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Business News/ News / Why Wind Farms Are Getting Paid Millions to Turn Off
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Why Wind Farms Are Getting Paid Millions to Turn Off

On today’s Big Take podcast, we cover a Bloomberg investigation into how some of Europe’s biggest energy firms are getting millions for power they never produced.

Why Wind Farms Are Getting Paid Millions to Turn OffPremium
Why Wind Farms Are Getting Paid Millions to Turn Off

(Bloomberg) -- Listen to The Big Take podcast on iHeart, Apple Podcasts, Spotify and the Bloomberg Terminal.

The UK is in the midst of a green energy transformation, with more than 40% of its electricity coming from wind power as of December. But wind can be unpredictable and the grid can’t always handle the power wind turbines generate on blustery days — and so to protect the grid, operators sometimes pay wind farms to power off. 

After Bloomberg’s team received a tip about troubling inaccuracies in the data used to calculate these payments, our reporters went looking for answers. And they found a big problem lurking in the UK’s renewable energy market: some wind farm operators were routinely overestimating their production forecasts, and traders and market experts say that, in effect, they’re getting paid to stop producing power that they wouldn’t have produced anyway. 

According to Gavin Finch and Todd Gillespie, the reporters who led this investigation, the price tag for consumers is in the millions of pounds. And with the UK aiming to triple the number of wind turbines in the country by the end of the decade, those costs could increase.

On Thursday, the UK energy regulator Ofgem said it would investigate the behavior of wind farms that have been overstating how much power they will produce.

Read the full story here:  Wind Farms Are Overstating Their Output — And Consumers Are Paying For It

Listen to The Big Take podcast every weekday and subscribe to our daily newsletter

Here is a lightly edited transcript of the conversation:

Sarah Holder: Over the last few decades, thousands of wind turbines have popped up in remote regions of the UK.

Todd Gillespie: There's been a huge surge in renewable generation in the UK.

Sarah Holder: That's my colleague Todd Gillespie. He’s done a lot of reporting on energy markets for Bloomberg. And he says that in particular, wind power in the UK has exploded.

Todd Gillespie: That's largely driven by very deliberate policy, um, measures that were taken by successive governments and largely to take advantage of the vast resources that we have in the North Sea and in Scotland.

Sarah Holder: And Todd says this ballooning of the country's wind power capacity? It’s directly related to subsidies from the UK government.

Todd Gillespie: These projects take a long time to build, right? So what the government did is said, right, we'll basically guarantee you a revenue price per megawatt-hour of power that you produce way out in the future. Once these projects are built, once they're up and running, you can have a 15-year contract from the moment they start going forwards and you can basically be sure that you're going to get your return on investment.

Sarah Holder: And at first glance, these investments seem to have paid off. Just 16 years ago, a little more than one percent of the country's electricity came from wind power. But last year?

Todd Gillespie: In December, we produced over 40% of our power from wind, which when you talk to people on the street, they don't quite realize quite how clean our energy system is compared to a lot of other countries.

Sarah Holder: But beneath those massive strides in renewable energy infrastructure, something is lurking. Today on the show: how a team of investigative reporters at Bloomberg uncovered a problem within the U.K.’s green power industry that’s costing consumers millions of pounds per year — and what it means for the country’s green energy future. I'm Sarah Holder. This is Big Take from Bloomberg News.

Sarah Holder: Before we explain what our colleagues uncovered, it’s helpful to know a little bit about how wind farms work.

Gavin Finch: Most of the wind farms in the UK are located in Scotland, and off the Scottish coast. That's where most of the wind is and there's lots more space there to build them.

Sarah Holder: That's Gavin Finch. He’s a member of Bloomberg's investigations team. And he and Todd worked together on this project.

Gavin Finch: But most of the consumption is in England, so that energy needs to travel south to where the people are.

Sarah Holder: To move power across the UK, the country relies on a network of transmission lines.

Todd Gillespie: Huge cables that come, you know, along the backbone of the country, and then they get taken down, into smaller and smaller cables through distribution networks, and then into really local networks and into people's homes, into factories, into businesses, and into your streetlights and everything outside your house as well.

Sarah Holder: That network of transmission lines is what's known as “the grid."

Gavin Finch: The UK grid is very outdated. It was built decades ago, kind of designed around big gas-powered power stations.

Sarah Holder: One of the challenges is that you need more grid — more cables and pylons — to handle the rise in power generation that countries are experiencing. With power plants that burn fossil fuels like coal or gas, humans are in control of how much electricity is being created. But that can be trickier with renewable sources like wind. No one can control the weather. And when the wind blows harder, the wind turbines spin faster, and generate more electricity.

Gavin Finch: So on super windy days, there's just no way that all that energy can travel from Scotland to England without overloading those transmission cables.

Sarah Holder: The solution to this problem relies on projections. Every day, wind farms look at wind forecasts and have to tell grid operators how much power they expect to produce throughout the day. If conditions are calm and grid operators see there won’t be enough wind power to meet demand, they look to local gas-fired plants to turn on and fill the gap. And if it ever looks like their turbines are going to produce more power than the transmission lines can handle, grid operators will tell the wind farms to turn off. And they'll pay the wind farms for the energy they're no longer able to sell.

Gavin Finch: So wind farms are paid lots and lots of money just to switch off, because otherwise everything would blow up.

Sarah Holder: That policy is known as curtailment. And it’s at the heart of Gavin and Todd's investigation.

Gavin Finch: Crucially, that compensation is based on what these wind farms forecast they would’ve produced. So there's an incentive there to overstate your output because then you're going to be paid more money in compensation.

Sarah Holder: For Gavin, Todd and the team, their curiosity about these payments started with a tip.

Gavin Finch: So we had a source who told us that we should look at wind farms because he'd noticed that they were routinely overstating how much energy they said they were going to produce. You know, he's a guy who's just very on top of the data and that was just an anomaly he spotted.

Sarah Holder: So they took that tip and went hunting for data.

Todd Gillespie: Anything that's connected to the grid and putting stuff into it — a wind farm or a power station or a battery, for instance — each of those will produce data on what they're generating at what level for pretty much every 30 minutes or so, constantly, 24-7, all the time, while you're awake, while you're sleeping. And all of that data from thousands of different assets combines into massive datasets that obviously cover years and years of historical data.

Gavin Finch: Todd and I and our colleagues on data investigations — well, really our colleagues on data investigations — did the incredibly painstaking task of crunching more than, I think it was like, 30 million market records into something intelligible that we could then use as the backbone of our reporting.

Todd Gillespie: What we were really looking for was for when these wind farms said they were going to generate a certain amount and we scraped to see all of the average estimates of what they said they would do, and the average output of what they produced.

Sarah Holder: In other words, they wanted to find out whether the tip was true — were wind farms overestimating how much power they produce and receiving extra curtailment money from the grid? And if they were, how much might UK consumers be overpaying? And what would that mean for the country’s vision to more than triple its wind turbines by the end of the decade? What they found out, after the break.

Sarah Holder: When we left off, Todd, Gavin and their team had just spent months compiling tens of millions of wind farm records. And they’d created a dataset that could answer their question: had certain UK wind farms been overestimating their power output?

Todd Gillespie: When we're looking at this data, what we're looking at is data both from their generation, but also on what's known as their physical notification. So that's what they tell the grid that they're expecting to forecast earlier in the day. And you can see in plain sight once you — when I say in plain sight, once you crunch the numbers and kind of, you know, uh, produce very nice-looking charts afterwards, thanks to our colleagues — um, you can see the gap in between those numbers quite starkly.

Gavin Finch: What became glaringly obvious once you analyzed that data was that about a third of the wind farms in our analysis were routinely overstating how much energy they said they were going to produce by at least 10% — with a bunch you're overestimating by at least 20%. And, you know, there are outliers within that that were, you know, kind of up at the 30, 40, 50% mark in terms of overstatement. Now this is controversial because, you know, they're paid compensation based on those forecast generation.

Sarah Holder: How accurately should these operators be able to estimate that output on any given day?

Gavin Finch: So, some of the wind farms in the analysis that we did, some of them got it remarkably accurate. There were a bunch that underestimated how much energy they would actually produce, but about a third overestimated by more than 10%.

Sarah Holder: So you find this gap between how much energy certain wind farms say they'll produce and the reality. What is going through your heads as reporters and investigators? What could that mean for the industry, for consumers?

Gavin Finch: Well, when you see that persistent gap and you speak to experts and experts say, well, if you're bad at forecasting, you should be bad at forecasting both sides, right? So you should come out somewhere around zero because you should be understating as much as you're overstating. So when you see such a positive tilt towards overstatement. It's just a red flag that something's going on there, especially when the wind farm is — it's in their favor to overstate. If you are overstating how much energy that you're going to produce on any given day, then if you are switched off, you're going to be being paid for energy that you never had any intention of producing in the first place.

Sarah Holder: What’s the response been like from wind farm operators themselves who are making these overestimates?

Gavin Finch: Um, so, yeah, it's important to stress that all the energy companies that we approached for comment said that they tried to make their forecasting as accurate as possible and hired third party contractors to help them do that. They said they take compliance with market rules and regulations very seriously, that they've never been contacted by OFGEM or the government about any of their forecasts and they also said that, you know, sometimes it is just very hard to predict what the wind is gonna do.

Sarah Holder: OFGEM is the Office of Gas and Electricity Markets. They’re the energy regulator in the UK.

Todd Gillespie: OFGEM, which has done a lot of work looking at retail costs, household bill costs in the past couple of years — on this front, they said that they do look at the behavior of energy market participants to ensure they're following the rules all the time and that any operators that are found to be deliberately submitting misleading information can face substantial fines. But on our specific findings, they didn’t comment, um, yet.

Sarah Holder: Former UK Energy Secretary Jacob Rees-Mogg said he was shocked by the scale of overestimation in Bloomberg’s findings. And he called on OFGEM to act urgently and investigate whether any of the wind farm operators were committing fraud. So, what does this all mean for British consumers?

Todd Gillespie: So the way that this works is quite a complex system of this money that the grid uses to pay them to turn off and the money that they pay gas plants to turn up because of these constraints. This constraint bill is rising every year in this country. So the big picture is that over the next decade, people are very worried that this annual toll is going to be into the billions of pounds. At the moment it's about 800 or so million pounds.

In the worst recent year in 2022, UK bill payers paid about 800 million pounds extra because of the costs associated with constraints generally speaking. So switching off these wind turbines and paying gas plants to switch up. This level of exaggeration, we've calculated over the past five years, added over 50 million pounds to their bills. So it's not, it's not insignificant addition to that.

Sarah Holder: That’s a lot of numbers. So, to break it down: that 800 million pounds — that’s the amount of extra money UK consumers paid because of grid constraints in 2022. That includes things like curtailment payments and money paid to gas-fired power plants to produce extra electricity. The 50 million pounds is how much our investigations team calculated has been paid unnecessarily over the last five years just to wind farms because they’ve over-estimated their power output. 

Todd Gillespie: But the key thing really is that when we're looking forward now, the UK government is looking to massively expand wind power even more than it has already. We're looking to triple — more than triple — the amount of wind capacity that we have on the system by the end of this decade. So even these small variances and these relatively small estimation biases — that you might call them — will start having a bigger and bigger impact as the next few years go on unless the kinds of behavior that we've seen and these kinds of patterns are reduced significantly.

Gavin Finch: While the 50 million figure that we kind of estimated would be how much was additionally added due to this overstatement — while that's not a very large number, the rules are very clear that you are not allowed to obtain any kind of, I think it's, “excessive benefit" is the language when you are paid to stop or reduce your output due to grid constraints.

You know, there are very clear, hard and fast rules that firms must submit their best estimate of their generation plans and stick to it as closely as possible. And it's difficult to see how those two rules are being adhered to when a wind farm is consistently overstating by 30%.

Sarah Holder: Obviously it's hard to ascertain intent through this data but what does your reporting show about why these best estimates are so inaccurate for some wind farm operators? Why are they overestimating their output?

Gavin Finch: Well, it's difficult to say exactly the motivations for why wind farms are overstating quite as much as they are. You know, certainly we've spoken with traders who are at firms that are not overstating. And they were left scratching their heads. They were like, well, there's no reason for getting it so consistently wrong when they can get it so consistently right. And their wind farms are only a few miles away from these other wind farms that are getting it so wrong. And so these traders that we spoke to, they said, well, really the only reason for that is that it's financially beneficial for some wind farms to behave in this way.

Sarah Holder: So after doing all this reporting, reviewing dizzying numbers of millions of records, crunching the data — what are you taking away?

Todd Gillespie: What it really shows is that the advent and the real surge in renewable energy that a lot of countries, not just the UK, are having, means that they're going to be reckoning with a lot of unpredictability, a lot of, uh, questions over the integrity of their systems and what a really sort of distributed energy market means.

And there needs to be, you know, the regulators and policymakers need to make sure that the market design and the enforcement of energy market regulation, you need to make sure that that's up to scratch. And the energy transition, as positive as it is for the fight against climate change, it also poses serious challenges.

Gavin Finch: You know, what I'm left with from this reporting project is: a worry that consumers are being saddled with lots of additional costs by energy firms who often are acting very much within the rules, very much within the law, but they are exploiting loopholes and badly drawn up market rules to maximize, um, their revenue at the expense of bill payers. We actually spoke to one trader who, he put it very bluntly, he basically said, look, what do you think happens when you incentivize a group of people to make as much money as they possibly can, staying just this side of the law? Well, they're going to make as much money as they possibly can, staying just this side of the law.

Sarah Holder: Gavin, Todd, thank you so much for being on the show.

Todd Gillespie: Thanks for having us.

Gavin Finch: Thank you very much.

Sarah Holder: This story was part of the Power Plays series from Bloomberg's investigations team. You can find Gavin and Todd’s piece, and other stories from this series, by searching for “Power Plays" on Bloomberg.com.

(Updates to reflect UK energy regulator inquiry)

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.

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Published: 02 Feb 2024, 12:28 AM IST
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