By Paul Homewood
As we know, the new Administrative Strike Prices for offshore wind are well above wholesale market prices, which have been trundling along at between £70 and £80/MWh for the last year or so:
https://www.ofgem.gov.uk/energy-data-and-research/data-portal/wholesale-market-indicators
It is generally accepted that wholesale prices tend to be set by the marginal cost of gas power. But as I noted the other day, the marginal cost of a CCGT plant, ie the fuel cost, is currently £49/MWh – so why the discrepancy between this and £80/MWh?
Carbon Pricing
The main factor is the UK Emissions Trading Scheme (UK ETS), effectively a carbon tax. CCGT plant operators must purchase allowances to cover the amount of CO2 emitted. The current market price for these allowances is around £50/Tonne CO2.
This equates to a surcharge on CCGTs of about £18/MWh.
So although the cost of fuel might only be £49/MWh, the carbon tax increases this to £67/MWh.
Market prices, of course, reflect supply and demand – when wind power is plentiful, for instance, prices fall. Often the market price might also be set by interconnectors or the most expensive gas generators when supply is tight.
But ultimately, at current gas prices, the new strike prices for offshore wind are more than double the cost of a modern CCGT plant.
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Author: Paul Homewood
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