United Kingdom

United Kingdom

WindEconomics: UK moves ahead with electricity reform

The UK's Department of Energy and Climate Change (Decc) has published a list of draft strike prices of contracts for difference (CfD), one of the cornerstones of the energy bill currently before parliament.

December strike price… Offshore wind investment is likely to suffer from UK government’s decision (pic:London Array)
December strike price… Offshore wind investment is likely to suffer from UK government’s decision (pic:London Array)

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Under this system, generators will receive a top-up payment when the wholesale electricity price is below a pre-agreed strike price and pay money back when the price rises above it.

The proposed onshore wind strike price of £100/MWh (EUR 116/MWh) is one of the cheapest on the list. This should encourage investment in what is seen as a cheap energy source. Only landfill gas (at £65/MWh), hydro (£95/MWh) and a few other technologies with very limited resource are cheaper. Offshore wind, however, supported to £155/MWh, has the most expensive strike price apart from wave and tidal stream. Offshore wind resource potential by 2020 is 8-16GW, significantly more than wave and tidal (around 0.1GW). These all compare with an estimated current year-round average price for baseload energy of around £51/MWh.

Decc's draft prices extend to 2018/19, by which time onshore wind's support level has fallen to £95/MWh and offshore wind to £135/MWh. This offshore strike price remains higher than large-scale solar but the difference is diminishing. Solar's potential resource is 2.4-3.2GW.

Fifteen-year contracts

The strike prices appear to be high by international standards, but this is due to the fact that contracts will only run for 15 years and that pre-development costs in the UK are high. Even in countries with 15-year contracts as part of a feed-in tariff, support prices are lower, and in Denmark, Germany, Spain and parts of Canada, 20-year wind contracts are available, see chart below.

No explanation is given for Decc's decision to restrict contracts to 15 years, which seems inconsistent with the UK government's wish to keep the additional costs for low-carbon technologies low. In comparison with a 20-year contract, a 15-year contract adds about £8/MWh more to the price of onshore wind and £15/MWh to offshore.

The overall cost of Decc's support package is limited by the so-called Levy Control Framework to £6450 million per annum by 2018 (£7.6 billion a year by 2020). If 20-year contracts had been put in place, the added cost of wind would have been around £700 million per annum lower in 2020, assuming Decc's mid range wind capacity estimates are achieved.

One problem with a fixed strike price is that it covers developments at sites with a wide range of wind speeds. So, good wind speed sites (8 metres per second and above) are likely to be more profitable than those with lower wind speeds.

Hard to compare

At first sight, onshore wind at £100/MWh appears to be more expensive than nuclear in the UK, although the final strike price for nuclear has yet to be agreed. The treasury is said to be aiming for £90/MWh or less, but a direct comparison with wind is meaningless, simply because the nuclear contract is likely to run for around 35 years (again, this is not confirmed yet).

A 35-year nuclear contract might bring the strike price within reach of £90/MWh, but a 15-year contract would increase the required strike price by about 25%, making it far more expensive than onshore wind, and not far short of the offshore wind price. If the value of the recently announced underwriting of the financing costs of new nuclear build was taken into account, the price of nuclear would probably be more expensive than offshore wind.

Decc has promised to release more detail on the background to the draft strike prices soon, including the reasons for the contract length. It is confident that the security of the contracts for difference will ensure investors will be happy with modest rates of return.

UK strike prices

international FITs

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