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Are there Perverse Incentives to Build Wind in Scottish Waters?

Dr John Constable: GWPF Energy Editor

EdF has reportedly paid a striking £500m for the as yet unbuilt 450 MW Neart na Gaoithe offshore wind farm near the Scottish coast of Fife. Why?

EdF Renewables is the dedicated UK renewables development vehicle of EdF Energy. It currently has to its credit, according to its website, 598 MW of operational capacity, comprising about 5% of the UK’s onshore wind. The oldest of these sites was commissioned in 1993, and the newest Corriemoillie, a seventeen turbine installation with a total capacity of 48.5 MW, in January 2017.

In November last year EdF Renewables has, however, disposed of a majority (80%) stake in five of its onshore wind farms, totalling about 100 MW. Interestingly, all of these wind farms were in England (in Lincolnshire and Cambridgeshire in fact). This appears to be a mere ebalancing of the portfolio, as well as a means of generating cash while shedding risk, and it clearly remains interested in wind. Dorenell, a 177 MW wind farm in Moray is under construction and Stranoch, an onshore wind farm of 72 MW, is awaiting completion,  while the first foundations for the Blyth Offshore (41.5 MW) were installed in November last year. In planning it has Fallago Rig 2, a proposal for a 41.5 MW extension to existing Fallago Rig wind farm. The website itself lists no other live proposals onshore, but recent press statements refer to more than 1 GW in development, a large fraction of which is probably comprised of the 600 MW spread over eleven projects that it bought in July 2017 from Partnerships for Renewables. Interestingly, all of those sites are in Scotland.

Confirmation of its continuing enthusisasm for wind, and for Scottish wind in particular, has emerged in the announcement on the 3rdof May that EdF has bought the Neart na Gaoithe offshore scheme, a very large proposal for 450 MW of capacity 15 km off the Scottish coast at Fife. It seems from press reports that EdF paid the developer, Mainstream, some £500m, a tidy sum for an unbuilt wind farm on which a further £1.5 billion will have to be spent in the construction. With so much else going on, why would EdF want to buy Neart na Gaoithe?

An obvious interpretation is that this indicates a move towards the offshore market, which it plainly is. But bearing in mind the continued activity onshore, this doesn’t seem to be a shift in emphasis. If anything it’s a diversion. Something else appears to be going on. There is something particularly attractive about Neart na Gaoithe. They simply had to have it.

Could a clue be found in the location? The project’s own website reports that the onshore grid connection would be at Crystal Rig onshore wind farm, which is owned by Fred Olsen renewables, and is under ten miles from Fallago Rig, EdF’s 144 MW wind farm in the Borders.

Both Crystal Rig (or to be precise, Crystal Rig II, the second phase of the development) and Fallago Rig are amongst the most significant recipients of constraint payments in the UK system, Fallago being near the top of the league of those most heavily constrained off. Since it commenced operation in 2013 it has received just under £28m not to generate, while Crystal Rig II has received about £13m. In point of fact, Fallago Rig has been payed handsomely, at a rate of £78/MWh (nearly double the lost income), not to generate about 354,500 MWh of electrical energy. This amounts to about 17% of its total output over that period.

Crystal Rig II, which is still famous in the industry for having successfully asked £999/MWh to be constrained off in late 2011, when its constraint payments started, has more recently been receiving a still generous £86/MWh to stop generating, with total payments amounting to £13m. The total volume constrained off amounted to 117,490 MWh, or about 5% of its output over the period. Other wind farms in the area, such as Dunlaw Extension are also doing well from constraint payments (£2.6m since 2012).

            In summary, this location is very well known to be behind a grid bottleneck, entailing heavy constraints. Since wind farms receive more in constraint payments than they would for generating normally, constraint-prone sites actually offer a higher average income per MWh generated than sites with good grid connections. There is thus a perverse incentive encouraging wind farm developers to connect in such places. Indeed, there is a such perverse incentive encouraging construction in Scotland overall.

            As the owner of the constraints star Fallago Rig, EdF Renewables knows this as well as anybody. Is that what lies behind their rebalancing of the portfolio? Is the possibility of constraints what made Neart na Gaoithe so compelling a purchase? Who can say? Nevertheless, these remain very interesting questions. When Neart na Gaoithe is commissioned, and it is likely to be built since it has a Contract for Difference worth £127/MWh, two and half times the current wholesale price, we shall find out just how much of its output will be bought off the system and at what price. We may also find out if the regulator, Ofgem, has the guts to tell a developer that it cannot reasonably expect generous compensation, or any compensation at all, for building a wind farm in an area with known, indeed notoriously weak connections to the English markets. We shouldn’t hold our breath, as they say, but it would pleasant if Ofgem were to stand up for the consumer from time to time.