Data collated by Cornwall Insight has shown that offshore windfarms delaying the start of their CfD contracts with the government, could have made significantly greater profits since the start of 2022.
Under a government’s Contracts for Difference (CfD) agreement, successful generators, are awarded a Strike Price for every unit of power1 that they generate through a competitive auction process. CfD supported assets include a variety of different renewable technologies, including offshore wind. If power prices go above the Strike Price generators pay the Low Carbon Contracts Company (LCCC) the difference, and vice versa. It has been widely reported that offshore windfarms with CfD agreements are choosing to delay the start of their CfD terms2 in order to take advantage of high wholesale power prices and avoid having to pay additional revenue back to the LCCC.
The data shows a significant commercial incentive for delaying the CfD, with Strike Prices for offshore wind in Allocation Round 2, held in 2017, set at £73.71/MWh and £94.81/MWh (both prices in current money), compared with the Intermittent Market Reference Price (IMRP) – used to determine CfD payments in each hour for the offshore windfarms – which has averaged £187.42/MWh since the start of 2022 up to 14 May.
Of the 3,190 hourly periods from the start of the year to 14 May, the IMRP has been higher than £73.71/MWh in 3,072 (96%) and higher than £94.81/MWh in 2,892 (91%) of them. If plants with these Strike Prices had activated their CfDs at the start of the year, this would have resulted in significant paybacks to the LCCC.
Under current regulation, theoretically, an offshore windfarm can commission anywhere within a 3-year window, with current assets that are now operational but have not yet activated their CfD making use of this to make additional revenue on the wholesale market.
Figure 1: Daily average IMRP vs selected offshore wind Strike Prices
Lee Drummee, Analyst at Cornwall Insight said:
“While the current rules providing for delays to the activation of CfDs were mostly likely written to provide leeway for unexpected setbacks to projects, they also allow for conscious delays from developers. The Department for Business, Energy and Industrial Strategy has urged companies to play fairly, especially in these trying times for consumers, however, the truth is, currently generators are well within their rights to delay support under the CfD scheme.
“The CfD mechanism is largely an effective tool for encouraging investment in renewables, whilst guarding against excess profits, and rising consumer prices. There are some fears that alternative suggestions on how to control returns, including the windfall tax, could be counterproductive to the UK’s decarbonisation efforts. However, there will also be questions raised around the fairness of generators in taking such an approach to their CfD contract and whether the CfD terms should be amended for future rounds to account for commissioning during periods of very high market prices.”
Reference:
1. Exemption for CfDs in AR2 and AR3 when the reference price is negative for at least six hours. In this case they receive no payments during the entirety of the period.
2. As part of the CfD application process, project developers must submit a Target Commissioning Date and a Target Commissioning Window (TCW) for the project. The TCW is a 12-month window during which the developer expects to commission the relevant asset, and once submitted cannot be changed. Subsequently the TCW also represents the window in which an asset can commence its CfD, after passing the necessary Operational Conditions, and receive payments across the full 15-year CfD contract length.
Generators can still commission within a further window after the TCW (two-years for offshore wind and one-year for other technologies); however, this will result in the CfD term being shortened from its original 15-year length.
–Ends
Notes to Editors
For more information, please contact: Verity Sinclair at v.sinclair@cornwall-insight.com
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About the Cornwall Insight Group
Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.
