Contracts for Difference (CfDs) are an industry-standard way to contract new renewable energy generating capacity, which has been very successful in advancing the growth of renewable generation at minimal or even zero cost to consumers.
One of the biggest draw-backs of CfDs is that they only price the quantity of energy, not its value. For example, 1MWh of intermittent, asynchronous electricity is reimbursed the same as 1MWh of dispatchable, synchronous energy even though the former requires the grid to purchase additional balancing, stability, power quality and resilience services that the latter delivers intrinsically. Technologies that deliver these additional benefits are (in general) more costly per unit of energy output than those that do not; but the overall cost to the system is significantly reduced. This saving to the grid needs to be reflected clearly, and the provider rewarded proportionately – not 100%, but in such a way as to both incentivise / reimburse the provider and benefit the consumer / grid.
Indeed, the situation is currently worse than that: the electricity is typically measured for payment when it gets onto the main onshore grid. This penalises behind-the-meter storage which reduces the MWh of electricity that gets onto the grid by a factor related to the efficiency of the storage.
Reimbursing Non-Core Factors
Consider two bids:
- Bid A is £50/MWh for output that includes £10/MWh imputed value of non-core services;
- Bid B is £45/MWh for output that includes no non-core services.
At the evaluation of the tender, the imputed value of the non-core services should be deducted from the price of each bidder. This would reduce A to £40 for the core services alone, to be compared like-for-like with B’s £45; A would therefore win, as being the cheaper bid.
Then when the contract is let, the full £50 is paid to A, to pay for the other services.
Evaluating Non-Core Services
For purposes of the tender, non-core services could be valued at one of two levels:
- The cost to the grid of securing such services elsewhere;
- Some proportion of such cost, e.g. 60-80% of it.
The first would maximise the incentives for providers, but would tilt the playing-field towards them and against providers of such services independently of the CfD process. The second would provide incentives for providers but discounted to reflect the benefits of the long-duration contract, and providing corresponding benefits to the grid / consumers.
For each given non-core service, the imputed value must be the same for all providers. This means that every bidder providing the same additional service will have the same amount deducted from their CfD headline value prior to the comparison, to prevent bidders over-valuing such non-core services.
Inclusions and exclusions
Non-core services that are to be excluded should be listed pre-tender, with a short (2-week, to ensure dialogue but not unduly delay the process?) window to challenge the exclusions. The remainder of non-core services fall into two categories: expected and unexpected.
Expected non-core services’ imputed values should be evaluated pre-ITT (Invitation To Tender), so that all bidders can use the same figures as a basis for their bids. The ITT should also declare a discount rate (e.g. the 60-80% above) to be imposed on unexpected services, to be a fair reflection of both cost to provide and benefits to both bidder and consumer / grid.
Emissions should be evaluated as a negative non-core service, at the Social Cost of Emissions minus the carbon price (or equivalent) applying at the time.
Evaluating Unexpected Services
Bidders should submit a cost-to-provide (with justification) for each non-core service. If there is no justification (e.g. if provision of that service cannot be separated out from provision of the core service or of another unexpected service), then use the market rate for procuring such service separately – to which a small discount may be applied.
Unexpected non-core services will need evaluating on (a) whether they are to be accepted in the bidding process and, if yes, (b) the imputed value at which they are to be accepted.
A value is to be placed on the unexpected services, using (as an input, but not the only one) the cost-to-provide that is submitted by a bidder. If multiple bidders offer the same service, there will be a range of values; it would be expected that the final determination would be towards the bottom end of such range, with potential for override if the System Operator (or other tendering organisation) suspects that these values are inflated. If such override is applied, then full justification is required, and a short (2-week, for the same reasons?) period allowed for representations from affected parties. The discount rate will then be applied to the determined value.
The above method applies well to generation, with and without behind-the-meter storage. However, the amount of non-core services delivered by co-located generation and storage depends on a number of factors, e.g.
- Input power of storage, as % of renewable generation nameplate power rating;
- Output power of storage, ditto;
- Duration of storage (hours) at output rated value (i.e. energy stored as a proportion of energy generated), after all losses are incurred.
These need to be considered carefully and the three factors applied differently, according to the benefits that they provide for the grid. The most important of the three is the duration; output power is secondary and input power tertiary; for many storage systems output power will equal input power.
Natural inertia is worth more than synthetic inertia. Also, systems with sufficient natural inertia do not need ultra-fast response times – which is why such response times only became important during the energy transition. Therefore natural inertia should be worth at least as much as the sum of synthetic inertia and all contracts requiring response times faster than those of the old Frequency Response (and equivalent) services, typically 20MW per minute ramp rate. Benefits to the grid are greater than the sum of those parts, because the parts do not need to be procured, dispatched and settled separately, making a more stable grid that is easier to manage and control.
Applying the Method to Storage
This CfD methodology could equally be applied to stand-alone storage and balancing plants. The core service would be balancing services (power absorption, power output, duration of each); the non-core services would relate to services provided by (for example) using grid-forming inverters or synchronous plant.
Applying the Method to Hydrogen
Again, the CfD methodology could equally be applied to the procurement of hydrogen. The core service would be hydrogen output; non-core services would relate to dispatchability, storage, cleanness. Note that there are two definitions of green hydrogen, strict and statistical. Strictly green hydrogen is created only using zero-carbon energy. Statistically green hydrogen is created using energy which is clean, but a surplus of clean energy is procured during periods of generation to balance the non-clean energy that is procured when the clean is not generating. The former would satisfy increasingly tight regulations in various places around the world, and is consistent with a zero-carbon economy, so should be considered more valuable than the latter. The latter, on the other hand, would require negative-emissions technology to clean up the emissions produced when the renewables are not producing; such costs can be imputed to the statistically-green – and also, proportionately, to non-green hydrogen.