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UK offshore wind prices come in 40% cheaper than gas in record auction

electrek.co

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Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#11

Post by MakersF »

CursedSilicon wrote: post #3
Havoc wrote: post #2

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.

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

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#12

Post by tialaramex »

boothby wrote: post #4
CursedSilicon wrote: post #3

Earlier 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…

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.

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#13

Post by 0cf8612b2e1e »

boothby wrote: post #4
CursedSilicon wrote: post #3

Earlier 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…

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.

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#15

Post by cbmuser »

Havoc wrote: post #2

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.

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.

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#16

Post by cbeach »

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.

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#17

Post by cbmuser »

blibble wrote: post #10
CursedSilicon wrote: post #3

Earlier 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

> 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…

There is no way of changing this. It’s how commodity markets work.

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#18

Post by laurencerowe »

tialaramex wrote: post #12
boothby wrote: post #4

Earlier quoted context omitted.

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…

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 mome…

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...

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#19

Post by otherme123 »

Havoc wrote: post #2

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 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.

Re: UK offshore wind prices come in 40% cheaper than gas in record auction

#20

Post by _fizz_buzz_ »

Havoc wrote: post #2

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.

> 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.

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