By Richard Johnstone | 3 October 2014
Government contracts worth £16.6bn to promote renewable electricity generation were poorly conceived and managed and did not secure best value, the Public Accounts Committee has concluded.
Analysing the contracts let by the Department of Energy and Climate Change in April – which guaranteed a price per megawatt-hour for providers over a 15-year period – MPs said the deals repeated failings from Private Finance Initiative projects.
The government is introducing a so-called Contracts for Difference regime in energy generation, whereby a ‘strike price’ is agreed with low-carbon energy generators over 15-years to allow them to plan investments. Under these plans, if the market price is lower than the strike price, a government-owned counterparty will pay generators the difference, while if it is higher then generators must pay the difference, although some of this cost can be passed onto consumers.
Ahead of the introduction of the new regime in April 2015, DECC awarded £16.6bn worth of early contracts to eight schemes deemed to be at risk if they had to wait for agreement. These were five offshore wind farms, two projects to convert coal-burning power plants to biomass, and one purpose-built biomass plant.
However, PAC chair Margaret Hodge said DECC’s own quantified economic case showed no clear net benefit from awarding the contracts early.
‘Indeed, if the department had used price competition, it should have led to lower energy prices for consumers who are already facing hefty charges,’ she said.
‘Furthermore, the terms of these contracts do not serve consumers well. For instance, consumers will pick up more of the risk associated with inflation, with little risk being borne by the developers.’
This repeated failings from PFI projects, such as accepting claims that investors would not come forward if contracts allowed bill payers to receive part of the benefit from higher-than-expected profits.
‘The department did not include claw-back provisions which would have ensured that simply hard-pressed consumers shared in any excessive profits achieved by project developers.’ Hodge said.
In addition, the deals were awarded without clear identification from DECC of how much capacity was needed from each technology to meet the 2020 target of generating 15% of energy from renewable resources.
‘Given that the department’s own data shows significant new renewable generation capacity is in construction, awaiting construction, or seeking planning permission, it is not clear that these early contracts were all necessary to meet the 2020 targets,’ Hodge added.
‘Quite simply, the department failed to defend consumers’ interest under the terms of these contracts.’
