Introduction and Summary
Those who have followed the history of the Contracts for Difference (CfD) scheme for subsidising renewables will be aware that some wind farms deliberately deferred implementing their contract with the British consumer in order to profit from a spike in market prices. Even the Department of Energy Security and Net Zero (DESNZ) admitted to the press that this was “not in the spirit of the scheme”. DESNZ attempted to deal with this sharp practice by tightening the contracts.
But experienced commercial players are extremely resourceful and appear to have found another way to secure a similar end by building and connecting well ahead of the specified start date for the contract.
For example, the Viking Wind Farm on the island of Shetland has two CfDs, one under Allocation Round 4 for half of its 443 MW, and one for the remaining half under round 5. These contracts are set to start in 2027 and 2028 respectively. But the construction of Viking and its interconnector were completed earlier this year, and it started operation in June this year, taking the market price for what energy it generated and also enjoying extremely generous constraint payments, discarding about 62.5% of its potential output while still receiving market prices for the constrained-off volume as well.
We estimate that Viking has earned over £10m in this month alone, when it would have only received about £3.5m if it had been paid under the CfD and had not been constrained. This implies a staggering price of about £199/MWh, as opposed to the already generous CfD price of £67/MWh.
These facts make a mockery of claims that projects such as Viking offer good value to consumers, or, as Viking’s launch publicity claimed, that this would one of the most productive onshore wind farms in Britain. On the contrary, it is shaping up to be one of the most heavily constrained, least productive and yet extortionately profitable wind projects ever built.
Background and Detailed Discussion
In its first month of operation, SSE’s Viking Wind Farm has joined the ranks of high-cost Scottish wind farms. This 443 MW wind farm consists of 103 turbines up to 155m high and is located on the island of Shetland. It has been in development for more than 15 years and has faced strong local opposition.
In addition to the wind farm, SSE was also granted permission by the UK energy regulator, Ofgem, to build a 600 MW HVDC interconnector from the Shetlands to the mainland, connecting the Viking wind farm to the GB grid. This cable joins the grid at Noss Head in Caithness.
Generation apparently started in June 2024 with the official opening on 28 August 2024
Unsurprisingly, given the modest volume of electricity demand on Shetland and the fact that the grid in the north of Scotland, where the interconnector lands, is already heavily congested, Viking wind farm has been repeatedly constrained off the GB grid, beginning on the 2 August 2024. Constraint reduction was required on 27 of the 31 days in August.
It has received £2.5 million in constraint payments in August 2024 alone. The constrained volumes of electricity are large, meaning that approximately 62% of what the wind farm operators claim could have been generated, given the prevailing wind condition, has had to be discarded. This means that only 52.3 GWh was generated and supplied in August giving a load factor of 16% for the month which would make this wind farm one of the most poorly performing in GB, not, as SSE claimed, the UK’s most productive onshore wind farm with an anticipated output of 1.8TWh per annum (implying an annual load factor of 46%).
In addition to the costs to the consumer of paying Viking over £2.5 million to reduce generation, the consumer loses via another complex loophole exploited by wind farm developers in that they have completed construction and connected well before the nominated start date for their Contract for Difference (CfD) where they have agreed to supply at a fixed price. Instead, they are taking the market price – for both generated and constrained off volumes - which happens to be advantageous for them.
When Moray Offshore Wind Farm deferred the implementation of its CfD in order to play the markets, the Department of Energy Security and Net Zero was quoted in the press as saying that this was not “in the spirit” of the scheme, and that they had moved to prevent such behaviour in the future.
By completing construction and connecting to the grid well ahead of the start date set for the contract for difference, Viking has apparently found a way to circumvent the Department’s changes to the contract to achieve similar ends. While apparently legal, this is not, surely, any more in the spirit of the scheme than deferral. The award of a CfD is a valuable property. The government gave the developer the security of a long-term contact, reducing risk and presumably financing costs. If the developer completed the scheme early, it is under a moral obligation to honour its contract and ask that the CfD is brought forward, even if that reduces its profitability.
It seems all but certain that Viking was aware that it would complete construction and connection 3 and 4 years before the CfD start dates, and that it would have the option of profiting prior to any planned grid expansion from a highly constrained, grid-connected wind farm in the wholesale market, rather than under the fixed price of the CfDs.
We estimate from half-hourly market data (Final Physical Notifications) and market index prices that Viking has been paid over £10 million for the 52.3 GWh generated in August, giving a cost per MWh of £199. This should be compared with the much lower price, £67/MWh, that Viking would have received under its Contract for Difference. Put simply, the consumer is paying nearly three times the fixed price to which SSE agreed and on the basis of which it was awarded a long-term government contract, with all the advantages that this implies.
It seems to us that this is a betrayal of trust, and that both the government and the consumer have been short-changed. Since SSE was able to finish construction and connect ahead of the contract date and will have known that this was likely for some time, they were and are under a moral if not a legal obligation to ask government to bring the start date of the contract forward.
The principal lesson from the Viking experience is that government is very poor at dealing with experienced commercial players and has left the British consumer open to much higher costs than were anticipated for what is proving from the outset to be, due to constraints, a very poorly performing site. Should this wind farm have been built in the first place? Would it have been built if SSE had been faced with the prospect of receiving the CfD and without the, in our view, unjustified, additional income from constraint payments. We doubt it. This is both an economic and an environmental mess.