To activate, or not to activate?

Back in 2017, when it was announced that windfarms had agreed Contracts for Difference (CfDs) to sell power to the grid at extraordinarily low prices, the mainstream media and the Green Blob went wild with claims that we were witnessing a revolution in costs.

Only us wicked sceptics said that it was a ridiculous suggestion, pointing out that there was no sign in the financial accounts or market announcements of windfarm operators to support such a claim.

It was therefore no surprise to the ‘denialist’ fringe when, at the start of 2021, major windfarms that had recently become fully operational suddenly decided that they would be delaying the start of their CfD contracts for a year. This enabled them to take advantage of market prices that had soared throughout 2021 and then gone stratospheric towards the end of the year in the wake of Russia’s invasion of Ukraine.

For the last twelve months, these windfarms have been making money hand over fist, but they are now facing another decision: activate their CfDs or delay for another year. The equation is not as simple as twelve months ago. While market prices are double the long-term norm, they are less than half the level of a year ago. The operators’ views on pricing over the next few years look to be critical. Just this week, the accountancy firm KPMG suggested that things would not be back to normal in the next couple of years. It’s likely they will soar again this winter. That being the case, my guess is that they will delay once more. The upsides of doing so are potentially very large, and the downsides are limited. In fact, no final decision on activation needs to be made until 2025.

But it is possible that at that point they will finally sign up. There are valuable hidden subsidies available for those who are inside the CfD scheme, such as exemption from increases in soaring grid balancing charges, and exemption from windfall taxes.

When you stand back and look at the CfD scheme, it’s clear that it’s a win-win for the generators, and a lose-lose for consumers. It may be possible for the Government to claw back some of the billions of extra profits through a windfall tax on those generators who haven't activated their CfDs, but it’s unlikely they would do that, in thrall to the Green Blob as they are. That being the case, all we can do is stand back and see which “win” the windfarms will choose.