New North Sea windfarms to get multi-national connections...

I'm wondering how the subsidy and support arrangements will work?

Currently in GB, windfarms bid into the Contract for Difference (CfD) auctions to secure an inflation-linked, fixed price contract for their generation, paid for by GB consumers, on the basis that all the power is flowing into GB, benefitting GB consumers.

Of course if that wind farm is now connected to two or more countries, with the power potentially flowing to different countries, varying continuously depending on wholesale prices, that's a much more complex question of how to determine where the power should flow, how that power should be valued and how the subsidy costs should be apportioned between the different countries and their consumers.

A free market. Hooray!

fixed price contract for their generation

As I understand it, it's fixed per unit price (per MWh) - so if the power goes elsewhere, they won't get paid for it.

   - Andy.

But another country will get electricity subsidised by the UK.  CfDs work on the basis that all the electricity is supplied into the UK, - a certain amount of capacity is being funded and the expectation is that the UK will benefit from getting power at a cheap rate when electricity prices are high, partly funded by us paying over the odds when electricity prices are low.

If the electricity goes elsewhere when prices are high then we lose out.  Of course, the UK would be quite happy not to pay over the odds for electricity when prices are low, but if prices are low will there really be that much demand from elsewhere?

TurboGen said:

Contract for Difference (CfD)

Is there a simple explanation of CfD? Most I've seen presume rather too much prior understanding, and start with intricacies that fail to explain what is going on.

It's not immediately obvious if the "CfDs" are bid (endlessly) in those half hourly periods (following some 'qualification' process  -power by the half hour).

Or, that the various suppliers submit a long period bid (multi-year), and are essentially guaranteed that price for the half hours, assuming they have availability to supply (pseudo bids for the half hours).

There is a perspective that has suppliers making their offers for each half hour, and then the grid buys it's demand at at the price of the supplier who is providing the marginal (i.e. at the margin) mega watt - all those who bid less then get more than requested, but never typically don't want to be a bidder whose cost is just above that margin cut-off.

Once the price point is determined (sort the bidders by price, versus cumulative total power offered[1]), then the secondary 'stability' and transmission capacity features ('curtailment') are applied, some what iteratively. [ 'curtailment' being where turbines will be paid for despite there being no way (as yet) to get their power to customers].

Is the basic CfD as described [1], or something else? I don't see 'CfD' being any different (in terms of competition between nations) from any other 'who am I contracted to for this half hour' sort of legal question.

Wind (and I'm guessing solar) gets a "special deal" in the electricity market - the assumption is that all the energy wind generators offer will be bought (minus that that cannot be delivered due to constraints and that which exceeds demand (or more accurately NGESO's ability to keep the grid stable)).  The forecasts of wind and solar availability therefore set a notional baseline generation around which the rest of the market takes place.

Wind generators with a CfD get paid the spot price.  If that spot price is less than the CfD price then the government makes up the difference, if the spot price is greater then the wind generator pays the government the difference - i.e. the wind generator gets a fixed price for the energy generated no matter what the spot price.

That guarantee is expected to work both ways - when agreeing the CfD price the government is taking a risk on the average price of electricity and the swings in the market, in return the wind generator agrees to build and maintain the generation facility.  If the wind generator was free to subsequently contract to supply others then the government potentially loses any upside it has on the deal and is effectively subsidising either the wind generator or their other customers.

Depends on the arrangements in the other countries and whether the new fields will get the current CfD arrangements, or something else.  I think Germany had something very similar to our FIT system before we did, and most EU countries have similar targets for moving away from volatile fossil fuels, so it's not just a case of the UK having "subsidies" when no-one else does. It might even be that other countries' subsidies are more generous than outs and we'd be benefitting unfairly at times. I dare say it would be possible to "harmonise" the financial arrangements so the electricity generated could go pro-rate to where is was of most use and the cost element shared equitably.

   - Andy.

As I understand it, there are at least three tiers to the electricity market - firstly there are bulk contracts between generators and suppliers (which underpin many of the "fixed price deals" you see nowadays as well a mitigating sudden price hikes in general), then there's the half-hour market which fills in the gaps (e.g. due to changes in weather) but whose prices are much more volatile, and finally there's the balancing market which deals with the minute-to-minute variations.

   - Andy.

CFDs are a long term way of price fixing to get around the unpredictable prices you get at an auction.

Imagine a coffee grower and a coffee buyer at an auction. The grower is nervous because they have no idea how much they are going to get paid per sack. The buyer is also nervous because they can't keep changing the price to their retail customers. 

So before the auction starts, they get together and agree a price between themselves. If the auction price turns out to be less than that agreement, the buyer will bung the seller some extra money to make up for it. If the price is higher, the seller will refund the extra to the buyer.

To be of any use, this needs to be a long term agreement between the two parties. 

This is one reason why the energy market in the UK is completely broken. We pretend that there's a half hourly auction for the wholesale price of electricity. But it's actually all been fixed before the auction ever happens.

CFDs are a long term way of price fixing to get around the unpredictable prices you get at an auction.

Imagine a coffee grower and a coffee buyer at an auction. The grower is nervous because they have no idea how much they are going to get paid per sack. The buyer is also nervous because they can't keep changing the price to their retail customers. 

So before the auction starts, they get together and agree a price between themselves. If the auction price turns out to be less than that agreement, the buyer will bung the seller some extra money to make up for it. If the price is higher, the seller will refund the extra to the buyer.

To be of any use, this needs to be a long term agreement between the two parties. 

This is one reason why the energy market in the UK is completely broken. We pretend that there's a half hourly auction for the wholesale price of electricity. But it's actually all been fixed before the auction ever happens.

The CfD offers more to the generator than your analogy.  The price isn't just agreed before the auction, it is agreed before the coffee grower even starts growing the coffee.  The only risk the coffee grower takes is their ability to grow coffee - i.e. plant seeds, maintain the plants and the weather, just as a CfD means that the only risks a wind generator takes are their ability to build a wind farm, maintain it and (not unlike coffee!) the weather.

Note that the support via CfDs is in addition to the support given by the market rules which effectively mean that wind and solar are purchased in preference to any other source.

Wind and solar cannot meaningfully take part in the traditional market where there are long term deals between generators and suppliers because they cannot guarantee to supply and so they are forced to sell at spot prices.

Also in many cases, it's the government that has negotiated the price, but the consumer is paying it. 

One of the conceptual difficulties is that any historic (aka 'traditional') market method that 'encourages' CO2 emissions is no longer acceptable, except as a truly last resort. There are quite a lot of poor studies that (e.g. looking at 100% hydro storage) make that category error. 

The fundamental issue is that the electricity supply system is, as a whole, a system, whilst economically and politically it is treated as a set of many disparate parts.  That means that wind generators do not pay the costs of having dispatchable plant available to cover for when nature doesn't provide or the cost of ensuring the grid has sufficient inertia to accommodate their low inertia generation.  Nor do wind generators have to worry about the fact that that dispatchable plant is now often designed to run intermittently which in turn means that those plants are often less efficient .  The ultimate example of that is the increase in big OCGTs in the UK.  Unless we want to live in a country where power is only available at the flick of a switch if the wind is blowing (despite the governments best efforts to lead us that way), then all of this hides the true economics of different energy sources.

Note that I'm deliberately not offering a view of whether wind is a good choice.  The economics are complex and sufficiently opaque that the man in the street stands no chance of having an informed view - that tends to lead to poor government choices as well.

Customers in the UK never even get the benefit of cheap wind energy on a windy day. So long as there is one gas fired power station running, the price of electricity is set by the price of gas.

The current neoliberal economics fails to account for 'externalities', such as climate change, so we are stuck with these arguments.

Simon Barker said:

Customers in the UK never even get the benefit of cheap wind energy on a windy day. So long as there is one gas fired power station running, the price of electricity is set by the price of gas.

For wind power contracted under CfDs, the price is fixed by their CfD agreement, it isn't affected by the market price. While it may be sold at the market price, set by the marginal power source (a CCGT, or OGCT, or even power across a European interconnector, of BESS etc), the actual cost to the consumer is the CfD price, because any surplus is recovered through the CfD scheme and goes back into the CfD pot, reducing costs at other times.

Where this criticism is valid, is for the earlier/older renewable generation which is subsidised under other schemes like Renewables Obligation and Feed in Tariffs, which pay a form of top-up on top of the wholesale price. But these schemes are now closed to new capacity, and all of the big projects in recent years and into the future are contracted under CfDs.

A lot of journalists don't appear to be aware of how the CfD system operates, so you see lots of articles blaming the cost of gas for pushing up all electricity costs, when in reality that is not the case. 

DShutt said:

The fundamental issue is that the electricity supply system is, as a whole, a system, whilst economically and politically it is treated as a set of many disparate parts.

Agree, it is the System Cost which is crucial, but unfortunately much of the debate in Britain takes place without awareness of this, so people use and compare the LCOE figures which represent just the cost of the generation, without that wider analysis of what the cost of the energy is once all of the costs of integrating it into the system are included, and the impacts on the costs of the wider generation mix.

The LCOE figures are widely used and compared, which give a very misleading view of the actual costs to the consumer once all the other costs are considered. They also distort public perceptions of what is best value for money - for example, where renewables LCOE are lower than say a baseload nuclear plant LCOE, but where the actual system cost and cost to the consumer could well be the reverse.

It's really quite an important topic, the area where the IET with its remit ought to be getting involved, to bring that consideration of the wider topic of system costs to help inform public debate and reporting.

Simon Barker said:

Customers in the UK never even get the benefit of cheap wind energy on a windy day.

Isn't the problem that it is difficult (impossible?) to store leccy in the required quantities?

Will we have red flags hoisted (OK messages by phone) announcing practically free energy to EV owners when there is surplus capacity? I doubt it; and even if we did, would it make any significant difference?

Net zero by 2050, or net zero ever? What tosh!

Nothing to do with net zero.  It's a stupid auction system set by the government and never fixed.  If it's a windy day, wind energy is dirt cheap.  If it's not windy, we don't have wind energy.

Under our auction system, every half hour energy providers bid a price that they are prepared to supply at.  It will actually take many providers to cover the country's needs, so the grid keeps adding energy providers, starting at the cheapest, until they have enough.  Then the price for all the electricity we get is set at the highest price they accepted.

Since we don't have enough wind farms or nuclear to supply the country, we always end up requiring at least some gas.  So the poor consumer gets no benefit at all from cheap wind energy. The wind farm operators get all the money.

If the energy system worked for the benefit of the consumer, then electricity would be cheap on a windy day and more expensive when it isn't.  Instead, it's expensive all the time.

The whole "it's the fault of net zero" is fossil fuel propaganda.  They hate the idea that we might one day stop buying their products, and try to poison the debate to prevent it happening.  If they can stop wind farms, we have to burn fossil fuels whatever they cost.