Rule changes 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 £100 million a year, according to an investigation carried out by the National Audit Office (NAO).
In September 2017, BEIS awarded 11 subsidies (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 BEIS had not changed the rules on how a capacity cap would apply.
Civil servants at BEIS 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 BEIS 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.
Meg Hillier the Labour MP who is chairman of the Committee of Public Accounts, commented: “The rules that BEIS set for the auction of <subsidy> Contracts for Difference has cost the consumer an extra £1.5 billion – and only a small amount of the extra money will be used to generate additional energy capacity.
“Once again BEIS has neglected to put the interests of customers at the forefront of its thinking.”
The National Audit Office scrutinises public spending for the Westminster parliament and is independent of government. The Comptroller and Auditor General, Sir Amyas Morse, is an Officer of the House of Commons and leads the NAO.
16 May 2018