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Early contracts for renewable electricity

The National Audit Office is not convinced that the Government sufficiently protected consumers’ interests by awarding without competition £16.6 billion worth of early contracts to eight renewable generation projects at risk of investment delay. This decision may provide higher returns to contractors than needed to secure the investment and also limits the amount of remaining budget subject to competition in later rounds.

In 2013, the Department of Energy & Climate Change launched the Final Investment Decision enabling for Renewables (FIDeR) scheme. This was to prevent unnecessary delays to investment in new renewable generation, while the Department established the Contracts for Difference regime, which will support such projects commissioned from 1 April 2015.

Contracts for Difference offer low-carbon electricity generators an agreed price for the electricity they will generate (known as the ‘strike price’), providing support to the extent that the strike price exceeds the wholesale price for electricity. The Contracts for Difference regime will replace the Renewables Obligation and should offer better value for money mainly by lowering financing costs.

The Department awarded early contracts to develop five off shore wind farms, two coal plant conversions to biomass, and one bio-mass combined heat and power plant. The total cost to consumers of these contracts over their contract lifetime will be £16.6 billion.

Today’s NAO report finds that, by awarding these early contracts, the Department has provided certainty of support to the contractors at least five months earlier than they could have achieved under the full Contract for Difference regime. The early contracts have given the UK’s renewable industry greater confidence in the near term; and have contributed to the transition to the reformed electricity market.

However, the scale of early contracts for renewables, awarded without competition, may have increased costs to consumers. The Department proceeded with the FIDeR scheme to secure continuing investment in new renewable generation, despite acknowledging that competitive pricing might reveal subsequently that its administratively set strike prices in some cases were too high. It is not clear that the full scale of these commitments was needed so soon to meet the UK’s 2020 renewable energy target. The early contracts have committed 58 per cent of the funds available for renewables Contracts for Difference to 2020-21.

The contracts contain provisions that require active management to protect value for money for consumers. Active and effective management of these provisions is essential to ensure contract costs are minimized for consumers.

The Department of Energy & Climate Change awarded the early contracts without price competition to avoid an investment gap. In so doing it has brought forward investment decisions by at least five months. The investments supported should contribute towards the UK’s achieving its renewable energy target in 2020, but it is not clear that awarding fewer early contracts would have put the achievement of that target at risk. As the Contracts for Difference regime has the potential to secure better value for consumers through price competition, committing so much of the available funding through early contracts, without competition, has limited the Department’s opportunity to secure better value for money.

Amyas Morse, head of the National Audit Office, 27 June 2014

Notes for Editors

8

Contracts awarded under the Final Investment Decision enabling for Renewables scheme: to five offshore wind farms, two coal plants converted to biomass, and one biomass-combined heat and power plant.

£16.6 billion

Cost to consumers of these contracts over their lifetime, assuming projects commission on time and at their full capacity (2013-14 prices undiscounted).

5 months

Months minimum acceleration of certainty of support from early contracts relative to first allocation round of the main Contracts for Difference regime

17.7 million megawatt-hours

Renewable electricity expected from these eight projects in 2020 if they reach their target capacity, before adjusting for transmission losses

324 million megawatt-hours

Department’s estimate of the UK’s total electricity generation in 2020

30 per cent

Department’s estimate of the minimum proportion of total electricity required from renewable sources to meet the UK’s 2020 renewable energy target

5 per cent

Estimated proportion of total electricity the eight projects awarded contracts will generate in 2020

4548 megawatts

Renewable generation capacity these projects should provide

£6.9 billion

Estimated funds available for all contracts for renewable electricity projects from 2015-16 to 2020-21, including these early contracts (2013-14 prices, undiscounted)

£4 billion

Estimated cost of support to these eight projects under the Final Investment Decision enabling for Renewables scheme from 2015-16 to 2020-21, assuming projects commission on time and at their full capacity (2013-14 prices, undiscounted)

58 per cent

Proportion of the estimated funds available for all contracts for renewable electricity projects taken by these eight projects from 2015-16 to 2020-21

 

1. The Department of Energy & Climate Change is responsible for achieving UK climate change commitments. The UK is committed under an EU directive to ensuring that 15 per cent of the energy used in the UK is from renewable sources by 2020. The government is also under a statutory obligation to reduce UK greenhouse gas emissions in 2050 by at least 80 per cent from 1990 levels. To meet the renewable energy commitment, the Department estimates that in 2020 some 30 per cent of electricity generation needs to be from renewable sources.

2. To help achieve these objectives, the Department has used the Renewables Obligation to encourage investment in renewable generation. The scheme requires electricity suppliers to pay for Renewables Obligation Certificates. These give renewable generators a premium over the wholesale price for each unit of electricity they supply.

3. As part of its plans for electricity market reform the Department is establishing the Contracts for Difference regime to replace the Renewables Obligation. Contracts for Difference will offer low-carbon electricity generators an agreed price for the electricity they generate (known as the 'strike price'). A newly formed 'Counterparty Body' will pay generators the difference between the market price and the strike price for the electricity they generate, where the strike price is higher. If the market price is higher than the strike price generators will pay the difference to the Counterparty Body. To enable it to make payments, the Counterparty Body is funded by electricity suppliers which may pass these costs on to consumers. The Department expects to award the first contracts under the main Contracts for Difference regime in December 2014. The Renewables Obligation will close to new projects in April 2017.

4. The Department has designed the Contracts for Difference scheme to be an improvement on the Renewables Obligation and estimates it will deliver a net economic benefit of £10.7 billion (in 2012 prices) up to 2030.

5. Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained by using the relevant links on our website.

6. The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of the House of Commons and leads the NAO, which employs some 820 staff. 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 almost £1.1 billion in 2013.

PN: 34/14