As the Environmental Audit Committee (EAC) slammed the government’s green investment plans and the Public Accounts Committee (PAC) branded the Renewable Heat Incentive (RHI) a “failure”, the National Audit Office (NAO) made it a triumvirate of damning reports for the government’s green energy plans today, concluding reforms to Contract for Difference (CfD) auctions had driven up costs for consumers.
The NAO investigation assessed the impact of the government’s April 2015 decision to change the rules governing clean energy contract auctions to cap the amount of support that could be secured by given technologies. A subsequent change then firmed up the cap for “fuelled technologies” to block bids over 150MW of capacity.
The government opted for the change on the grounds it would stop the auction closing early and block larger developers from gaming the system and locking out competition from smaller rivals.
But the NAO concluded the change meant “smaller, more expensive projects could be awarded contracts ahead of projects generating more electricity but at a cheaper price per unit”. It calculated that the contracts awarded at the next CfD auction last autumn were around £100m a year higher than they could have been as a result of the rule change.
“The NAO found that the contracts awarded in the 2017 auction will cost energy users around £1.5bn extra over the contracts’ 15-year life, for only a small amount of additional capacity, compared with what would have happened if the Department had not changed the rules on how a capacity cap would apply,” it said.
It also accused the Department for Business, Energy and Industrial Strategy (BEIS) of failing to highlight the change to its programme management board or test whether it was likely to lead to unintended consequences. “In some situations, the design change could have produced better value for money for consumers, but the Department did not assess how likely these were to occur in practice,” the NAO said.
And the report noted how the system of ‘pay as clear’ auctions meant all successful bids received the clearing price for the auction, even if they had originally tabled lower bids.
The report highlighted that the latest CfD auction had delivered lower contract prices than the government has expected, largely because of a sharp drop in projected offshore wind costs. As a result the auction secured more clean energy capacity than the government expected and even when potential top up payments are taken into account the latest round of contracts are set to come in below the Department’s spending cap of £290m a year.
A BEIS spokesman said the report confirmed overall CFD costs had fallen sharply. “The generation of offshore wind in the UK is a success story – with 15 per cent of our electricity coming from our powerful turbines,” he said. “This has meant that the price of offshore wind has dropped by more than half – and we are getting more clean power for less as part of our ambitious modern Industrial Strategy. In light of this success, following a review, changes have been made to the rules for the next Contracts for Difference auction to ensure that we continue getting best value for money for consumers.”
BusinessGreen understands the changes include an intention to remove the “maxima rule” for fuelled technologies at the next CfD auction round.
However, the energy industry argued that in addition to removing the cap on fuelled technologies allowing other forms of renewables such as onshore wind and solar to compete at the CfD auction would deliver yet more capacity at a lower cost to consumers.
“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,” said Lawrence Slade, Chief Executive of Energy UK. “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.”
His comments were echoed by James Court, head of policy and external affairs at the Renewable Energy Association, who urged the government to remove the cap on fuelled technologies and let a wider range of renewables compete for contracts.
“This NAO report is confirmation of the industry’s concerns that Government intervention in the CfD auctions is raising costs for consumers. While this report focuses on fuelled technologies such as biomass and biomethane, similar reforms have unnecessarily excluded low-cost solar and onshore wind from competing,” he said. “The fuelled technology cap was an unnecessary intervention. It created a restraint on technologies which can deliver cost effective power and heat, and the policy did not take into full account the wider benefits derived from more sustainable waste management. It additionally could have been designed in an alternative way to deliver more capacity at lower cost, as we made clear in our consultation response.
“In our view there should be no cap in the next auction, scheduled for spring 2019, and this report adds to that view.”
David Oliver, senior energy consultant at Inenco, said other parts of the government’s energy policy framework could be similarly driving up costs for consumers.
“The NAO has acknowledged that the outcome of the 2017 CfD auction has led to higher energy prices being paid for businesses and homes over the next decade thanks to more expensive projects ‘pulling up the strike price’ for everyone,” he said. “Whilst some changes will be made to future auctions, the fact remains that the government has over-paid for projects that could have be delivered at a far lower cost, locking in higher bills for homes and businesses for years to come.
“We believe that a similar flaw also affects the annual Capacity Market auction, where generators are paid the auction strike price, even when they submit lower bids. The main message from today’s report must be a review of the auction design to optimise the process and ensure no project is paid more than is necessary to ensure future security of supply from low carbon generation at as low a cost as possible to homes and businesses. Such a review should be extended to cover the Capacity Market auction as well as the CfD auction.”