[magnetic-recoil]

Offshore wind in the UK currently uses the "Contracts for Difference" payment mechanism. Operators bid to build turbines, and the best value operators get assigned areas of the sea. Then, they receive a fixed price from consumers for any electricity they generate (effectively, but there's market mechanisms in there that complicate the accounting).

Initially, this was much more expensive than fossil electricity, but the price of turbines has dropped and the price of fossil electricity has grown, so now existing wind turbines are lowering the price consumers pay for electricity.

New wind farms have achieved CfD rates of less than £0.04 per kWh, which is not a subsidy for the wind farm operators, but rather a subsidy for electricity consumers as this electricity is far cheaper than market rates.

[RobinL]

I've always wondered under the mechanism who has benefited from higher energy prices in the UK? With consumers currently paying high prices, who's getting the difference between the CfD price and the market price for energy generated by wind. Is it the government do you know?

[magnetic-recoil]

Wind farm operators sell their power onto the market (they can sell however they like, but the reference price is calculated according to the day-ahead spot price).

Any imbalance between the agreed price and the reference price is sent to the LCCC (Low Carbon Contracts Company, part of the government).

The LCCC then re-charges any CfD payments or surplus funds to the electricity suppliers. This should eventually work its way into an increase or reduction in household energy bills. So the end consumer should get the difference between the wholesale and CfD price, in theory. This is also taken into account when the OFGEM price cap is calculated.

To answer your question about who benefits from high electricity prices - mostly fossil fuel producers, but also fossil power stations, legacy renewable generators with direct subsidies rather than CfDs, and electricity market traders exploiting the volatility.

[RobinL]

thanks - very interesting!

I think that also clarifies something I'd found confusing: that the spot price is currently effectively determined by the price of gas, and yet the UK consumer is benefitting from the presence of wind generation (which generates much cheaper power than gas)

If I've understood your post correctly, this is because the electricity companies don't directly pass the spot price onto consumers. Instead when the price to consumers is calculated, the part attributable to wind is taken account of at the lower price.

So effectively the marginal price to consumers is actually affected by the average cost of generation (which is turn, from an economic point of view is arguably undesirable, because it means consumers don't have sharp enough incentives to save electricity at the margin)

[magnetic-recoil]

Yes, that's right. The spot price is determined by the marginal source of electricity. That's normally gas, but is sometimes coal, imports, or pumped hydro storage. The consumer actually benefits twice - once when the wind is sold into the market, which necessarily lowers the spot price for _all_ electricity (more wind supply is the same as reducing total demand, which will reduce the market price). Then, the difference between the spot price and the CfD price is refunded, but this time only on the electricity actually generated by wind.

In general, electricity suppliers don't literally pass the spot price on to consumers. It used to be that a supplier could price electricity however they liked, including passing the spot price on. However, for the past few years, suppliers are required to buy futures, and price their supplied electricity on that basis, because of the domestic price cap. If they didn't they would run the risk of going bankrupt like Bulb. Futures bring stability, and in an efficient market with perfect information buying futures would be the same as buying spot. But the market is not efficient and with perfect information, so that assumption doesn't apply. Notwithstanding that, you were correct, the part of electricity generation attributable to wind should be taken account of at the lower price.

For most consumers, their marginal cost of electricity is identical to their average cost (ignoring the standing charge) as they are on a fixed rate tariff. It would undoubtedly be more efficient to charge consumers the actual marginal cost at the time of consumption, and then refund the CfD payments in a monthly payment later, but that's not how it's done sadly.

[DrScientist]

Adding to that, they are now looking at local hydrogen production from wind excess.

While not nearly efficient as using the electricity directly, it's more efficient than throwing it away.

Also the offshore farms sit in a pool of the raw material ( water ).

[fbdab103]

They produce hydrogen from sea water? I had assumed fresh water sources, but I suppose salt water on an absolute scale is not that more loaded with particulates than anything else.

[snickmy]

for record, best electrolysis for hydrogen is a 50% efficiency end-to-end conversion.

[DrScientist]

Yep efficiency isn't great - but as I said, better then the efficiency of throwing excess away ( zero ).

There is also value in the ability to store the energy - not as efficient as something like using water to store potential energy ( ~75% ), but there is value there.

I'm not somebody who thinks it will be hydrogen everywhere - frankly electricity is easier to distribute and we already have a good infrastructure - but that's not to say it doesn't have a role.