UK offshore wind prices come in 40% cheaper than gas in record auction
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Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#2Now 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.
Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#3Now 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.
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
Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#4Now 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.
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 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.
Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#5Related:
UK secures record supply of offshore wind projects
Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#6Now 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.
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?
Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#7Now 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 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.
Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#8Now 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.
Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#9Earlier quoted context omitted.
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 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…
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Re: UK offshore wind prices come in 40% cheaper than gas in record auction
#10Now 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.
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
> 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