Government accused of underestimating CfD costs

Aurora Energy Research claims true subsidy costs could be £80 million a year higher

The government has been accused of underestimating the subsidy costs in the recent Contracts for Difference (CfD) by almost 50 per cent.

A briefing note by Aurora Energy Research claims the government’s methodology for forecasting future subsidy payments appears to underestimate the likely cost by almost £80 million a year.

And the note warns unless it changes its methodology, the government also risks “overspending on future renewables auctions”.

Last month’s CfD round awarded subsidy contracts to 3.2GW of offshore wind with a strike price of £57.50.

The note states that under these contracts, the government is obliged to pay a top up between the price the plant receives in the wholesale market when it generates and the strike price.

It adds the department of business, energy and industrial strategy (BEIS) currently calculates the subsidies as the difference between the strike price and its forecast of the average wholesale price.

But the “capture price” that windfarms actually receive is lower than the average wholesale price.

It claims BEIS forecasts the subsidies to the offshore wind allocated in last month’s CfD round to be £176 million per year, based on the difference between the strike price and the baseload price.

Aurora estimates if capture prices are used to estimate subsidy payments then the CfD bill increases to £261 million a year instead – an increase of almost 50 per cent.

The executive director of RenewableUK, Emma Pinchbeck, said the Levy Control Framework (LCF) urgently needs reform, so that it can better manage the “staggering speed with which the energy market is changing”, but added it is important to note that the issues with the LCF are “basically an accounting problem that occupies the Westminster bubble”.

“What is counted as market price or as top-up payment yoyos with wholesale price fluctuations, but crucially the total amount consumers pay doesn’t change,” said Pinchbeck.

“Offshore wind costs have plummeted spectacularly. The strike prices were the result of a fiercely competitive auction and are lower than the cost of other new generators like gas and nuclear. While we know the LCF is far from perfect, overall consumers will benefit from ever-cheaper renewables.”

A BEIS spokesman said the CfD scheme is based on “robust estimates and sophisticated modelling of future wholesale energy prices over the 15-year contract period”.

“We regularly review these to ensure that we provide the best value for bill-payers,” added the spokesman.