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REF Blog

REF Interim Statement on DECC Announcement of CfD Auction Prices

The Department of Energy and Climate Change (DECC) has today published the results of the first round of competition for Feed-in Tariffs with Contracts for Difference (FiTs CfDs, hereafter CfDs), a subsidy mechanism that will run alongside the Renewables Obligation (RO) until the latter closes to new entrants in early 2017, when CfDs will become the sole subsidy mechanism for large scale renewable electricity generators.

DECC's documents can be viewed here:

Press Release
https://www.gov.uk/government/news/world-leading-auctions-to-provide-major-green-electricity-boost

Statistics: Contracts for Difference (CFD) Allocation Round One Outcome
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407059/Contracts_for_Difference_-_Auction_Results_-_Official_Statistics.pdf

Breakdown of the outcome by technology, year and clearing price.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407277/Tables_for_notes_to_editors_docx.pdf


The most salient facts are:

1. The main beneficiaries of this round are offshore wind (two sites; total capacity 1,162 MW) and onshore wind (15 sites; total capacity 749 MW). Solar (72 MW) and Advanced Conversion Technologies (62 MW) are the next largest but of a different order of magnitude.

2. The guaranteed prices awarded in this round are significantly below both the strike prices determined administratively in previous DECC announcements, and, still more importantly, suggest that the income delivered by the RO since 2002 has been excessive. For example, the two offshore wind projects have accepted prices of £119.89/MWh and £114.39/MWh, as opposed to an announced strike price of £140/MWh, which is also approximately the current income under the RO, a reduction of about 18%.

The onshore wind projects announced today have accepted prices between £79.23 and £82.50, a reduction of about 18% on the strike price of £95/MWh, which is also the approximate income under the RO. The solar prices awarded today represent a saving of about 58% on the strike price of £120/MWh, which is in fact already somewhat less than the current income per unit received by solar farms qualifying for double ROCs.

We infer that the vast over-supply of consented renewable electricity projects, on which REF commented in May 2014 (Progress towards the 2020 Renewables Targets: http://www.ref.org.uk/publications/313-progress-towards-the-2020-renewable-electricity-target), and the restrictions on the available subsidy budget resulting from the Treasury's Levy Control Framework (LCF), has put enormous pressure on the renewables industry, and on the wind industry in particular.

Indeed, these prices suggest real concern verging on panic amongst those with consented projects that are unlikely to be built before March 2017, when the RO closes to new entrants. Such companies may well fear they will be unable to obtain subsidy at all and will therefore not be able to proceed with construction, with the development cost so far incurred being written off. Thus, industry participants have found themselves in a classic prisoner's dilemma bargaining situation, and, desperate to secure a CfD subsidy contract, some companies have broken ranks and accepted lower levels of subsidy than would be preferred by the industry as a whole.

Nevertheless, the prices announced today are important and set the scene for the future. It will be difficult for government to justify awarding contracts with higher prices than these, and many companies will now find themselves with consented projects that have no reasonable prospect of being built since the income levels in today's announcements are insufficient to deliver the very high rates of return that all but completely de-risk their schemes and make the projects or planning consents saleable at high prices.

This will, however, result in attempts both desperate and greedy to build quickly and register under the more attractive Renewables Obligation while it is still available. The Levy Control Framework may consequently be placed under considerable strain, and Government will almost certainly have to consider an early closure of the RO to new onshore wind entrants, as they have already closed it for solar.

Overall, the most important conclusion from today's announcement is that previous criticisms of the Renewables Obligation were correct. The RO was and is an overly generous scheme that resulted in hyperprofits for many technologies. In 2002 when the RO was introduced the wholesale price of electricity was approximately £20/MWh, with a Renewables Obligation Certificate bringing in a further £45/MWh, giving a total income of £65/MWh, more than three times the wholesale price and even at that time arguably very generous indeed for many technologies, including onshore wind.

Wholesale prices rose sharply after this point, with ROC values being roughly stable, increasing the total income for onshore wind, for example, to between £90 and £100/MWh, well in excess of that formerly thought more than sufficient to motivate investment. However, government took no action to reduce the RO subsidy in the light of rising wholesale prices, and only introduced minor changes in 2013 when it reduced the ROC banding for new onshore wind entrants to 0.9 ROCs per MWh, equivalent to a £5/MWh reduction from £45/MWh about £40/MWh in subsidy.

As a consequence of government's failure to act firmly there has been a development stampede for onshore wind and, more recently, for solar. This overheating has resulted in very bad proposals, a great deal of justified anger amongst actual and prospective wind and solar farm neighbours, and a general disenchantment with the renewables sector. What was promised to the public as a grass roots phenomenon where small would be beautiful rapidly turned into oppressive corporate style property development with little or no concern for the local environment. It was and continues to be a public relations disaster.

It is clear from the onshore wind prices announced today, which are equivalent to a subsidy level of about £32/MWh for onshore wind, that the subsidy rewards so far obtained and still being obtained under the Renewables Obligation are excessive, and that in 2013 DECC was wrong to oppose pressure, presumed to come from the Treasury, to cut the RO level for onshore wind by 25% (http://www.telegraph.co.uk/news/earth/energy/windpower/10177891/Wind-farm-subsidies-cut-by-25-per-cent.html).

In the light of today's prices, and in the consumer interest, DECC should now revisit the subsidy levels under the RO, and reduce the number of ROCs awarded per MWh to future and existing schemes. In other words the cuts to ROC levels must be immediate and retrospective.

Furthermore, there is a strong case for making this review retroactive, with the aim of recovering excess subsidy income already obtained by the industry.

Consumers have paid out approximately £15 billion in subsidies to renewable electricity generators since 2002 when the RO began, with the current annual total being in excess of £3 billion per year. Of that £15bn total, roughly £4bn has been paid in total to onshore wind, and the annual subsidy to onshore wind is currently running at about £750m a year. If the UK's onshore wind fleet were being paid the CfD prices announced today that total would be about £550m a year, suggesting that perhaps £200m a year, or 25%, is currently in excess of need. The historic excess of over-support will clearly be significant and could well amount to several hundreds of millions. Consequently, there is a strong case for retroactively recovering as much as possible of that excess and redistributing it to consumers.

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DECC Publishes Energy Price Impacts


The Department of Energy and Climate Change has today published the tables of policy-induced price impacts that were the subject of REF's Freedom of Information request and DECC’s response.

These price impacts were deliberately omitted from the 2014 issue of Estimated Impacts of Energy and Climate Policies on Energy Prices and Bills, in spite of their obvious importance and the fact that they had appeared in all previous issues of Estimated Impacts, as discussed in a previous REF blog.

The price impact tables have been usefully released as a spreadsheet annex to the 2014 document titled Supplementary tables - Prices and Bills 2014.

The price impacts are reported as a percentage increase over the price that would apply if there were no climate change policies, and these predicted prices depend heavily on future prices for fossil fuel, so DECC has provided calculations assuming a range of potential fossil fuel prices in 2020 and 2030 labelled ‘Low’, ‘Central’ and ‘High’. Consequently, these are complex tables that require careful reading, but even a quick glance reveals their significance, as a few selected figures will indicate.

For example, green taxes are estimated to add £52/MWh to 2020 electricity prices for domestic households in the central fossil fuel price scenario (or a 37% price increase on the price without policies), up from £49/MWh or a 33% price increase over prices without policies, as reported in Estimated Impacts 2013.

If fossil fuel prices are at the low end of DECC’s predictions in 2030, policies are estimated to cause a 60% electricity price increase for domestic households, as compared with prices without policies.

These are serious effects, but the impacts on industrial and commercial consumers are extremely severe, and give even deeper cause for concern. In the Central fossil fuel price scenario for 2020, low carbon policies will result in a 50% electricity price increase for small businesses. In the Low fossil fuel price scenario for 2020, low carbon policies will cause a 77% price increase for medium-sized businesses with obligations under the Carbon Reduction Commitment (CRC), and this would rise to 114% in 2030.

In this context it is important to remember that energy price increases for industrial and commercial consumers will necessarily be passed through to domestic households in the costs of goods and services, giving a much greater total cost of living effect than that found in the household energy bill alone.

Furthermore, energy cost increases will also affect households by exerting a downward pressure on wages and on rates of employment (i.e. as energy costs for businesses rise they will try to hold wages down and will employ fewer people).

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Where are the Energy Price Impacts?

Update : 10 December, 2014.  DECC has now released the energy price impacts.

On the eve of the deadline expiry, DECC yesterday responded to REF’s Freedom of Information request for the ‘estimated impacts of energy and climate policies on energy prices’; data inexplicably omitted from their study titled Estimated Impacts of Energy and Climate Policies on Energy Prices and Bills (2014). Their response can be read here.

The price impacts (p/kWh) of Government’s green policies have been published in all previous issues of this key document, and indeed are explicitly referred to in its title.

Price impacts are extremely important because they permit analysts and members of the public to assess the raw impact of policies, before the claimed offsetting impacts of energy efficiency, for example, are taken into account. This allows the reader to form a view of the plausibility of the offsetting effects and also to estimate impacts on particular users rather than on the ‘average’ users upon which DECC’s study focuses. This latter point is very important for business consumers, because businesses vary so much, with the ‘average’ business being almost meaningless.

The price impacts reported in DECC’s previous studies are very high; for example, in the 2013 study DECC calculated that green taxes increase electricity prices by 26% to 44% for households in 2020, and 33% to 77% for industrial and commercial consumers.

Because of changes in DECC’s own fossil fuel price forecasts there is good reason for thinking that the upper end of these price impact estimates may be even higher, due to cheap gas. This makes the exact price estimates of great importance, which is why their deliberate omission from Estimated Impacts 2014 is so reprehensible, and why we submitted our FoI request.

In response, DECC has refused to disclose to us the price impact data we requested, but has done so on the questionable ground that they have now decided to publish the data themselves. When they will do so is unknown.

Since the department had recently refused to provide exactly this information in response to a Parliamentary Question from Lord Ridley, we can only conclude that our FoI, perhaps combined with pressure from other quarters, had made it clear that attempts to withhold this information could neither be defended nor sustained.

While we are pleased that DECC recognises that it should not have removed the price impact data from the 2014 edition of Estimated Impacts, the refusal to disclose the information immediately is unsatisfactory, and seems to us to be in contravention of the spirit of the FoI laws.

The department’s motivation is obvious. In effect, by refusing to disclose information on the grounds of imminent publication, DECC has evaded the deadlines implicit in the FoI regulations and has succeeded in retaining control over the timing and manner of the release of the data.

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DECC Conceals Estimates of Energy and Climate Policy Price Impacts

On the 6th of November the Department of Energy and Climate Change (DECC) published the third and much delayed edition of its Estimated Impacts of Energy and Climate Change Policies on Energy Prices and Bills.

REF has previously criticised the methodology used in the previous two issues of Estimated Impacts (2011 and 2013), particularly the tendency to focus on modelled average bills not price effects and so conceal important variations in effects on different types of domestic households. DECC also made use of unreasonably optimistic assumptions with regard to the effects of energy efficiency measures. For further details see our study Shortfall, Rebound, Backfire (2012), and subsequent correspondence with DECC and the UK Statistics Authority.

The latest, 2014, release of Estimated Impacts continues to suffer from many of the faults identified by REF in previous editions, and is rendered still more unsatisfactory because the tables showing the electricity and gas price impacts (£/MWh), rather than modelled average bill effects, have been deliberately withheld, even though they appeared in the three previous editions.

This omission of important data renders the title of DECC’s publication meaningless, since no information is in fact given on the effects of policy impacts on gas and electricity prices.

Furthermore, the overall study is now opaque, since without information on the price effects, the reader cannot form a clear view of the likely effect on any individual consumer, or of the plausibility of the government’s modelled average bill impacts.

In response to this extraordinary state of affairs, REF’s director, John Constable, submitted a Freedom of Information request on 10 November 2014 seeking the missing information. This request is due for response by the 8th of December.

Others are equally interested in this matter, and we note that on the 11 November Lord Ridley tabled two Parliamentary Questions seeking information on the same subject:

HL2833: To ask Her Majesty’s Government why detailed estimates of the impacts of energy and climate policies on the retail prices (pounds per megawatt hour) of gas and electricity are omitted from the 2014 edition of the annual Estimated Impacts of Energy and Climate Change Policies on Energy Prices and Bills when they have been present in all previous editions.

HL2834: To ask Her Majesty’s Government what are the impacts in pounds per megawatt hour of each energy and climate change policy on (1) retail gas prices, and (2) retail electricity prices, for (a) domestic consumers, (b) medium-sized businesses, and (c) energy-intensive users in their low, central, and high fossil-fuel price scenarios.

DECC has now (27.11.14) responded to these questions but has not provided the information requested and has given an unsatisfactory reason for withholding the information. The response is as follows:

The layout of the 2014 Estimated Impacts of Energy and Climate Change Policies on Energy Prices and Bills report [1] was reviewed to focus on overall bill impacts following feedback on the length of Annexes and confusion between the prices and bills tables in previous reports.

The price and consumption effects of each policy on domestic consumers, medium-sized businesses, and energy intensive users are converted into £ impacts and set out in a single set of tables in Annex D.
The results of fossil fuel price sensitivity analysis are summarised in Chapter 6.

[1] This Answer included the following attachment: Est. impact of policies on energy prices & bills (prices_and_bills_report_2014.pdf)

This answer amounts to a straight-forward refusal to reveal the impact of energy and climate policies on gas and electricity prices to consumers. This is clearly unacceptable.

In the Foreword to Estimated Impacts (2014) the Secretary of State for DECC, the Rt Hon Ed Davey MP, states that ‘We are committed to being transparent with the public about the costs of energy policies’. However, neither the study that follows nor DECC’s subsequent behaviour are consistent with Mr Davey’s intentions.

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Ecotricity Advertisement in the Guardian

On the 7th of November the wind farm developer and green electricity supplier Ecotricity placed a double page spread advertisement in the Guardian newspaper. This advertisement claimed that wind power played a significant part in securing supplies on the 19th of October, when four nuclear power stations were already offline and the system came under further pressure in the evening because of a fire at Didcot B power station, a Combined Cycle Gas Turbine (CCGT) power station.

Specifically, Ecotricity wrote that:

“No one noticed that around nine million homes worth of electricity had electricity had simply ‘disappeared’ after four nuclear power stations had shut down and Didcot went up in flames. No one noticed because Britain’s windmills carried on turning, powering almost 25% of our country. It was a historic event that went almost unnoticed; one revolution after another quietly secured our energy needs. The lights didn’t go out. We have wind energy to thank for that.”

These claims are repeated on the Ecotricity web site: “Nothing Happened”.

In yesterday’s Sunday Telegraph (23.11.14) Christopher Booker’s column discussed the Guardian advertisement, and called its accuracy into question: “Revealed: the Guardian Wind farm advert that tried to pull the wool over our eyes

As Mr Booker notes, REF has looked at the historic electricity data available to us to see what actually happened on the 19th October and whether Ecotricity’s claims can be substantiated. Our conclusion is that they cannot, and the claims are misleading. The following account, based on the data in the public domain, shows why.

As background to the history of event on the 19th of October, it must be noted that while the advertisement refers to the fact nuclear power stations were offline on that day, this nuclear outage was a combination of scheduled and longer term work which had already been accommodated in the National Grid planning for provision of electricity. In other words, the nuclear outage was expected and planned for, and is strictly speaking irrelevant to the actions taken in response to the immediate problems arising from the emergency on the evening of 19th of October.

The events of that day can be summarized thus: On the 19th of October 2014 Didcot B5, the CCGT unit that caught fire was not scheduled to generate electricity for the entire day. Instead it was scheduled to ramp up from zero to 720 MW and then back down to zero, starting the process at around 5pm, then reaching 700 MW at 7:30pm, holding that level until 10:30 and then ramping down again to zero at half past midnight. Thus, it seems the plan was for it to provide electricity for the evening hours when demand would be high.

The fire meant the B5 unit had to reduce output rapidly and prematurely between 8:30 and 9pm. Consequently there was a shortfall of generation for the hours of 9pm to midnight. For one and a half hours of that time the shortfall was 700 MW, and for one and a half hours there was a smaller lack of capacity.

During the immediate period after Didcot B5 stopped it appears from the public-domain electricity data that large coal generators, mainly Eggborough, but also Fiddlers Ferry, and Cottam, picked up the slack, with some help from Combined Cycle Gas Turbines, initially Immingham and Medway and then Langage.

Specifically, it would appear that in order to address the problem and provide the heavy lifting required, National Grid kept Eggborough (a 2,000 MW coal station) on the system for an hour or so longer than the station had had been planning to generate. After that, Langage an 885 MW CCGT generator was kept on the system longer than scheduled.

In other words, supplies to consumers were secured in spite of the fire at Didcot and no one noticed that the system was under stress because coal and gas generators were able at short notice to step into the breach left by Didcot B. Wind power was not only essentially passive but was in fact declining during the event, as can be seen from the REF online fuel mix data tables and charts. (The Didcot event would have impacted settlement periods 42 to 48 on 19 October and settlement period 1 of the next day.)

Furthermore, throughout the whole of the 19th October, including while this event was taking place, wind power in Scotland was being constrained off the system because of network limitations on the lines running into England. By our reckoning the volume of wind energy (MWh) constrained off between the hours of 9pm to midnight was roughly the same as that lost during that period because of the Didcot fire, as can be seen from the REF constraint payment tables.

It is almost certain that the wind-induced shortfall throughout the day would have been made up by fossil fuelled conventional generation, though only National Grid can be specific about the measures it took to replace constrained off wind power.

Thus, in summary it was not wind power that made up for the loss of Didcot B5, as Ecotricity imply; on the contrary, it was conventional power stations, namely coal and gas generators, that stabilized the system. Moreover, wind power was causing a separate problem for the grid system operator.

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New Ed Davey Letter Confirms that Onshore Wind Targets for 2020 are already Met


Read more...

Summary & Conclusions

1. A letter from the Secretary of State for Energy and Climate Change, the Rt Hon Ed Davey, MP, to Mary Creagh MP, reveals that DECC calculates that sufficient onshore wind has been developed (i.e. consented and likely to be built) to meet the upper level of government expectations for this technology, 13 GW (about 6,500 turbines), confirming an earlier study by REF

2. Consequently, the 6.4 GW of onshore wind currently in the planning system (approximately 3,000 turbines) are surplus to requirements. The presence of this needless 6.4 GW of onshore wind in the planning system is causing undue cost to local authorities and widespread planning blight to affected communities, to say nothing of misdirected capital and development effort in the energy industry.

3. In our judgment Mr Davey should cool the sector down with a statement to the effect that the onshore wind target is now met, that DECC does not support onshore wind applications currently in the planning system, and that effort should be focused on other areas.

4. In the absence of such a statement, which we believe unlikely for political reasons, decision makers in the planning system, from local councillors, to inspectors to the Secretary of State at the Department of Communities and Local Government, Mr Pickles, can be confident that in applications for onshore wind no weight need be given to the project’s contribution towards renewable energy targets.

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Robert Freer

REF is saddened to report the death of Robert Freer, one of our technical advisors, and a keen supporter of our objectives.

Robert Freer was a civil engineer who worked mainly on energy and maritime projects and especially at the interface between research and practice. He was involved in the design and construction of nuclear, hydro-electric, diesel, and gas turbine power stations in this country and overseas (including Dounreay, Winfrith, Kariba and Aswan) and on the development of a prototype wind energy generator and a wave energy device. He was awarded the George Stephenson Medal by the Institution of Civil Engineers in 2002, and organised and led two DTI sponsored OSTEMS visits to a number of European countries and to Japan on dam safety and on energy from waste. Robert also served on a number of committees of the Institution of Civil Engineers on the ICE Council.

Robert’s funeral will take place on the 29th of September at 11am at St George’s Church, Hanover Square.

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DECC response to Wind Farm Constraint Payments

The Sunday Telegraph recently published an article giving further details of the constraint payments made to wind power, mostly, though not now entirely, in Scotland. The principal point was that the prices charged were still well in excess of lost income, and were arguably an abuse of market power. 

The Department of Energy and Climate (DECC) has responded to the piece and attempts to defend both the wind power industry and its own record in protecting the consumer from over-charging.

DECC’s response contains a number of irrelevant or confused statements suggesting that the Department either does not understand the constraints market or is seeking to mislead the public.

For example, DECC states that: "Constraint payments are nothing new. National Grid has been paying coal and gas generators - and others - to change their planned output well before wind farms joined the mix.”

This is misleading. Additional payments to stop generating are in fact a new phenomenon, and are the outcome of lost subsidy. Indeed, since wind power generators actually ask for more than the subsidy lost when constrained off, their income is greater per MWh when not producing electricity than when they are generating and selling their electricity as normal. This increases consumer costs.

By contrast, when conventional generators are asked to stop generating, these generators pay back into the system because they have saved the value of the fuel. This means that consumer costs are reduced.

Furthermore, while DECC is correct in saying that National Grid pays conventional generators to change their planned output, this is irrelevant to the wind case, since National Grid is asking the conventional generators to start generating; a very different market service which can, of course, incur an increased cost.

What DECC does not mention is that each MWh of wind electricity constrained off the system must be replaced by a MWh of conventional electricity the other side of the grid constraint. Consequently, those energy companies owning both wind farms in Scotland and conventional generation elsewhere may be benefitting twice over from the Government’s policy of encouraging the building of wind farms in areas of the country that are frequently unable to export their electricity.

DECC also writes that "The payments are made on a competitive bid basis to ensure that these costs are as low as possible.” This is misleading. In fact the constraint market is extremely illiquid since grid constraint problems are geographically specific, and often National Grid has little or no choice of which wind farms to constrain. This ‘over-a-barrel’ situation may be part of the reason why wind constraint prices are so high.

Finally, DECC writes that “We [DECC] tightened the rules in 2012 so generators cannot profit unfairly during constraint periods. Since then, prices paid to generators to curtail wind have more than halved.”

Firstly, is important to note that DECC admits that prior to 2012 the prices charged were indeed ‘unfair’. It would be interesting to know if they intend to recover those unfair charges from the wind farms concerned.

Secondly, we observe that the prices charged by wind farms to reduce output range from £25 to £78 per MWh more than the lost subsidy of approximately £50 per MWh. It is far from clear that the scale and the range in premiums could be justified by the transaction costs of constraining off a wind farm.

We conclude from DECC’s response that the department is unwilling or unable to protect the consumer against market gouging. This gives deep cause for concern since the scale of the constraint problem is almost certain to grow, and if this excessive pricing is not nipped in the bud, high prices will become an acceptable norm with damaging consequences for the consumer.

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Thermo-Economics

REF's director, John Constable, has just published an article "Thermo-Economics: Energy, Entropy and Wealth" in the journal of the Economics Research Council. This piece attempts to explain the relationship between thermodynamics and the theory of wealth in economics. From this perspective Dr Constable then argues that government attempts to drive an energy transition ahead of the learning curve and against the cost gradient and dangerous and likely to be reduce well-being as well as creating political discontent.

 

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REF on Guardian Constraints Story

On the 3rd of April the Guardian published a short article on constraint payments to wind power in Scotland ("Gas company special payments dwarf constraint payments to wind farms"). This story was based in part on a story in The Times earlier in the week ("Wind farms are paid £8.7m in one month to stop turbines"), and partly on an interview with REF.

The Guardian does not seem to have fully explained the significance of these extra payments to wind power, or the relation between payments to wind to stop and payments to conventional generators to start generating. REF sent the following letter to the editor, which has not, as far as we can tell, yet been published:

Dear Sir:

Your article (“Gas company special payments dwarf constraint payments to windfarms” 04.04.14) mistakenly downplays the significance of wind farms in Scotland demanding compensation well in excess of the subsidies lost when National Grid needs to stop them from generating. This is already very expensive and set to become more so.

The article also surprisingly implies that because conventional generation is paid to be constrained “on" to the system it is somehow acceptable for wind farms to overcharge per MWh when they are constrained “off".

However, such a view not only glosses over the economic and technical differences between constraining generation “on” and constraining it “off", but also fails to recognise the causal relation between these two actions, namely that constraining off wind farms on one side of a grid bottleneck, means that conventional generators on the other side, often gas, must be constrained on to maintain continuity of supply.

Thus, a significant proportion of the constrained on payments received by conventional generators must also be attributed to the proliferation of wind farms in Scotland, where the Connect & Manage policy has permitted and even encouraged wind development to exceed grid capacity.

It is possible, perhaps likely, that some energy companies who own both wind farms and conventional generation are making unreasonable profits on both sides of the equation, but a lack of transparency in the reporting of electricity market data makes it impossible for those outside the industry to investigate this matter.

The consumer is clearly vulnerable to unchecked exploitation at present, and strong intervention by government and the regulator, Ofgem, is long overdue.

Yours sincerely,
John Constable.

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