CfD rule change to cost electricity consumers extra £1.5bn

Electricity consumers will be out of pocket by £1.5 billion due to a change in the rules for the latest Contracts for Difference (CfD) auction, parliament’s spending watchdog has concluded.

The National Audit Office (NAO) has today (16 May) published the results of an investigation into the 2017 CfD following the introduction of new rules by the Business, Energy and Industrial Strategy (BEIS) department for the low carbon electricity scheme.

Offshore wind projects, which were able to submit much lower than expected “strike price” bids thanks to efficiency and technological improvements, benefited from the rules that initially award contracts to the lowest bidders.

Three offshore wind farm projects, generating a total of 3.2GW, swallowed up all but a small proportion of the 3.3GW of capacity awarded contracts in last September’s auction.

However, projects were then rejected if they would bust the cap on capacity being procured through the process.

This meant that eight small-scale projects, which were more expensive per unit of electricity generated, won out at the expense of larger and cheaper schemes, according to the NAO report.

The impact was exacerbated by rules, which were designed before officials understood the dramatic fall taking place in offshore wind prices, that “pulled up” the price per unit lower bidders received to those procured by their more expensive counterparts.

The NAO calculates that the rule changes meant that electricity consumers will be paying around £100 million extra each year, adding up to around £1.5 billion over the 15‑year life of the CfD contracts.

It says: “The 2017 auction will cost consumers significantly more, relative to the additional capacity it secured, because of the department’s rule change.”

Commenting on the NAO’s findings, Meg Hillier, chair of the House of Commons Public Accounts Committee, said: “The rules BEIS set for the auction of Contracts for Difference has cost the consumer an extra £1.5 billion, and only a small amount of the extra money will be used to generate additional energy capacity.

“Once again the department has neglected to put the interests of service users at the forefront of its thinking.”

However the peak additional payment, which will hit a forecast £176 million in 2023-24, is due to be less than the annual budget cap for top‑up payments set by the department of £290 million per year, says the report.

Responding to the report, Lawrence Slade, chief executive of Energy UK, said: “2017’s CfD auction saw the strike prices for offshore wind reduced by nearly 50 per cent, showing how the cost of low carbon energy is continuing to fall.

“This report from the NAO further highlights the cost reduction to consumers and underlines the case for a level playing field in delivering all renewable technologies at future auctions. Ensuring that the least cost technologies have a route-to-market is the best way of minimising the cost to the consumer of delivering the environmental benefits of decarbonisation.

“The energy industry has shown it can deliver – with over a quarter of electricity generation now provided by renewables with clear industrial strategy benefits. We now need the government to set out clarity over future auctions and the technologies participating in them.”