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Moray East windfarm's deferral of cfd nets £647 Million Profit

4C Offshore | Chloe Emanuel
By: Chloe Emanuel 25/09/2023 Renewable Energy Foundation
Offshore wind farm at sunset
The Moray Offshore Windfarm (East), known as Moray East, located off the North East coast of Scotland, has generated headlines due to its substantial income, raising questions about the costs and revenue streams in the renewable energy sector. Since its launch in June 2021, Moray East has amassed over £1 billion in income, boasting an average income of £234 per megawatt-hour (MWh) generated, significantly exceeding the average price of £168/MWh received by gas-fired generators.

This impressive financial performance is even more striking considering that Moray East initially secured Contracts for Difference (CfDs) in Allocation Round 2 in November 2017, guaranteeing a capped price of £57.50/MWh in 2012 prices (equivalent to £74.49/MWh today). However, rather than implementing the CfD contract, Moray East opted for the considerably higher market prices driven by geopolitical events like the Ukraine conflict. Consequently, Moray East offshore windfarm reaped £812 million in electricity sales since its launch in 2021.

Furthermore, Moray East has requested payment for reducing its electricity output, known as constraint payments, a move some argue is unjustified. This decision added another £101 million to its income, in addition to £195 million from contracted wholesale income for constrained electricity.

Had Moray East chosen to implement its CfD and supplied electricity at the contracted price, the wind farm would have received £350 million, with the excess of approximately £460 million being returned to consumers under CfD terms. However, by refusing to activate the CfD contract, Moray East effectively doubled its income, preventing consumers from receiving the £460 million rebate. This situation unfolded because the CfD contract's terms allowed deferral without penalty, placing most of the risk on consumers rather than the generator.

When combining income from generation, constrained periods, and income while constrained, Moray East's total revenue from June 2021 to July 2023 exceeded £1.1 billion. Estimates suggest that consumers may have overpaid by approximately £647 million during this period. In terms of electricity cost, the wind energy generated by Moray East during this period translates to £234 per MWh, surpassing the cost of gas-fired Combined Cycle Gas Turbines (CCGT) during the same period, which stood at £168 per MWh.

This situation highlights concerns regarding the cost-effectiveness of wind energy and the financial complexities within the renewable energy sector. While renewable energy is often promoted as a more affordable alternative to fossil fuels, Moray East's case raises questions about the actual costs and revenue mechanisms in the industry.

The United Kingdom government awarded Moray East a 15-year Feed-in tariff with a Contract for Difference in 2017, guaranteeing a strike price of £57.50 per MWh. Under the CfD scheme, the contract holder is ensured the strike price, regardless of market fluctuations. When market prices are lower than the strike price, consumers are charged to bridge the gap, and wind farms refund the excess to the contract administrator if market prices exceed the strike price. The scheme aimed to provide price stability to both parties, promoting investment in renewable energy generators and protecting consumers from unnecessary subsidies.

However, Moray East's decision to defer the CfD contract and benefit from higher market prices, coupled with constraint payments, has sparked controversy. Constraint payments, awarded when wind farms reduce output due to local usage constraints or network congestion, are contentious. While some analysts argue that no compensation should be provided for lost subsidies when constrained, the Electricity System Operator (ESO) has, with regulatory approval, paid compensation to wind farms.

Moray East's claim of £101 million for output reduction during constraint periods has raised questions, particularly since it continued to earn wholesale income while constrained, suggesting that National Grid may have unjustifiably paid for reducing output. The wind farm's total income from constraint payments stood at £101 million.

In conclusion, Moray East's substantial income and its deferral of CfD contracts have drawn attention to consumer costs in the renewable energy sector. The complex revenue streams and legal loopholes in CfD contracts need immediate government attention. Additionally, constraint payments, which have been a significant expense for consumers, warrant stricter regulatory action by Ofgem to protect consumer interests.

For more information about offshore wind farm projects across the globe, click here.


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