The government may have failed to protect the interests of bill payers when awarding green energy contracts, says the National Audit Office (NAO).
Eight long-term deals worth £16.6bn were signed earlier this year to secure projects at risk of cancellation.
The NAO says too much money was awarded to these renewable sources “without price competition” and is concerned this could ultimately increase costs.
The government says the projects will provide jobs and private investment.
Under an EU directive, the UK government is committed to producing 30% of electricity from renewable energy sources by 2020.
To drive investment in this area, the government has long operated a system of subsidising generators.
In an effort to improve efficiency and value for money, the Department for Energy and Climate Change (DECC) embarked on a series of reforms to the electricity market over the past two years.
The major change has been the introduction of Contracts for Difference.
This is a two-way system where the government sets an agreed price for electricity and the generators either receive a subsidy or have to pay money back depending on the state of the market.
Ultimately, the idea is that generators would bid for these contracts, guaranteeing that consumers would get green energy at the most competitive price.
But with the system not fully up and running until April next year, DECC was faced with the tricky problem of how to fund enough renewables to meet 2020 targets.
Its solution was to award early contracts to five offshore wind farms, two coal plant conversions to biomass and one biomass combined heat and power plant.
However the NAO is not satisfied that the way these contracts have been awarded is good for consumers and the long-term health of the renewables industry.
“Our view is that awarding £16.6bn of contracts has limited the opportunities to secure better value for money through competition under the contracts for difference regime, due to start this year,” said Jill Goldsmith from the NAO.
The NAO highlights the fact that the money will generate just 5% of the renewable electricity required by 2020.
It is also concerned that the department made its decision to commit consumer funding, not on the basis of price competition but with a weighting for the likely impact on the project of any delay or “hiatus”.
“The qualification rule around hiatus required confirmation that the project would be put back if they didn’t get funding,” said Jill Goldsmith.
“It was a kind of yes/no qualification criteria which was largely based on confirmation from the project’s board that this was the case.”
The government watchdog is concerned that the prices that have been agreed for energy under these contracts “may provide higher returns than needed to secure the investment”.
The report suggests that the projects were likely to make money but the government did not ask for any information on projected costs and profits in the bidding process.
The early contracts
The projects that have been approved are:
• Beatrice offshore wind, Outer Moray Firth
• Burbo Bank offshore wind, Liverpool Bay
• Drax 2nd biomass conversion unit, Selby
• Dudgeon offshore wind, north of Cromer
• Hornsea offshore wind, off the East Yorkshire coast
• Lynemouth biomass conversion, Ashington, Northumberland
• Teesside biomass with combined heat and power, Middlesbrough
• Walney extension offshore wind, off Walney Island
Crucially DECC has not included any provision for clawing the money back if returns are excessive, something that has drawn the ire of Margaret Hodge, chair of the Commons committee of public accounts.
“I am frustrated that, despite the huge consumer subsidy that has gone into supporting these projects, the Department has failed to put in place any arrangements to recoup consumers’ money if providers make bigger-than-expected profits from these projects,” she said.
“This is an issue we have raised as a committee before: private providers must not be allowed to make excessive profits at the expense of consumers and taxpayers.”
The report also expresses concern that these early contracts have been awarded 58% of the funds available for renewable contracts up to 2020/21.
“We are not convinced that they needed to do this amount this early,” said Jill Goldsmith.
“It ties their hands on the amount available for spending in the next round.”
The report is at pains to point out that the steps taken have boosted confidence in the market and the projects supported can make a significant contribution to meeting the UK’s 2020 targets.
The government goes further, saying these projects will provide an extra £12bn of private investment, will support 8,500 jobs and add up to 5% of low carbon capacity to the energy mix.
A DECC spokesperson said: “The government has been dealing with a legacy of underinvestment and neglect in our energy system, meaning we’ve needed to drive through reforms to secure investment in new generation to keep the lights on in the years and decades ahead while decarbonising our electricity supplies, and getting the best possible deal for consumers.
“As the NAO’s report recognises, these early contracts are designed to offer better value to billpayers than the previous system and have reassured those we need to invest in our energy security. Without that investment, projects would have been unable to go ahead or been significantly delayed – putting our future energy security at risk.”
Officials from DECC are due to appear before the committee of public accounts on 2 July.
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