Chapter 14: CfD vs Marginal Pricing - Market Design Disasters

There is an urban myth that all British electricity is expensive because of the role of gas fired power.

PPAs Most commonly associated with renewable projects like wind and solar, a PPA contract is a bilateral, over the counter agreement that bypasses the wholesale electricity market and enables generators to sell their power at a longer term ??more?? fixed rate to an energy supplier or an industrial customer that uses lots of electricity. This agreement can be mutually beneficial because it can allow the energy consumer to fix their prices (potentially indexed by inflation) and for the generator to insulate themselves from any fluctuation in wholesale prices. This is particularly important for obtaining debt finance at reasonable rates, because without this sort of guarantee, the profits of renewable power generators can be incredibly volatile.

CfDs The Government CfD programme is designed to stabilise the cost of renewable electricity relative to the more volatile wholesale gas price. The way is does this is to effectively sell an insurance policy to the developers of renewable projects that tops-up, or knocks-off any difference between the wholesale price and a guaranteed strike price that they will end up receiving. The money to pay any top-ups, when the wholesale price is low come from a CfD levy on consumers, and any surplus in times of high prices goes back to consumers as a credit. This means that both from the perspective of the renewable generator and the end consumer, there is essentially a fixed price for the power that is generated under CfDs. So while the wholesale power market continues to exist, and operates as a market of last resort to enable fine-tuning of the electricity grid, there is much greater stability at an outer level. By the year 2030, over x% (TODO number and source) of Britain's power is expected to be generated under CfDs. The more power which is generated under CfD's the more stable power prices will become. The wholesale power price will remain important to generators and the grid for balancing the grid, but it will be increasingly irrelevant when it comes to determining consumer prices.