Windfarms on to a windfall through delaying start of contracts
Offshore windfarms operators that delayed the start of their ‘contracts for difference’ (CfD) would have made significantly greater profits this year than other operators, revealed Cornwall Insight.
Data collected from the energy specialist suggests shows a significant commercial interest in stalling on the beginning of contracts in the sector.
Under the Government’s CfD agreement, successful generators are awarded a ‘strike price’ for every unit of power they generate through a competitive auction process.
CfD supported assets include a variety of different renewable technologies, such as offshore wind.
If power prices go above the strike price, generators pay the Low Carbon Contracts Company (LCCC) the difference, and vice versa.
There have been widespread reports operators of offshore windfarms with CfD agreements are choosing to delay the start of their CfD terms in order to take advantage of high wholesale power prices and avoid having to pay additional revenue back to the LCCC.
This is backed by Cornwall Insight’s findings, which revealed strike prices for offshore wind in Allocation Round 2 held in 2017 were set at £73.71/per megawatt hour (MWh) and £94.81/MWh.
This compares unfavourably with the Intermittent Market Reference Price (IMRP) – which is 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 per cent) and higher than £94.81/MWh in 2,892 (91 per cent) 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 regulations, theoretically, an offshore windfarm can commission anywhere within a three-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.
Lee Drummee, analyst at Cornwall Insight said: “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.”