So, what's auctioned here isn't power.

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.

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laurencerowe 4 hours ago | parent | next [-]

Some wind farms intentionally delayed their entry into the CfD system to profit from this (though contract terms may have been tightened since.)

https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind...

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zingar 3 hours ago | parent | prev [-]

I’m missing something. Is the operator paying actual cash money if the market price goes up? It’s not just that they’re forced to produce electricity at a rate that’s possibly less than what it cost to buy fuel?

(Or in the case of renewables: producing for less profit than they would if they made their contract later)

	▲	tialaramex an hour ago \| parent \| next [-]
		> at a rate that’s possibly less than what it cost to buy fuel? You might need to sit down for this. The wind farms don't use fuel. Wind just happens, it's a natural phenomenon that has no real regard for our stupid "wind farm" even as we're harvesting gigawatts of power the wind doesn't ccare. If you were thinking "Wait I thought all the providers have these contracts, not just renewables" then er no, they're a subsidy, the CfD is a subsidy scheme. That cheap to make, expensive to run open cycle gas turbine some asshole put on a local industrial estate doesn't get a CfD, it can offer to sell the resulting electricity at market prices, and really the big problem is as you observed, that's possibly less than what it costs to buy fuel. Yeah, it is, bad idea to keep building Open Cycle Gas Turbines I reckon. Sure enough the UK almostly exclusively has more expensive to build but cheaper to run Combined Cycle plants. CfDs are used to subsidise renewable future power. A long term energy independence strategy. Even if you don't care about the planet warming and the sea levels rising you won't be burning all this gas in a thousand years 'cos there's not enough gas. Whereas the sun will shine until long after we're gone, and the accompanying winds won't stop either. The size of the subsidy varies, if you're building a pilot plant of a new technology that you're sure will revolutionize clean energy but, alas, no-one ever made one that worked before, the government might be willing to pay you four or five times as much money for your energy, partly because they're not expecting you to actually make any energy because you will likely fail. If your plan's big problem is that it's way less mechanically reliable than you'd like, this is a big incentive to incrementally improve that reliability. If your device that involves being in and out of an incredibly powerful tidal stream of corrosive sea water at freezing temperatures makes power but doesn't crack, tear, fall to pieces or explode in the scheduled period of operation you're that much closer to actually having a useful technology and paying you five times over the odds for the MWh you did make is a reasonable price.
	▲	hnaccount_rng 3 hours ago \| parent \| prev [-]
		Think of it this way: as a windfarm operator you know your costs and you know your expected amount of energy produced. But you don’t know the precise timing and therefore the market value at generation time. 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