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Forecasting Framework costs "poor"

The recommendation comes in a report examining the Levy Control Framework, which is intended to help control the costs of three government schemes to support low-carbon generation.

The Framework sets yearly caps on the forecast costs of the Renewables Obligation, Feed in Tariffs, and Contracts for Difference—schemes funded through levies on energy companies and ultimately paid for by consumers via energy bills.

The Committee concludes the Framework has "suffered from a lack of transparency, rigour and accountability" and forecasting of its costs has been poor.

£110 expected to be added to household energy bills in 2020

The government department responsible (formerly the Department of Energy & Climate Change, now the Department for Business, Energy & Industrial Strategy) continues to expect to overspend the Framework budget.

The report states that as a result, these costs are likely to add around £110 to the typical household's yearly energy bill in 2020, £17 more than budgeted for.

The Committee is concerned there is a "culture of optimism bias" in the Department, having also highlighted "wildly optimistic" forecasts of demand for Green Deal loans in its Report from July last year, Household energy efficiency measures.

Department urged to "foster a culture of openness and transparency"

It urges the Department to "foster a culture of openness and transparency" around its consumer-funded energy  policies and work with HM Treasury to demonstrate the schemes provide value-for-money.

The report states:

"In July 2014 Government agreed to provide Parliament with an annual report on the impact of policies on energy bills, but has not done so since 2014.

The consumer-funded policies report which the Department published a few days before our evidence session on the Framework is not an adequate substitute for a full report on consumer bills: for example, it does not show the net impact of policies once cost-saving effects are included."

Chair's comment

Meg Hillier MP, Chair of the PAC, said:

"Bill-payers deserve to know whether or not the energy schemes they fund represent good value.

The Government has failed to meet its commitment to report annually on the impact these policies are having on bills. Current arrangements just aren’t good enough.

At the same time, the Government expects the cost of levies to continue to bust the budget—meaning customers will pay more than expected.

This is a result of poor forecasting and further evidence of excessive optimism in the implementation of energy policy.

Government must take action to address this and also ensure customers can see clearly what they are paying towards existing and future schemes through their bills."

Background

Our electricity system is undergoing a radical transformation in response to two challenges: the need to maintain a secure energy supply and the need to reduce carbon emissions.

These challenges arise because demand for electricity is expected to increase over the next two decades while many of the UK's existing coal and nuclear power stations will shut.

At the same time, government wants a growing proportion of electricity to come from low-carbon sources like wind, solar energy and nuclear power to meet its climate change targets.

Most government policies to promote and manage this transition involve placing obligations on energy suppliers with the resultant costs being funded by consumers through their energy bills.

To help control these costs, in 2011 HM Treasury and the Department (formerly the Department of Energy & Climate Change, now the Department for Business, Energy & Industrial Strategy) created the Levy Control Framework.

Framework was £64 of household's annual energy bill

The Framework sets yearly caps on the forecast costs of three government schemes to support low-carbon generation that are funded by consumers: the Renewables Obligation, Feed in Tariffs, and Contracts for Difference.

The Framework requires the Department to take early action to reduce costs if forecasts exceed the cap. The cap is £4.9 billion for 2016–17 rising to £7.6 billion for 2020–21. In 2016 Framework costs constituted £64 of the typical household's yearly energy bill.

Report summary

Government’s management of the Levy Control Framework (the Framework) has suffered from a lack of transparency, rigour and accountability.

Forecasting of Framework costs has been poor, and the Department (formerly the Department of Energy & Climate Change, now the Department for Business, Energy & Industrial Strategy) continues to expect to overspend the Framework budget.

As a result these costs are likely to add around £110 to the typical household's yearly energy bill in 2020, £17 more than budgeted for.

"Wildly optimistic" forecasting gave misleading picture

We are concerned that the problems with forecasting reflect a culture of optimism bias in the Department.

We reported earlier this year that the Department's forecast of demand for Green Deal loans had been "so wildly optimistic it gave a completely misleading picture of the scheme's prospects to Parliament and other stakeholders".

The Department must now foster a culture of openness and transparency around its consumer funded energy policies and together with HM Treasury, it must do more to demonstrate that these schemes are providing value-for-money for consumers.

Please note: all figures in this report are in 2011–12 prices as that is the basis on which the Framework budget is set.