7 ms·

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

by 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”

by boothby 9mo ago

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”