Subsidy overspend the result of ‘group think’ at Decc

The subsidy overspend which led the government to cut Feed-in Tariff (FiT) rates and close parts of the Renewables Obligation (RO) a year early, was the result of “group think” at the now defunct Department of Energy and Climate Change.

An internal report, which was produced in 2015 but only just published, found that the department focussed “too narrowly on central assumptions and forecasts” and failed to properly monitor the developing situation on the ground.

“The root cause, in my view, is the relative weight the department places on the assumptions that underpin its central forecasts – and on those forecasts in shaping both policy and the legal frameworks that give that policy practical expression,” wrote the department’s non-executive director at the time Tom Kelly.

“In contrast, the process of monitoring and responding to how those assumptions play out in reality seems to lack sufficient focus. There seems to be an incomplete feedback loop between the theory of policy formulation and the monitoring of reality.”

This was despite the problems that the led to the overspend – “a drop in wholesale prices; a surge in demand for the RO and FiTs; significantly higher load factors; and the legal costs of any attempt to change schemes” – being identified at “a reasonably early stage” in 2013.

The Office for Budget Responsibility projected last July that by the final year of the Levy Control Framework (LCF) in 2020/21 annual spending on the three subsidy mechanisms covered by the framework – Contracts for Difference, RO and the FiT – would reach £9.1 billion (2011/12 prices); well above the £7.6 billion budget cap. The government responded by cutting back subsidies to try and bring costs under control; closing elements of the RO a year early and slashing FiT rates.

Kelly said the failure to properly assess the impact of policies given the “inevitable uncertainties involved in making policy in such a complex environment” was the result of “weaknesses in the original governance arrangements that were not rectified over time, a lack of transparency and a tendency to group think”.

His report made a total of nine recommendation including: putting a single person at the department in overall charge of the LCF; producing a quarterly report on the mechanism for the energy secretary; and regularly publishing the assumptions which underpin budget calculations.

In a response published alongside the report, the Department for Business, Energy and Industrial Strategy (BEIS) said it has “accepted his recommendations and developed an implementation plan to ensure their delivery”. It added that it has continued to monitor the deployment of technologies, has improved its methodology for calculating load factors and has refined its models to allow for analysis of a wider range of scenarios.

The department said it considered introducing generation caps or a gain share mechanism to mitigate the impact of higher load factors on the LCF budget but concluded this could not be implemented in time for the upcoming allocation round. It also released its latest projections for spending covered by the LCF.

BEIS officials are due to appear before the Public Accounts Committee to give evidence on the LCF overspend on Wednesday (30 November).

Projected LCF expenditure (£m, 2011/12 prices):

Source: BEIS  

Note: Figures rounded to nearest £5m or nearest five percentage points.