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Wind farms to pay back £660m under CfD scheme amid high gas prices

Through the CfD auctions, renewables are guaranteed a strike price, giving developers long-term security.

Through the CfD auctions, renewables are guaranteed a strike price, giving developers long-term security.

Wind farms are expected to pay back £660 million under the Contracts for Difference (CfD) scheme amid the current energy crisis.

According to new analysis from the Energy and Climate Intelligence Unit (ECIU), between October 2021 to April 2023 wind farms are expected to pay back the significant sum as their contracted prices are much lower than the wholesale cost of electricity.

Gas prices have surged by as much as 500% over the last year, driving up wholesale energy prices in the UK and Europe. Following the Russian invasion of Ukraine, gas prices and subsequently energy prices have become even more volatile, and could mean CfD supported wind farms will pay back even more than currently predicted during the 18 month period from October 2021.

The analysis follows statistics from Low Carbon Contracts Company suggesting that renewable generators were to return £39,222,407 to electricity suppliers for the final quarter of 2021, due to the wholesale price surging well beyond the strike price achieved in CfD auctions.

More, and cheaper, wind farms are coming online through the CfD scheme in the next few years. As such, if such an energy crisis were to happen again in five years’ time, wind could pay back £6.7 billion in a year according to the ECIU. This would be equivalent to £85 per house.

Going forwards, even if wholesale prices return to 2021’s levels of around £50/MWh, a number of new wind projects coming online would still pay back given their low contracted price.

By 2030, if the UK reaches its 40GW offshore wind target as well as further onshore wind coming online through the CfD auctions – the pot one technology is able to compete in the current auction for the first time since 2015 – wind could pay back £26 billion in the event of another gas crisis. This would be equivalent to £330 a home, said the ECIU.

Given wind generators are expected to continue making payments into early 2023, the cost of the CfD to billpayers will be effectively zero. The ‘green levy’ as its been called, will fall to just 29p per home in administration fees, a significant cut from £35 as of the April 2021 price cap.

The CfD levy cannot currently be set to be negative, but this is something the government may consider following managing the immediate crisis, suggested the ECIU. This would enable households to essentially receive payments from cheap wind farms.

“Even though ‘green levies’ are falling and are dwarfed by the cost of gas on bills, there is valid debate as to whether these costs should be transferred to general taxation. It’s worth considering though this would mean any wind paybacks in future go to the Treasury and not potentially into people’s pockets,” said Dr Simon Cran-McGreehin, head of analysis at the ECIU.

The most recent round of the CfD opened in December, with a target of 12GW of electricity capacity set to gain £285 million of funding. The winners are to be announced in spring/summer.

Since it was launched in 2015, it has awarded contracts totalling almost 16GW of new renewable electricity capacity, and is broadly considered a great success. There has been around a 65% reduction in the per unit price of offshore wind since the first auction round.

In February, the government announced that from March 2023, CfD auctions would be held annually instead of every two years, to further accelerate the development of domestic renewable energy.

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