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.
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.
> The actual cost has to price in the impact of using it.
Is there real evidence the collected tax revenue is actually offsetting carbon emissions?
There's a lot of fraud in carbon credit systems - where often the sole benefit is feeling and/or looking good.
Is this self-imposed tax actually having a real result - or is it just artificially increasing the price of energy? If the latter, then it's not really fair to claim it's the actual cost.
.. you are commenting on an article about how non-carbon-emitting energy options are beating out polluting alternatives, aided by exactly these taxes, so obviously yes, they are working exactly as intended: price signals for the market to get carbon out of the energy system
The purpose of the tax is not to raise money to plant trees, it’s to raise the cost of emissions so that markets
move away from them
TFA's claim is offshore wind prices are 40% cheaper than gas.
The parent comment stated "actual cost has to price in the impact of using it". Most people would agree on this. However, for both claims to be true, the collected tax revenue must be spent offsetting the impact of that gas usage - not simply reducing gas usage (ie. that consumed gas isn't being compensated for).
If the UK government is spending that tax revenue on anything it wants, then it's not the actual cost, is it?
>* 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"?
When your country emits more CO2 there’s more CO2 in the atmosphere independent of what anyone else does.
So it’s true each individual country only receives a fraction of the negative impact of their own emissions, but that fraction isn’t zero and therefore should be taxed to maximize economic efficiency. Further joining international treaties to agree to collectively tax carbon at a higher rate representing the harm across all those countries is even more economically efficient.
The government is literally comparing a raw price with a price+tax … and what makes this even more disingenuous is that the government themselves applied this tax. AND the tax is absurdly high!
> 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.
The entire sector will need government bailouts within a decade. The executives running these wind power companies are going to run off with huge bonuses, the company is going to default on its debts, and the government is going to force the taxpayers to make the banks whole because "we need power!"
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?
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.
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.
"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.
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.
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?
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.
> 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.
It is exactly why the market is the best approach for electricity. Everyone is incentivized to produce electricity as cheap as they can. Otherwise it doesn’t pay off to produce cheaper because one gets punished by having to sell for less anyway.
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.
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.
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.
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.
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.
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.
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
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.
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.
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)
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
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.
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).
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”
> 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
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).
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.
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.
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.
For 5, add in that the new grid capacity is years behind schedule, and the existing grid capacity needs to come offline because it's decrepit, and you also have a policy to connect new sources immediately
It leads to a lot of telling new sources to dump their energy, and paying them to dump their energy, while simultaneously paying old gas generators (nearer the demand) to fire up. All for the want of more grid capacity.
> 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.
This does not work at scale. Sure, there is plenty of anecdotes how you can successfully play this game as a consumer living in a rural house with electric car, power wall, and rooftop solar, but try to telling about it to someone living in a high-rise apartment or to a heavy industry business. Your preaching will fall on deaf ears.
IIRC there are several utilities in the UK which provide option to price electricity dynamically, but they are not popular because people do not want to play this game. They want reliable supply of electricity for reasonable prices. Trying to mold consumption to satisfy intermittency of generation is nothing more than shifting the externality akin to telling people "you must plant trees to offset CO2 emissions!".
The most popular UK electricity retailer is Octopus Energy which is specifically focused on variable prices and flexible consumer demand. By what metric do you mean variable rate retailers are not popular?
Intermittency is already handled by the price mechanisms, they are set quarter-hourly; if you’re not available when there is high demand you don’t get paid.
The marginal price windfalls happen specifically when you’re able to deliver at a low cost when demand is high in the same ISP.
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_e...
Related:
UK secures record supply of offshore wind projects
https://news.ycombinator.com/item?id=46614777
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.
> The actual cost of gas
The actual cost has to price in the impact of using it.
For example, it's cheaper for UK water companies to pump sewage into rivers and onto beaches:
https://www.bbc.com/news/articles/cz9kz8ydjpno
https://www.bbc.com/news/uk-england-london-67357566
https://www.bbc.com/news/articles/c5yprnd848ko
https://www.theguardian.com/environment/2025/sep/16/sewage-o...
But maybe it's a nice idea to force them to deal with sewage properly so you don't have to live in rivers of shit.
> The actual cost has to price in the impact of using it.
Is there real evidence the collected tax revenue is actually offsetting carbon emissions?
There's a lot of fraud in carbon credit systems - where often the sole benefit is feeling and/or looking good.
Is this self-imposed tax actually having a real result - or is it just artificially increasing the price of energy? If the latter, then it's not really fair to claim it's the actual cost.
Carbon tax is not about offsetting emissions, it's about disincentivising fossil fuels.
.. you are commenting on an article about how non-carbon-emitting energy options are beating out polluting alternatives, aided by exactly these taxes, so obviously yes, they are working exactly as intended: price signals for the market to get carbon out of the energy system
The purpose of the tax is not to raise money to plant trees, it’s to raise the cost of emissions so that markets move away from them
TFA's claim is offshore wind prices are 40% cheaper than gas.
The parent comment stated "actual cost has to price in the impact of using it". Most people would agree on this. However, for both claims to be true, the collected tax revenue must be spent offsetting the impact of that gas usage - not simply reducing gas usage (ie. that consumed gas isn't being compensated for).
If the UK government is spending that tax revenue on anything it wants, then it's not the actual cost, is it?
>* 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_op...
Yes, it is completely reasonable if you understand the concept of externalities.
> 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.
When your country emits more CO2 there’s more CO2 in the atmosphere independent of what anyone else does.
So it’s true each individual country only receives a fraction of the negative impact of their own emissions, but that fraction isn’t zero and therefore should be taxed to maximize economic efficiency. Further joining international treaties to agree to collectively tax carbon at a higher rate representing the harm across all those countries is even more economically efficient.
Do you apply this logic for everything?
Dumping your waste, others be damned, is a hell of a way to live.
>>Is that unreasonable
It’s not unreasonable to report the facts and let the reader decide. The carbon tax is a readily available fact where in your example is subjective.
Nothing you've said actually means anything.
The self-imposed tax is there and isn't going anywhere, so it's included in the price.
The other two points are accounted for in the strike price, because this capacity came into being and is now offering electricity at the strike price.
The government is literally comparing a raw price with a price+tax … and what makes this even more disingenuous is that the government themselves applied this tax. AND the tax is absurdly high!
> 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.
Thank fuck I am 100% off grid.
The entire sector will need government bailouts within a decade. The executives running these wind power companies are going to run off with huge bonuses, the company is going to default on its debts, and the government is going to force the taxpayers to make the banks whole because "we need power!"
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?
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.
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.
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.
"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.
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.
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?
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.
> 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.
That's why "market" isn't a good approach for electricity.
It is exactly why the market is the best approach for electricity. Everyone is incentivized to produce electricity as cheap as they can. Otherwise it doesn’t pay off to produce cheaper because one gets punished by having to sell for less anyway.
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.
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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)
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
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...
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.
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).
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”
> 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
There is no way of changing this. It’s how commodity markets work.
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).
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
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.
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.
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.
For 5, add in that the new grid capacity is years behind schedule, and the existing grid capacity needs to come offline because it's decrepit, and you also have a policy to connect new sources immediately
It leads to a lot of telling new sources to dump their energy, and paying them to dump their energy, while simultaneously paying old gas generators (nearer the demand) to fire up. All for the want of more grid capacity.
https://ukerc.ac.uk/news/transmission-network-unavailability...
This is addressed by the capacity market mechanism.
> 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.
I've never seen a red light, but the UK has had multiple electricity rates for households since the 1980s.
https://en.wikipedia.org/wiki/Economy_7
My parents would set timers on the dishwasher, washing machine etc too run at night.
This does not work at scale. Sure, there is plenty of anecdotes how you can successfully play this game as a consumer living in a rural house with electric car, power wall, and rooftop solar, but try to telling about it to someone living in a high-rise apartment or to a heavy industry business. Your preaching will fall on deaf ears.
IIRC there are several utilities in the UK which provide option to price electricity dynamically, but they are not popular because people do not want to play this game. They want reliable supply of electricity for reasonable prices. Trying to mold consumption to satisfy intermittency of generation is nothing more than shifting the externality akin to telling people "you must plant trees to offset CO2 emissions!".
The most popular UK electricity retailer is Octopus Energy which is specifically focused on variable prices and flexible consumer demand. By what metric do you mean variable rate retailers are not popular?
Intermittency is already handled by the price mechanisms, they are set quarter-hourly; if you’re not available when there is high demand you don’t get paid.
The marginal price windfalls happen specifically when you’re able to deliver at a low cost when demand is high in the same ISP.
This just seems like data-free fear mongering.