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

165 points by doener 10mo ago

Havoc 10mo ago
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.
- CursedSilicon 10mo ago
  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
  - boothby 10mo ago
    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.
    - deleted 10mo ago
      [deleted]
    - tialaramex 10mo ago
      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.
      - laurencerowe 10mo ago
        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-farm-taking-nearly-three-times-its-cfd-price-in-august-2024 https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind...
      - zingar 10mo ago
        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)
        10mo ago
    - 0cf8612b2e1e 10mo ago
      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.
      - SoftTalker 10mo ago
        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).
        hnaccount_rng 10mo ago
        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”
  - blibble 10mo ago
    > 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
    - cbmuser 10mo ago
      There is no way of changing this. It’s how commodity markets work.
      - otherme123 10mo ago
        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).
      - blibble 10mo ago
        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
  - MakersF 10mo ago
    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
- tialaramex 10mo ago
  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?
  - hkt 10mo ago
    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.
- Analemma_ 10mo ago
  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.
- bryanlarsen 10mo ago
  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.
  - QuantumGood 10mo ago
    "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.
    - bryanlarsen 10mo ago
      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.
  - Havoc 10mo ago
    > 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-fiction https://www.nationalgrid.com/the-great-grid-upgrade/fact-or-...
- otherme123 10mo ago
  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.
- deleted 10mo ago
  [deleted]
- cbmuser 10mo ago
  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.
  - zingar 10mo ago
    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.
    - _fizz_buzz_ 10mo ago
      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.
- _fizz_buzz_ 10mo ago
  > 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.
  - KptMarchewa 10mo ago
    That's why "market" isn't a good approach for electricity.
    - mr_00ff00 10mo ago
      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.
      - hkt 10mo ago
        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.
        mr_00ff00 10mo ago
        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.
- benj111 10mo ago
  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.
- Moldoteck 10mo ago
  All countries have merit order and it's not insane
- chippiewill 10mo ago
  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.
ChrisArchitect 10mo ago
Related: UK secures record supply of offshore wind projects https://news.ycombinator.com/item?id=46614777 https://news.ycombinator.com/item?id=46614777
cbeach 10mo ago
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.
- bryanlarsen 10mo ago
  > 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.
- gruez 10mo ago
  >* 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_operation https://en.wikipedia.org/wiki/Concentrated_animal_feeding_op...
  - BJones12 10mo ago
    > 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.
wcoenen 10mo ago
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_energy) https://en.wikipedia.org/wiki/Contracts_for_Difference_(UK_e...
linuxftw 10mo ago
[flagged]
- chilmers 10mo ago
  So RWE, the German multinational that won the largest share of this auction, with a yearly revenue of €29bn and an existing 153.2 TWh of power generation, is going to need a bailout from the British government, in the next four years, over a project to supply 7GW?
  - linuxftw 10mo ago
    Revenue isn't profits. Their free cash flow has been negative billions for the last few years. A major capital project like this can only result in a bailout.
marsven_422 10mo ago
[dead]
CrzyLngPwd 10mo ago
Thank fuck I am 100% off grid.
fuoqi 10mo ago
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.
- bryanlarsen 10mo ago
  This is addressed by the capacity market mechanism.
- nothrabannosir 10mo ago
  > 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.
simplisticelk 10mo ago
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.
- bryanlarsen 10mo ago
  Operating costs dominate the cost of natural gas electricity, not the capital costs. An idled gas plant does save considerable money.
  - simplisticelk 10mo ago
    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.
    - actionfromafar 10mo ago
      If electricity spot prices is cheap enough (when available), then people will eventually find uses for it. This will drive economic development.
      - simplisticelk 10mo ago
        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.
chickenbig 10mo ago
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-generation-costs-2025 https://www.gov.uk/government/publications/electricity-gener... [1] https://assets.publishing.service.gov.uk/media/6967b0c806fabb0212703506/annex-a-additional-estimates-and-key-assumptions-2025.xlsx https://assets.publishing.service.gov.uk/media/6967b0c806fab...

165 points by doener 10mo ago

Havoc 10mo ago

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.

CursedSilicon 10mo ago
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
- boothby 10mo ago
  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.
  - deleted 10mo ago
    [deleted]
  - tialaramex 10mo ago
    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.
    - laurencerowe 10mo ago
      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-farm-taking-nearly-three-times-its-cfd-price-in-august-2024 https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind...
    - zingar 10mo ago
      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)
      - 10mo ago
  - 0cf8612b2e1e 10mo ago
    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.
    - SoftTalker 10mo ago
      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).
      - hnaccount_rng 10mo ago
        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”
- blibble 10mo ago
  > 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
  - cbmuser 10mo ago
    There is no way of changing this. It’s how commodity markets work.
    - otherme123 10mo ago
      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).
    - blibble 10mo ago
      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
- MakersF 10mo ago
  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
tialaramex 10mo ago
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?
- hkt 10mo ago
  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.
Analemma_ 10mo ago
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.
bryanlarsen 10mo ago
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.
- QuantumGood 10mo ago
  "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.
  - bryanlarsen 10mo ago
    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.
- Havoc 10mo ago
  > 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-fiction https://www.nationalgrid.com/the-great-grid-upgrade/fact-or-...
otherme123 10mo ago
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.
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cbmuser 10mo ago
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.
- zingar 10mo ago
  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.
  - _fizz_buzz_ 10mo ago
    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.
_fizz_buzz_ 10mo ago
> 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.
- KptMarchewa 10mo ago
  That's why "market" isn't a good approach for electricity.
  - mr_00ff00 10mo ago
    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.
    - hkt 10mo ago
      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.
      - mr_00ff00 10mo ago
        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.
benj111 10mo ago
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.
Moldoteck 10mo ago
All countries have merit order and it's not insane
chippiewill 10mo ago
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.

ChrisArchitect 10mo ago

Related: UK secures record supply of offshore wind projects https://news.ycombinator.com/item?id=46614777 https://news.ycombinator.com/item?id=46614777

cbeach 10mo ago

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.

bryanlarsen 10mo ago
> 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.
gruez 10mo ago
>* 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_operation https://en.wikipedia.org/wiki/Concentrated_animal_feeding_op...
- BJones12 10mo ago
  > 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.

wcoenen 10mo ago

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_energy) https://en.wikipedia.org/wiki/Contracts_for_Difference_(UK_e...

linuxftw 10mo ago

[flagged]

chilmers 10mo ago
So RWE, the German multinational that won the largest share of this auction, with a yearly revenue of €29bn and an existing 153.2 TWh of power generation, is going to need a bailout from the British government, in the next four years, over a project to supply 7GW?
- linuxftw 10mo ago
  Revenue isn't profits. Their free cash flow has been negative billions for the last few years. A major capital project like this can only result in a bailout.

marsven_422 10mo ago

[dead]

CrzyLngPwd 10mo ago

Thank fuck I am 100% off grid.

fuoqi 10mo ago

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.

bryanlarsen 10mo ago
This is addressed by the capacity market mechanism.
nothrabannosir 10mo ago
> 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.

simplisticelk 10mo ago

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.

bryanlarsen 10mo ago
Operating costs dominate the cost of natural gas electricity, not the capital costs. An idled gas plant does save considerable money.
- simplisticelk 10mo ago
  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.
  - actionfromafar 10mo ago
    If electricity spot prices is cheap enough (when available), then people will eventually find uses for it. This will drive economic development.
    - simplisticelk 10mo ago
      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.

chickenbig 10mo ago

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-generation-costs-2025 https://www.gov.uk/government/publications/electricity-gener... [1] https://assets.publishing.service.gov.uk/media/6967b0c806fabb0212703506/annex-a-additional-estimates-and-key-assumptions-2025.xlsx https://assets.publishing.service.gov.uk/media/6967b0c806fab...