Summary:
A recent study by Bloomberg has drawn attention to the way that wind farms overstate likely generation at times of constraint and thus cause unreasonable cost (£51m since 2018) to consumers. While correct, excessive prices charged by wind farms to reduce output are a much more significant problem, resulting in much higher total costs for consumers, exceeding for example, £100m in 2023 alone.
Wind farm operators are routinely paid not to generate electricity when they are sited behind a grid bottleneck and are generating more energy than can be used locally or exported.
The price that the Electricity System Operator (ESO), and, ultimately the consumer pays, is set by the generators and is supposed to reflect the cost of reducing output. It is the position of the regulator, Ofgem, that profit taking is neither legitimate nor reasonable during periods of constraint, and Ofgem has the power under the Transmission Constraint Licence Condition (TCLC) to act if they determine that constraint prices charged are excessive and thus indicative of profit-taking.
The income that generators receive during a constraint is based on the bid prices they set, as well as the volume of electricity that the wind farm predicts would have been generated over the period of the constraint. This volume in MWh is notified by the generator to the ESO in a Final Physical Notification (FPN) electronic message.
A recent study by Bloomberg (How UK Energy Prices Are Inflated by Wind Farms Overestimating Power Output) revealed that some wind farm operators are overstating their FPN volumes and thus are receiving payments for electricity that would not have been generated. Bloomberg estimated that consumers could have overpaid an estimated £51 million since 2018 as a result of this overstatement.
The Bloomberg report apparently triggered an Ofgem investigation into the allegations.
While investigation of the potential overstatement of output is to be commended, it is surprising that no investigation is or has been conducted into the inflated prices charged for reducing output which are a far greater cost burden to the consumer. For example, REF estimates that elevated prices charged for constraints cost the consumer in excess of £100 million in 2023 alone.
This figure can be obtained by taking the bid prices set by the generators and subtracting any subsidy they would forego in the event of being constrained off the grid. A common misconception is that the bid price is compensation for the lost sale of electricity not generated. This is not the case. When the ESO constrains a wind farm, the ESO pays an unconstrained generator to supply the required MWh and the curtailed wind farm receives payment from their contracted purchaser as if they had actually generated that electricity. However, they do lose subsidy.
Subsidy Mechanisms
There were 173 wind farms registered as Balancing Mechanism (BM) units and therefore submitting bid prices into the Balancing Mechanism in 2023. The subsidy regime breakdown for these 173 wind farms is shown in Table 1.
Table 1: The 173 wind farm BM units submitting bid prices in 2023 fell into nine different subsidy regimes.
| Subsidy Mechanism | RO Band (in ROCs per MWh) | Number of BM units |
|---|---|---|
| Renewables Obligation (RO) | 0.9 | 41 |
| 1 | 38 | |
| 1.5 | 4 | |
| 1.8 | 8 | |
| 2 | 26 | |
| 2.5 | 1 | |
| 3.5 | 2 | |
| Contracts for Difference (CfD) | n/a | 25 |
| ‘Unsubsidised’ | n/a | 28 |
Table 1 shows that the majority of constrained windfarms in 2023 are in receipt of subsidies under the Renewables Obligation (RO). For each MWh constrained off the system, RO-subsidised wind farms forego the relevant number of ROCs for their band. The current value of a ROC is approximately £60, so a wind farm in the 0.9 ROCs per MWh band would forego approximately £54 for every MWh constrained off the system. If the wind farm had entered a bid price of, say, £70 per MWh, to be constrained off, that would mean a premium of £16 per MWh for the wind farm during a constraint. A wind farm in the band which received two ROCs per MWh would forego approximately £120 of subsidy for every MWh constrained off the system; a constraint bid price of £136 per MWh would mean a premium of £16 per MWh in such a case.
Thus, the premium sought by the operators for the RO-supported wind farms can be determined by subtracting the appropriate subsidy estimate from the bid price.
‘Unsubsidised’ wind farms are those which were not in receipt of a public subsidy in 2023. This includes wind farms that have been awarded Contracts for Difference (CfDs) such as Moray East, but have elected to defer taking up their CfD while wholesale energy prices are high. The unsubsidised category also includes wind farms which are supported by private commercial agreements (Power Purchase Agreements) such as that between Halsary wind farm and Tesco.
Since these wind farms do not forgo a subsidy, and they are not responsible for providing the predicted output to their commercial partner when they are constrained (this being paid for by the ESO in the first instance and consumers ultimately) any bid price over zero can be considered a premium.
The remaining wind farms are CfD-subsidised. In normal unconstrained operation, CfD generators receive their strike price. When constrained they receive the wholesale price plus the bid price. We estimate the premium to be any excess of wholesale price plus bid price over the strike price.
Figure 1 is an interactive chart that shows the range of average bid prices submitted per wind farm BM unit in 2023 (click on Bid Price) as well as the average premium above subsidy forgone sought by the wind farms (click on Premium). The chart also shows, below the axis, the actual GWh constrained off the grid in 2023.
Figure 1: Two charts are available above depending on whether the Premium or Bid Price button is clicked. The charts show a breakdown of either the average premiums or average bid price charged in £/MWh per BM unit for constraints in 2023 on the upward axis and the actual GWh constrained off on the downward axis.
The colour legend indicates the relevant subsidy mechanism for each BM unit. The RO subsidised wind farms fall into one of seven bands in shades of green to blue, where R9 is for those receiving 0.9 of a ROC per MWh; R1 for those receiving 1 ROC per MWh, R15, 1.5 ROC per MWh, R18, 1.8 ROCs per MWh, R2, 2 ROCs per MWh, R25, 2.5 ROCs per MWh and R35,3.5 ROCs per MWh.
The wind farms with a CfD are coloured yellow. The wind farms which have private commercial support and no public subsidy are in red.
The chart can be zoomed using the middle wheel of a mouse, and panned/dragged left and right by holding down the relevant mouse button. A key showing wind farm name and BM unit, average premium charged for being constrained off in £/MWh, the subsidy mechanism and actual GWh constrained off in 2023 for each bar in the chart is obtained by moving the mouse to the bar of interest.
Hover over any of the subsidy legend boxes to highlight wind farms in that subsidy regime.
The charts reveal the following:
From the Bid Price chart:
1. The different wind farms set a very wide range of bid prices to reduce output, ranging from £18 per MWh to £340 per MWh. However, since different subsidy regimes apply, it is fairer to compare wind farms which are in the same subsidy category. For example, those units receiving 0.9 ROCs per MWh set bid prices ranging from £73 per MWh to £249 per MWh. The range for the units receiving 1 ROC per MWh is £70 per MWh to £144 per MWh. Unsubsidised wind farms set bid prices ranging from £18 per MWh to £182 per MWh. This large range of prices demanded by wind farms with similar lost subsidy levels is extremely striking.
2. It is reasonable to expect bid prices to fall into tight bands, with units in the same subsidy group clustering together. The unsubsidised wind farms would be expected to set the lowest prices and the lower ROC bands ought to charge less than the higher ones. The chart shows that this does not apply across all units, from which we can conclude that either profit taking is occurring or that there exist very large and as yet unexplained differences in the costs of reducing output between wind farms using the same technology and with the same subsidy.
3. The actual volumes of electrical energy (MWh) constrained off the system shows that the ESO tends to favour the lower-priced units, as expected, but is not able to do so in all instances, resulting in the accepted bid prices ranging from £18 per MWh to over £200 per MWh.
From the Premium chart:
4. The potential premium above subsidy forgone sought by the windfarms ranges from £10 per MWh up to £195 per MWh. This is a very wide range and it is difficult to believe that it reflects a range of costs for reducing output.
5. The so-called ‘unsubsidised’ wind farms were most often constrained off the system, and tend to cluster at the high premium end of the chart. Thus, the units that are most expensive and have the largest cost impact on consumers are being bid down most often. This does not seem reasonable, and is certainly not in the consumer interest.
From this data it is possible to estimate the excess cost charged to the consumer for wind farm constraints in 2023. If it were to be assumed that all wind farms would settle for a profit of £10 per MWh for reducing output (the lowest rate charged by any wind farm), the excess cost in 2023 could be estimated at £136 million.
Making a more generous assumption that all wind farms should accept the median profit sought (£42 per MWh) for reducing output, the excess cost to the consumer in 2023 can be estimated at £106 million.
Potential profit taking of this magnitude during periods of grid constraints needs to be investigated by Ofgem.
We emphasise that this is not an issue for the ESO. As can be seen from the interactive chart, the ESO tends to accept the lower bid prices. The problem is that the bid prices on offer to the ESO are unreasonably high.
The complex and opaque UK subsidy regime obscures the impact of constraint bid prices on the costs to the consumer, but Ofgem has the authority to check this behaviour and apply retrospective fines to recover these excess profits if it determines that there has been an abuse of market power. To date, with the exception of the recent fine for Dorenell wind farm company, it has failed to do so.
Note on bid prices used in these calculations
Bid prices for generators are given for each half hour settlement period on the BMReports website. The averages for 2023 were calculated from the bids greater than -£999 per MWh and only those with a Bid Offer pair number of -1. Elexon publishes a beginners guide with an explanation of bid/offer pairs in the BM. It appears that market participants set bid prices of -£999 and -£9999 to signal to the ESO that they cannot be constrained off the system.