From THE DAILY SKEPTIC
by David Turver
The Low Carbon Contracts Company (LCCC) administers the Contracts for Difference (CfD) subsidy scheme and publishes data to show how much it is worth. Data are usually published about 10 days in arrears and are sometimes adjusted. Now, we have complete data for August 2024, and it is enough for a reasonable analysis.
Overall Subsidy Level Increases
The headline is that overall CfD subsidies rose sharply in August 2024, withdrawing a total of £237 million – the third highest total on record and the highest for the month of August (see Figure 1).
The total is up £84.2 million from July’s total. The main driver of the increase was offshore wind, which was up £74.5 million from last month. This August total is also up £123.8 million from August 2023. Since August last year, offshore wind subsidies are up £72.3 million, biomass conversion £35 million, biomass with CHP up £10.2 million and onshore wind £5.1 million.
There are several factors that have led to the increase in subsidies since last year. First and most obvious, more wind farms have now activated CfD since last year. The Moray East and Hornsea Project 2 offshore projects came online earlier this year, as did the Sneddon onshore wind farm. In addition, the CfD part of the Drax biomass plant was not used last August, but received a subsidy of £25.6 million in August 2024.
Load Factor
However, the number of turbines claiming subsidies is not the only reason for increased subsidies. The load factor is also up. This means that onshore and offshore wind farms are produced closer to the theoretical maximum during the month (see Figure 2).
Using the nameplate capacity recorded by LCCC for each installation, we can calculate the load factor for each project and aggregate it by technology. In August 2024, CfD-funded offshore wind farms achieved a load factor of 34.7%, the third highest August on record, the highest since August 2020 and up three percentage points from last year. Onshore wind achieved 24.9%, the second highest August load factor on record and up from 16.7% last year.
More wind means more generation and, other things being equal, more generation means more subsidies.
Subsidy per MWh
Another thing that affects the subsidy rate is the CfD strike price and the reference price used to calculate the subsidy rate. For offshore wind, the weighted average strike price has fallen by £23/MWh from around £178/MWh in August 2023 to £155/MWh this year. This is due to the addition of Moray East and Hornsea Project 2, both of which have lower strike prices than previous offshore wind farms. Onshore wind strike prices are up a few pounds from last year to £113/MWh, and solar is up £4 to £110/MWh.
However, the Intermittent Market Reference Price (IMRP), which is used as a baseline for the price of renewable electricity sold on the market, fell sharply last year. The average IMRP, weighted by generation, has fallen by around £25/MWh from £76/MWh in August 2023 to around £51/MWh in August 2024.
The subsidy per MWh is calculated as the difference between the strike price and the IMRP. Finally, subsidies per MWh for offshore wind increased slightly from last year and increased significantly for onshore wind and solar (see Figure 3).
Gas prices are lower this year than last, so this explains some of the reduction in IMRP, as gas often sets the electricity market rate. However, adding uncontrollable renewable generation can also affect IMRP. There were two days in August when the weighted IMRP for offshore wind fell below £20/MWh and three occasions when the weighted IMRP for solar fell below £10/MWh. If the price remains positive, this is not a problem for the generator; they only make up the difference with extra subsidies. If the price goes negative for some time, then some wind farms do not pay curtailment costs.
Conclusion
The addition of newer, cheaper offshore wind farms has not had a significant impact on subsidies per MWh. The reduction in the average strike price has been overwhelmed by the combination of indexation going up in April and lower gas prices since last year. Even if the gas price remains at the current rising level, we will not see a significant reduction in the subsidy per MWh because the increased generation from renewable energy pushes the IMRP, thus increasing the subsidy. For the generator, the head wins, the consumer loses the tail. We can expect more record subsidies between now and February 2025 as the seasonal load factor increases again and Drax continues to work to replace its remaining coal plants, which are not long in coming.
David Turver writes in Eigen value Substack page, where this article first appeared.
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