In a report out today, the government spending watchdog says that it 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”.
It said that the decision could result in contractors making more profit than they otherwise would have. It also limits the amount of remaining budget for future projects.
In 2013, the Department of Energy & Climate Change (DECC) launched the Final Investment Decision enabling for Renewables (FIDeR) scheme. This was to prevent unnecessary delays to investment in new renewable generation, while DECC established the Contracts for Difference regime, which will support such projects commissioned from 1 April 2015.
The NAO said that awarding the contracts early gave DECC certainty of support to the contractors at least five months earlier than they could have achieved under the full Contract for Difference regime. But the lack of 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. The NAO said that it was 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 already committed 58% 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.
NAO chief Amyas Morse said: “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.”
Margaret Hodge, chair of the House of Commons public accounts committee, expressed ‘frustration’ at the DECC’s failure to put in place a mechanism for recouping excessive profits of private contractors. “The UK faces a big challenge to move to a more sustainable electricity market and deliver on our climate change commitments. These early contracts are an important part of that,” she said. “DECC is aiming to generate 30% of electricity from renewable sources by 2020. It awarded these contracts to eightprojects, without price competition, at a cost to consumers of £16.6bn. Yet between them these projects will generate just 5% of the renewable electricity required. At the same time by committing so much funding up front the department has limited its options for future investments.
“I am also 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. 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.”