I appreciate your insights into the effectiveness of Contracts for Difference (CfDs) in supporting the renewable energy sector, particularly offshore wind projects. I agree that CfDs can provide a longer-term solution by creating a market for electricity supply at stable long-term prices, addressing some of the challenges related to risk and uncertainty. I will look into your article as I have access through my academic account.
I recently conducted market research on the usage of hydrogen as a fuel for buses in the Scandinavian region. One interesting point raised by market players was the inadequacy of subsidies in reducing risk and costs for hydrogen fuel. They emphasized that the stability of hydrogen prices in the long term is crucial, and subsidies do not offer this, as they often depend on political considerations, and are not long-term sustainable.
However, I would like to explore your perspective on technology neutrality and the fact that CfDs are designed for specific technologies (going against the tech-neutral principle some government institutions have). This mechanism is used today for other technologies such as hydrogen in the UK, named the Low-Carbon Hydrogen Agreement (LCHA), which was deployed last August. This essentially means the government is "betting" on a technology for which the major impact is still uncertain. While government intervention is necessary for the deployment of certain technologies, "betting" on specific technologies involves significant risk with no certain return on investment, especially when there are feasible solutions with a guaranteed return. What are your thoughts on this?
That's a good question, without a simple answer. Multi-technology auctions should happen - if you offer a CfD, fossil fuels cannot not be competitive (nobody can predict the price of gas 10 or 20 years from now and thus they will not be able to offer a fixed price) but you could see competition between the different renewables. Things like how capture price is dealt with could make the difference.
As to hydrogen, I'm not sure it's something that should be promoted, except where there is specific unavoidable demand for it - as input for refineries, or to produce green steel. Governments should then mandate the use of green hydrogen (or at least that the underlying industry become carbon-light) and that should be enough to trigger long term off take, without the need for PPAs. Given that governments are mandating hydrogen use, some form of support for the financing might then make sense (such as a first loss tranche). but nothing is simple there. Hydrogen production should be driven by actual industrial use, and not by regulatory arbitrage on its manufacturing.
Please excuse an intentional attempt to take the other side of the argument - as much for the purpose of discussion
Please tell me the difference between a CfD and a subsidy. Maybe a definition would be helpful - but a government mandated contract is a good start? As opposed to an oil company where the contract is with an established market.
It is a subsidy because there is no market to support wind at it's all in pricing (including financing) therefore the subsidy is creating a market which allows wind to be just about competitive provided they don't have to subsidise gas powered back-up
It's a swap - like an interest rate swap. It could be a subsidy if the value of expected future payments under the contract are not nil and the day it's signed. Where it becomes tricky is that this calculation requires a reference price for future power that does not exist beyond a few years. This can be answered in various ways. One is that governments have their own price scenarios - so if the CfD provides a lower price than that scenario, it's not a subsidy, and if it's higher, it is. The other is that the auction is competitive enough (and open to other technologies) and finds the best available supply for 20-years of power - so that creates the market price for the 20-year period.
That gets into the question of what production profile you use. If the CfD difference is paid against an average price, projects get the "capture price" (which is lower if they produce at the "wrong time" and cannot produce when demand is higher) and thus the production profil is irrelevant (it's a risk borne by the project)
Note, in response to your point that wind should have gas back up - this is a myth. Demand is not constant, and flexible capacity is needed only to cover the difference between inflexible capacity (which includes nuclear and other inflexible baseload) and actual demand. That difference can be quite high at times of demand peaks - so baseload also structurally requires "gas backup" to cover for real demand. The example of Germany shows that you actually need less flexible capacity (gas or hard coal), in MWh, today than 20 years ago, ie when 50% of generation has moved from baselaod generation (nuclear+lignite) to renewable (wind+solar)
I fully understand the mechanics of a CfD; the point I'm making is that wind needs a government mandated CfD to finance projects. Without a Government (actually end-user) mandated CfD then wind projects would be subject to higher cost of capital. We have witnessed the impact that has on capital projects.
It's not a market made price, but a government made price which is paid for by end-users. The price includes non-energy related costs, including the "goodness" of the energy.
This is a subsidy however much it is dressed up as something else.
You are absolutely correct on baseload - but the emphasis on intermittent energy requires instantly available back-ups until storage and transmission physics are overcome.
I forget the website where I first started reading you several lifetimes ago - but Euan (?) covered this point very thoroughly at the time
If it's Euan it must be the Oil Drum - it's been a while indeed. But Euan is wrong on this - not that there is a need for backup, but that it's more costly than what we have today - we need a different profile for flexible "on call" capacity, but it's not more difficult or more expensive.
So there is no subsidy, in the sense that a MWh produced is a MWh produced. If it's not at the right time, the capture price reflects that (ie the instantaneous price that an intermittent source gets at a "bad" time is less than the average which is used to calculate the difference under the CfD.) As it were, the capture price of solar is expected to go down in the coming years (as all the electricity is generated at the same time, in day time) but that for offshore wind is expected to improve as its production profile is better. But this is in any case reflected in the net prices that projects actually get. So "goodness" is reflected i the price, even with a CfD.
Hi Jerome, I would love to read the article. tuomas.j.makela@aalto.fi Thank you!
Hi Jérôme. Would very much appreciate to receive the article: fhammer@integratedwind.com
Hi Jerome, would like to receive the article: lpgn.coe@gmail.com
Bonjour Jerome, would be keen to receive the article. cyril.dissescou@nexifratch.com. Thanks!
Thanks for yet another one great reflexion. Can I please ask for a copy of the paper? agarcia@bluefloat.com
Hi Jerome, thanks for your work. I'd like to read your paper.
alberto.silingardi@outlook.it
regards
Hi Jerome - thanks as always for the insightful newsletter. Could you please send a copy of the paper to tebaker1@gmail.com ? Thanks!
I appreciate your insights into the effectiveness of Contracts for Difference (CfDs) in supporting the renewable energy sector, particularly offshore wind projects. I agree that CfDs can provide a longer-term solution by creating a market for electricity supply at stable long-term prices, addressing some of the challenges related to risk and uncertainty. I will look into your article as I have access through my academic account.
I recently conducted market research on the usage of hydrogen as a fuel for buses in the Scandinavian region. One interesting point raised by market players was the inadequacy of subsidies in reducing risk and costs for hydrogen fuel. They emphasized that the stability of hydrogen prices in the long term is crucial, and subsidies do not offer this, as they often depend on political considerations, and are not long-term sustainable.
However, I would like to explore your perspective on technology neutrality and the fact that CfDs are designed for specific technologies (going against the tech-neutral principle some government institutions have). This mechanism is used today for other technologies such as hydrogen in the UK, named the Low-Carbon Hydrogen Agreement (LCHA), which was deployed last August. This essentially means the government is "betting" on a technology for which the major impact is still uncertain. While government intervention is necessary for the deployment of certain technologies, "betting" on specific technologies involves significant risk with no certain return on investment, especially when there are feasible solutions with a guaranteed return. What are your thoughts on this?
That's a good question, without a simple answer. Multi-technology auctions should happen - if you offer a CfD, fossil fuels cannot not be competitive (nobody can predict the price of gas 10 or 20 years from now and thus they will not be able to offer a fixed price) but you could see competition between the different renewables. Things like how capture price is dealt with could make the difference.
As to hydrogen, I'm not sure it's something that should be promoted, except where there is specific unavoidable demand for it - as input for refineries, or to produce green steel. Governments should then mandate the use of green hydrogen (or at least that the underlying industry become carbon-light) and that should be enough to trigger long term off take, without the need for PPAs. Given that governments are mandating hydrogen use, some form of support for the financing might then make sense (such as a first loss tranche). but nothing is simple there. Hydrogen production should be driven by actual industrial use, and not by regulatory arbitrage on its manufacturing.
Great read as usual, would also love a copy of the paper: fredwantiez@gmail.com
Hello Jérôme, I would be keen on reading the full article please : gary.mdl@gmail.com.
Many thanks for this insightful work.
Thanks. I would like a copy of the article (julien.jomaux@gmail.com).
And thanks in general for your work.
Please excuse an intentional attempt to take the other side of the argument - as much for the purpose of discussion
Please tell me the difference between a CfD and a subsidy. Maybe a definition would be helpful - but a government mandated contract is a good start? As opposed to an oil company where the contract is with an established market.
It is a subsidy because there is no market to support wind at it's all in pricing (including financing) therefore the subsidy is creating a market which allows wind to be just about competitive provided they don't have to subsidise gas powered back-up
It's a swap - like an interest rate swap. It could be a subsidy if the value of expected future payments under the contract are not nil and the day it's signed. Where it becomes tricky is that this calculation requires a reference price for future power that does not exist beyond a few years. This can be answered in various ways. One is that governments have their own price scenarios - so if the CfD provides a lower price than that scenario, it's not a subsidy, and if it's higher, it is. The other is that the auction is competitive enough (and open to other technologies) and finds the best available supply for 20-years of power - so that creates the market price for the 20-year period.
That gets into the question of what production profile you use. If the CfD difference is paid against an average price, projects get the "capture price" (which is lower if they produce at the "wrong time" and cannot produce when demand is higher) and thus the production profil is irrelevant (it's a risk borne by the project)
Note, in response to your point that wind should have gas back up - this is a myth. Demand is not constant, and flexible capacity is needed only to cover the difference between inflexible capacity (which includes nuclear and other inflexible baseload) and actual demand. That difference can be quite high at times of demand peaks - so baseload also structurally requires "gas backup" to cover for real demand. The example of Germany shows that you actually need less flexible capacity (gas or hard coal), in MWh, today than 20 years ago, ie when 50% of generation has moved from baselaod generation (nuclear+lignite) to renewable (wind+solar)
I fully understand the mechanics of a CfD; the point I'm making is that wind needs a government mandated CfD to finance projects. Without a Government (actually end-user) mandated CfD then wind projects would be subject to higher cost of capital. We have witnessed the impact that has on capital projects.
It's not a market made price, but a government made price which is paid for by end-users. The price includes non-energy related costs, including the "goodness" of the energy.
This is a subsidy however much it is dressed up as something else.
You are absolutely correct on baseload - but the emphasis on intermittent energy requires instantly available back-ups until storage and transmission physics are overcome.
I forget the website where I first started reading you several lifetimes ago - but Euan (?) covered this point very thoroughly at the time
If it's Euan it must be the Oil Drum - it's been a while indeed. But Euan is wrong on this - not that there is a need for backup, but that it's more costly than what we have today - we need a different profile for flexible "on call" capacity, but it's not more difficult or more expensive.
So there is no subsidy, in the sense that a MWh produced is a MWh produced. If it's not at the right time, the capture price reflects that (ie the instantaneous price that an intermittent source gets at a "bad" time is less than the average which is used to calculate the difference under the CfD.) As it were, the capture price of solar is expected to go down in the coming years (as all the electricity is generated at the same time, in day time) but that for offshore wind is expected to improve as its production profile is better. But this is in any case reflected in the net prices that projects actually get. So "goodness" is reflected i the price, even with a CfD.
I’d love a copy. Please send to rhysmwilliams@icloud.com
Thanks
Hi Jerome, I would be very interested in reading the article behind this!