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.