Rule changes made by the Department for Business, Energy and Industrial Strategy (the Department) on its 2017 auction for contracts to support new, low-carbon electricity generation will increase costs for energy users by around £100m a year, according to an investigation carried out by the National Audit Office (NAO).
In September 2017, the Department awarded 11 Contracts for Difference through an auction to low-carbon electricity generation projects. Contracts for Difference fix the price that generators receive for their electricity for a set period, with energy users paying a top-up if the market price falls below this amount.
In April 2015, the Department changed the rules on how a capacity cap would apply in future auctions. This change meant smaller, more expensive projects could be awarded contracts ahead of projects generating more electricity but at a cheaper price per unit. The Department subsequently decided to cap the amount of generating capacity that projects using “fuelled technologies” could be awarded in the September 2017 auction at 150MW, meaning the new rule would apply.
The NAO found that the contracts awarded in the 2017 auction will cost energy users around £1.5 billion 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.
The Department did not 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.
Despite the additional costs, the contracts awarded in the 2017 auction were at lower prices than the government had expected, with the costs for offshore wind farms having fallen significantly. The auction also secured more generating capacity than the government had expected. National Grid forecasts that the cost to energy users of top-up payments for the winning projects will be less than the annual budget cap the Department had set of £290 million per year.
The Department awarded 11 contracts to projects capable of providing electricity to around 3.6 million homes (3.3 GW of capacity). The majority comes from three offshore wind projects (3.2 GW). The remaining eight contracts were awarded to smaller “fuelled-technology” projects.
Further information about the NAO’s investigation is available in the report: https://www.nao.org.uk/report/the-2017-auction-for-low-carbon-electricity-generation-contracts