Contracts for difference can reduce CO2 emissions,
but also increase nuclear waste
The EU has decided to make their introduction
mandatory for the promotion of wind power, photovoltaics, geothermal
energy, hydropower, and nuclear energy from 2027 onwards
For
the RWE Group, the calculation seems to be paying off. That is why it
accepted the “reference price” of around 105 euros per megawatt hour
(see above)
in the British government's seventh tender for the promotion of
CO2-free electricity generation – which was effectively about offshore
wind energy. In contrast, Energie Baden-Württemberg decided that its
previous calculation no longer worked after it failed to win the
contract. It therefore considered it advisable to abandon two of its
three offshore projects off the British coast. Both may have
made the right decision. However, it is also possible that one of them
miscalculated. This will only become clear later on and even then it
will be difficult for outsiders to assess.
Bilateral
contracts for difference are financial instruments that offset price
differences between a fixed reference price and the current market
price. They thus make it possible to hedge against risks associated with
price fluctuations. In the energy industry, for example, this means
that the state guarantees the operator of a wind farm a certain price
for the electricity fed into the grid, not only nominally, but also
taking into account the real monetary value of this reference price,
which, especially over longer periods of time, usually falls to a
greater or lesser extent due to inflation. If the actual market price
achieved is higher than this guaranteed price, the electricity producer
must reimburse the government for the difference. Conversely, the
producer is reimbursed by the government for the difference if the
market price falls below the guaranteed revenue.
Such
“contracts for difference” have been in place in England since 2014 to
support – at least formally – all types of CO2-free electricity
generation. This criterion was defined very broadly, favoring the
capture of greenhouse gases from fossil fuel-fired power plants through
CCS as well as the construction of new nuclear power plants. In
practice, this mainly involved the construction of new nuclear power
plants to replace the old ones and expand the existing fleet. This
particularly expensive and also highly risky technology was no longer
profitable unless it continued to be subsidized by the state or other
interested investors. This was also the reason why, in 2012, the German
nuclear power plant operators RWE and E.ON revised their original plans
and preferred to write off several hundred million euros in advance
payments already made rather than invest around 16 billion euros in the
construction of new reactors in the UK by 2025 (120304).
Otherwise, they would certainly have lost much more money.
David
Cameron's government therefore came up with the idea of luring foreign
investors with a heavily inflated and long-term guaranteed revenue of
£92.50 per megawatt hour, which was about twice the current market price
and was guaranteed at a stable level for 35 years, taking into account
inflation (131009). In October 2014, the EU Commission also approved this billion-euro subsidy via a “contract for difference” (141020).
Nevertheless, in June 2016, Cameron's botched referendum took place, in
which the British voted by a narrow majority to leave the EU (see Background, September 2016).
With
this assurance of a high return guaranteed by the state and independent
of the actual market price, Electricité de France (EDF) was brought on
board with the Chinese nuclear industry as a minority partner. As a
result, Cameron's successor, Theresa May, was able to give the green
light in September 2016 for the planned construction of two EPR reactors
at the Hinkley Point C site (160905).
But then hardly anything worked out. In March 2016, EDF's chief
financial officer resigned because he no longer wanted to take
responsibility for the financial risk associated with the Hinkley Point C
investment, after construction costs had tripled even for the first and
so far only EPR in France (160314).
A month later, the French government announced that it would support
EDF with five billion euros to ease its debt burden of 37 billion (160405).
The then Minister of Economy, Macron, denied that this bailout had
anything to do with the investment in Hinkley Point C. Rather, he said,
it was the result of the reorganization of the French nuclear industry
with the redistribution of roles for Areva and EDF (150703 and
Background,
July 2015). To reinforce this, EDF, which had become the sole ruler of
the nuclear distribution business, announced its final investment
decision for Hinkley Point C two months earlier than originally intended
(160714).
Hinkley
Point C is still not finished and, like other nuclear power plant
construction sites, has become a bottomless pit. EDF now expects
commissioning to be delayed until 2031, by which time the originally
estimated construction costs will have risen from around €21 billion to
over €50 billion. The price guaranteed for the electricity generated
under the “contract for difference” will certainly earn EDF a lot of
money, but never the sums it had to invest.
This
does not rule out the possibility that contracts for difference can be a
useful instrument for promoting all types of renewable energies. The
best example of this is also the UK, which is surrounded by the sea like
no other country and now has the largest installed capacity of offshore
wind energy in Europe: at the end of 2024, this was just under 16
gigawatts, followed by Germany with 9.1 GW and the Netherlands with 4.7
GW.
As
early as 2022, the German Institute for Economic Research (DIW) argued
in one of its weekly reports entitled “Contracts for difference promote
the expansion of renewable energies and reduce electricity price risks” (PDF)
for the general application of this financial instrument to promote
renewables. In contrast, the German Renewable Energy Federation (BEE),
which represents operators of renewable energy plants, warned in another
paper against the “hasty introduction of a CfD support framework”
because it would not achieve the hoped-for goal of cost savings and
relief for electricity customers (PDF).
The
EU Commission was already warming to the idea of mandatory introduction
of contracts for difference because France was pushing for it. The
Paris government had a keen interest in including nuclear energy, as in
the UK. On March 14, 2023, the Commission then proposed a reform of the
electricity market, which, in the new EU Regulation 2025/1747, provided
for, among other things, the introduction of bilateral contracts for
difference for electricity from “non-fossil energy sources,” i.e.,
including electricity from nuclear energy (230905).
This was a mild affront to the German government at the time, which
rejected precisely that. It was therefore hoped that this would still
change. However, this did not happen. In its final version, the
legislative proposal decreed in Article 19d of the new EU Electricity Market Regulation that“direct price support schemes for investments in new electricity generation capacity”– specifically for“wind energy, solar energy, geothermal energy, run-of-river hydropower, nuclear energy”– in the form of “bilateral contracts for difference or equivalent systems with the same effect”.
On April 11, 2024, the European Parliament voted in favor of the new
regulation by a large majority, followed by the EU Council of Ministers
on May 21. The “qualified majority” required in the Council of Ministers
now even included Germany (240502).
The term “direct price support systems” is not defined in the regulation
or elsewhere. Other parts of the regulation text are also vague (PDF).
However, there is no doubt that a further amendment to the Renewable
Energy Sources Act (EEG) will be necessary, replacing the current
“market premium” with contracts for difference. The special promotion
of larger solar and wind power projects, which since 2017 has only
been possible through tenders (170207),
will also no longer be possible in its current form.
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