On 23 October, 2023, REF sent a letter to Ofgem reporting a possible breach of the Transmission Licence Constraint Condition by Moray East offshore wind farm. Apart from a belated acknowledgement of receipt of the letter on 4 January 2024, we have heard nothing further, so today publish the contents of the letter to Ofgem:
Introduction
Renewable Energy Foundation (REF) is a UK charity publishing data and analysis on the UKrenewables sector. We have long believed that respect for the consumer interest is a key element in a genuinely sustainable approach to emissions reduction. In the course of recent work we have become aware of what we believe to be a breach of electricity market regulations, namely the Transmission Constraint Licence Condition (TCLC) that severely disadvantages the consumer and brings the energy sector generally into disrepute. This letter provides details of the observation, and asks that Ofgem conduct their own investigation with a view to taking appropriate action.
Moray East Offshore Wind Farm
Ofgem has recently published decisions regarding breaches of the Transmission Commission Licence Condition (TCLC) by Foyers pumped storage and South Humber Bank CCGT. Based on the reasoning in these decisions and the public domain data available, it is our belief that Moray East Offshore Wind Farm (hereafter Moray East) has been in breach of the TCLC since its inception in 2021.
In the two years from 1 October 2021 to 30 September 2023, Moray East (which consists of 3 BM units), received the third highest number of instructions to reduce output because of a grid constraint. Moray East’s total constrained volume (GWh) in this period was also the second largest across all generator types.
We estimate that Moray East was paid approximately £100 million by the Electricity System Operator (ESO) for these actions, making it by a long margin the most expensive site used to manage constraints, comprising 60% of the total constraint costs to the consumer for all generator types for the period.
These costs appear unjustifiably high: compared to the bid prices of other wind farms, those set by Moray appear to significantly exceed the costs incurred in reducing output.
175 wind Balancing Mechanism (BM) units (114 wind farms) have received constraint payments for reducing output since 2010. These wind farms are either subsidised via the Renewables Obligation (RO) (122 BM units) or Contracts for Difference (CfD) (25 BM units), or “unsubsidised” (28 BM units). Projects are termed “unsubsidised” either because the owners have not yet taken up their CfD or because the site owners have made private Power Purchase Agreements (PPAs) with commercial entities.
The main justification for submitting negative bid prices into the Balancing Mechanism is to recoup any subsidy foregone when reducing output.
The 28 unsubsidised wind farm BM units have no subsidy to lose, so their bid prices should be less than, for example, those wind farms which receive subsidy under the RO.
To establish an appropriate benchmark for wind farm prices one must first note that RO-subsidised wind farms receive between 0.9 and 3.5 ROCs per MWh, depending on the age and location of the generator. With this estimate of lost subsidy in hand one can determine any probable excess paid by the ESO for constraining these generators, an excess that requires justification to avoid the accusation of abuse of market power.
For the two years from 1 October 2021 to 30 September 2023, there were 115 RO-subsidised wind farm BM units receiving bid prices ranging from £12 per MWh to £92 per MWh greater than their specific ROC subsidy forgone. (The BM convention is to quote bid prices as negative numbers if the ESO is required to pay for generators to reduce output. All bid prices quoted in this letter are to be considered negative, i.e., wind farms are generally paid to reduce output.)This very wide range of excess costs to reduce output during a grid constraint is in itself suspicious, and merits a separate Ofgem investigation.
However, we can use this data to calculate that the volume (MWh) weighted average bid price premium for RO supported wind farms was £23 per MWh above the ROC subsidy revenue forgone.
By comparison, Moray East received on average £66 per MWh for reducing output. It would appear, therefore, that Moray East charges £43 per MWh more to reduce output than the average RO supported wind farm. If Moray East had set bid prices at the average of £23 per MWh, the consumer would have been saved approximately £69 million over the two years. If Moray East had set its bid prices at the low end of £12 per MWh, the consumer would have been saved £87 million.
We note that Moray East is not alone in apparently setting bid prices in excess of plausible costs, but the sheer volume of energy constrained off from Moray East means that the aggregate cost to the consumer is remarkably large. Among the other wind farms which don’t receive public subsidy, Seagreen stands out. It has only recently reached full capacity, but since July 2023 has already received £12.5 million in constraint payments with a current bid price of £61 per MWh.
There are 17 wind farms (comprised of multiple BM units) that are without public subsidy. The average bid prices they have received in the 2 years we have looked at range from £10 per MWh to £147 per MWh. Note that these figures are the average volume-weighted bid prices actually paid by the ESO over the two year period, as distinct from current bid prices set by the generators. As of the beginning of October, 2023 we observe that the latest bid prices that unsubsidised wind farms are charging for reducing output have increased and now range from £18 per MWh to £150 per MWh.
Conclusion and Recommendations
We believe that Moray East has overcharged the ESO and thus the consumer during periods of constraints and that this should be investigated by Ofgem as a breach of the TCLC.
We also believe the entire sector should be investigated for overcharging.
If you would like any further information or explanation of the data we have used or the reasoning underpinning the conclusions above, we should be happy to answer your questions.