From the Daily Skeptic
Author: David Telfer
The Low Carbon Contracts Company (LCCC) administers the Contract for Difference (CfD) subsidy scheme and publishes data showing our costs. Data is usually released about 10 days later and is sometimes adjusted. We now have complete data for August 2024, and it's stable enough to do some reasonable analysis.
The overall subsidy level has increased
The headline news is that overall CFD subsidy rose sharply in August 2024, with a total reduction of £237 million, the third highest total on record and the highest level so far in August (see Figure 1).
The total is an increase of £84.2m on July's total. The main driver of growth was offshore wind, which was £74.5m more than a month ago. The total amount of subsidies in August this year was also £123.8 million higher than in August 2023. 5.1 million pounds for wind power.
There are many reasons for the increase in subsidies since last year. First and most obviously, since last year, more and more wind farms have launched CFDs. The Moray East and Hornsea Project 2 offshore schemes came online earlier this year, as did the Sneddon onshore wind farm. Additionally, the CfD portion of the Drax biomass plant was completely unused in August last year, but attracted £25.6 million in subsidies in August 2024.
load factor
However, the number of turbines applying for subsidies is not the only driver of the subsidy increase. The load factor also increases. This means that electricity production from both onshore and offshore wind farms this month is close to the theoretical maximum (see Figure 2).
Using the nameplate capacity of each installation recorded by the LCCC, we can calculate the load factors for each project and aggregate them by technology. Load factors at CfD-funded offshore wind farms reached 34.7% in August 2024, the third highest August on record and the highest level since August 2020, up three percentage points from last year. Onshore wind power reached 24.9%, the second-highest August load factor on record, higher than last year's 16.7%.
More wind means more electricity, and all else being equal, more electricity means more subsidies.
Subsidy per megawatt hour
Other factors that influence the level of subsidy are the CFD execution price and the reference price used to calculate the level of subsidy. For offshore wind, the weighted average strike price has fallen by £23/MWh from around £178/MWh in August 2023 to £155/MWh this year. This is due to the addition of the previously mentioned Moray East and Hornsea 2 projects, both of which have executed at lower prices than earlier offshore wind farms. The execution price for onshore wind increased by a few pounds from last year to £113/MWh, while the execution price for solar increased by £4 to £110/MWh.
However, the Intermittent Market Reference Price (IMRP), which serves as the benchmark for the price at which renewable energy electricity is sold in the market, fell sharply from last year. Average IMRP weighted by generation has fallen from £76/MWh in August 2023 to around £51/MWh in August 2024, a drop of around £25/MWh.
The subsidy per MWh is calculated as the difference between the execution price and the IMRP. As a result, subsidies per megawatt hour for offshore wind power have increased compared with last year, and subsidies for onshore wind power and solar power have increased significantly (see Figure 3).
Natural gas prices are lower this year than last year, which could explain part of the decline in IMRP, as natural gas typically determines market electricity prices. However, adding more uncontrolled renewable energy generation will also affect IMRP. There were two days in August when the offshore wind-weighted IMRP fell below £20/MWh, and there were three days when the solar-weighted IMRP fell below £10/MWh. If prices remain positive, this doesn't matter to generators; they simply make up the difference through additional subsidies. If prices are temporarily negative, some wind farms will not pay curtailment charges.
in conclusion
The increase in newer, cheaper offshore wind farms has not had a significant impact on subsidies per megawatt hour. The decline in average strike prices was offset by a combination of April's index gains and lower natural gas prices from last year. Even if gas prices remain at current high levels, we are unlikely to see significant reductions in subsidies per MWh, as increased renewable generation will drive down IMRP and thus increase subsidies. For generators, they win heads, and consumers lose tails. Between now and February 2025, we expect to receive additional record subsidies as seasonal load factors pick up and Drax continues to operate to replace our last coal plant closing.
Written by David Turver own values The substack page, where this article first appears.
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