By Paul Homewood
NZW has a long detailed analysis of how CfDs work.
I would like to add some actual numbers to it:
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Advocates of wind and solar electricity argue that Contracts for Difference (CfDs) are good value because they deliver green power at fixed prices, which protect us from volatility in the fossil fuel market. Critics argue that wind and solar CfDs are expensive relative to the alternatives, and that this reveals that the claimed cost reductions in these technologies under the Levelised Cost of Electricity (LCOE) metric are illusory when one takes into account a wider range of factors that cannot be avoided in reality. How should we judge the value of CfDs?
At one level, the CfD itself reveals whether it is costing or saving money. It guarantees a fixed value (the strike price) to the operator, regardless of market prices. If the market reference price is more than the strike price, the operator has to pay the difference to the Low Carbon Contracts Company (LCCC), which administers the scheme. This value is a net gain to electricity customers. If the market reference price is less than the strike price, the LCCC pays the operator the difference, so as to ensure it receives the strike price in the round. This value is then a net loss to electricity customers.
To date, strike prices have mostly been well above the market reference price. Consumers have had to contribute material sums to pay wind and solar operators their premium over the market value. However, for around a year from late 2021, when prices surged, the strike prices were below the market reference prices on average, and CfDs saved consumers some money.
https://www.netzerowatch.com/all-news/the-cost-of-contracts-for-difference
It is misleading to say that “for around a year from late 2021, when prices surged, the strike prices were below the market reference prices on average, and CfDs saved consumers some money”, as the graph below shows:
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https://dp.lowcarboncontracts.uk/dataset/actual-cfd-generation-and-avoided-ghg-emissions
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To date, the subsidy bill for CfD has amounted to £10.6billion. Even during 2022, when gas prices spiked, consumers still had to pay £1.3 billion to subsidise renewables. It may be true that savings were made for short periods during that time, and also that some of the lower prices contracts returned money to consumers. But overall CfDs still cost consumers money during 2022.
While this was less than the year before, it should also be pointed out that during the lockdowns of 2020 energy prices fell sharply, meaning that the subsidy paid was much greater. Indeed, taking 2020 and 2022 together, it is apparent that electricity customers were much worse off overall.
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The analysis also questions whether CfDs will save us money in future:
“With the plans (of all incumbent parties, though Labour’s are the ones that now count) to massively increase the amount of wind and solar on the grid, future costs are more important than the historic figures. Proponents claim that the costs of these technologies are still falling. The future costs of fossil fuels and other technologies (e.g. nuclear) are uncertain. So the past (as usual) is not necessarily a guide to the future. Perhaps CfDs will become a way, not only of delivering green electricity, but also of saving consumers money? That is a common claim, not only of eco-socialists, but also of so-called free-market environmentalists.
I don’t pretend to know. Cost trends are not endlessly linear, but neither is it easy to know when the discontinuity will occur. Those who claim to know that they won’t save consumers’ money make the same mistake as those who claim to know that they will. We will find out in due course. But we can at least be clear how that judgment should be made.”
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While it is stating the obvious to say that nobody knows what fossil fuel prices will be in the future, the analysis is remiss in not stating the costs that we do know now– the Administrative Strike Prices set for this year’s CfD auction. Offshore wind, in particular, is currently priced at around £102/MWh. We also know that the wholesale electricity prices have ranged between around £60 and £70/MWh this year, and that these sort of prices are consistent with historical trends prior to the pandemic and Ukraine war:
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OFGEM
Given the facts we do have at hand, while diversity of energy supply is important, there is clearly not an economic case for continuance of CfDs. Investors should take the risk themselves, and not customers.