By Guy Chazan
Energy costs for consumers were pushed up by the UK government’s decision
to award £16.6bn of early subsidies to renewable projects without price
competition, according to a critical report by the National Audit Office.
The prices that renewable developers were awarded for their energy “may
provide higher returns than needed to secure investment”, the NAO said.
It also said the awards leave less money in the pot for other renewable
projects that will compete for subsidies in the future.
A government spokesperson said that, without the early contracts, “projects
would have been unable to go ahead, or been significantly delayed – putting
our future energy security at risk”.
However, the NAO report will stoke concerns that generous state support for
green energy will push up household fuel bills at a time when rising energy
costs are already a hot political issue.
At the heart of the debate is the new system of support for low-carbon
energy projects, known as contracts for difference or CFDs, which were
introduced last year as part of the government’s sweeping reform of the
electricity market.
These guarantee developers an agreed price for the electricity they
generate. If the market price for electricity is lower than this “strike
price”, the developers receive a top-up payment: if it is higher, they have
to pay the difference.
CFDs are to be launched later this year. But the Department of Energy and
Climate Change also created an early form of CFD to allow developers with
advanced projects to move ahead with them quickly before the full rollout
of the scheme, and so avoid a hiatus in investment.
In April, the government revealed it had awarded early CFDs to eight
projects – five offshore wind farms and three biomass ventures. These are
centred on strike prices that were set by government fiat, rather than
through auctions.
But the contracts have proven controversial. They require state aid
approval from the European Commission, but officials in Brussels have
expressed concern over the fact that they were awarded without competitive
auctions.
That objection also figures prominently in the NAO’s report. It said the
early CFDs had given the UK’s renewable industry greater confidence in the
near term: but their sheer scale “may have increased costs to consumers”.
It said Decc had proceeded with the scheme despite acknowledging that
competitive auctions for full CFDs to be awarded later this year “might
reveal subsequently that its administratively set strike prices in some
cases were too high”.
It added that it was not clear that the whole £16.6bn of commitments were
needed so soon to meet the UK’s target of generating 15 per cent of its
energy from renewables by 2020.
The NAO also said the early contracts had used up 58 per cent of the total
funds available for renewables’ CFDs to 2020-21.
Responding to the NAO report, Margaret Hodge, chair of parliament’s public
accounts committee, said that by committing so much funding upfront, Decc
had “limited its options for future investments”.
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