Putting wind and solar in their place: Internalising congestion and other system-wide costs with enhanced contracts for difference in Great Britain

Aug 1, 2023

The large-scale deployment of renewable energy assets can create system-wide costs due to the impact on congestion management and reserve provision, and may have a limited effect on carbon emissions if subject to curtailment. We show how the successful UK incentive scheme for renewable energy, termed Contracts-for-Difference (CfD), can be further enhanced by introducing three new cost components to internalise these system-wide externalities. The proposed scheme can help: (i) incentivise more efficient investments by signalling where renewable assets can offer more value from a whole system perspective, (ii) promote fairer competition between renewable energy technologies with different levels of intermittency, and (iii) reduce actual carbon emissions by accounting for the effect of grid redispatch. The developed case studies show that one additional MWh of renewable generation in the northern regions of Great Britain (GB) increases congestion management cost by £5.61/MWh (14% of the CfD2019 price), and that the potential carbon emission abatement is reduced by 9% (23.52 kgCO2/MWh) due to grid redispatch. By contrast, deployment in southern regions can decrease congestion cost by £4.04/MWh, and can increase potential carbon abatement by 17% (44.33 kgCO2/MWh). Finally, one additional MWh of intermittent wind generation in GB can increase reserve provision cost by £6.58/MWh, while a perfectly predictable technology would decrease reserve cost by £2.44/MWh.

Publication details
The urgency of zero
Research paper
Hepburn, Cameron
Energy Economics

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