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PAC slams ‘extremely generous’ wind farm energy contracts

By Richard Johnstone | 14 January 2013

MPs have accused the government of repeating the mistakes of the Private Finance Initiative when awarding contracts for connecting offshore wind farms to the National Grid.

The Public Accounts Committee found the deals were ‘extremely generous’ to private sector bidders and unlikely to deliver any savings. The fact that payments to the firms were guaranteed and linked to inflation could well lead to higher prices for customers, the MPs said.

Under the first round of deals agreed with the Department for Energy and Climate Change and regulator Ofgem in 2011, suppliers were given 20-year contracts to provide the transmission equipment to connect wind farms to the National Grid.

The contracts provide a guaranteed income for suppliers, increasing annually in line with the Retail Prices Index measure of inflation, regardless of whether the assets are used. Future payments are estimated to total £17bn, paid by the National Grid but ultimately funded through electricity bills, MPs found.

However, operators can be fined only a maximum of 10% of their income in any one year if their facilities are not working.

PAC chair Margaret Hodge said estimated returns of 10%–11% on initial investments were extremely generous given the limited risks.

In setting up the new market, the department ignored ‘vital lessons’ from PFI deals, including the need to share gains made when bidders are able to refinance debt to a lower cost. It was ‘shocking that the Treasury allowed it to proceed’ without such safeguards, Hodge said.

Both the department and the regulator said the terms were formulated to ensure a competitive market, with bids made on the basis of expected returns.

Hodge said this argument has already been undermined as the first licences had been won by just two firms. ‘The Treasury's defence, that it did not want to introduce any limitations on investors, does not cut it. It used a similar argument in relation to early PFI deals, only to reverse its position later. The Treasury must ensure that lessons from the PFI are passed on and applied across government.’

Responding to the report, an Ofgem spokeswoman said the new regime had attracted £1.1bn of private investment during a global financial crisis. 

She added: ‘Ofgem’s objective is to ensure this necessary investment is delivered at a fair price. In the first round of the process, new entrants were awarded licences following strong competition. Ofgem estimate this saved at least £290m for consumers.

‘As with any new market, there are lessons from early transactions. The initial tenders were conducted under interim arrangements. It has always been Ofgem’s intention to refine the tender process to deliver greater efficiencies and further benefits to consumers.’

A Decc spokeswoman added: ‘The offshore electricity transmission regime harnesses competitive forces to drive value for money for consumers. Potential licence holders bid against each other on price in the context of the licence terms. With six licences now granted, now is the right time to re-examine some of the terms. We therefore welcome Ofgem’s current consultation on them.’

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