Modelling the potential impacts of locational versus system-wide strike prices in contracts for difference for low carbon generation

This paper describes the use of a cost-minimisation algorithm to explore the potential impact of two options for financial support for low carbon generation in the form of contracts for difference in a system with locational marginal pricing: 1. with a system-wide strike price; 2. with locational strike prices. A two zone system is modelled with the additional financial support for low carbon generation represented as negative variable costs that have the effect of filling in the difference between wholesale market prices and the strike price, the latter intended to cover the long-run costs of low carbon generation. The British case is modelled in which there is a limit to the total top-up expenditure. It is shown that the case of a system-wide strike price can result in less new low carbon generation capacity compared with the case of locational strike prices, due to the increased top-up spend in the lower price zone more rapidly meeting the constraint on the total cost of top-up payments to low carbon generation. However, it is also shown that the imposition of this constraint leads to a failure of the model to settle on one solution due to the non-convex relationship between installed capacity of low carbon generation and wholesale market price.