From NOT A LOT OF PEOPLE KNOW THAT
By Paul Homewood
h/t Ian Magness
The developer behind one of Britain’s largest offshore wind farms is exploring ditching state subsidies in favour of private power deals as it scrambles to boost the project’s finances.
Ørsted has confirmed it may give up some government support that would apply to Hornsea 3, off the coast of Yorkshire, amid concerns that the subsidies it has been awarded are too low.
Instead, a spokesman said the company may seek to sell 25pc of the scheme’s power on a so-called merchant basis – where it receives no state support but can potentially reap bigger returns.
This would amount to selling about 700 megawatts of the wind farm’s planned 2.8 gigawatt (GW) output, a total which is enough to power three million homes.
The move comes as Ørsted’s bosses scramble to boost the viability of the scheme ahead of a final investment decision, expected by the end of this year.
On Friday, bosses at Ørsted told financial analysts they were examining an option to pass over 25pc of the CfD contract so the company would instead be free to sell power from the scheme for a higher market rate.
This could potentially boost returns from the scheme – assuming the company can secure better prices for the power privately than what it is guaranteed under Hornsea 3’s CfD.
Ørsted, the world’s biggest offshore wind developer, has insisted it intends to press ahead with Hornsea 3 in “all scenarios” but has yet to take a final decision.
The project is scheduled to begin generating in 2026 and has been awarded a subsidy deal worth about £45 per megawatt hour in today’s prices – less than what was offered in the most recent subsidy auction.
The pool of potential buyers for the 700 megawatts of power on offer is likely to be confined to heavyweight companies with big electricity demands.
Kathryn Porter, an independent energy consultant and founder of Watt Logic, said Ørsted faced a difficult choice between “locking in at a really low level of return or taking bigger risks and being able to make more money”.
She added: “They may take a view that they can get the project over the line because electricity prices will be high enough that they can make a decent enough return.
“Experience to date, however, shows that UK power market investors do not have much appetite for risk.”
A key risk is whether the Government would extend the Electricity Generator Levy – which affects receipts from power sold at more than £75 per megawatt hour – beyond March 2028.
Ørsted was threatened with a credit downgrade by ratings agency S&P last week after taking huge writedowns on the value of its offshore wind projects in the US.
The terms of the CfD are quite clear – it is all or nothing. Orsted are under no legal obligation to trigger their contract, in other words take up their option to sell. However, if they do, they must sell all of the electricity they supply to the Grid under CfD terms. The only way to avoid this would be to transmit power direct to an end user, bypassing the Grid.
And, I suspect, the government will be loathe to amend the contract to allow what Orsted want.
With market prices as they are at the moment, there is no logical reason why Orsted should not sell all Hornsea’s power via PPA’s. But as Kathryn Porter points out, investors in offshore wind farms like certainty, not risk. And the Electricity Generator Levy, if extended past 2028, would take away a large chunk of any excess profits.
Work on installing the turbines is not expected to start till 2026. Despite Orsted’s protestations, there is an increasing likelihood that they will pull the plug on Hornsea.
But whether they do, or sell via PPAs, private consumers will not benefit from the low prices already contracted.
Dogger Bank
Meanwhile SSE’s Dogger Bank offshore wind farm, which began generating last month, has still not appeared to have triggered its CfD, currently priced at £49.77/MWh.
I’m waiting confirmation from the Low Carbon Contracts Company, but it seems that they too will sell at much higher market rates.
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Don’t read anything into the fact that Dogger Bank hasn’t triggered its CFD. I has only hooked in its first turbines, and can’t trigger it even if it wants to until a complete phase of the project has been fully commissioned in perhaps a year or so.
My question is what would be the consequences in a private contract for failure to perform when they cannot meet the contracted demands? Would that penalty squash any such ventures?
Yes Tom, it would be a major issue in the real world but these were contracts written by the British government. They forgot to make the forward agreements (inclusive of subsidies) mandatory. In financial market terms, they wrote a swap but didn’t charge for the optionality implicit in the goods’ seller being able to get out of the contract when/if the market price rose. So the farmers won’t sell at the contracted prices.
As for stopping future ventures well, yes, that’s exactly what is happening. The latest British market round for new windmill farms did contain clauses making the (subsidised) contracts obligatory and it totally tanked – no takers. The industry is demanding much, much higher guaranteed prices this time but, for now, the British government isn’t minded to agree (not least because it nails the lie that windmills produce cheap/the cheapest electricity.
The initial planners simply set up a new corporation at the start of the venture that can be declared bankrupt if the plan fails. Those planners own a lot of the shares of that corporation for very little actual investment. Been such since trading companies sent ships to India for spices. If the ship went down, the incorporated entity failed, customers lost their downpayments, investors lost their money, banks lost what they had lent. The initial planners start over again with other investors and 3 out of 4 success ratio was sufficient to keep the planners from being considered crooks.
Offshore wind doesn’t seem to be hitting that success ratio….
as a senior member of the shipping industry i object to your comments on our centuries old practices.
how dare you out us publicly!
Wind farms are subject to the same market arrangements as everyone else. That is, their contractual obligation for each half hour is registered with the central register. Any discrepancy is invoiced at the system balancing price. The incentive is that system prices tend to be very disadvantageous if there is a surplus or deficit at the system level in the same direction. The result is that wind farm contracts tend to rely on nominations close to actual delivery time to reduce the imbalance risk. Day ahead is common, and is the basis for CFD pricing.
Wind farms may trade additionally any time up to gate closure an hour before the half hour contract period to buy in additional supply from other generators, or sell more output to try to minimise their exposure at lower cost. The same applies to other generators and to energy retailers who have to balance purchases against what they are eventually deemed to have supplied once all the meter readings are in.
Magesox,
Thanks.
It seems that the UK’s #Rolls Royce# of Civil Service, who had some input into these contracts, have come up with a battered, clapped out #Austin Allegro# of a contract.
And they have index-linked pensions that I have to help pay – or go to jail.
Nice non-job if you can get it.
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Reply to m
Magesox, below. Grrrr!
Auto
“”can potentially””
Well that’s a surprise in this world of could, might, may etc etc
There are some limited provisions in the CFD terms to alter the registered capacity of the project. I will try to look up the permitted circumstances and extent, and the implications for what might be metered under the CFD. I know that in the case of Moray East (which has yet to takeup its CFD) the actual capacity is much higher than the CFD contract capacity.
One of the difficulties with market pricing is that you get no compensation when prices are low, so you become first in line to curtail. The recent Moray East accounts show a rather lower achieved capacity factor in consequence, although the serendipity of getting crisis prices offset that financially. Another problem is finding commercial buyers willing to tolerate intermittent supply.
Add in the enormous uncertainties surrounding how the area will be reformed under REMA and I truly don’t envy the decision makers considering Hornsea 3.
It is delusional to think a PPA will bail Orsted out, when the CfD subsidies are insufficient. Correctly calculated, the LCOE of onshore wind is about 2.5x CCGT, which is why it must be subsidized. The EIA says offshore wind is 3x onshore, so about 7.5x CCGT. No private power purchaser can afford to pay that.
The accounts for Moray East for 2022 were published recently. It’s a 950MW offshore wind farm that didn’t take up its CFD. Its revenue was £702m thanks to the crisis market conditions, on a low capacity factor of just 30.8% – an average of £274/MWh. A significant portion of revenue will have come from constraint payments explaining the low capacity factor, as it is sited in the far North of Scotland with its grid connection coming ashore near Banff.
Ørsted is partly owned by de danish state, (50.1 per cent)
Story tip – good little article – A horror story for climate zealots – American Thinker
It’s a lot like the illusion climate zealots have that getting rid of carbon somehow means that they get to keep civilization. They don’t get to keep it if they get what they want.
If wind and solar were enough to power industrial civilization, the Dutch would have had our civilization back in the 1500s.
Zero carbon means zero industrial civilization. It means 7 billion people starve to death. It means we have forgotten to fear the cold.
So for a frightening read as the weather changes and the leaves fall, check out “To Build a Fire.” And remember how to be frightened of the cold.
“If wind and solar were enough to power industrial civilization, the Dutch would have had our civilization back in the 1500s.”
This has to be the most stupid thing i’ve read today.
Not sure about that, I read the Guardian today
Apparently their staff are refusing to come back to the office. And, the outrage, the canteen is no longer serving hot food! Urgent discussions on how to end this phobic violence against their own workers’ digestions, and make the Guardian a safe place for staff again, a safe place, that is, for them not to come to work in.
Its all about intersectionality, I mean bad enough you suffer from the violence of not being served a hot lunch, but when you add that to also the covert violence of making you come in to the office not to be served it. Well!
In context its making a valid point with a literary flourish. Of course literally its not true, the thing we have going for us now is the industrial and IT revolutions, so wind power today can be exploited on a scale the Dutch couldn’t dream of. The fact that the Dutch, with only hand and horse power, limited amounts of metal, no knowledge of electricity, could only do limited things with their brick, wood and fabric windmills shows nothing about what we can do today.
But it is true in this sense: even with present day technology its impossible to run an industrial civilization on wind and solar, and the attempt, if persisted in to the bitter end, will indeed result in something close to zero industrial civilization.
You cannot run a modern society with wildly fluctuating electricity supply, It will be simply unusable, Without large amounts of gas consumption you cannot make it usable. There is no other practical, grid scale, means of filling in the gaps. In fact, the dependence on gas is so great that it probably makes no sense to build the wind at all, just use more efficient CCGT and dispense with it.
In the end, with all the modern knowledge, you would end up with something not far off 17c Holland. No modern factory of any sort can run without reliable consistent electricity supply. You can’t run a semi conductor plant or a steel mill on it. And you cannot get that out of wind.
I am actually becoming slightly more optimistic about the situation. The UK is in many ways a test case. Its becoming clearer as the project goes on that its not working and may run into too many road blocks ever to be implemented. Take the vendors’ and activists at face value, and make their assertions about wind being cheaper into contractual provisions, and you get walks and no-bids. The Royal Society’s report on Net Zero, with its absurd estimate that you would need 900 caverns to store hydrogen for backup generation. A polite British way of saying that its impossible. The unfolding real issues with EVs, insurance, range, refuel times. We currently have a near buyer’s strike on heat pumps.
It is possible that the project will be derailed because it will be impossible to get the necessary participants. Continue to get no-bids and walks from wind contractors, find that EV new sales are collapsing, and that the bottom falls out of the used EV market (because who wants to buy an uninsurable used EV with unknown battery state?). It all may collapse whatever governments try to do.
Paradoxically, pumping water is one of the things that wind is good at. Pump more and store it when wind is available and use the storage when wind is unavailable. Works great for stock tanks and irrigation. Anything else not so much.
Oh, and when tou have to pump water on demand as in flood control, electric driven pumps are king.
O/T. Modelling update…
“”In a new study, Kad et al. fill a knowledge gap by projecting how mountain precipitation will change with global warming in response to rising CO2. In previous work, mountain precipitation was predicted to increase with global warming, because atmospheric moisture rises along with temperature. However, observations in many regions over the past few decades have shown varying weather patterns in mountainous areas.””
https://eos.org/research-spotlights/carbon-dioxides-effect-on-mountain-climate-systems
Fill that gap….
The only gap is between their ears
“a total which is enough to power three million homes“.
I think that should be written “a total which is enough to power three million h-m-s”.
In the meantime they need to return all the government money they have already received.
The private sector won’t be as footloose with money as western leaders are with taxpayers cash – no business case, no investment and there is no business case for windplagues
“…enough to power three million homes.” They forgot to add “when the wind is blowing”.
just plaing devils advocate for a second – doens this mean that all those cfd contracts, which everyone said was a rip off at the time – was actually quite kanny pricing?
The ones that were a ripoff remain a ripoff, which is most of them that are actually operational, with average strike prices now worth around £175/MWh. The more recent bids were clearly below cost and designed to secure rights, in the expectation of renegotiating later on the back of government commitment to wind. We’ve seen the same tactic in the US.