Early contracts for renewable electricity
27 Jun 2014 04:09 PM
Full report: Early contracts for
renewable electricity
The National Audit Office 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. This decision
may provide higher returns to contractors than needed to secure the investment
and also limits the amount of remaining budget subject to competition in later
rounds.
In 2013, the Department of
Energy & Climate Change launched the Final Investment Decision enabling for
Renewables (FIDeR) scheme. This was to prevent unnecessary delays to investment
in new renewable generation, while the Department established the Contracts for
Difference regime, which will support such projects commissioned from 1 April
2015.
Contracts for Difference offer
low-carbon electricity generators an agreed price for the electricity they will
generate (known as the ‘strike price’), providing support to the
extent that the strike price exceeds the wholesale price for electricity. The
Contracts for Difference regime will replace the Renewables Obligation and
should offer better value for money mainly by lowering financing
costs.
The Department awarded early
contracts to develop five off shore wind farms, two coal plant conversions to
biomass, and one bio-mass combined heat and power plant. The total cost to
consumers of these contracts over their contract lifetime will be £16.6
billion.
Today’s NAO report finds
that, by awarding these early contracts, the Department has provided certainty
of support to the contractors at least five months earlier than they could have
achieved under the full Contract for Difference regime. The early contracts
have given the UK’s renewable industry greater confidence in the near
term; and have contributed to the transition to the reformed electricity
market.
However, the scale of early
contracts for renewables, awarded without 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. It is 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 committed 58 per cent 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.
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.
Amyas Morse, head of the
National Audit Office, 27 June 2014
Notes for
Editors
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Contracts awarded under the
Final Investment Decision enabling for Renewables scheme: to five offshore wind
farms, two coal plants converted to biomass, and one biomass-combined heat and
power plant.
£16.6
billion
Cost to consumers of these
contracts over their lifetime, assuming projects commission on time and at
their full capacity (2013-14 prices undiscounted).
5
months
Months minimum acceleration of
certainty of support from early contracts relative to first allocation round of
the main Contracts for Difference regime
17.7 million
megawatt-hours
Renewable electricity expected
from these eight projects in 2020 if they reach their target capacity, before
adjusting for transmission losses
324 million
megawatt-hours
Department’s estimate of
the UK’s total electricity generation in 2020
30 per
cent
Department’s estimate of
the minimum proportion of total electricity required from renewable sources to
meet the UK’s 2020 renewable energy target
5 per
cent
Estimated proportion of total
electricity the eight projects awarded contracts will generate in
2020
4548
megawatts
Renewable generation capacity
these projects should provide
£6.9
billion
Estimated funds available for
all contracts for renewable electricity projects from 2015-16 to 2020-21,
including these early contracts (2013-14 prices, undiscounted)
£4
billion
Estimated cost of support to
these eight projects under the Final Investment Decision enabling for
Renewables scheme from 2015-16 to 2020-21, assuming projects commission on time
and at their full capacity (2013-14 prices, undiscounted)
58 per
cent
Proportion of the estimated
funds available for all contracts for renewable electricity projects taken by
these eight projects from 2015-16 to 2020-21
1. The Department of Energy
& Climate Change is responsible for achieving UK climate change
commitments. The UK is committed under an EU directive to ensuring that 15 per
cent of the energy used in the UK is from renewable sources by 2020. The
government is also under a statutory obligation to reduce UK greenhouse gas
emissions in 2050 by at least 80 per cent from 1990 levels. To meet the
renewable energy commitment, the Department estimates that in 2020 some 30 per
cent of electricity generation needs to be from renewable
sources.
2. To help achieve these
objectives, the Department has used the Renewables Obligation to encourage
investment in renewable generation. The scheme requires electricity suppliers
to pay for Renewables Obligation Certificates. These give renewable generators
a premium over the wholesale price for each unit of electricity they
supply.
3. As part of its plans for
electricity market reform the Department is establishing the Contracts for
Difference regime to replace the Renewables Obligation. Contracts for
Difference will offer low-carbon electricity generators an agreed price for the
electricity they generate (known as the 'strike price'). A newly formed
'Counterparty Body' will pay generators the difference between the
market price and the strike price for the electricity they generate, where the
strike price is higher. If the market price is higher than the strike price
generators will pay the difference to the Counterparty Body. To enable it to
make payments, the Counterparty Body is funded by electricity suppliers which
may pass these costs on to consumers. The Department expects to award the first
contracts under the main Contracts for Difference regime in December 2014. The
Renewables Obligation will close to new projects in April
2017.
4. The Department has designed
the Contracts for Difference scheme to be an improvement on the Renewables
Obligation and estimates it will deliver a net economic benefit of £10.7
billion (in 2012 prices) up to 2030.
5. Press notices and reports are
available from the date of publication on the NAO website, which is at
www.nao.org.uk. Hard copies can be obtained by using the relevant links on our
website.
6. The National Audit Office
scrutinises public spending for Parliament and is independent of government.
The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of
the House of Commons and leads the NAO, which employs some 820 staff. The
C&AG certifies the accounts of all government departments and many other
public sector bodies. He has statutory authority to examine and report to
Parliament on whether departments and the bodies they fund have used their
resources efficiently, effectively, and with economy. Our studies evaluate the
value for money of public spending, nationally and locally. Our recommendations
and reports on good practice help government improve public services, and our
work led to audited savings of almost £1.1 billion in
2013.