Fact check: Many wind power auctions set prices below the current market price

6 December 2024, 15:34

Gwynt y Mor offshore wind farm. Picture: PA

Wind farms sign a contract which guarantees them a set price for every unit of electricity they produce.

Reform UK leader Nigel Farage claimed that all wind farms that had submitted successful bids in Great Britain had charged double the market price.

Mr Farage said: “Ed Miliband’s promise that they would reduce electricity bills are wrong. And I can tell you that because I’ve seen the strike prices: 171 successful wind energy auctions, both offshore and onshore all struck at double the current market price.”

On the BBC’s Question Time on December 5 (at around 39 minutes) Mr Farage, who is the MP for Clacton, repeated the claim that there had been 171 deals, but this time added that they had all been struck while Ed Miliband was Energy Secretary, and said that they were at “high strike prices.”

Evaluation

There have only been 114 successful wind power energy auction bids since the current system launched around a decade ago, not 171 as Mr Farage claimed. Of these, 32 occurred since Ed Miliband became the Secretary of State following Labour’s general election victory in July.

Analysis by the PA news agency suggests that the strike prices for 23 of these 114 wind farms were set at double what the market price was at the time the contracts were announced, while 49 were agreed at less than half of the then-market price.

The facts

What are wind energy auctions?

The main way that the Government supports low-carbon electricity generation is called the Contracts for Difference (CfD) scheme.

Currently there is an auction every year to allow generators of renewable energy to bid for contracts under the scheme in Great Britain.

If they win a contract, the builders of solar and wind farms are promised that during the lifetime of the contract they will be paid a fixed price for every megawatt hour (MWh) of electricity they produce. This fixed price is called a “strike price”.

Companies are therefore reassured that if electricity prices fall in the future, they will remain protected – they will still be paid the same amount per MWh. Conversely, it means that customers are protected if electricity prices soar because they will continue to pay the same amount per MWh for the electricity from those energy farms. In addition, because the renewable developers are taking less risk, they can also often borrow money cheaper, so the cost of building a wind farm is lower.

How many auctions have there been, and how many wind projects have been awarded?

There have been six so-called allocation rounds since the CfD process was set up around a decade ago.

Each allocation round is numbered, and referred to as AR1, AR2 and so on. Only the most recent of these – AR6 – was run while Ed Miliband was Energy Secretary.

Across all allocation rounds, contracts have been awarded for several types of wind farms: onshore wind, offshore wind, floating offshore wind and remote island wind.

In AR1 there were 17 successful wind projects; in AR2 there were three; in AR3 there were 10; in AR4 there were 22; in AR5 there were 25; and in AR6 there were 32. There were also five projects awarded before allocation rounds started.

Together these all add up to 114.

These 114 contracts can be split into a total of 146 phases .

What strike price were these contracts awarded at?

One complication with the strike price is that it is measured in 2012 prices so does not take into account inflation since then. That means that the strike price awarded in a contract is not directly comparable to the price of electricity today.

To get the current price for AR6, the Government said to multiply the strike price in AR6 by a so-called inflator of 1.3736. That means that a strike price of £100 per MWh in AR6 is actually £137.36 when measured in 2024 money.

In AR5 the inflator was 1.3415; in AR4 it was 1.2056; in AR3 it was 1.1335; in AR2 it was 1.0761; and in AR1 it was 1.0636.

This means that the lowest strike price, taking into account inflation, was £45.03 in AR4. The highest strike price was £192.21 in AR6. The average strike price, post-inflation, ranged between £45.83 in AR3 and £91.57 in AR1.

The pre-allocation round CfD contracts were struck at either £140 or £150 per MWh, which in today’s money is £194.31 and £208.35.

What “current market price” was Mr Farage referring to?

It is not clear what Mr Farage meant when he said “double the current market price.” Mr Farage and Reform UK did not respond to an email asking for his source.

The price at the time he was speaking was around £98.80 per megawatt hour (MWh). If Mr Farage was referring to that price then the most expensive wind CfDs – awarded at £150 in 2014, which is £208.35 in today’s money – are twice as expensive as the current market price. However, that is only a handful of the contracts, not all of them as Mr Farage claimed.

Instead, Mr Farage might have been referring to the strike price which was current at the time the contracts were signed.

PA analysed four different possible market prices – two for the quarter in which the result was announced, one for the hour that the results were announced, and one for the day that results were announced. Data was not available for AR1, but was available for every other allocation round. For AR1 the average data for the whole of 2015 was used instead, and for the pre-AR contracts the average for 2014 was used.

This analysis found that 23 out of the 114 wind contracts were awarded at a strike price which was double at least one of the four current market prices. All but one of those 23 were in the first allocation round in 2015 or in contracts awarded in 2014, before allocation rounds starter. Meanwhile there were 49 strike prices which were lower than half the market price at the time, these were split across AR4 and AR5.