Offshore wind farms delaying their Contracts for Difference (CfD) contracts could have made significantly higher profits since the start of this year, new data collated by Cornwall Insight has shown.
The way the CfD works is generators are awarded a strike price for every unit of power they generate. If power prices go above this strike price, generators pay the Low Carbon Contracts Company (LCCC) the difference – and vice versa.
However, some offshore wind generators with CfD agreements are delaying the start of their CfD, allowing them to take advantage of high wholesale power prices and avoid having to pay back additional revenue to the LCCC.
Indeed, last month the Department for Business, Energy and Industrial Strategy (BEIS) called on companies to act “fairly” after Moray East Offshore Wind Farm delayed taking up its CfD.
The farm – which was developed as a joint venture owned by Ocean Winds (56.6%), Diamond Green Limited (33.4%) and CTG (10%) – secured a CfD contract in 2017, and was fully commissioned last month. In a statement, it said it was “proceeding according to plan within the terms set by the CfD process”.
Under current regulation, theoretically, an offshore wind farm can commission anywhere within a three-year window, with current assets that are operational but haven’t yet activated their CfD able to make use of this to make additional revenue on the wholesale market, Cornwall Insight said.
The data shows there is a "significant commercial incentive" for delaying the CfD, with strike prices for offshore wind in 2017’s Allocation Round 2 being set at £73.71/MWh and £94.81/MWh (both prices in current money).
This is compared to the Intermittent Market Reference Price (IMRP), which is used to determine CfD payments in each hour for offshore wind farms, which has averaged £187.42/MWh since the start of 2022 up to 14 May.
Of the 3,190 hourly periods from the start of the year to 14 May, the IMRP has been higher than £73.71/MWh in 3,072 (96%) and higher than £94.81/MWh in 2,892 (91%) of them.
Therefore, if plants with these strike prices had activated their CfDs at the start of the year, this would have resulted in significant paybacks to the LCCC, Cornwall Insight said.
In January, it was announced by the LCCC that CfD generators would be paying £39,222,407 back due to the wholesale price surging well beyond the strike price - with this the first ever quarter this has occurred.
The LCCC also stated it expected that this would continue into the next quarter, while the Energy and Climate Intelligence Unit forecast that between October 2021 to April 2023 wind farms will need to pay back £660 million.
Lee Drummee, analyst at Cornwall Insight said: “The CfD mechanism is largely an effective tool for encouraging investment in renewables, whilst guarding against excess profits, and rising consumer prices. There are some fears that alternative suggestions on how to control returns, including the windfall tax, could be counterproductive to the UK’s decarbonisation efforts.
"However, there will also be questions raised around the fairness of generators in taking such an approach to their CfD contract and whether the CfD terms should be amended for future rounds to account for commissioning during periods of very high market prices.”