[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.