Latest round of renewables would be paying back £7bn under current prices, over £100 off bills
UK’s Contracts for Difference (CfD) scheme means that cheap new renewables pay back part of that high power price, to the tune of £300million in six months over the past winter.
By George Smeeton
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The latest contracts for wind and solar projects announced by the Government today [1] would save £7billion on electricity costs under wholesale prices seen during the current gas crisis, equivalent to over £100 per home, analysis by the Energy and Climate Intelligence Unit has found. [2]
With Russia’s invasion of Ukraine exacerbating the gas crisis and causing gas prices to surge to record levels last winter, our reliance on gas power plants dragged electricity prices up to around £200 per megawatt-hour (MWh). [3]
But the UK’s Contracts for Difference (CfD) scheme means that cheap new renewables pay back part of that high power price, to the tune of £300million in six months over the past winter, and a forecast of £1billion from April this year to March next year. [4]
Today’s announcement gives the go-ahead for a further 11gigawatts (GW) of renewables at prices that are a quarter that of gas power plants during the crisis, and on average lower even that the price of gas power before the crisis. This includes 7GW of new offshore wind at around £45/MWh (in 2021 prices), taking us over halfway to the Government’s target of 50GW by 2030. And onshore wind makes a comeback with almost 1GW, having been excluded for the contracts since 2015 despite being supported by 80% of the public. [5]
Dr Simon Cran-McGreehin, Head of Analysis at ECIU said: “To keep bills low, these new wind farms can’t come online soon enough. At today’s prices with gas so expensive every household would be getting the equivalent of a £100 net zero dividend. In the meantime, existing wind and solar projects are already doing their bit to help bill payers, saving an estimated £1.3billion over 18months in the current gas crisis”
Savings will continue to grow as more renewables are deployed. CfD wind projects already contracted and coming online over the coming few years would bring annual savings to £6.7bn per year under wholesale prices of £200/MWh. The new projects announced today would take the savings to almost £14bn a year.
Previous analysis by the ECIU found that reaching the Government’s previous target of 40GW of offshore wind by 2030 would take savings to £26bn a year under high wholesale prices. And adding another 10GW of offshore wind to meet the new target of 50GW by 2030 would take total CfD savings from wind and solar to £34bn a year, equivalent to over £500 per home – and not including savings from any further onshore wind and solar capacity that is also built. [6]
Note to editors:
1. Contracts for Difference Allocation Round 4 results (BEIS, 7 July 2022): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1088875/contracts-for-difference-allocation-round-4-results.pdf
2. Savings are calculated as follows:
- Strike prices in 2012 prices are converted to 2021 prices using the factor 1.21 (from BEIS 2021 CfD Budget Notice), and then subtracted from a day-ahead wholesale power price (e.g. £200/MWh for the past winter), to give the savings per MWh. This is repeated for each technology.
- The annual output is calculated from the capacity and the load factor (from BEIS Allocation Round 4 Allocation Framework), and the total saving is the product of this annual output and the saving per MWh.
3. CfD repayments are calculated using the day-ahead power price, which was typically around £200/MWh over the past winter. See, for example, the ‘IMRP’ on the chart of p3 of the following webpage of the LCCC that administers CfDs: https://www.lowcarboncontracts.uk/index.php/dashboards/cfd/actuals-dashboards/historical-dashboard
4. The LCCC reports that CfDs have repaid almost £300m in Q4 2021 and Q1 2022, and forecasts repayments of almost £1bn in Q2 2022 to Q1 2023. See presentation of data at LCCC online seminar: https://www.lowcarboncontracts.uk/events/webinars/cfd-interim-levy-rate-and-total-reserve-amount-ilrtra-q3-2022
5. Public support for renewables is reported in BEIS Public Attitudes Tracker: https://www.gov.uk/government/collections/public-attitudes-tracking-survey
6. Analysis of future savings in presented in ‘Paying Back’ (ECIU, March 2022): https://ca1-eci.edcdn.com/paying-back-CfD-March2022.pdf?v=1647007723 The estimated strike price of £45/MWh (in 2021 prices) for offshore wind used in that analysis turns out to be exactly as per the results of AR4. Additional savings due to increasing the offshore wind target from 40GW to 50GW by 2030 are calculated using the same methodology, adding around £8bn per year under high wholesale prices. The savings per home would therefore be larger than the £330 stated in that report. The value of £500 per home is calculated using a slightly revised methodology to that in the earlier report, and now allocates just over 40% of savings to households, which is slightly higher than their 35% share of consumption used as a proxy in previous analysis, owing to businesses having lower unit rates on average.
For more information and media bookings:
George Smeeton, Head of Communications, ECIU, Tel: 07894 571 153, Email: george.smeeton@eciu.net