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It’s possible to see the problem here

The unit at the facility runs on a Government-backed contract under which Drax returns to consumers any profits it receives from market prices above a certain level.

But the company powered down generation at the unit as the energy crisis raised market rates for electricity in early 2022, according to Bloomberg.

If it had kept the unit running at full capacity, the company would have returned an estimated £639 million in profits to consumers, according to estimates by Bloomberg.

Not broken any rules
Three other units, from which Drax could keep all profits, were kept running at the time. There is no suggestion that Drax has broken any rules.

But Ed Davey, who was the Lib Dem energy secretary at the time of the contract negotiations, told the news organisation that Drax appeared to be “gaming the contract”.

If it was Ed who wrote the contract then the holes through which one could game would likely be pretty large.

6 thoughts on “It’s possible to see the problem here”

  1. It sounds like the government subsidised a backup unit and ‘hired’ the company to run it. Naturally the company maximised its own, not the governments profits.

    Of course if I ran things, everything’d be generated by burning coal and gas. So backup units’d be cheap and profitable to run without a subsidy.

  2. Argh. I work in the energy sector – at one time, it was my job to write (well, plan out the provisions, we had lawyers to do the actual writing) the contracts for power producers to sell to us – a large utility. Of course, part of that involved reviewing past contracts to see the outcomes – intended or (especially) unintended. Before that, I worked on the other side of the table, with companies that developed power plants (all thermal, as it happens) and sold energy and capacity to utilities like us. I frequently heard the claim that one side or the other was “gaming the contract.”
    I got tired of it, and started correcting the claimant(s): “the other side is responding to the constraints and incentives you put in the contract. If that’s not what you wanted, whose fault is that?” The claim is a combination of sloppy thinking and unwillingness to accept responsibility for past actions.

  3. dcardno @ 2.35, glad to see there are cretins writing contracts in the private sector – I thought they were only writing contracts for the government and the public sector…….

  4. I find dcardno’s comment instructive. And how many very well(over?) paid people are sitting either side of the table discussing all this?
    I mean it’s not very hard, is it? You generate some electricity, send it down the wires, it gets used. You bill people for what they consume. Only government can manage to turn it into this complicated mess. The administration requires more effort than the product.

  5. The other angle on this (not often discussed!) is that CFDs put a cap and floor on price, but not profit. In this case, while the price of power went up, so did the price of inputs (the biomass and the cost of transporting it.) So Drax decided (I think) to sell some of the biomass on the open market, and to keep some in reserve for the winter, (when, arguably, it would have been doing a job just as valuable, keeping the lights on at a time of greater demand.)
    A CFD is not a capacity payment mechanism: it is designed to make sure that power, when generated, is sold within a certain price range; it is not designed to ensure that power is generated, even if it is uneconomic for the generator to do so.
    As other commentators have said, if you lay out the terms of a contract, you can’t complain if the other party follows the rules of that contract, but does something you don’t like.
    The English language has the phrase “with the benefit of hindsight” for just this eventuality.

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