it's got an offramp.
Edit to answer my own concern: But, reading this article, it does seem like the auction is the offramp. The government takes bids for enough power to supply the country, and once the auction is settled the worst-case cost is paid to all winners. So there's a hope that gas will eventually subsidize its replacement with renewables.
So, what's auctioned here isn't power.
What they're auctioning are what's called "Contracts for Difference". The contract has a "Strike price" which is in essence the price the government (via a for-purpose company) agrees you will be paid regardless of what happens for electricity sold to the system.
Now as the word "difference" might suggest there will be a difference between the market price at any particular moment and this strike price. The CfD works by the government paying you the difference when the market price was lower, and you pay the government the difference when it's higher. You can definitely afford to pay them 'cos you just got to sell power for $$$$
Why do this? Well, the trick is that a government (even if politicians don't always act like it) is here for the long haul. So for them guaranteeing how much you'll be paid for energy you're not going to make for ten years is fine. Tax will still exist in ten years, houses with electric light will still exist in ten years, this is an easy bet. But for a wind farm company, a commercial undertaking, such guarantees are incredibly valuable and would be unaffordable from elsewhere. So this is (relatively) a very cheap subsidy.
When there was a gas price spike because Russia invaded Ukraine the contracted wind farms paid a whole lot of money because of that difference I talked about, if you'd gone freelance, no CfD subsidy well, you're printing cash, 'cos at those prices you probably made back your whole install costs in a year of trading.
Some wind farms intentionally delayed their entry into the CfD system to profit from this (though contract terms may have been tightened since.)
https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind...
I’m missing something. Is the operator paying actual cash money if the market price goes up? It’s not just that they’re forced to produce electricity at a rate that’s possibly less than what it cost to buy fuel?
(Or in the case of renewables: producing for less profit than they would if they made their contract later)
Think of it this way: as a windfarm operator you know your costs and you know your expected amount of energy produced. But you don’t know the precise timing and therefore the market value at generation time.
From the first two you can calculate what you need in terms of £/MWh (include whatever profit you want in there). Now you can go to the government and bid that price in the auction. If you win, you have a safe profit and all risk (and upside potential) now lies with the government. As GP said, in the case of 2022 you would have lost out on revenue. But that’s the price foe guaranteed margins
The CfD part is a technical detail. It ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale.
What I’m not sufficiently familiar with is whether you _have_ to go to such an auction (i.e. whether the auction also is the mechanism of capacity planning) or whether you are free to bypass this system and just hook up your wind park and carry the risk yourself. But functionally this is an insurance scheme for profits, with a market based pricing system
> ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale
Still missing something in relation to a point above. Does one of these scenarios involve the operator “paying” or “giving back” actual money when the market price is higher than agreed? As opposed to just operating at a loss or less profit?
If you are willing to ignore the mechanics, then the result rounds to: The operator will receive the auctioned value of x £/MWh for each MWh delivered to the grid
If you are interested in the mechanics, then _I think_ (i.e. not first hand knowledge) the operator will join each auction (once per day for each 15 min interval of the next day) and offer his energy amount there. He will then receive the integral of (auction price) times (volume) from “the grid”. If that is too little money he then goes to the government and asks for a top up to (contract price) times (volume). If that was too much he has to pay the government the difference.
But again. That is purely mechanical. The end effect of the contracts is you will always receive say 80£ per MWh delivered. Independent of the MWh was worth 500£ in that 15 min interval or -50£. It’s “just” a risk transfer
Ah I’m seeing a possible confusion. There are two different auctions in the description. The first one is for the CfD price and happens (for each project) once. The second one is the daily-price-discovery one and happens daily
> at a rate that’s possibly less than what it cost to buy fuel?
You might need to sit down for this. The wind farms don't use fuel. Wind just happens, it's a natural phenomenon that has no real regard for our stupid "wind farm" even as we're harvesting gigawatts of power the wind doesn't ccare.
If you were thinking "Wait I thought all the providers have these contracts, not just renewables" then er no, they're a subsidy, the CfD is a subsidy scheme. That cheap to make, expensive to run open cycle gas turbine some asshole put on a local industrial estate doesn't get a CfD, it can offer to sell the resulting electricity at market prices, and really the big problem is as you observed, that's possibly less than what it costs to buy fuel. Yeah, it is, bad idea to keep building Open Cycle Gas Turbines I reckon. Sure enough the UK almostly exclusively has more expensive to build but cheaper to run Combined Cycle plants.
CfDs are used to subsidise renewable future power. A long term energy independence strategy. Even if you don't care about the planet warming and the sea levels rising you won't be burning all this gas in a thousand years 'cos there's not enough gas. Whereas the sun will shine until long after we're gone, and the accompanying winds won't stop either.
The size of the subsidy varies, if you're building a pilot plant of a new technology that you're sure will revolutionize clean energy but, alas, no-one ever made one that worked before, the government might be willing to pay you four or five times as much money for your energy, partly because they're not expecting you to actually make any energy because you will likely fail. If your plan's big problem is that it's way less mechanically reliable than you'd like, this is a big incentive to incrementally improve that reliability. If your device that involves being in and out of an incredibly powerful tidal stream of corrosive sea water at freezing temperatures makes power but doesn't crack, tear, fall to pieces or explode in the scheduled period of operation you're that much closer to actually having a useful technology and paying you five times over the odds for the MWh you did make is a reasonable price.
I wonder, what’s to stop an energy company with a mixture of RE and gas from disabling X% of their RE infrastructure, forcing gas to come online and the higher rate? Only the biggest producers control enough of the market to do it, but it seems plausible for the company to find specific demand scenarios where they could tip the price in their favor.
There's a big wind farm I drive by occasionally and sometimes most of the windmills are feathered. Some are turning, so there's clearly wind. I have assumed this is when the demand is low (or maybe negative).
That’s not necessarily true. In general a single windmill is more efficient at pulling energy out of the wind than two are. And the marginal costs of windmills are not zero. I.e. their maintenance cadence (also) scales with active hours. So it might be a “at this price-wind point it’s not profitable for us to run a second mill”
> Like if gas is $5 and RE is $1 the RE folks get $5 instead?
yes
if there's 1mW of gas in the grid then everyone gets paid the gas price
this is called pay-as-clear, and has some positives (strongly encourages RE construction), and some disadvantages (zero long term planning, paying gas generators absurd rates if they can squeeze in at the top of the auction)
UK government is consulting on changes to this system at present
There is no way of changing this. It’s how commodity markets work.
There are alternatives, like "pay as bid", which heavily incentives the best price guesser instead of the cheapest producers. And is a system more fragile against collusions in concentrated markets (i.e. a handful of big producers that agree on high bids).
of course there is
this is not the global oil market
the UK electricity market is a government creation, highly regulated, and only accessible to limited participants
30 minutely, day ahead, pay-by-clear auction markets are not a property of the universe
Electricty is a homogeneous good which is traded at one price independent of origin.
Why should an operator of wind turbine sell their kWh for less if the current price is high? That would be stupid.
The non renewable operator would be free to sell at a competitive price or not at all. Perhaps on nights when there’s no wind at sea they might be able to make their obsolete infrastructure pay for itself briefly.
But that is exactly what is happening. Each seller can offer their price and each bidder can also offer their price. And since running a gas turbine is more expensive than wind power they are forced by the market to turn their gas turbines off when there is wind. However when there is only a little wind they can power up their gas turbines and sell to the highest bidder. But since there is also a little bit wind, the wind power people can also sell to that highest bidder. That is how it happens that suddenly wind power is just as expensive as the gas turbines, because there is simply not as much wind power to go around for all the people that need electricity.
All countries have merit order and it's not insane
This line of chatter has been going around UK-centric online discussions and it's such a braindead line of thinking. Marginal pricing is used in a gazillion countries and is tried and tested.
You do marginal pricing because otherwise providers will simply bid what they think the crossover price will be - marginal prices lower prices in the long run because providers try to improve their margins and lower their bids.
Also renewables bid on the spot and day ahead markets really low because their cost is almost entirely capex (and also most are under CfD anyway so may as well bid 0) - the spread isn't nearly as good as the data would imply. If you didn't use marginal pricing you'd have them bidding higher to cover their capex.
That's not really "a system", that's how marginal pricing always works for fungible goods. If you need to buy 100 units of something, and the guy selling next to me can't go any lower than $10 without selling at a loss, I'm going to sell at $9.99 every time. Why would I do otherwise?
The point of this is that it's supposed to guarantee windfall profits for wind operators, to make it attractive to keep building out wind until all the marginal gas is pushed out of the market mix. The price being set by the highest-cost source in the mix is a feature for incentivizing buildout, not a bug.
You're kind of missing the point. Renewables use contracts for difference. The article we are discussing is the level of that CFD. So what ever the market price, renewables either give or receive money in line with the CFD.