Windfarms able to access greater market revenues: Data collected by Cornwall Insight has shown that offshore windfarms delaying the beginning of their CfD contracts with the government, might have made substantially bigger profits since the start of 2022.

Under a government’s Contracts for Difference (CfD) agreement, favourable generators, are awarded a Strike Price for each unit of power1 that they generate during a competitive auction process. CfD supported assets contain a range of different renewable technologies, along with 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 broadly 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 displays a considerable commercial incentive for delaying the CfD, with Strike Prices for offshore wind in Allocation Round 2, taking place 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 figure out CfD payments in each hour for the offshore windfarms – which has averaged £187.42/MWh since the beginning of 2022 up to 14 May.

Of the 3,190 hourly periods from the biginning of the year to 14 May, the IMRP has been greater than £73.71/MWh in 3,072 (96%) and greater 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 brought about significant paybacks to the LCCC.

Under present regulation, theoretically, an offshore windfarm can commission anywhere inside of a 3-year window, with present assets that are now operational but have not yet activated their CfD making use of this to make extra revenue on the wholesale market.

Figure 1: Daily average IMRP vs selected offshore wind Strike Prices

Windfarms able to access greater market revenues

Source: EMR Settlement, LCCC, Cornwall Insight

Windfarms able to access greater market revenues

Lee Drummee, Analyst at Cornwall Insight announced:

“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 6 hours. In this case they collect 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 through 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 throughout the full 15-year CfD contract length. Generators can still commission within a further window after the TCW (2-years for offshore wind & one-year for other technologies); however, this will lead to the CfD term being shortened from its original 15-year length.

Windfarms able to access greater market revenues

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