Electricity at £200/MWh coming soon

The Low Carbon Contracts Company publishes a very useful dataset on payments under the Contracts for Difference subsidy scheme. This enables us to see how the rates paid to generators increase over time.

The four lines represent groups of windfarms with the same strike price. The steady rise in the price paid to generators is mainly because the CfD is indexed to consumer prices (CPI), but also because although windfarm operators pay a share of the costs of the balancing mechanism, they are compensated for any increases. By the looks of it, we could see some windfarms paid £200/MWh by 2025 or 2026, and earlier if inflation takes off.

The indexation of the contract is interesting, because the majority of a windfarm's operating costs - the depreciation - represents a sunk cost - the capex - and is therefore not subject to inflation. And, as we have just seen, the operators are compensated for rises in a proportion of the rest. This changes our assessment of the future profitability of those windfarms that have made low CfD bids, but unfortunately for electricity consumers, our dismal assessment of windfarm costs remains unaffected.