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Financing Renewable Energy Projects - Contracts for Difference (CfD) Auctions
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- Опубликовано: 15 мар 2023
- This video looks at the Contracts for Difference auctions in Great Britain. What is it, why is it used and how does it work.
The Contracts for Difference (or CfD as it is more commonly termed) is an auction where developers of renewable generation (such as onshore wind farms, offshore wind farms and solar farms) bid into an auction with the aim of winning a 15-year contract that will guarantee a standard rate of payment for the electricity they produce.
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This video looks at the Contracts for Difference auctions in Great Britain. What is it, why is it used and how does it work.
The Contracts for Difference (or CfD as it is more commonly termed) is an auction where developers of renewable generation (such as onshore wind farms, offshore wind farms and solar farms) bid into an auction with the aim of winning a 15-year contract that will guarantee a standard rate of payment for the electricity they produce.
Excellent video, i had no idea this is how it works
Thank you - yes, it is an interesting concept and one that can often be misunderstood
Excellent video
Thank you very much
As you pointed out in the previous comment, negative prices will become more common as capacity is built out, and developers will lose out at those times.
However, it makes sense for the country to ultimately have excess capacity in tandem with storage or other means of using excess power profitably.
How do you see this playing out?
When CFD auctions are held, do they have a storage element specified to accompany the generation, or is that separate (ie the responsibility of the National Grid)?
Many thanks - good video btw.
Thank you! You have summarised the main issue - what to do with the excess power. As it stands there is no storage element to CFD. Private investors should be incentivised to build storage assets, especially with the rise of negative prices where they should be able to charge their asset at a profit. It is the responsibility of National Grid to then use these assets effectively to manage the grid when required. Still lots of work to be done - more Pumped Hydro Storage would be great for Britain but such a significant cost! What are your thoughts?
@@business.energy.economics.3828 It's a mess. No forward thinking from this government - because why would you forward-think renewables if your main goal is helping big oil to survive whilst personally reaping the benefits? Sorry - rant over - hopefully with a change of government we can expect an improvement.
I can't see why developers need to be incentivised to provide storage - it's an insurance policy at worst and a huge opportunity at best. If generating companies between them provide enough storage to satisfy the UK's elec demands for the worst 2 week period in winter ie when it's freezing and there's no wind [or sun], then they've cracked it and for the rest of the year they potentially have a surplus, which will sometimes be massive and will provide a very decent export revenue [we have one of the best wind resources in the world].
As for the type of storage, currently the cheapest option is batteries, but again this government is anti that, because it steers us away from big oil.
Definitely no forward thinking! The good news is that the Battery storage capacity is set to double over the next year. The not-so-good news is that the current set of Batteries are generally ignored by National Grid (interesting article - www.solarpowerportal.co.uk/news/esn_raises_concerns_over_balancing_mechanism_due_to_80_battery_skip_rate) with gas-fired power plants seemingly favoured. This has to change!
@@business.energy.economics.3828 A huge thanks (and subs of course) to you all - this video has filled in quite a few of the many blanks in my knowledge! It's quite hard for a non-expert RUclips viewer to get a picture of how this country should be investing in order to capitalise on the resources we have, and you guys should be proud that you're filling the gap! Please keep these videos coming - there's a helluva lot of fud out there that needs countering!
Thanks again @wotireckon I am taking a short hiatus at the moment to finalise a training course on Renewable PPA's. New content on RUclips in the next couple of months!
Great video, I wonder if 15 years is too long though, lots can change in the Energy industry in that amount of time
Definitely, it is a significant commitment. The main alternative to a CfD for Developers is to seek a PPA with another organisation. These contracts also tend to have 10 - 15year durations. If the market for PPA's moves towards shorter durations, maybe the CfD will follow!
@@business.energy.economics.3828 Yep and I remember watching another video that it is incredibly hard to find a long term ppa like that now with lots of uncertainty for companies and factories. Do you have any views on Nuclear for the UK?
I think Nuclear has a part to play. Important to have a 24/7 option to offset Renewables. The cost of Nuclear plants has to be considered, however, as storage and a more diverse range of renewable sources may limit the number of Nuclear plants we need. What do you think?
Very good explanation of this concept
Thank you, can be a difficult one to explain without the visual representation
@@business.energy.economics.3828 the graph @2:40 is key
Thanks, yes it definitely makes it easier to explain!
Thank you, just what I needed. I understand that nowadays the auction prices are generally below (say 50% of) the market price, i.e. renewable generators can provide energy for less money than current wholesale prices. Considering this, is there any reason for these companies to bid into the auctions, besides lowering some financial risk? Wondering because if not signing a CfD means they don't have to pay back the difference to the gvt and can thus make twice as much money, I would take the risk? (Especially given renewable energy production will fast become even cheaper so risk will decrease.)
Another question that plagues my non-economist brain is why a generator (say one that has a CfD with the gvt) would sell their energy at the wholesale price. Can they sell it for cheaper and if so why wouldn't they, given that it doesn't make financial difference for them (all they end up with is the auction price after all), and given that it might (?) stimulate competitive pricing, out-compete gas, and be cheaper for the consumer? Or are they just bound by the CfD to sell at wholesale price?
Thank you. Yes, the main reason renewable generators bid into the CfD is to cover their financial risk - securing a CfD contract makes it easier for them to go to a bank/lender and ask for the money they require to build the renewable asset. Also, some may take the view that power prices will become cheaper the more renewable assets built. In terms of the 2nd part of your question, often the CfD is contractually linked to a wholesale market reference price, such as a Day-Ahead auction, which means that the generator can only ever use this auction as a reference price (and not sell the power elsewhere). It keeps it simple from a contractual perspective, however, as you say - being able to sell power elsewhere may stimulate some more competition!
Very helpful video. Interested to understand better of why prices move into negative territory from a market standpoint. I understand excess supply leads to reduced demand, leads to lower prices, but why would it move into negative territory? Surely it just moves to 0 as there will be no buyer at that point.
What's your view on how CFDs will evolve as we build out more renewables. Would it be a case of a higher floor so negative pricing can be better compensated e.g. £70 rather than £50 per MWh so if prices move to -£51 to use your example, generators still receive positive pricing (+£19 MWh) or is that just unrealistic (given such a high floor is unsustainable) and too high?
Interested as at a certain point CfD usage for renewable generation will become far less attractive, as say PPA usage, and will be a far less attractive investment. Is that the point? Or do you think we'll see models adopted for storage e.g. greater pumped hydro, or more colocation of H2 electrolysers to increase demand?
Lots there to unpack, but welcome your view from an economics standpoint!
Interesting mechanism that allows renewable assets to be built
It has been successful in Britain. Will be interesting to see how the mechanism develops over time
@@business.energy.economics.3828 hopefully the cost of building offshore wind keeps going down
Difficult couple of years for Developers in terms of rising material costs and price volatility. Things are starting to look more stable
@business.energy.economics.3828 that's good news. Hopefully we see more and more renewable assets built
It has certainly helped so far!
actually, they don't incur losses. The part from 3:30 is incorrect.
Hi @jane9907, in Britain they do. They can ultimately decide not to operate the windfarm if prices reach such negative numbers. If they do operate the windfarm at such times as the negative pricing is so low, they will incur a loss.
@@business.energy.economics.3828 how they might incur losses though? If the market price is lower than the strike price, government pays them the diff. If the market price is above the strike, the market pays to company the full amount and company pays the diff to the government. Earlier in the video you say that they are paid fixed price for the whole contract duration and that’s correct.
@@jane9907 the government will pay them the value of the Auction Price (say this is £50/MWh). This is the maximum value the government will pay. If the wholesale price ends up at -£20/MWh, the government will pay them £50/MWh (the revenue is therefore £30/MWh). If the wholesale price reaches -£51/MWh, the government will pay £50/MWh (the revenue is therefore -£1/MWh i.e. a loss)
@@business.energy.economics.3828 ok, I got the point, but looking at the data, the market price for wholesale electricity never went that low, and when it does it doesn’t last longer than an hour. The weighted average market price for one year is actually around the strike price
@@jane9907 yes, absolutely - not that much of an issue at present. There are also slight nuances to the rules (how long the negative pricing lasts etc). One thing renewable generators are aware of, however, is price cannibalisation - the more renewable generation that we have, the more likely lower (and negative) prices will occur. Interesting to see how this develops over the years!
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You could always do your own video with a studio quality microphone