Controlling the consumer-funded costs of energy policies: The Levy Control Framework
The government has missed opportunities to exploit the full potential of the Levy Control Framework and this has contributed to decisions which have not secured value for money, according to today’s report from the National Audit Office.
The Levy Control Framework, established by the former Department of Energy & Climate Change (the Department) and HM Treasury, set a cap for the forecast costs of certain policies funded through levies on energy companies and ultimately paid for by consumers. Since November 2012, the Framework has covered three schemes to support investment in low-carbon energy generation: the Renewables Obligation, Feed-in Tariffs and Contracts for Difference. It sets annual caps on costs for each year to 2020-21, with a cap of £7.6 billion in 2020-21 (in 2011-12 prices).
According to the latest forecast, the schemes are expected to exceed the cap and cost £8.7 billion in 2020-21. This is equivalent to £110 (around 11%) on the typical household dual fuel energy bill in 2020, £17 more than if the schemes stayed within the cap.
The NAO concludes that the introduction of the Framework in 2011 was a valuable step forward in government’s approach to controlling the costs of consumer-funded energy policies. However, weaknesses in forecasting and in its approach to allocating the Framework budget up until April 2015 have resulted in a situation in which there is little unallocated budget left for new projects between now and 2020-21. 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.
According to the NAO, the government failed to fully consider the uncertainty around its central forecasts and define its appetite for the risks associated with that uncertainty. If the Department and HM Treasury had asked more explicitly ‘what if our forecasts or key assumptions are wrong?’, this might have prompted more robust design and monitoring of the Framework, and reduced the likelihood of significantly exceeding the Framework’s budgetary cap.
Following an internal review in 2015, the Department made a step change in its governance arrangements for scrutiny and challenge of Framework costs. It has taken on more commercial specialists and is committed to collecting market intelligence more frequently.
Today’s report also finds that the Framework has not met its potential to support investor confidence because of its short and decreasing timeframe and a lack of transparency over forecasts and how the budgetary cap would operate.
The NAO recommends that government needs to do more to develop a sufficiently coherent, transparent and long-term approach to controlling and communicating the costs of its consumer-funded policies. This should include providing an updated report on the impact of its energy policies on bills, as the relationship between Framework costs and the affordability of energy bills is not straightforward.
“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 building on recent improvements it has made to the governance of the Levy Control Framework.”
Amyas Morse, Head of the National Audit Office
Notes for Editors
Cap on costs of low-carbon energy schemes in 2020-21 set by the Levy Control Framework
Expected Framework costs in 2020-21 according to government forecasts made in February 2015
Expected Framework costs in 2020-21 according to forecasts made four months later, in June 2015
Permitted headroom above the cap, above which HM Treasury could impose a financial penalty on the energy department (formerly the Department of Energy &
Climate Change, now the Department for Business, Energy and Industrial Strategy)
Amount by which government's June 2015 forecast exceeded the cap in 2020-21
Billion expected costs of Framework schemes in 2020-21 according to the latest government forecasts
Total amount that Framework costs are expected to add to a typical household dual-fuel energy bill in 2020 (11% of the entire bill)
The part of the £110 that comes from exceeding the cap
£54 amount households will pay through bills in 2020 to support the Capacity Market, Warm Homes Discount, Energy Company Obligation and Smart Meters - consumer funded schemes not currently covered by the cap
Average household annual energy bill in 2020, according to government forecasts in November 2014.
Average household annual energy bill in 2020 according to the latest government forecasts: increased Framework costs have been offset by falling fossil fuel prices
- The Levy Control Framework required the Department of Energy and Climate Change to take early action to bring costs down if forecasts exceed this cap, with urgent action required if forecasts exceed a 20% 'headroom' above the cap.
- The NAO last reported on the Framework in 2013 The Levy Control Framework. Since then, progress in decarbonising electricity has been faster than government expected, and energy markets have been profoundly affected by a significant fall in fossil fuel prices. In February 2015 the Department forecast that 2020-21 costs would be £7.1 billion, £0.5bn below the Framework cap. Four months later, in June 2015, it had revised its estimates dramatically, to £9.1 billion in 2020-21, a £1.5 billion above the cap. This prompted wide-spread changes to Framework schemes to cut costs, which have reduced forecast costs but not brought them within the budgetary cap.
- Although the expected costs of the Framework schemes have increased over time, in recent years falling wholesale prices of energy have had a far more significant effect on household bills. The Department’s most recent forecast indicates household energy bills in 2020 may be lower than they are today, despite growing Framework costs, if wholesale prices stay near their current level.
- Press notices and reports are available from the date of publication on the NAO website.Hard copies can be obtained by using the relevant links on our website.
- The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 785 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.21 billion in 2015.
- Because the Framework's budget is defined in 2011-12 prices, we use 2011-12 prices for all figures in the report unless otherwise stated. The ‘latest government forecasts’ are forecasts as of July 2016.