UK wind subsidies go negative
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UK wind subsidies go negative
Plus: Putin’s gas-fired power play, stranded asset risks exaggerated + MORE
First up: There’s only one story worth talking about this week: soaring European energy prices. It’s complicated, so today’s break-out story is a bit longer than usual.
And: A corollary of crazily high power prices is, yes, negative subsidies. Wind farms are now paying money back to the UK government.
Here’s the line-up:
💥Too much politics, not enough gas – Dissecting the European energy crunch
⚡Transition lines:
Wind subsidies go negative as UK power prices soar
Humanity is getting better at extracting economic value from oil
Are stranded asset risks being exaggerated?
And more…
🧠Energised minds:
Unsound monetary policies incentivise wasteful oil production
Energy transition is complex, and debate too polarised
COP must shift the narrative from pain to gain
💥Too much politics, not enough gas
European energy prices are going ballistic. Barely a day has gone by this month without wholesale gas and power prices breaking the previous day’s new all-time high. But what is really driving the bull run, what does it mean for decarbonisation, and how is this playing out in the political arena? Energy Flux breaks it all down.
⚡Transition lines
Decarbonisation stories you need to read
WIND SUBSIDIES GO NEGATIVE AS UK POWER PRICES SOAR. When is a subsidy not a subsidy? In today’s crazy energy market, it seems. Surging UK wholesale power prices have inverted the assumption that wind farms are paid a top-up as a reward for producing green electrons.
In ‘normal’ times, the UK’s Contracts for Difference (CfD) subsidy regime pays a top-up to eligible generators up to a pre-set maximum (the strike price). Since wholesale power prices are almost always below the strike price, the CfD holder receives a premium, which suppliers charge back to electricity consumers.
But with the price of UK day-ahead power soaring to eye-watering levels amidst a Europe-wide energy crunch, CfD strike prices are now below the amount that generators are earning for their power. So, they have to pay back the difference (hence the ‘d’ in CfD).
The Low Carbon Contracts Company, which administers the CfD, on 6 September 2021 registered its first ever day of net negative costs for the UK’s portfolio of CfD projects (most of which are wind farms).
Since the early CfD awards were at high strike prices (set by the government to spur investment) and only the first wave of CfD projects is currently operational, the payback quantity is small.
Subsequent CfDs were awarded to projects with strike prices set at competitive auctions. As these wind farms are built out, and assuming wholesale power prices remain volatile and spiky, Britain should expect many more periods of negative subsidies.
RELATED: The UK government launched its “biggest ever” CfD round this week. Round 4 will make £265 million per year available to low carbon generators, with £200 million for offshore wind. Notably, up to 5 GW of onshore wind and solar – which had been excluded under previous Conservative governments – will be allowed to participate. Wave, tidal and floating wind also have ring-fenced allocations. Round 4 aims to double the renewable electricity capacity secured in the third round and generate more than the previous three rounds combined. But this didn’t stop some despicably cynical commentators from belittling the initiative. Frankly, I’m appalled.
RELATED #2: Will the UK finally capture the full economic benefits of offshore wind in the fourth CfD round? British-based supply chain companies have long struggled to compete, with the spoils of the subsidy regime leaking overseas. While the UK’s ‘world beating’ offshore wind industry is gearing up for massive growth, another tower manufacturer – CS Wind in Argyll – has gone into administration. It seems that the plant’s South Korean owners were happy to let it go to the wall, to the chagrin of local politicians.
ARE STRANDED ASSET RISKS BEING EXAGGERATED? Carbon Tracker has issued its latest warning about the “severe” risks of oil and gas investments being rendered uneconomical to produce as the world decarbonises.
The think-tank bases its arguments on the International Energy Agency’s finding that no investment in new oil and gas production is needed if the world aims to limit global warming to 1.5°C.
That’s a big if. As discussed in last week’s Energy Flux, the 1.5°C carbon budget is probably on track to be exhausted by 2030, with global heating likely to rise to 2.3°C by end of the century.
The IEA’s Net Zero Emissions by 2050 (NZE) scenario, upon which claims of stranded asset risk are based, has been compared to the Rorschach inkblot – a psychological test onto which people project their own interpretations of reality.
For climate activists, the NZE modelling is proof that fossil fuel investments must stop immediately, with an endorsement from the world’s pre-eminent energy authority, the IEA. For oil and gas lobbyists, it proves that net zero is unachievable.
In reality, NZE merely shows one extremely improbable pathway, among several, to get to climate neutrality by mid-century. It does not claim to be the best pathway, and is not a suggestion for collective global action. The IEA was under intense pressure to produce it.
Moreover, the gap between climate rhetoric and reality remains vast. Climate Action Tracker says no major developed economy has a 1.5°C compatible climate action plan, and only Gambia is deemed to be doing its part to meet the goals of the Paris agreement. Stranded asset risks should be weighed accordingly.
OIL INTENSITY OF GLOBAL ECONOMY FALLING STEADILY: We are getting better at extracting economic value from every barrel of oil we consume. That’s the finding of energy researchers at Columbia University, who concluded that “oil has become a lot less important and humanity has become more efficient in making use of it”.
Oil intensity – the volume of oil consumed per unit of GDP – has fallen every year in an almost perfectly linear fashion since its zenith in 1973, when the world used a little less than one barrel of oil to produce $1,000 worth of GDP (2015 prices). By 2019 (the last data set before Covid) global oil intensity was 0.43 barrel per $1,000 of global GDP – a 56% decline.
Why does this matter? Over time, it makes oil harder to dislodge from end-use applications, particularly those with fewer alternatives. Per the researchers:
“A key ramification for policy makers is that the less scope for fuel substitution in final goods (the lower the price sensitivity of demand), the higher any enacted carbon price would have to be to dent oil consumption… In transport, it will take a very large adjustment – of prices or of substitutes.”
Presumably, oil intensity will at some point reach a minimum floor, but who knows where that would be, nor when. And what would such a world look like? Burning oil, which is the most wasteful use of this precious resource, would probably not be happening at all.
A humble suggestion for further research: Considering that GDP is such a notoriously poor measure of human wellbeing, how about an analysis of the oil intensity of achieving access to basic services such as clean water, sanitation facilities, domestic electricity and an adequate diet? Just a thought.
Also worth reading:
International
BP, ADNOC and Masdar form strategic partnership in CCUS, hydrogen for cities in the UK, UAE and beyond
US, EU agree to cut methane emissions by one-third this decade
Global offshore wind growth soars, but not enough to get world to net zero by 2050
Direct air capture is ‘an exercise in futility’
Solar power’s supply chain crisis makes 1.5°C climate target a major challenge
Americas
Chevron pledges $10 billion low carbon investment drive, but leaves activists waiting on Scope 3 emissions
First US commercial scale offshore wind project achieves financial close, but Iberdrola rails against ‘protectionism’
Renewable chemicals start-up Solugen raises $357 million in venture funding round (see also this Q&A with the founders)
World’s biggest battery out of service after ‘overheating incident’ in California
Shell completes acquisition of residential clean energy supplier Inspire Energy
Hurricane Ida cut off power to at least 1.2 million electricity customers
Europe
BP hires ex-RWE Renewables chief to spearhead gas & low carbon business
Shell to build ‘one of Europe’s biggest’ biofuels facilities
Asia-Pacific
Iberdrola to develop 6,000 MW offshore wind energy portfolio in Taiwan
Africa
Nigerians use heat from ‘toxic and illegal’ gas flare to dry tapioca (3-minute video story)
Russia & CIS
Gazprom to produce LNG using liquefaction technology ‘patented in Russia’
Australasia
BHP’s oil decommissioning bill estimate lower than thought, assuaging concerns over merger with Woodside
Energy storage solution to support decarbonisation of mining operations in Australia
🧠Energised minds
Critical thinking on crucial energy issues
‘Unsound monetary policies incentivise wasteful oil production’ – Relentless money printing gives corporations an incentive to constantly recapitalise, writes Steve Barbour of Upstream Data Inc. Oil producers can raise more money the harder they pump their wells, but this accelerates production decline, increases maintenance costs and heightens associated gas volumes – which are often flared off or vented. (HEALTH WARNING: This blog makes some contentious claims about fossil fuels and the energy transition.)
‘Energy transition is complex, debate is too polarised’ – Too many commentators fail to grasp the nuances of what the energy transition implies for people in developing economies, writes energy industry veteran and author Terry Etam. “Many have been conditioned by the reflexive defaults in the media – are you massively concerned about climate change, or are you a fossil fuel shill? Because you must be one or the other. It’s stupid, but that’s what it’s come to.”
‘COP must shift the narrative from pain to gain’ – Mitigating climate change is still being painted as expensive, with the wealth-generating and redistributive potential underplayed, write Kingsmill Bond and Sam Butler-Sloss of Carbon Tracker. “COP must therefore act as a giant megaphone to make clear to the peoples of the world that there is a bright future ahead if the interests of the many can overcome the rents of the few.”
🙃And finally...
Yes, this is genuine: eco-friendly warships, replete with ‘eco mode’ kite for downwind sailing. Saving the planet, one automated drone strike at a time!
That’s all for now. Energy Flux returns to your inbox this time next week.
Thanks for reading!
Seb