There are very few journalists (and I think fewer regulators or civil servants or politicians) who understand how it all works. Perhaps a handful in the specialist press, or occasionally someone who really does know gets to write for the national press: Kathryn Porter, who worked in electricity trading before becoming a consultant is an example. Timera 's blog is essential reading to understand developments in gas and electricity markets with a UK/Europe focus and an eye on elsewhere.
There is a recent example of an apparently informed article from Ross Clark that in fact described the pool system of electricity prices of over 20 years ago, not how it works today, which is far more complex. It's unfortunate that it was so wrong, because it is easy to dismiss if you are in OFGEM - yet the underlying message was basically correct. I'd like to get in touch with Ross Clark to try to help him aim his canons more accurately, so if anyone knows how, please indicate.
We needed to get dirty coal off the system (we could have replaced it with more environmental friendly coal burning power stations but nobody was interested) and that was through gas. So we had considerably decarbonised our power generation compared to other countries but then we let the environmental evangelists take control of the agenda and they then moved onto all fossil fuels are bad (oh and if we ever eliminate them they will target renewables after!!). What this did was make us stupidly start adopting solar/wind before it was a mature technology and this has required vast subsidies (your CfD costs are bad enough but on to of this are the FiT and ROC costs as well) as well as giving us low capacity generation. Had we waited until technology had matured we could have built out more capacity for less environmental impact (yes i know some of the bigger wind units are suffering teething problems but history shows we humans resolve these issues) and at less cost. Also because gas generators have less certainty on their income streams many have moved away from long term supply contracts and using the spot market making is more vulnerable to price spikes.
So to support your view what we need to do now is setup some 10-15 year long term gas deals with US, M.East/Africa so we have cost and volume certainty, build alot more LNG storage and use the CCGTs as baseload and let the renewables displace it when its available. Oh and of course no more subsidised renewables if its cost effective it will find its own market like solar is on roofs of warehouses. Oh and get on with 3-4 more nukes they are the only viable route to net zero if thats what the majority want.
1. CO2 is currently 420 ppm, which is 0.042%. Humans are responsible for 3% of that, which is 0.00126%. Thus, 99.99874% of all CO2 is created naturally.
2. At under 150 ppm CO2, plant life dies, and everything else dies with it.
3. The atmosphere has had periods where CO2 was up to and higher than 4000 ppm. During the Triassic period 215 million years ago, both plant and animal life thrived and Alaska was a jungle.
4. When Mt. St Helens erupted in 1980, it released the same amount of pollution as 270 years of human industrial activity in 1970. That’s 270 x 1970 industrial activity - IN ONE DAY. -zFree
1) You're massively off on the human responsibility.
Since the industrial revolution atmospheric CO2 has risen from 280ppm to 420ppm
and the isotope mix of the CO2 shows it's come from burning fossil fuels
1/3rd of current atmospheric CO2 is due to human activity in a couple of hundred years, and we're releasing much more now than we were in, say, 1950.
2) Nobody is saying we should reduce CO2 levels below 280-300ppm (and frankly with the amount of blowhards and fossil fuel propaganda most people in the know are just trying to stop it climbing much higher)
3) Yes, and at those times the temperature was much higher despite the sun releasing less energy then than now. Life now is optimized for the current climate and, with restrictions on migration due to human activity we'll see a huge mass extinction if temperatures rise much.
4) Rubbish, volcanic eruption is nowhere near that high in CO2 emissions. The Mt Helens eruption released about 10 million tons of CO2 over 9 hours. Humans currently release that much in about 2.5 hours.
1. That gas generally sets the price paid to all, but its taxed for carbon emission per tonne which therefore pushes up the cost of all electricity artificially.
2. That with air heat pumps they are 4 times the price of a gas boiler, and in winter when the temperature falls below about -2C the heat generated is less than required to heat your house.
3. That at a COP of about 2.4 to 2.7 in winter 1KW of electricity would produce 2.4 or 2.7KW of heat. However a gas boiler produced 0.8KW of heat per KW of gas consumed.
However, electricity is 4 times the price of gas so taking price into account 1KW of gas = 3.2KW of heat but 1KW of electricity is at most 2.7KW of heat, so your heating bills will go up by 3.2/2.7 = 18%
You may get some of that back in the summer, but of course if you are like me I use virtually no gas between April and October.
4. If we have a protracted blocking high and temperatures never get above zero and can fall to -10C then your bills will not only go through the roof, but there still won't be enough heat to keep you warm. Great stuff for older people.
Can we also add in that global warming does not mean the UK will get warmer, the UK has a temperate climate because of the Atlantic conveyor which is a warm water stream running from the equator past Europe and Ireland and runs into a sinking zone off Greenland.
The result of which means we get winter temperatures between 2C to 8C on average while Canada on the same latitude gets winter temperatures of -5C to -15C
The intensity of the Atlantic conveyor has reduced by 20% since the 1970's and at some point it will simply shut down, plummeting us into Canadian style winters.
That will mean icing of wind turbines, reducing their efficiency in moderate icing by 30% and air source heat pumps will be 100% useless, electricity demand will soar and solar panels will be covered in snow.
The point about excess renewables driving the wholesale price down to a level that is below the marginal cost of firm resources such as nuclear is a salient one that could be discussed further.
Everything else seems like more of a market structure problem than a renewables problem, for those of you operating in markets that include a FiT. If you were to recreate these charts for most U.S. RTOs, you’d see renewables bid in at zero or less and the market clearing at the marginal cost of gas, without the additional FiT cost.
Excellent read and handiwork on recreating the charts. I simply wanted your readership to realize this isn’t a problem inherent to the fact these resources are “renewable.” Policymakers creating this issue because they want to incentivize renewables is a policy problem, not a renewable problem.
The value proposition of renewables varies by market. For me, as an American, the price you all pay for offshore wind is stunning (although you have also much higher NG prices). I’m not sure what kind of grid benefits you realize from that - does it tend to be windiest when load is highest in the UK?
In parts of the U.S. with warm summers and high irradiance, solar as on on-peak resource aligns well with peak load times. If coal, geothermal, and nuclear aren’t options (and don’t get me wrong, nuclear, at least, should be but for the misplaced fears many have and policies that make it extremely expensive) solar is an attractive on-peak resource and the only long-term hedge against natural gas prices. An all-gas portfolio is not for the faint of heart...
As with most things in life, the answer is often in between the two extremes. A diversified portfolio of nuclear for baseload, CCGT for baseload/intermediate, CT for peaking, solar for peaking (where available), wind for intermediate/peaking (where available), and maybe some storage where economic is probably the right approach.
Yes, I can see solar being helpful in places like Texas. In the UK, it's pointless. It produces most on sunny summer days when demand is low (not many have aircon) and produces nothing on Winter evenings when demand is highest. Wind supply totally uncorrelated to demand so it needs reliable backup. Better to simply invest in the reliable backup. We also have a bit of hydro, but we don't have the geography for much expansion.
With solar having little value during peak times, wind having some value but not being very predictable, and the UK already having relatively high gas prices, it seems you all could promote more gas E&P to increase supply and reduce cost. You could probably then recover the emissions with the savings.
The major difference between the UK and the US is that the US is essentially an isolated gas market in that you supply yourselves and cannot easily supply anyone else.
Therefore in the US there is effectively an isolated supply and demand market with more supply than demand which drives down prices.
In the rest of the world its international, often supplied by cross continental pipelines and is traded internationally.
Therefore the price is set internationally, not nationally, even if the UK had been able to supply 100% of its own gas demand the price would have been the same because the gas producers sell into the international market and if you pay less than market price you don't get the gas.
So the US is an outlier in world terms, I'm aware that there are some exports now by LNG which if large enough may start to drive your gas prices up, but currently its much lower and less variable than the rest of the world.
And for that you'l have to thank President Trump who made you energy self sufficient where you can use renewables as required and sell the fossil fuel excess, that's not a position western Europe is in.
The UK market is more complicated than you assume. Back when we had a small export surplus in the early years of the century, NBP prices were actually lower than Henry Hub, and about the cheapest in the world. The small volume of export in summer was competing with Norwegian and Dutch gas on the near Continent. In winter, our gas market was largely isolated, and we used production flex in the North Sea to meet higher demand. As our production started to reduce we became more reliant on Norwegian pipeline gas, which gradually took over the role of providing winter flex. Some Norwegian gas was effectively exported in summer months. As pipeline availabilities fell the UK sought security of being able to import LNG, but in practice it was simply re-exported to the Continent in summer with the UK acting as an offshore LNG terminal, with pipeline supply adequate to meet domestic demand. Dutch gas production was also in decline, increasing import demand (and fostering the Nordstream project and Yamal LNG). Only in winter were some imports from the Continent and/or additional topups of LNG needed.
Pipeline gas can only be sold at the end of the pipeline, unlike LNG which trades internationally wherever shipping costs make a sale profitable. NBP is only exposed to international LNG prices when the UK is using LNG for itself. If LNG is being re-exported, it is the Continental buyer who pays for the import and the transit cost via the UK. There is no ability to supply extra once the export pipes are full, so there is no linkage to the GB market.
The LNG price we have to pay depends on how far it has to come and what competing markets might pay. During the recent crisis we have been importing from as far away as Peru (and even Australia), so shipping via the Panama canal has been costly - and other suppliers have been able to take advantage of our need for long haul supply, and increased their prices. So being able to back out long haul LNG reduces the prices we must pay: everything we can produce for ourselves (or get by dedicated pipeline from Norway) is helpful.
There is no world market price for gas. There are many local markets (even within the US there are substantial price variations), linked only where physical arbitrage is possible (competing pipeline supplies, or LNG movements). Logistic costs for shipping and piping gas are considerable, and that acts to limit the influence of one market on another, even when a physical connection is possible.
Solar is only a bit player in Texas. Probably partly a case of where the subsidies were and were not available, but also the really sunny bit is the uninhabited desert SW, a long way from demand in Dallas and Houston. Solar actually does quite a good job at present levels by making up for daytime lulls in wind generation that are typical in Texas.
For big solar, try South Australia, where it creates havoc for the grid. In fact, rooftop solar subsidies see even utility solar curtailing midday to avoid negative prices. Utility solar tends to be axis tracking, so as to generate more just after dawn and before sunset, when prices are better and rooftop output is much reduced.
An optimal system tries to ensure that the expected total system cost is minimised, and can keep the lights on. Those costs include the grid transmission system as well as the generators and their fuels, and also energy storage costs. A nuclear fuel rod or a pile of coal are very cheap storage. A gas cavern is rather more costly because of the costs of pumping in and out. Batteries are very costly.
Having power stations located close to centres of demand reduces the need for a large transmission grid. Indeed, a century ago there was no grid, with towns having their own generators. The grid developed to allow power stations to provide backup for each other for maintenanceor unexpected trips. It also allowed minemouth coal fired stations to be developed across much of the UK, saving the need for coal transport. Renewables are located far from demand, and require a massive expansion of grid capacity that will only get intermittent use because the renewables are intermittent, driving up cost per delivered MWh. Moreover, the more renwables you install the bigger the need to curtail surpluses, which drives up the cost of the output that is used.
The French had close to the ideal system when they developed cheap nuclear with very flexible hydro and some gas providing the intra day flexibility, and scheduling of nuclear refuelling and maintenance to provide seasonal flex. They also took advantage of being able to dump some otherwise surplus power on neighbouring countries: that is obviously a solution that doesn't work when everyone is trying it.
For the UK, lacking larger hydro resource, it would make sense to include coal as an alternative to some gas. Indeed, when LNG prices went ballistic after the Fukushima earthquake as Japan sought gas to replace the nuclear it shut, the UK increased its coal burn to save costly gas. Because of the relatively low capital cost of fossil fuel generation having the option is well worthwhile. We could have saved a large fortune over the recent crisis if we had been able to switch back to coal, but we had destroyed most of our capacity and refused to run the rest except as extremely inefficient last resort backup with all the wasted warming up burn.
Renewables only really might make some sense in small island or remote systems where generation is otherwise from diesel. However, because of intermittency you still need that diesel backup, and the optimal level of renewables is limited by rising curtailment. In fact, without subsidies, and even though it can be costly to deliver diesel in small boats or trucked over deserts, it is often the preferred option.
You will struggle to find cases where wind and solar really reduce costs at the whole system level: there are always subsidies and taxes on competitors. Hydro and geothermal are different, but far from universally available.
You are not pricing that which is required. To meet a variable demand minute to minute you need supply management minute to minute.
What is required is a costing of all the factors required to maintain a grid which are
1. Cost of generation
2. Cost stability of generation
3. Cost of reliability of generation
4. Cost of flexibility of generation to meet variable demand
5. Cost of grid management in terms of things like voltage support and reactive load management.
Simply putting all the selection and pricing on cost of generation fails to price in all the other requirements that are necessary to maintain a grid system.
Gas generation meets all of the requirements bar one cost stability of generation, but it meets all of it currently on price, ability to be reliable, to be able to load vary to meet demand and the ability to provide voltage and reactive load support.
Renewables only provides one of those - price stability (and that's arguable as new projects are reporting 40% increase in costs) but it suffers no price cost for its lack of reliability, its lack of ability to vary to meet demand or any form of grid support, in fact it is negative on all of those.
To have the cheapest electricity system that works, you have to price all the necessary elements and on that basis gas comes out by far the cheapest because, apart from anything else, it provides one key element that no other source apart from coal can, which is the ability to load vary in real time to meet variable demand.
If you think increasing domestic gas supply will bring down prices, then wouldn’t you also have to accept that reducing domestic gas demand (eg wind generation displacing gas generation) has also lowered prices? I’m sceptical of both claims but I don’t see how you can believe one without the other?
In reality so far wind has mainly displaced coal and nuclear. Gas use is little changed, because gas is needed to handle the intermittency of the wind displacing baseload (i.e. virtually continuous) generation. Increasing wind capacity is not going to drive out gas pari passu either, because from now on steadily rising proportions of wind output will end up being curtailed and surplus. When demand is low and wind is strong we already get curtailment surpluses. More capacity will make those surpluses bigger, and will start to generate surpluses at progressively higher levels of demand and also at lower wind speeds against low demand. Flexible generation (e.g. or i.e. gas) is still needed to handle Dunkelflaute, when wind contributes essentially nothing. You end up with very little extra wind generation that is useful by adding more capacity once you start getting beyond supplying about 60% of demand on average - and already, the marginal wind farm is effectively curtailing half its output, doubling its cost - one reason why LCOE calculations are useless in assessing the competitiveness of wind.
You may think that storage solves the problem, but the variable size and intermittency of surpluses helps to dent the economics - never very good to being with - severely. The size of stores needed to cover extended Dunkelflaute periods, variations in seasonal demand etc. makes storage quite impractical and uneconomic. It can only be used economically for handling short term variations such as storing a solar surplus for use in the evening.
The grid used to be built up of reliable supply, coal, gas, nuclear backed up with short term balancing supply minute to minute (hydro) and medium term (hour to hour) balancing supply, coal and gas.
Coal has all but gone.
That means the only medium term balancing supply is gas.
To replace that there are only a limited number of options
1. A lot more hydro - simply isn't the geography for it in the UK
2. Grid batteries, hideously expensive, going to get more expensive and simply could not store enough for more than a day or two at best.
3 Hydrogen - created from excess renewables via electrolysis which would then have to be pumped into huge storage facilities and then burned in a gas fired power station.
The economics of hydrogen simply don't add up, you lose 30% in converting the energy into Hydrogen, pumping it and compressing is difficult, adding another 10% loss, there will likely be 5% losses of H2 gas and then it has to be burned in a gas fired power station at about 35% efficiency.
So from the original energy you'd get about (1 - .45)x 0.35 = 19%
So if wind energy was at its cheapest at £40/MWH the cost of hydrogen generation would be about 40/0.19 = £210/MWH
The cost of natural gas generation is about £60/MWH at historic prices and even in the gas price spike it was only about £250/MWH
So last year when gas prices peaked H2 would be slightly cheaper, but to replace gas now it would be 3.5 times more expensive
And remember that gas £60/MWH includes carbon taxes, so it would be even cheaper without it.
Quite simply, economically there is no replacement for gas unless you want very expensive electricity.
From 2010 to now renewables has gone from 3% to 40% yet prices have gone up by far more than inflation. But as I think David pointed out that has only replaced coal (which is cheaper) and declining Nuclear output.
Increasing gas supply in the UK is unlikely to bring down domestic gas prices but it does have two very significant benefits.
1. If their is a price hike in gas, you benefit from much higher UK income and taxes as a result which means you have a degree of counter balance to UK domestic prices going up
2. In the event of national shortage (as has happened twice before) you can ban the export of national strategic supplies (as Europe did in 2003 and last year) and that means that while prices may be high you are less likely to run out with the massive associated costs.
As David has pointed out in his article the cost of power at your plug is not the same as the price of generation at the source output. As I outlined above there are far more considerations in building a stable grid than price alone, and each component has an associated cost.
1. Cost of generation
2. Cost stability of generation
3. Cost of reliability of generation
4. Cost of flexibility of generation to meet variable demand
5. Cost of grid management in terms of things like voltage support and reactive load management.
Renewables may currently score well on point 1, but it doesn't score well on the other 4 and the inescapable fact that a grid must be balanced minute to minute means that there is a severe cost to the unreliability of renewables.
Put simplistically, if you could supply 100% of demand direct from renewables today, tomorrow might be windless and over cast and you might only get 10% from renewables, therefore today all that generation that will supply tomorrow will have to be shut down earning nothing.
The economics of generation is that "generation = income" and if you can't generate you don't earn which affects the economics of all the back up sources you need to maintain to supply when renewables don't supply.
Therefore as renewables increases there are two options
1. Generators forced off the grid by renewables will have to charge far more when they do generate in order to pay for when they can't generate to compensate to make the economics of the asset add up.
2. You have to pay generators to shutdown the marginal cost of their generation and lost profit.
Therefore while renewables appear cheap at the source of supply, they add substantial costs to the system elsewhere as a result of their variability, their inductive exports on a grid designed for capacitative generation.
In removing those associated costs of back up you'd need have far more renewables than necessary and able to store excess to supply potentially long periods of under supply but all current sources of storage are either very expensive and/or very expensive or impossible to build (Current potential options are Hydrogen, Battery or hydro)
But any of those options are going to be in my estimation either at least as expensive as having conventional power stations shutdown and paid to do so or even more expensive.
So don't get your hopes up that renewables will bring your electricity prices down in future, they are, as they have been since 2010 only going up as a result of renewables.
To clarify my earlier comment, I am not saying that renewables will bring down bills, or that renewables have replaced gas capacity. I am saying that if we hadn’t generated the wind we have, we would have used more gas. To put numbers on that, in 2020 it was 75GWh. If we hadn’t generated that, that would mean combusting around 150GWh more gas, around 17% of current gas demand. I agree that the increasing balancing and grid costs should be placed at the door of renewables, but if you are going to make an argument for fracking on the impact of gas bills the the same reasoning should apply to renewables. Hard to get a number on annual likely fracking output but expect it would be similar. Or don’t try and make a cost argument but make it on energy security and economic growth arguments as you do. Given the expected drop in North Sea production one could argue we need all the gas demand reduction we can get to reduce the dependence on imported gas, which would be a further argument to support new wind.
To be clear what I'm saying, this renewables thing has a series of phases
1. initial production - no renewable curtailment 2010 - 2018
In this phase renewables replace gas. They are NOT cheaper because the gas price was low and renewables were priced in at £160 - 200/MWH against gas at about £60/MWH
So they were more expensive AND if you owned a gas station you had your income curtailed because you had to reduce generation to allow renewables onto the grid. Gas generators like all fixed asset power stations have fixed costs, if you curtail their income, they have to charge more when they do generate in order to cover the fixed costs like staff, insurance, business rates, pensions, and more thermal cycling which shortens plant life and increases maintenance costs.
So its not cheaper
2. Large scale production - 2018 to today
All the arguments of phase 1 apply with the following modifications.
NEW renewables are now cheaper, CfD contracts have fallen as low as £40/MWH BUT many of those are not in production yet and many are now pulling out unless the CfD contacts are significantly increased.
OLD Renewables CfD's that were £160-200/MWH get an annual inflation uplift so they are now even more expensive but par of that is offset with lower CfD's for new generation coming on, the effect probably balances out.
Gas was more expensive when gas prices rocketed, but they are now down to roughly what they were pre price spike so gas generation after inflation is probably about £80/MWH after allowing for inflation.
However, more renewables means less gas generation, and the lower it gets as a % then the fixed costs of generation become more and more significant so for the more limited time it does generate it will have to charge more per MWH to make the economics of the power station work or the grid has to pay the gas stations not to generate and cover all its fixed costs.
So although renewables are cheaper, that creates costs for back up generation like gas that cannot earn to pay its bills.
The result is the consumer costs go UP even though the cost of renewable generation has come down.
3. Replacing Gas altogether
This is where it gets really expensive.
As the article says, you have to cover the worst winter conditions that may prevail for an extended period like a dunkelflaut where there will be little to no wind or solar generation for potentially weeks with coincident very high demand.
That means you will have to run the grid on the excess stored energy from excess renewables generated at times of excess, and that excess needs to be quite large
There are limited ways of storing it - all of which are expensive and carry huge capital costs like
1. Grid batteries - very expensive - estimated at £200/MWH at least and unlikely to get cheaper and could not store more than days of energy and there will be at least 30% losses
2. Potential energy - lifting weights - again limited, about 20% losses will only last days
3. Hydro (pumped) we don't have the geology for it in sufficient scale, very expensive and will cost massively (not including the fact many continental hydro plants are running out of water)
4. Hydrogen - hugely expensive again and from production to storage to burning losses makes it about 19% efficient so renewables at £40/MWH becomes back up generation at 40/0.19 = £210/MWH and is likely the cheapest option.
This has to be set against gas generation which is currently about £80/MWH - all these options from generation to storage to re-generation are all massively more expensive and that's before factoring in the grid modification and capital costs.
In short, there is no phase where renewables end up being cheaper that gas or nuclear generation, not even close.
Agree with pretty much all of that, though would just point out that the fixed o&m cost of a gas plant are pretty small in the big picture, which is why they are so good at balancing out renewables at relatively low cost. Capacity market pays for them to be available when needed and ensure there is sufficient supply. The balancing mechanism rewards them for their flexibility. Some evidence that they have been over compensated by rigging the market in their favour. It will be interesting to see how much this reduces balancing costs by https://www.ofgem.gov.uk/publications/new-rules-boost-consumer-protection-winter-202324
Agree there is no sense in taking gas off the grid completely until we have much cheaper storage or loads of new nuclear.
The primary issue is that if you have a generating asset, no matter what type, if you are forced to curtail your business in favour of another generator then you have a significantly increased operating cost and therefore the prices you have to charge per unit increases.
In the olden days the grid owned the generating assets and therefore it managed its own balancing, so it built capacity to meet winter demand with a presumed number of plants may be unavailable at any one time.
Excess capacity was usually maintained between 110 - 120% of peak winter demand.
In reality at least 10% would be unavailable at any one time either due to breakdown maintenance or refuelling in the case of nuclear plants.
Therefore you as consumer were paying for roughly 10% of plant to be available but unused. The summer excess was used to shut down plants to do statutory maintenance
Today we have 15GW of solar and 25GW of wind, that's 40GW when peak winter demand is currently about 50GW.
The installed rated capacity is now technically about 150-160%, so if the wind and solar is operating at full capacity you could end up with 50% of plant being available to generate but unable to do so.
So the capacity or curtailment payments now have to go out to 50% of capacity rather than 10% and all that cost has to be attributed to renewables as a direct cost and therefore added to their effective cost of generation.
That is a huge increase in system costs, and then you have to add in payments for grid support on reactive load, frequency support and voltage support etc.
And even if you get rid of that requirement to pay plants that are shutdown that can only be done with mass storage and as I've demonstrated all the storage methods are hugely expensive and arguably more expensive than paying existing plants to be curtailed or shutdown.
So there is no way I can see where renewables are cheaper that nuclear/fossil fuel plants.
As to O&M costs, gas plants do have a lot less "kit" than a nuclear plant where O&M costs are large, but often being shutdown has increased costs from things like chemical protection of the plant.
For example, on nuclear we had to do extensive preservation during outages of boilers and other systems to prevent corrosion which could otherwise have seriously shortened boiler life.
As to gas plants fleecing the balancing mechanism i'm less convinced by that, we have to remember that gas prices during that period had shot up to at times ten times normal. A lot of gas supply contracts are bought well in advance and there's no way of knowing if you are going to be called on to use it and if you don't you may not have storage for it.
So they may have had to cancel deliveries in CfD markets for gas they had bought but couldn't take. I'm no expert in that area but its difficult to store gas/oil beyond a minimal amount.
For example, during covid the oil price collapsed to Minus $8 a barrel because there was nowhere to store it worldwide.
In short, there is no way that renewables are going to be cheaper to the consumer than conventional existing plants was the main point.
Could you explain a little bit more how CFD strike price works? Is it a flat fee for renewables that are paid by customers regardless of how much electricity is produced or consumed? Is this typical in Europe? Is this also used in USA?
CfD strike prices are agreed at the beginning of a project and rise each year in line with inflation. They are paid per unit generated. Operators csn also earn the CfD price plus a bit of compensation if they are asked to curtail output.
I haven't looked at how the systems work in the EU or US, but I think France and Spain might use them.
Because of the merit order effect it is unlikely that CFD wind farms will be paid as much as their strike price to curtail: if curtailment needs to include them market prices will be negative, reducing the compensation needed.
The corollary is that the most costly wind farms are never curtailed, saddling consumers with the full strike price, while curtailed wind farms are mostly paid more than their economic loss. Those forced into voluntary economic curtailment are the losers, along with consumers.
I'm going to quibble about a couple of things in your article. The volume of electricity delivered via FiT payments is actually quite small, and the economics are not easy to calculate as the rules have changed over time. Suffice to say it's very costly for what it is, with some tariffs paying almost £600/MWh. I'm considering trying to delve into it all, which occasioned producing this mouseover map of the amount of domestic solar PV installed in each parliamentary constituency.
Just over half of wind generation is produced under the ROC regime. On average, across onshore and offshore, wind gets about 1.4ROCs per MWh. ROCs are inflation linked, and designed to cost a premium to the notional cashout price through creating an artificial shortage that forces cashout purchases that get redistributed to real ROCs. We can expect the current year may end up being worth ~£65/ROC. In addition REGOs (greenwash certificates) are now becoming economically rather more interesting, probably selling for around £6/MWh although some have been auctioned for as much as £10/MWh. Altogether it means that ROC wind gets close to £100/MWh premium to day ahead market prices on average, though the top whack goes to floating wind on 3.5ROCs per MWh - on its own worth £227.50/MWh assuming £65/ROC - on top of market price. The difference in pricing regime matters when it comes to curtailment.
CFDs do NOT pay out for curtailed production. The curtailment and negative market price rules do vary, however. All CFDs place a ceiling on payout of the current indexed strike price, so there is no additional compensation if prices go negative. But if the CFD is paying £180/MWh and the market drops to minus £50/MWh, the net income of £130/MWh is still pretty handy. For an onshore windfarm being paid just 1ROC/MWh the economics look rather different: net income drops to £15/MWh (plus the REGO which also only pays out if there is production). So it only has around £20/MWh at stake, and is therefore only second to a Moray East on market prices which will simply voluntarily curtail rather than pay £50/MWh for the privilege of bolstering its annual output figures.
Note that if Moray East had in fact sold some of its output a week earlier for say £60/MWh its rational choice is to curtail and buy in power from elsewhere at the market price of minus £50/MWh, and pocket the £110/MWh difference as pure profit - much better than just £60/MWh. Potentially a nice synergy with neighbouring Beatrice sitting on its £186/MWh CFD if it has unsold output.
We end up with a curtailment price merit order that depends on the size of the ROC or CFD subsidy and the level of market price. Curtailment is actually a function of the Balancing Mechanism. The Grid will be interested in ensuring that there is curtailment to avoid overloading transmission lines. Wind farms located upstream of inadequate transmission links are in a limited local competition for curtailment, and so they can extract a premium to their true economic loss - they can work out what the economic loss for other wind farms would be, and will have a good idea of how much curtailment is needed, so they can price their curtailment bids accordingly. The Grid will meekly accept what is necessary to avoid overloading the cables. Curtailment is paid for in the Balancing Mechanism as bid - not at a market clearing price, but the market behaves to bid close to the clearing price.
Of course, the larger the curtailment needed the greater the risk that much higher payments will be necessary. I've seen Hornsea1 being paid over £150/MWh for instance, while Kype Muir, South of Glasgow and near major transmission constraints regularly pops up at around £80/MWh.
Where curtailment gets trickier for CFDs is that some have a condition that there is no CFD payout at all if day ahead market prices are negative for 6 or more contiguous hours for any hour in the period of negative pricing. So with larger and longer surpluses there can suddenly be a large tranche of CFD generation that curtails voluntarily, creating a shortage to be exploited in the run up to Gate Closure and in the Balancing Mechanism. Mostly, the market is gamed so that there are 5 contiguous hours of negative prices, followed by one hour of marginally positive prices, followed by a relapse to negative prices again, meaning that subsidies apply throughout. Bear in mind these events for now happen overnight when demand is low.
The most recent conditions for CFDs are much tougher: there is no CFD payout for any hour when day ahead prices are negative. That means these wind farms will be first in line to curtail with no compensation. In turn it means they need higher prices from the production they do sell - just one of the reasons why the current AR5 CFD auction is deeply unattractive.
Rising capacity (and falling demand) means that instances of negative prices are much more likely. There have been some spectacular cases on the Continent, caused by (domestic) solar surpluses that can't be turned off or priced out, with prices going as high as €500/MWh and more to curtail. National Grid has been involved in bribing Dutch solar farms in a bid to try to avoid overloading the interconnectors.
Of course, it is consumers who get to pay for it all, including for subsidising exports at negative prices.
Thanks. In the year to end March 2022, FiT operators generated just short of 8TWh. Not massive but 2-3% of total generation. I now get more than £600/MWh for my 2010 solar panels.
Mine were installed in 2010, just before the cut in tariffs. Of course, they are index-linked, so now I get 68.3p for each kWh generated (since April 2023) plus 4.82p for deemed exports of half the generation. So, overall now over £700/MWh. My mistake!
Plus you are not paying retail price of at least £300/MWh on the generation you do actually use. The current regime for new installations only offers those savings, plus a low tariff for surplus export, which is metered. Until the crisis, export tariffs were only around £30/MWh. It means that solar only begins to make sense if you are home to use the output. Batteries and thermal stores (how much hot water do you use in summer?) are costly, and only available for larger homes with the safe installation space. Higher export tariffs reduce the benefit of storage, which remains hard to justify other than for greenie points, especially now we have higher interest rates.
David, apologies for being very late to this discussion. I found this article extremely informative but was confused by one statement you made. You write:
'The wind generator might offer electricity to the market at a low price and receive the wholesale price for its power, but we pay the extra as a subsidy though our bills'.
Why would a wind generator offer electricty to the market at less than his strike price? Or have I misunderstood something
There is also the issues of gas plants not coming on line until the strike price is high enough to cover their start-up costs, since they burn fuel and incur wear on the equipment during start-up and shut-down when they are not generating electricity. And they're gambling on how long they'll be up generating.
Why isn't this being shouted from the rooftops?
Alternatively why isn't it being reported by any journalist?
Please share it and help "shout it from the rooftops".
There are very few journalists (and I think fewer regulators or civil servants or politicians) who understand how it all works. Perhaps a handful in the specialist press, or occasionally someone who really does know gets to write for the national press: Kathryn Porter, who worked in electricity trading before becoming a consultant is an example. Timera 's blog is essential reading to understand developments in gas and electricity markets with a UK/Europe focus and an eye on elsewhere.
There is a recent example of an apparently informed article from Ross Clark that in fact described the pool system of electricity prices of over 20 years ago, not how it works today, which is far more complex. It's unfortunate that it was so wrong, because it is easy to dismiss if you are in OFGEM - yet the underlying message was basically correct. I'd like to get in touch with Ross Clark to try to help him aim his canons more accurately, so if anyone knows how, please indicate.
We needed to get dirty coal off the system (we could have replaced it with more environmental friendly coal burning power stations but nobody was interested) and that was through gas. So we had considerably decarbonised our power generation compared to other countries but then we let the environmental evangelists take control of the agenda and they then moved onto all fossil fuels are bad (oh and if we ever eliminate them they will target renewables after!!). What this did was make us stupidly start adopting solar/wind before it was a mature technology and this has required vast subsidies (your CfD costs are bad enough but on to of this are the FiT and ROC costs as well) as well as giving us low capacity generation. Had we waited until technology had matured we could have built out more capacity for less environmental impact (yes i know some of the bigger wind units are suffering teething problems but history shows we humans resolve these issues) and at less cost. Also because gas generators have less certainty on their income streams many have moved away from long term supply contracts and using the spot market making is more vulnerable to price spikes.
So to support your view what we need to do now is setup some 10-15 year long term gas deals with US, M.East/Africa so we have cost and volume certainty, build alot more LNG storage and use the CCGTs as baseload and let the renewables displace it when its available. Oh and of course no more subsidised renewables if its cost effective it will find its own market like solar is on roofs of warehouses. Oh and get on with 3-4 more nukes they are the only viable route to net zero if thats what the majority want.
Absolutely bang on.
1. CO2 is currently 420 ppm, which is 0.042%. Humans are responsible for 3% of that, which is 0.00126%. Thus, 99.99874% of all CO2 is created naturally.
2. At under 150 ppm CO2, plant life dies, and everything else dies with it.
3. The atmosphere has had periods where CO2 was up to and higher than 4000 ppm. During the Triassic period 215 million years ago, both plant and animal life thrived and Alaska was a jungle.
4. When Mt. St Helens erupted in 1980, it released the same amount of pollution as 270 years of human industrial activity in 1970. That’s 270 x 1970 industrial activity - IN ONE DAY. -zFree
Over the last 800,000 years the Co2 levels have varied from a low of about 170ppm to 295ppm, I don't think there was a period when plan life died.
My apologies, should have said 150ppm, i've fixed it. Thank you for the heads up
1) You're massively off on the human responsibility.
Since the industrial revolution atmospheric CO2 has risen from 280ppm to 420ppm
and the isotope mix of the CO2 shows it's come from burning fossil fuels
1/3rd of current atmospheric CO2 is due to human activity in a couple of hundred years, and we're releasing much more now than we were in, say, 1950.
2) Nobody is saying we should reduce CO2 levels below 280-300ppm (and frankly with the amount of blowhards and fossil fuel propaganda most people in the know are just trying to stop it climbing much higher)
3) Yes, and at those times the temperature was much higher despite the sun releasing less energy then than now. Life now is optimized for the current climate and, with restrictions on migration due to human activity we'll see a huge mass extinction if temperatures rise much.
4) Rubbish, volcanic eruption is nowhere near that high in CO2 emissions. The Mt Helens eruption released about 10 million tons of CO2 over 9 hours. Humans currently release that much in about 2.5 hours.
Please can you get this across to MSM including newspapers etc. The general public need to understand this situation.
I am doing my best. Please share it as far as you can too.
How do we get this stuff into the heads of the climate nutjobs?
That seems to be the problem
Can you also add in the following:-
1. That gas generally sets the price paid to all, but its taxed for carbon emission per tonne which therefore pushes up the cost of all electricity artificially.
2. That with air heat pumps they are 4 times the price of a gas boiler, and in winter when the temperature falls below about -2C the heat generated is less than required to heat your house.
3. That at a COP of about 2.4 to 2.7 in winter 1KW of electricity would produce 2.4 or 2.7KW of heat. However a gas boiler produced 0.8KW of heat per KW of gas consumed.
However, electricity is 4 times the price of gas so taking price into account 1KW of gas = 3.2KW of heat but 1KW of electricity is at most 2.7KW of heat, so your heating bills will go up by 3.2/2.7 = 18%
You may get some of that back in the summer, but of course if you are like me I use virtually no gas between April and October.
4. If we have a protracted blocking high and temperatures never get above zero and can fall to -10C then your bills will not only go through the roof, but there still won't be enough heat to keep you warm. Great stuff for older people.
Frack, frack and frack some more!
Can we also add in that global warming does not mean the UK will get warmer, the UK has a temperate climate because of the Atlantic conveyor which is a warm water stream running from the equator past Europe and Ireland and runs into a sinking zone off Greenland.
The result of which means we get winter temperatures between 2C to 8C on average while Canada on the same latitude gets winter temperatures of -5C to -15C
The intensity of the Atlantic conveyor has reduced by 20% since the 1970's and at some point it will simply shut down, plummeting us into Canadian style winters.
That will mean icing of wind turbines, reducing their efficiency in moderate icing by 30% and air source heat pumps will be 100% useless, electricity demand will soar and solar panels will be covered in snow.
Oh, and of course by then we'll have shut down all fossil fuel generation so will have no alternative to turn to.
The point about excess renewables driving the wholesale price down to a level that is below the marginal cost of firm resources such as nuclear is a salient one that could be discussed further.
Everything else seems like more of a market structure problem than a renewables problem, for those of you operating in markets that include a FiT. If you were to recreate these charts for most U.S. RTOs, you’d see renewables bid in at zero or less and the market clearing at the marginal cost of gas, without the additional FiT cost.
Excellent read and handiwork on recreating the charts. I simply wanted your readership to realize this isn’t a problem inherent to the fact these resources are “renewable.” Policymakers creating this issue because they want to incentivize renewables is a policy problem, not a renewable problem.
However, if the market had not been rigged in favour of in particular intermittent renewables, then the renewables would not have been built.
The value proposition of renewables varies by market. For me, as an American, the price you all pay for offshore wind is stunning (although you have also much higher NG prices). I’m not sure what kind of grid benefits you realize from that - does it tend to be windiest when load is highest in the UK?
In parts of the U.S. with warm summers and high irradiance, solar as on on-peak resource aligns well with peak load times. If coal, geothermal, and nuclear aren’t options (and don’t get me wrong, nuclear, at least, should be but for the misplaced fears many have and policies that make it extremely expensive) solar is an attractive on-peak resource and the only long-term hedge against natural gas prices. An all-gas portfolio is not for the faint of heart...
As with most things in life, the answer is often in between the two extremes. A diversified portfolio of nuclear for baseload, CCGT for baseload/intermediate, CT for peaking, solar for peaking (where available), wind for intermediate/peaking (where available), and maybe some storage where economic is probably the right approach.
I wish I could give you 10 likes for that.
Yes, I can see solar being helpful in places like Texas. In the UK, it's pointless. It produces most on sunny summer days when demand is low (not many have aircon) and produces nothing on Winter evenings when demand is highest. Wind supply totally uncorrelated to demand so it needs reliable backup. Better to simply invest in the reliable backup. We also have a bit of hydro, but we don't have the geography for much expansion.
With solar having little value during peak times, wind having some value but not being very predictable, and the UK already having relatively high gas prices, it seems you all could promote more gas E&P to increase supply and reduce cost. You could probably then recover the emissions with the savings.
The major difference between the UK and the US is that the US is essentially an isolated gas market in that you supply yourselves and cannot easily supply anyone else.
Therefore in the US there is effectively an isolated supply and demand market with more supply than demand which drives down prices.
In the rest of the world its international, often supplied by cross continental pipelines and is traded internationally.
Therefore the price is set internationally, not nationally, even if the UK had been able to supply 100% of its own gas demand the price would have been the same because the gas producers sell into the international market and if you pay less than market price you don't get the gas.
So the US is an outlier in world terms, I'm aware that there are some exports now by LNG which if large enough may start to drive your gas prices up, but currently its much lower and less variable than the rest of the world.
And for that you'l have to thank President Trump who made you energy self sufficient where you can use renewables as required and sell the fossil fuel excess, that's not a position western Europe is in.
The UK market is more complicated than you assume. Back when we had a small export surplus in the early years of the century, NBP prices were actually lower than Henry Hub, and about the cheapest in the world. The small volume of export in summer was competing with Norwegian and Dutch gas on the near Continent. In winter, our gas market was largely isolated, and we used production flex in the North Sea to meet higher demand. As our production started to reduce we became more reliant on Norwegian pipeline gas, which gradually took over the role of providing winter flex. Some Norwegian gas was effectively exported in summer months. As pipeline availabilities fell the UK sought security of being able to import LNG, but in practice it was simply re-exported to the Continent in summer with the UK acting as an offshore LNG terminal, with pipeline supply adequate to meet domestic demand. Dutch gas production was also in decline, increasing import demand (and fostering the Nordstream project and Yamal LNG). Only in winter were some imports from the Continent and/or additional topups of LNG needed.
Pipeline gas can only be sold at the end of the pipeline, unlike LNG which trades internationally wherever shipping costs make a sale profitable. NBP is only exposed to international LNG prices when the UK is using LNG for itself. If LNG is being re-exported, it is the Continental buyer who pays for the import and the transit cost via the UK. There is no ability to supply extra once the export pipes are full, so there is no linkage to the GB market.
The LNG price we have to pay depends on how far it has to come and what competing markets might pay. During the recent crisis we have been importing from as far away as Peru (and even Australia), so shipping via the Panama canal has been costly - and other suppliers have been able to take advantage of our need for long haul supply, and increased their prices. So being able to back out long haul LNG reduces the prices we must pay: everything we can produce for ourselves (or get by dedicated pipeline from Norway) is helpful.
There is no world market price for gas. There are many local markets (even within the US there are substantial price variations), linked only where physical arbitrage is possible (competing pipeline supplies, or LNG movements). Logistic costs for shipping and piping gas are considerable, and that acts to limit the influence of one market on another, even when a physical connection is possible.
Solar is only a bit player in Texas. Probably partly a case of where the subsidies were and were not available, but also the really sunny bit is the uninhabited desert SW, a long way from demand in Dallas and Houston. Solar actually does quite a good job at present levels by making up for daytime lulls in wind generation that are typical in Texas.
For big solar, try South Australia, where it creates havoc for the grid. In fact, rooftop solar subsidies see even utility solar curtailing midday to avoid negative prices. Utility solar tends to be axis tracking, so as to generate more just after dawn and before sunset, when prices are better and rooftop output is much reduced.
An optimal system tries to ensure that the expected total system cost is minimised, and can keep the lights on. Those costs include the grid transmission system as well as the generators and their fuels, and also energy storage costs. A nuclear fuel rod or a pile of coal are very cheap storage. A gas cavern is rather more costly because of the costs of pumping in and out. Batteries are very costly.
Having power stations located close to centres of demand reduces the need for a large transmission grid. Indeed, a century ago there was no grid, with towns having their own generators. The grid developed to allow power stations to provide backup for each other for maintenanceor unexpected trips. It also allowed minemouth coal fired stations to be developed across much of the UK, saving the need for coal transport. Renewables are located far from demand, and require a massive expansion of grid capacity that will only get intermittent use because the renewables are intermittent, driving up cost per delivered MWh. Moreover, the more renwables you install the bigger the need to curtail surpluses, which drives up the cost of the output that is used.
The French had close to the ideal system when they developed cheap nuclear with very flexible hydro and some gas providing the intra day flexibility, and scheduling of nuclear refuelling and maintenance to provide seasonal flex. They also took advantage of being able to dump some otherwise surplus power on neighbouring countries: that is obviously a solution that doesn't work when everyone is trying it.
For the UK, lacking larger hydro resource, it would make sense to include coal as an alternative to some gas. Indeed, when LNG prices went ballistic after the Fukushima earthquake as Japan sought gas to replace the nuclear it shut, the UK increased its coal burn to save costly gas. Because of the relatively low capital cost of fossil fuel generation having the option is well worthwhile. We could have saved a large fortune over the recent crisis if we had been able to switch back to coal, but we had destroyed most of our capacity and refused to run the rest except as extremely inefficient last resort backup with all the wasted warming up burn.
Renewables only really might make some sense in small island or remote systems where generation is otherwise from diesel. However, because of intermittency you still need that diesel backup, and the optimal level of renewables is limited by rising curtailment. In fact, without subsidies, and even though it can be costly to deliver diesel in small boats or trucked over deserts, it is often the preferred option.
You will struggle to find cases where wind and solar really reduce costs at the whole system level: there are always subsidies and taxes on competitors. Hydro and geothermal are different, but far from universally available.
You are not pricing that which is required. To meet a variable demand minute to minute you need supply management minute to minute.
What is required is a costing of all the factors required to maintain a grid which are
1. Cost of generation
2. Cost stability of generation
3. Cost of reliability of generation
4. Cost of flexibility of generation to meet variable demand
5. Cost of grid management in terms of things like voltage support and reactive load management.
Simply putting all the selection and pricing on cost of generation fails to price in all the other requirements that are necessary to maintain a grid system.
Gas generation meets all of the requirements bar one cost stability of generation, but it meets all of it currently on price, ability to be reliable, to be able to load vary to meet demand and the ability to provide voltage and reactive load support.
Renewables only provides one of those - price stability (and that's arguable as new projects are reporting 40% increase in costs) but it suffers no price cost for its lack of reliability, its lack of ability to vary to meet demand or any form of grid support, in fact it is negative on all of those.
To have the cheapest electricity system that works, you have to price all the necessary elements and on that basis gas comes out by far the cheapest because, apart from anything else, it provides one key element that no other source apart from coal can, which is the ability to load vary in real time to meet variable demand.
If you think increasing domestic gas supply will bring down prices, then wouldn’t you also have to accept that reducing domestic gas demand (eg wind generation displacing gas generation) has also lowered prices? I’m sceptical of both claims but I don’t see how you can believe one without the other?
Quite possibly. But we use far more gas for heat than for electricity generation. We need far more supply
In reality so far wind has mainly displaced coal and nuclear. Gas use is little changed, because gas is needed to handle the intermittency of the wind displacing baseload (i.e. virtually continuous) generation. Increasing wind capacity is not going to drive out gas pari passu either, because from now on steadily rising proportions of wind output will end up being curtailed and surplus. When demand is low and wind is strong we already get curtailment surpluses. More capacity will make those surpluses bigger, and will start to generate surpluses at progressively higher levels of demand and also at lower wind speeds against low demand. Flexible generation (e.g. or i.e. gas) is still needed to handle Dunkelflaute, when wind contributes essentially nothing. You end up with very little extra wind generation that is useful by adding more capacity once you start getting beyond supplying about 60% of demand on average - and already, the marginal wind farm is effectively curtailing half its output, doubling its cost - one reason why LCOE calculations are useless in assessing the competitiveness of wind.
You may think that storage solves the problem, but the variable size and intermittency of surpluses helps to dent the economics - never very good to being with - severely. The size of stores needed to cover extended Dunkelflaute periods, variations in seasonal demand etc. makes storage quite impractical and uneconomic. It can only be used economically for handling short term variations such as storing a solar surplus for use in the evening.
The grid used to be built up of reliable supply, coal, gas, nuclear backed up with short term balancing supply minute to minute (hydro) and medium term (hour to hour) balancing supply, coal and gas.
Coal has all but gone.
That means the only medium term balancing supply is gas.
To replace that there are only a limited number of options
1. A lot more hydro - simply isn't the geography for it in the UK
2. Grid batteries, hideously expensive, going to get more expensive and simply could not store enough for more than a day or two at best.
3 Hydrogen - created from excess renewables via electrolysis which would then have to be pumped into huge storage facilities and then burned in a gas fired power station.
The economics of hydrogen simply don't add up, you lose 30% in converting the energy into Hydrogen, pumping it and compressing is difficult, adding another 10% loss, there will likely be 5% losses of H2 gas and then it has to be burned in a gas fired power station at about 35% efficiency.
So from the original energy you'd get about (1 - .45)x 0.35 = 19%
So if wind energy was at its cheapest at £40/MWH the cost of hydrogen generation would be about 40/0.19 = £210/MWH
The cost of natural gas generation is about £60/MWH at historic prices and even in the gas price spike it was only about £250/MWH
So last year when gas prices peaked H2 would be slightly cheaper, but to replace gas now it would be 3.5 times more expensive
And remember that gas £60/MWH includes carbon taxes, so it would be even cheaper without it.
Quite simply, economically there is no replacement for gas unless you want very expensive electricity.
From 2010 to now renewables has gone from 3% to 40% yet prices have gone up by far more than inflation. But as I think David pointed out that has only replaced coal (which is cheaper) and declining Nuclear output.
Increasing gas supply in the UK is unlikely to bring down domestic gas prices but it does have two very significant benefits.
1. If their is a price hike in gas, you benefit from much higher UK income and taxes as a result which means you have a degree of counter balance to UK domestic prices going up
2. In the event of national shortage (as has happened twice before) you can ban the export of national strategic supplies (as Europe did in 2003 and last year) and that means that while prices may be high you are less likely to run out with the massive associated costs.
As David has pointed out in his article the cost of power at your plug is not the same as the price of generation at the source output. As I outlined above there are far more considerations in building a stable grid than price alone, and each component has an associated cost.
1. Cost of generation
2. Cost stability of generation
3. Cost of reliability of generation
4. Cost of flexibility of generation to meet variable demand
5. Cost of grid management in terms of things like voltage support and reactive load management.
Renewables may currently score well on point 1, but it doesn't score well on the other 4 and the inescapable fact that a grid must be balanced minute to minute means that there is a severe cost to the unreliability of renewables.
Put simplistically, if you could supply 100% of demand direct from renewables today, tomorrow might be windless and over cast and you might only get 10% from renewables, therefore today all that generation that will supply tomorrow will have to be shut down earning nothing.
The economics of generation is that "generation = income" and if you can't generate you don't earn which affects the economics of all the back up sources you need to maintain to supply when renewables don't supply.
Therefore as renewables increases there are two options
1. Generators forced off the grid by renewables will have to charge far more when they do generate in order to pay for when they can't generate to compensate to make the economics of the asset add up.
2. You have to pay generators to shutdown the marginal cost of their generation and lost profit.
Therefore while renewables appear cheap at the source of supply, they add substantial costs to the system elsewhere as a result of their variability, their inductive exports on a grid designed for capacitative generation.
In removing those associated costs of back up you'd need have far more renewables than necessary and able to store excess to supply potentially long periods of under supply but all current sources of storage are either very expensive and/or very expensive or impossible to build (Current potential options are Hydrogen, Battery or hydro)
But any of those options are going to be in my estimation either at least as expensive as having conventional power stations shutdown and paid to do so or even more expensive.
So don't get your hopes up that renewables will bring your electricity prices down in future, they are, as they have been since 2010 only going up as a result of renewables.
To clarify my earlier comment, I am not saying that renewables will bring down bills, or that renewables have replaced gas capacity. I am saying that if we hadn’t generated the wind we have, we would have used more gas. To put numbers on that, in 2020 it was 75GWh. If we hadn’t generated that, that would mean combusting around 150GWh more gas, around 17% of current gas demand. I agree that the increasing balancing and grid costs should be placed at the door of renewables, but if you are going to make an argument for fracking on the impact of gas bills the the same reasoning should apply to renewables. Hard to get a number on annual likely fracking output but expect it would be similar. Or don’t try and make a cost argument but make it on energy security and economic growth arguments as you do. Given the expected drop in North Sea production one could argue we need all the gas demand reduction we can get to reduce the dependence on imported gas, which would be a further argument to support new wind.
To be clear what I'm saying, this renewables thing has a series of phases
1. initial production - no renewable curtailment 2010 - 2018
In this phase renewables replace gas. They are NOT cheaper because the gas price was low and renewables were priced in at £160 - 200/MWH against gas at about £60/MWH
So they were more expensive AND if you owned a gas station you had your income curtailed because you had to reduce generation to allow renewables onto the grid. Gas generators like all fixed asset power stations have fixed costs, if you curtail their income, they have to charge more when they do generate in order to cover the fixed costs like staff, insurance, business rates, pensions, and more thermal cycling which shortens plant life and increases maintenance costs.
So its not cheaper
2. Large scale production - 2018 to today
All the arguments of phase 1 apply with the following modifications.
NEW renewables are now cheaper, CfD contracts have fallen as low as £40/MWH BUT many of those are not in production yet and many are now pulling out unless the CfD contacts are significantly increased.
OLD Renewables CfD's that were £160-200/MWH get an annual inflation uplift so they are now even more expensive but par of that is offset with lower CfD's for new generation coming on, the effect probably balances out.
Gas was more expensive when gas prices rocketed, but they are now down to roughly what they were pre price spike so gas generation after inflation is probably about £80/MWH after allowing for inflation.
However, more renewables means less gas generation, and the lower it gets as a % then the fixed costs of generation become more and more significant so for the more limited time it does generate it will have to charge more per MWH to make the economics of the power station work or the grid has to pay the gas stations not to generate and cover all its fixed costs.
So although renewables are cheaper, that creates costs for back up generation like gas that cannot earn to pay its bills.
The result is the consumer costs go UP even though the cost of renewable generation has come down.
3. Replacing Gas altogether
This is where it gets really expensive.
As the article says, you have to cover the worst winter conditions that may prevail for an extended period like a dunkelflaut where there will be little to no wind or solar generation for potentially weeks with coincident very high demand.
That means you will have to run the grid on the excess stored energy from excess renewables generated at times of excess, and that excess needs to be quite large
There are limited ways of storing it - all of which are expensive and carry huge capital costs like
1. Grid batteries - very expensive - estimated at £200/MWH at least and unlikely to get cheaper and could not store more than days of energy and there will be at least 30% losses
2. Potential energy - lifting weights - again limited, about 20% losses will only last days
3. Hydro (pumped) we don't have the geology for it in sufficient scale, very expensive and will cost massively (not including the fact many continental hydro plants are running out of water)
4. Hydrogen - hugely expensive again and from production to storage to burning losses makes it about 19% efficient so renewables at £40/MWH becomes back up generation at 40/0.19 = £210/MWH and is likely the cheapest option.
This has to be set against gas generation which is currently about £80/MWH - all these options from generation to storage to re-generation are all massively more expensive and that's before factoring in the grid modification and capital costs.
In short, there is no phase where renewables end up being cheaper that gas or nuclear generation, not even close.
Agree with pretty much all of that, though would just point out that the fixed o&m cost of a gas plant are pretty small in the big picture, which is why they are so good at balancing out renewables at relatively low cost. Capacity market pays for them to be available when needed and ensure there is sufficient supply. The balancing mechanism rewards them for their flexibility. Some evidence that they have been over compensated by rigging the market in their favour. It will be interesting to see how much this reduces balancing costs by https://www.ofgem.gov.uk/publications/new-rules-boost-consumer-protection-winter-202324
Agree there is no sense in taking gas off the grid completely until we have much cheaper storage or loads of new nuclear.
The primary issue is that if you have a generating asset, no matter what type, if you are forced to curtail your business in favour of another generator then you have a significantly increased operating cost and therefore the prices you have to charge per unit increases.
In the olden days the grid owned the generating assets and therefore it managed its own balancing, so it built capacity to meet winter demand with a presumed number of plants may be unavailable at any one time.
Excess capacity was usually maintained between 110 - 120% of peak winter demand.
In reality at least 10% would be unavailable at any one time either due to breakdown maintenance or refuelling in the case of nuclear plants.
Therefore you as consumer were paying for roughly 10% of plant to be available but unused. The summer excess was used to shut down plants to do statutory maintenance
Today we have 15GW of solar and 25GW of wind, that's 40GW when peak winter demand is currently about 50GW.
The installed rated capacity is now technically about 150-160%, so if the wind and solar is operating at full capacity you could end up with 50% of plant being available to generate but unable to do so.
So the capacity or curtailment payments now have to go out to 50% of capacity rather than 10% and all that cost has to be attributed to renewables as a direct cost and therefore added to their effective cost of generation.
That is a huge increase in system costs, and then you have to add in payments for grid support on reactive load, frequency support and voltage support etc.
And even if you get rid of that requirement to pay plants that are shutdown that can only be done with mass storage and as I've demonstrated all the storage methods are hugely expensive and arguably more expensive than paying existing plants to be curtailed or shutdown.
So there is no way I can see where renewables are cheaper that nuclear/fossil fuel plants.
As to O&M costs, gas plants do have a lot less "kit" than a nuclear plant where O&M costs are large, but often being shutdown has increased costs from things like chemical protection of the plant.
For example, on nuclear we had to do extensive preservation during outages of boilers and other systems to prevent corrosion which could otherwise have seriously shortened boiler life.
As to gas plants fleecing the balancing mechanism i'm less convinced by that, we have to remember that gas prices during that period had shot up to at times ten times normal. A lot of gas supply contracts are bought well in advance and there's no way of knowing if you are going to be called on to use it and if you don't you may not have storage for it.
So they may have had to cancel deliveries in CfD markets for gas they had bought but couldn't take. I'm no expert in that area but its difficult to store gas/oil beyond a minimal amount.
For example, during covid the oil price collapsed to Minus $8 a barrel because there was nowhere to store it worldwide.
In short, there is no way that renewables are going to be cheaper to the consumer than conventional existing plants was the main point.
Very interesting.
Could you explain a little bit more how CFD strike price works? Is it a flat fee for renewables that are paid by customers regardless of how much electricity is produced or consumed? Is this typical in Europe? Is this also used in USA?
CfD strike prices are agreed at the beginning of a project and rise each year in line with inflation. They are paid per unit generated. Operators csn also earn the CfD price plus a bit of compensation if they are asked to curtail output.
I haven't looked at how the systems work in the EU or US, but I think France and Spain might use them.
Because of the merit order effect it is unlikely that CFD wind farms will be paid as much as their strike price to curtail: if curtailment needs to include them market prices will be negative, reducing the compensation needed.
The corollary is that the most costly wind farms are never curtailed, saddling consumers with the full strike price, while curtailed wind farms are mostly paid more than their economic loss. Those forced into voluntary economic curtailment are the losers, along with consumers.
I'm going to quibble about a couple of things in your article. The volume of electricity delivered via FiT payments is actually quite small, and the economics are not easy to calculate as the rules have changed over time. Suffice to say it's very costly for what it is, with some tariffs paying almost £600/MWh. I'm considering trying to delve into it all, which occasioned producing this mouseover map of the amount of domestic solar PV installed in each parliamentary constituency.
https://datawrapper.dwcdn.net/ApSy6/1/
Just over half of wind generation is produced under the ROC regime. On average, across onshore and offshore, wind gets about 1.4ROCs per MWh. ROCs are inflation linked, and designed to cost a premium to the notional cashout price through creating an artificial shortage that forces cashout purchases that get redistributed to real ROCs. We can expect the current year may end up being worth ~£65/ROC. In addition REGOs (greenwash certificates) are now becoming economically rather more interesting, probably selling for around £6/MWh although some have been auctioned for as much as £10/MWh. Altogether it means that ROC wind gets close to £100/MWh premium to day ahead market prices on average, though the top whack goes to floating wind on 3.5ROCs per MWh - on its own worth £227.50/MWh assuming £65/ROC - on top of market price. The difference in pricing regime matters when it comes to curtailment.
CFDs do NOT pay out for curtailed production. The curtailment and negative market price rules do vary, however. All CFDs place a ceiling on payout of the current indexed strike price, so there is no additional compensation if prices go negative. But if the CFD is paying £180/MWh and the market drops to minus £50/MWh, the net income of £130/MWh is still pretty handy. For an onshore windfarm being paid just 1ROC/MWh the economics look rather different: net income drops to £15/MWh (plus the REGO which also only pays out if there is production). So it only has around £20/MWh at stake, and is therefore only second to a Moray East on market prices which will simply voluntarily curtail rather than pay £50/MWh for the privilege of bolstering its annual output figures.
Note that if Moray East had in fact sold some of its output a week earlier for say £60/MWh its rational choice is to curtail and buy in power from elsewhere at the market price of minus £50/MWh, and pocket the £110/MWh difference as pure profit - much better than just £60/MWh. Potentially a nice synergy with neighbouring Beatrice sitting on its £186/MWh CFD if it has unsold output.
We end up with a curtailment price merit order that depends on the size of the ROC or CFD subsidy and the level of market price. Curtailment is actually a function of the Balancing Mechanism. The Grid will be interested in ensuring that there is curtailment to avoid overloading transmission lines. Wind farms located upstream of inadequate transmission links are in a limited local competition for curtailment, and so they can extract a premium to their true economic loss - they can work out what the economic loss for other wind farms would be, and will have a good idea of how much curtailment is needed, so they can price their curtailment bids accordingly. The Grid will meekly accept what is necessary to avoid overloading the cables. Curtailment is paid for in the Balancing Mechanism as bid - not at a market clearing price, but the market behaves to bid close to the clearing price.
Of course, the larger the curtailment needed the greater the risk that much higher payments will be necessary. I've seen Hornsea1 being paid over £150/MWh for instance, while Kype Muir, South of Glasgow and near major transmission constraints regularly pops up at around £80/MWh.
Where curtailment gets trickier for CFDs is that some have a condition that there is no CFD payout at all if day ahead market prices are negative for 6 or more contiguous hours for any hour in the period of negative pricing. So with larger and longer surpluses there can suddenly be a large tranche of CFD generation that curtails voluntarily, creating a shortage to be exploited in the run up to Gate Closure and in the Balancing Mechanism. Mostly, the market is gamed so that there are 5 contiguous hours of negative prices, followed by one hour of marginally positive prices, followed by a relapse to negative prices again, meaning that subsidies apply throughout. Bear in mind these events for now happen overnight when demand is low.
The most recent conditions for CFDs are much tougher: there is no CFD payout for any hour when day ahead prices are negative. That means these wind farms will be first in line to curtail with no compensation. In turn it means they need higher prices from the production they do sell - just one of the reasons why the current AR5 CFD auction is deeply unattractive.
Rising capacity (and falling demand) means that instances of negative prices are much more likely. There have been some spectacular cases on the Continent, caused by (domestic) solar surpluses that can't be turned off or priced out, with prices going as high as €500/MWh and more to curtail. National Grid has been involved in bribing Dutch solar farms in a bid to try to avoid overloading the interconnectors.
Of course, it is consumers who get to pay for it all, including for subsidising exports at negative prices.
Thanks. In the year to end March 2022, FiT operators generated just short of 8TWh. Not massive but 2-3% of total generation. I now get more than £600/MWh for my 2010 solar panels.
How on earth do you get £600/MWH from solar panels??
I thought feed in tariffs were were about 5p/KWH or £50/MWH
Mine were installed in 2010, just before the cut in tariffs. Of course, they are index-linked, so now I get 68.3p for each kWh generated (since April 2023) plus 4.82p for deemed exports of half the generation. So, overall now over £700/MWh. My mistake!
Plus you are not paying retail price of at least £300/MWh on the generation you do actually use. The current regime for new installations only offers those savings, plus a low tariff for surplus export, which is metered. Until the crisis, export tariffs were only around £30/MWh. It means that solar only begins to make sense if you are home to use the output. Batteries and thermal stores (how much hot water do you use in summer?) are costly, and only available for larger homes with the safe installation space. Higher export tariffs reduce the benefit of storage, which remains hard to justify other than for greenie points, especially now we have higher interest rates.
Jeez you must be coining it in, of course another expense to the rest of us!
Yes, but they are old panels, probably half as efficient as more modern panels.
Which is why renewables will not bring prices down, they send them up.
It’s the same story in the US. The LCOE is little more than Aladdin’s Genie Lamp, it’ll give you whatever you wish... sort of.
In the US, just like LOCE for the UK, relies on wild assumptions of increasing load factors, etc
Here’s a piece we on LOCE in the US. Same story, different place:
https://eagleforge1.substack.com/p/the-devil-is-in-the-details-part?utm_medium=ios
David, apologies for being very late to this discussion. I found this article extremely informative but was confused by one statement you made. You write:
'The wind generator might offer electricity to the market at a low price and receive the wholesale price for its power, but we pay the extra as a subsidy though our bills'.
Why would a wind generator offer electricty to the market at less than his strike price? Or have I misunderstood something
There is also the issues of gas plants not coming on line until the strike price is high enough to cover their start-up costs, since they burn fuel and incur wear on the equipment during start-up and shut-down when they are not generating electricity. And they're gambling on how long they'll be up generating.