UK secures record supply of offshore wind projects
* the gas price in the article includes the government’s self-imposed carbon tax. The actual cost of gas (£55) is FAR lower than the £91.20 strike price Milibad has set for wind. And Miliband has locked in this terrible pricing for 20 years!
* there are huge extra costs for wind power that are not accounted for in this quoted strike price. The grid must be upgraded. Expensive new power generation capability will need to be built to compensate for the intermittency of wind
* the stated power capacity of wind generation is a theoretical maximum, and the actual capacity will be much lower in practice.
The new wind power is mostly idling natural gas power plants, which can spin up on the rare occasions there's no wind in the North Sea. Then the UK only uses the expensive shipped LNG a few days a year. The much cheaper piped natural gas is already allocated.
Is that unreasonable? Carbon dioxide is an externality, and it needs to be accounted for accordingly. Suppose the government is tendering contracts for milk for school lunches. One farm runs a CAFO[1] that pollutes the local river. The other has cows on a pasture that doesn't. Is it that unreasonable for the government to be like "well hang on, the CAFO farm might be cheaper the grass fed farm, but it'll cost us money to clean up all the shit they're dumping into the river, so we're going to impose a tax on the CAFO farm for their pollution"?
[1] https://en.wikipedia.org/wiki/Concentrated_animal_feeding_op...
The actual cost has to price in the impact of using it.
For example, it's cheaper for UK water companies to pump sewage into rivers and onto beaches:
https://www.bbc.com/news/articles/cz9kz8ydjpno
https://www.bbc.com/news/uk-england-london-67357566
https://www.bbc.com/news/articles/c5yprnd848ko
https://www.theguardian.com/environment/2025/sep/16/sewage-o...
But maybe it's a nice idea to force them to deal with sewage properly so you don't have to live in rivers of shit.
The self-imposed tax is there and isn't going anywhere, so it's included in the price.
The other two points are accounted for in the strike price, because this capacity came into being and is now offering electricity at the strike price.
The context: this is about bids from wind farm operators to win "contracts for difference" with the Low Carbon Contracts Company, an entity owned by the UK government. It's essentially a subsidy scheme where the wind farms can lock in a specific price per MWh for all the electricity they will produce over a certain period. But only if they bid low enough to be among the winners of the auction.
https://en.wikipedia.org/wiki/Contracts_for_Difference_(UK_e...
Havoc•1h ago
i.e. if you're buy 99% cheap RE, 1% expensive gas then you're paying for 100% at the higher gas price.
CursedSilicon•1h ago
Like if gas is $5 and RE is $1 the RE folks get $5 instead?
Devils advocate would say that might work out in RE's favor. Lower production costs mean more profit and therefore more incentive to build more RE
boothby•1h ago
Edit to answer my own concern: But, reading this article, it does seem like the auction is the offramp. The government takes bids for enough power to supply the country, and once the auction is settled the worst-case cost is paid to all winners. So there's a hope that gas will eventually subsidize its replacement with renewables.
tialaramex•1h ago
What they're auctioning are what's called "Contracts for Difference". The contract has a "Strike price" which is in essence the price the government (via a for-purpose company) agrees you will be paid regardless of what happens for electricity sold to the system.
Now as the word "difference" might suggest there will be a difference between the market price at any particular moment and this strike price. The CfD works by the government paying you the difference when the market price was lower, and you pay the government the difference when it's higher. You can definitely afford to pay them 'cos you just got to sell power for $$$$
Why do this? Well, the trick is that a government (even if politicians don't always act like it) is here for the long haul. So for them guaranteeing how much you'll be paid for energy you're not going to make for ten years is fine. Tax will still exist in ten years, houses with electric light will still exist in ten years, this is an easy bet. But for a wind farm company, a commercial undertaking, such guarantees are incredibly valuable and would be unaffordable from elsewhere. So this is (relatively) a very cheap subsidy.
When there was a gas price spike because Russia invaded Ukraine the contracted wind farms paid a whole lot of money because of that difference I talked about, if you'd gone freelance, no CfD subsidy well, you're printing cash, 'cos at those prices you probably made back your whole install costs in a year of trading.
laurencerowe•56m ago
https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind...
zingar•27m ago
(Or in the case of renewables: producing for less profit than they would if they made their contract later)
hnaccount_rng•6m ago
From the first two you can calculate what you need in terms of £/MWh (include whatever profit you want in there). Now you can go to the government and bid that price in the auction. If you win, you have a safe profit and all risk (and upside potential) now lies with the government. As GP said, in the case of 2022 you would have lost out on revenue. But that’s the price foe guaranteed margins
The CfD part is a technical detail. It ~ doesn’t matter whether you first sell the energy and then go to the government for reimbursement. Or whether you sell the energy to the government which then handles the follow up sale.
What I’m not sufficiently familiar with is whether you _have_ to go to such an auction (i.e. whether the auction also is the mechanism of capacity planning) or whether you are free to bypass this system and just hook up your wind park and carry the risk yourself. But functionally this is an insurance scheme for profits, with a market based pricing system
0cf8612b2e1e•1h ago
SoftTalker•40m ago
blibble•1h ago
yes
if there's 1mW of gas in the grid then everyone gets paid the gas price
this is called pay-as-clear, and has some positives (strongly encourages RE construction), and some disadvantages (zero long term planning, paying gas generators absurd rates if they can squeeze in at the top of the auction)
UK government is consulting on changes to this system at present
cbmuser•57m ago
otherme123•45m ago
blibble•37m ago
this is not the global oil market
the UK electricity market is a government creation, highly regulated, and only accessible to limited participants
30 minutely, day ahead, pay-by-clear auction markets are not a property of the universe
MakersF•1h ago
Instead of focusing on this, here a few more impactful things that would help: 1. Zonal pricing, so that there is an aligned incentive to build production where demand is (connection to the grid is a big limiting factor) 2. Stop providing contracts to renewable where curtailed production gets paid (curtailed energy is paid by consumers as taxes on bills normally) 3. Start allowing to build more renewable so that renewable are setting the marginal price 4. Push utilities to do PPA (power purchase agreements) with producers of RE so they can agree to a fixed price, and a smaller slice of electricity is bought at the auction
There are a few more, but these are the most important.
Regarding your edit: the gas plant is not subsidizing, the customers are paying. But of course at the moment building renewable is so lucrative thanks to this setup, that there is a big incentive to build them. Of course they need to plan for 20-30 years, and the risk of getting to big periods at 0 marginal pricing is real, so builders need to evaluate well the risk (and PPAs can help)
In a non-competitive world what you say would be true (you'd avoid filling in the remaining 1%), but there are a large number of power producers that a cartel is unlikely
tialaramex•1h ago
So, OK, clearly this CCGT electricity here (made with gas) offered for £85 per MWh we're going to buy that, for £85 per MWh.
Now, we also needed all this wind power which bids £5 per MWh. Presumably you'd want to pay them less than £85 per MWh. So, too bad, they bid too low, they get punished right? But since you aren't OK with paying less than the bid price, doubtless if they had bid £84 you'd pay that right?
Notice that the incentive in your model is for everybody to guess what you'll pay and bid just barely below that, whereupon you've wasted a lot of resources, your strategy no longer has any price discovery value, and you're paying almost as much as before. A triumph of... rationality?
How much do you reckon you can save the average household if you do this? £50 per year? Twice that?
Analemma_•1h ago
The point of this is that it's supposed to guarantee windfall profits for wind operators, to make it attractive to keep building out wind until all the marginal gas is pushed out of the market mix. The price being set by the highest-cost source in the mix is a feature for incentivizing buildout, not a bug.
bryanlarsen•1h ago
That's how commodity producers like farmers can be profitable. The marginal producer makes no profit, but every producer who can get their costs below the marginal producer makes a profit.
If farmers didn't make any money, they'd stop farming and we'd have no food.
QuantumGood•21m ago
bryanlarsen•13m ago
Yes, costs have skyrocketed -- combine harvesters start at about a million now. But wheat prices and yields have been high enough to more than compensate.
But Saskatchewan farmers are a great example of a low cost producer. A Saskatchewan farm usually runs about 10,000 acres per operator. UK farms with a couple hundred acres can't compete.
cbmuser•59m ago
Why should an operator of wind turbine sell their kWh for less if the current price is high? That would be stupid.
zingar•48m ago
_fizz_buzz_•9m ago
otherme123•55m ago
The key is that in the UK gas sets the price almost 100% of the time, vs 25% in Germany or less than 10% in France. The fix: build more of the cheap sources. A patch: cap what gas can bid.
_fizz_buzz_•50m ago
That isn’t a “system”. It’s just what happens. Why would the 99% RE be forced to sell at a lower price? They will sell at whatever the market value is. Which is determined by supply and demand. And the gas turbines will only turn on if it becomes profitable for them to turn on at that price. So the causality actually is the other way around. Lots of demand increases electricity prices, higher electricity prices make it profitable for more expensive means of production to be powered up.
KptMarchewa•47m ago
mr_00ff00•37m ago
The one that I can think of is the government sets the amount of electricity produced, and then it’s rationed. But I doubt the UK would be happy with rationed electricity where your power shuts off the second it’s over. That would be essentially mandatory blackouts all the time.
Not to mention the cost would be held by the government, so you end up paying it in taxes anyway.
_fizz_buzz_•17m ago
benj111•27m ago