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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 t

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 9mo 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 9mo ago
  [deleted]
- tialaramex 9mo 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 9mo 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 9mo 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)
    - hnaccount_rng 9mo ago
      Think of it this way: as a windfarm operator you know your costs and you know your expected amount of energy produced. But you don’t know the precise timing and therefore the market value at generation time. From the first two you can calculate what you need in terms of £/MWh (include whatever profit you want in there). Now you can go to the government and bid that price in the auction. If you win, you have a safe profit and all risk (and upside potential) now lies with the government. As GP said, in the case of 2022 you would have lost out on revenue. But that’s the price foe guaranteed margins The CfD part is a technical detail. It ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale. What I’m not sufficiently familiar with is whether you _have_ to go to such an auction (i.e. whether the auction also is the mechanism of capacity planning) or whether you are free to bypass this system and just hook up your wind park and carry the risk yourself. But functionally this is an insurance scheme for profits, with a market based pricing system
      - zingar 9mo ago
        > ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale Still missing something in relation to a point above. Does one of these scenarios involve the operator “paying” or “giving back” actual money when the market price is higher than agreed? As opposed to just operating at a loss or less profit?
- 0cf8612b2e1e 9mo 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 9mo 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 9mo 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 9mo 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 9mo ago
  There is no way of changing this. It’s how commodity markets work.
  - otherme123 9mo 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 9mo 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 9mo 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

boothby 9mo 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 9mo ago
[deleted]
tialaramex 9mo 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 9mo 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 9mo 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)
  - hnaccount_rng 9mo ago
    Think of it this way: as a windfarm operator you know your costs and you know your expected amount of energy produced. But you don’t know the precise timing and therefore the market value at generation time. From the first two you can calculate what you need in terms of £/MWh (include whatever profit you want in there). Now you can go to the government and bid that price in the auction. If you win, you have a safe profit and all risk (and upside potential) now lies with the government. As GP said, in the case of 2022 you would have lost out on revenue. But that’s the price foe guaranteed margins The CfD part is a technical detail. It ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale. What I’m not sufficiently familiar with is whether you _have_ to go to such an auction (i.e. whether the auction also is the mechanism of capacity planning) or whether you are free to bypass this system and just hook up your wind park and carry the risk yourself. But functionally this is an insurance scheme for profits, with a market based pricing system
    - zingar 9mo ago
      > ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale Still missing something in relation to a point above. Does one of these scenarios involve the operator “paying” or “giving back” actual money when the market price is higher than agreed? As opposed to just operating at a loss or less profit?
0cf8612b2e1e 9mo 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 9mo 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 9mo 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 9mo 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 9mo ago
There is no way of changing this. It’s how commodity markets work.
- otherme123 9mo 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 9mo 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 9mo 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