Renewable Energy Foundation

Summary

On its website the Moray Offshore Windfarm (East), known as Moray East and comprising one-hundred 9.5 MW turbines located off the North East coast of Scotland, describes itself as a “highly competitive offshore wind project”.

It is certainly notable for its extremely high levels of income, over £1 billion since it began generating in June 2021 and up to July 2023, with a strikingly high average of £234 per megawatt hour generated, well in excess of the average price of £168/MWh, received by gas-fired generators in the same period.

This is all the more remarkable since Moray East was originally awarded Contracts for Difference (CfDs) in Allocation Round 2 in November 2017 with a guaranteed but capped price of £57.50/MWh in 2012 prices (the CfD administrator calculates that this would at present be equivalent to £74.49/MWh).

However, Moray East has not implemented its CfD, preferring to take the much higher market prices prevailing in the wake of the invasion of Ukraine. As a result of this decision Moray East offshore windfarm received £812 million in electricity sales since coming on line in summer 2021.

Moray East is also asking to be paid to reduce output (constraint payments), a behaviour that is arguably unjustified, adding a further £101 million, plus £195 million contracted wholesale income it receives for the constrained off electricity.

Had Moray East implemented its CfD and delivered electricity at the contracted price, the wind farm would have received £350 million with the consumer receiving the difference of about £460 million under the terms of the CfD. By refusing to take up the CfD contract, Moray East has more than doubled its income and prevented the consumer receiving a rebate of £460 million. Moray East was able to achieve this remarkable result because the CfD contract terms permitted deferral without penalty, in effect placing almost all the risk on the consumer, and very little on the generator.

When generation income and the income it receives when constrained are totalled, Moray East is found to have received over £1.1 billion in the period June 2021 to July 2023. We estimate that this means the consumer has overpaid by approximately £647 million. In that period, the actual volume of electricity generated was 4,740 GWh which means the price paid for wind energy generated by Moray East in this period is £234 per MWh, greatly exceeding the price of gas-fired Combined Cycle Gas Turbines over the same period, which was £168 per MWh. The claim that wind energy is invariably cheaper than fossil fuelled energy appears to be a fallacy.

Detailed Discussion

The UK government awarded Moray East a 15-year Feed-in tariff with Contract for Difference on 11 September 2017. This entitled the wind farm to a guaranteed price, referred to as the strike price, of £57.50 per MWh (2012 prices). Strike prices are (CPI) index-linked so the strike price had risen to £68.55 by the time the first of the three Moray East phases was commissioned in summer 2021.

Under the CfD scheme, the holder of the contract is assured of receiving the strike price regardless of the level of market prices. When market prices are less than the strike price, a levy is charged on the consumer to top up the price so that it matches the strike price. Alternatively, should market prices be higher than the strike price, the wind farm is obliged to return the difference to the contract administrator, with funds being notionally returned to the consumer.

The scheme was designed to give both parties to the contract price certainty. It would incentivise investment in renewable electricity generators by giving security and stability of revenue and avoiding exposure to volatile wholesale prices. At the same time the contract would protect consumers from paying needless subsidies on top of high electricity prices, a factor that has plagued the previous subsidy mechanism, the Renewables Obligation, and made it extremely expensive to consumers.

However, the terms of the CfD scheme as devised by the Government allowed developers to defer the start date of the contract, and Moray East has elected to do this. In the period up to the end of July 2023, they have received £812 million from selling electricity in the wholesale market.

Had they been obliged to take up the CfD promptly, they would have received only £350 million because the price would be capped at the level of the strike price. Thus, Moray East’s decision to exploit the legal loophole and defer implementing its contract, has cost the consumer £462 million. Assuming that the wind farm was profitable at the CfD strike price that Moray accepted, this additional income would have to be accounted as sheer profit and a clear breach of the spirit of the Contracts for Difference system, which was designed to give price security to both parties.

But that is not the whole story. The wind farm has tapped into a second very profitable source of income, namely constraint payments. Moray East is located off the far north-eastern coast of Scotland which is a highly constrained area of the GB electricity grid. 

Fig 1. Moray East windfarm consists of 100 turbines (900 MW) off the north east coast of Scotland (blue). Moray West windfarm (in green) which has consent for 60 turbines (882 MW) is not yet built. 

Constraint payments arise when wind farms are paid to reduce output at times when their electricity can neither be used locally nor, because of network congestion, transmitted to areas of the country where it can be used. Under the subsidy system that preceded the CfD arrangement, wind farms received a subsidy payment on top of the prevailing wholesale price, but they would lose this subsidy if constrained off the system. In the view of some analysts, including ourselves, this loss is a foreseeable market risk, and no compensation should be offered, but the Electricity System Operator (ESO), with the approval of the regulator, has in fact thus far paid the wind farms compensation to cover this lost subsidy.

It is important to note that the constraint payment is recompense for lost subsidy not compensation for the electricity which would have been generated because under the terms of its contract the wind farm is in fact paid for that electricity even though it has not generated the energy.

Moray East has charged £101million to reduce output. But no subsidy was forgone when it was constrained off because it is operating as a merchant generator and taking the wholesale price. Since it will have retained its wholesale income (which we estimate at £195 million at the high prevailing market prices) when constrained off, it has lost no income, and it can reasonably be argued that National Grid should not have paid to reduce output. As it is, Moray East actually earned more per MWh when not generating than when generating and selling normally. This appears to us to contravene the principle set out in the Transmission Constraints Licence Conditions (TCLC) that a generator should not profit from a grid constraint, and to require investigation by the regulator Ofgem.

To put this matter in the context of the CfD deferral: If Moray East had been operating under the CfD and received the strike price for the constrained electricity output, they would have received £112 million. In fact, by deferring their CfD, taking the higher wholesale prices and charging to reduce output during periods of constraint, Moray East made £296 million, some £184 million more than reasonably could have been charged under the CfD regime.

The total overpayment by the consumer arising from the three streams of revenue for Moray East comes to £647 million as summarised in Table 1 below.

The total electricity generated by Moray East in the period of this study is 4740 GWh which gives the cost of £234 per MWh. The comparable cost of gas-fired energy from CCGT generators for the same period is £168 per MWh.

Table 1: Summary of the revenue achieved by Moray East’s revenue by deferring implementation of its CfD and charging for constraints, compared with what would, reasonably, have been charged under the CfD, as estimated by REF for the period June 2021 to end of July 2023.

1 Generation income for Moray East whilst operating outside of its CfD is estimated from the windfarm’s actual generated electricity multiplied by the market index price for each half hour in the period studied.
2 Constraints income is the amount paid by the Electricity System Operator to Moray East for reducing output in the period.
3 Constrained volume proceeds is estimated from the volume of electricity in MWh constrained off the system (and supplied by another generator) multiplied by the market index price for each half hour period.
4 The generation income that Moray East would have received under the CfD is estimated by multiplying the actual generated electricity by the prevailing strike price for Moray East.
5 Constrained proceeds should be zero because there is, in our view, no justification for an extra payment when constrained off, since Moray will not lose income.
6 Constrained volume proceeds if the CfD had been taken up by Moray East is estimated by multiplying the constrained volume by the prevailing strike price.

Table 1 shows that a very significant portion of Moray East’s income, some 27%, arises from being constrained off the system. Indeed, Moray East was by far the biggest beneficiary of wind farm constraint payments of all GB wind farms in 2022: constraint payments to wind farms in 2022 to reduce output came to a total of £227 million with Moray East alone accounting for 30% of that sum.

Averaged over the year of 2022, 29% of Moray East’s output could not be used, and in the month of February 2022 an extraordinary 60% of Moray East’s potential output was constrained off.
Given that Moray East is located in a region where the grid network is notably weak, it is unsurprising that this very large wind farm has been heavily constrained, resulting in a significant cost burden on consumers. We note that permission has already been granted for Moray West which will effectively double the generation capacity in that area, almost certainly resulting in still higher constraint costs for consumers.

Conclusions

The UK’s approach to renewables has resulted in unjustifiably high costs to consumers, but the multitude and complexity of the revenue streams available to generators has concealed this fact. There are two issues that government needs to address immediately. Firstly, the failure to draft watertight CfD contracts has cost the consumer dearly, and it must not happen again. Although Government has recently made changes to CfD legislation requiring generators to take up CfDs promptly for future projects, it is difficult to see how this loophole has been definitively closed when some developments involve CfDs on subsets of their output. Secondly, constraint payments such as those obtained by Moray East have been an absurdly expensive scandal for more than a decade, and Ofgem should take firmer action to protect the consumer.