NAO: Renewables subsidies ‘have not secured value for money’

Renewables subsidies levied on customers’ bills “have not secured value for money” because the government has “missed opportunities to exploit the full potential of the Levy Control Framework”.

Despite efforts to rein in spending, the annual cap set by the framework is still on course to be breached by £1.1 billion by the end of the decade, a new report by the National Audit Office (NAO) has warned.

The report said the introduction of the Levy Control Framework (LCF) in 2011 was a “valuable step” towards limiting the burden of renewables subsidies on customers’ energy bills. However, “weaknesses in forecasting” and the government’s approach to the allocation of the budget have meant there is little left to be spent. “Holding back more of the LCF budget and allocating it later would have been more cost-effective because the costs of renewable energy sources have fallen”, it added.

The LCF sets annual caps on spending under the three schemes designed to support the development of low-carbon generation – the Renewables Obligation, the Feed-in Tariffs and Contracts for Difference. The budget is set to rise to £7.6 billion (2011/12 prices) by its current end in 2020/21.

When the NAO last reported on the framework in 2013, the Department of Energy and Climate Change (Decc) projected the spending covered by the framework to reach £6.9 billion by 2020/21 – well within the budget.

The forecast remained broadly unchanged for the next 18 months, despite the department signing Contracts for Difference for eight large renewable projects in May 2014 and awarding a further 27 through an auction in February 2015. At the time spending was still projected to be within budget at £7.1 billion by 2020/21.

However, by April 2015 the department began to forecast it would breach the spending caps during every year of the framework, and in June of that year it projected costs to rise to £9.1 billion – £1.5 billion over the cap and “only fractionally under” the 20 per cent of extra headroom allowed by the framework.   

In the time since, the government has enacted changes to energy policy to bring costs under control; closing the Renewables Obligation early and cutting the Feed-in Tariffs rates. Nevertheless, the NAO said spending is still set to hit £8.7 billion by 2020/21 – surpassing the cap by £1.1 billion. That equates to £110 to the average household’s duel fuel bill, with £17 of that paying for the overspend.

Projected composition of a typical household bill by 2020

Source: National Audit Office, Decc figures

The awarding of Contracts for Difference to eight projects under the Final Investment Enabling for Renewables (FIDeR) process in May 2014, “served to present prevent a hiatus in investment and demonstrated that Contracts for Difference were an investable proposition”.

However, it also “limited its ability to secure value for money with future contracts”: “According to the latest assumptions, the early contracts now take up all budgetary space under the cap not occupied by the Renewables Obligation and Feed-in Tariffs.”

Decc took “too long” to establish that the budget would breached, in part because it failed to update its assumptions. “One of the department’s crucial assumptions – the load factor of new-build offshore wind turbines – was not updated for 18 months, despite indications during this time that it may have been contributing to an underestimation of cost,” the report said. 

The government also failed to “fully consider the uncertainty around its central forecasts”: “If the department and HM Treasury had asked more explicitly ‘what if the forecasts or key assumptions are wrong?’ this might have prompted more robust design and monitoring of the framework.”

The NAO criticised the government for failing to make clear its forecasts or publish the underlying assumptions, despite being recommended to do so by both itself and the Energy and Climate Change Committee.  It said concerns over the commercial sensitivity of the information could be overcome.

“Improving the transparency of forecasts would improve parliamentary accountability, enhance the confidence of private investors and expose the underlying assumptions to more effective external challenge,” it added.

The NAO acknowledged the need of the government to maintain flexibility in policy but said this has to be balanced against the need of investors for certainty. It therefore urged the government to extend the framework beyond its current end in 2020/21.

Contracts for Difference are set to make up an increasingly large share of the LCF budget going forward as they gradually take the place of the Renewables Obligation. Under the scheme, generators are paid the difference between the price they receive for their power on the wholesale market and a set strike price. This means if wholesale price falls the cost of the subsidies rises and vice-versa.

The NAO said the government should “consider moving away from a system of capping renewables’ costs relative to the wholesale price of electricity”. This would prevent changes in the wholesale price affecting whether caps are breached or not.

NAO head Amyas Morse said: “The Levy Control Framework has helped make some of the impacts of renewable energy policies on consumers clearer.  But government’s forecasting, allocation of the budget and approach to dealing with uncertainty has been poor, and so has not supported value for money.

“In addition, a lack of transparency over the Framework and expected future energy bills has undermined accountability to parliament and consumers. I look forward to BEIS [the Department for Business, Energy and Industrial Strategy] building on recent improvements it has made to the governance of the Levy Control Framework.”

A spokesman for the Department for Business, Energy and Industrial Strategy (BEIS) said: “Our top priority is ensuring that families and businesses have a secure, affordable, clean energy supply. Our actions have reduced projected costs on the Levy Control Framework by around £520m, and we continue to make further improvements to deliver value for money for consumers.” BEIS said it will “fully consider” the recommendations of the NAO and provide a fuller response in “due course”. 

There have already been repeated calls for the government to reform the Levy Control Framework. Writing in the journal Energy Policy in August Matthew Lockwood from the the University of Exeter said uncertainty is “built into” the LCF because the factors which determine the cost of renewable subsidies are themselves “variable and uncertain”.