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Are you aware of examples with a formal priority? My understanding was that solar and wind are just necessarily the low bids so that's why they always sell int

Are you aware of examples with a formal priority? My understanding was that solar and wind are just necessarily the low bids so that's why they always sell into basically any market until they saturate all demand. They're the low bids because if your power plant needs fuel, you must bid high enough to pay for the fuel, at least on average and at least most of the time, or else you go bankrupt when you can't pay your fuel bills. But wind and solar don't need fuel. While you're not going to make a profit selling wind electricity for $5 per MWh because of your enormous capital costs - you make more money doing that than if you bid $50 per MWh and lost the auction to a gas plant. These auctions actually pay everybody the same price, so even though your bid was $5, if some $45 per MWh gas plants were needed to hit the target capacity, you're getting $45 per MWh for your wind power. But because your bid was low, you always sell at whatever the price is.

robertlagrant 3y ago
Good challenge! This is how I understand the UK government's CfD[0] regarding renewable energy strike prices. As long as you don't go above the max, you can always sell. [0] https://www.gov.uk/government/news/boost-for-offshore-wind-as-government-raises-maximum-prices-in-renewable-energy-auction https://www.gov.uk/government/news/boost-for-offshore-wind-a...
- tialaramex 3y ago
  Ah, I see, you've misunderstood what the strike price is. The electricity market isn't paying that strike price, it's just paying the market rate. The government (via the "Low Carbon Contracts Company" which it owns for this purpose) settles the difference (hence "Contracts for Difference") between the strike price† and the market price of electricity when you sell it. There are three prices to think about here: A. The price you are willing to sell your electricity to the market for. This is probably very low, let's say it's £1 per MWh. B: The settled price for a period, paid by the market. The market pays everybody a price determined by finding the minimum price for which it could buy enough electricity (with some margin). This will usually be higher than A, if it was lower you just won't sell electricity, for a coal or gas plant this means you needn't burn fuel to make electricity. Maybe B is £48 per MWh. C: The strike price from your government auction. This will often be higher than prevailing market prices (B) but not always. LCCC settles the difference with you, if C is higher than B (the usual case) you get enough money to make that up, if B is higher than C, you pay them the difference. C might be £67 per MWh. So in our worked example we bid A = £10, the market settled at B = £48, but our net reward is C = £67. If other people's prices were way higher maybe a major gas pipeline exploded, maybe A = £10, but B = £200, however our net reward is still C = £67. Why would anybody want a CfD? Because all the cost is in building the wind farm, whereas all the profit comes from long term energy supplying, and it's hard to predict what that'll pay. Knowing, a decade in advance, that you're getting £67 per MWh, no matter what, makes it much easier to find investors for your wind farm project.

robertlagrant 3y ago

Good challenge! This is how I understand the UK government's CfD[0] regarding renewable energy strike prices. As long as you don't go above the max, you can always sell. [0] https://www.gov.uk/government/news/boost-for-offshore-wind-as-government-raises-maximum-prices-in-renewable-energy-auction https://www.gov.uk/government/news/boost-for-offshore-wind-a...

tialaramex 3y ago
Ah, I see, you've misunderstood what the strike price is. The electricity market isn't paying that strike price, it's just paying the market rate. The government (via the "Low Carbon Contracts Company" which it owns for this purpose) settles the difference (hence "Contracts for Difference") between the strike price† and the market price of electricity when you sell it. There are three prices to think about here: A. The price you are willing to sell your electricity to the market for. This is probably very low, let's say it's £1 per MWh. B: The settled price for a period, paid by the market. The market pays everybody a price determined by finding the minimum price for which it could buy enough electricity (with some margin). This will usually be higher than A, if it was lower you just won't sell electricity, for a coal or gas plant this means you needn't burn fuel to make electricity. Maybe B is £48 per MWh. C: The strike price from your government auction. This will often be higher than prevailing market prices (B) but not always. LCCC settles the difference with you, if C is higher than B (the usual case) you get enough money to make that up, if B is higher than C, you pay them the difference. C might be £67 per MWh. So in our worked example we bid A = £10, the market settled at B = £48, but our net reward is C = £67. If other people's prices were way higher maybe a major gas pipeline exploded, maybe A = £10, but B = £200, however our net reward is still C = £67. Why would anybody want a CfD? Because all the cost is in building the wind farm, whereas all the profit comes from long term energy supplying, and it's hard to predict what that'll pay. Knowing, a decade in advance, that you're getting £67 per MWh, no matter what, makes it much easier to find investors for your wind farm project.