NAO raises doubts over renewable energy contracts

27 Jun 14
The National Audit Office has criticised the government for awarding £16.6bn worth of contracts for eight renewable energy generation projects without a competition.

Auditors said that the Department of Energy and Climate Change might not have protected consumers’ interests in awarding the contracts, which guaranteed a price per megawatt-hour for providers over 15 years.

According to today’s Early contracts for renewable electricity report, this price deal – agreed before the government’s wider reforms to the energy market are introduced – may provide higher returns to contractors than was needed to secure investment. The early agreements also reduced the funding available for later rounds, the examination concluded.

The government is introducing a so-called Contracts for Difference regime, whereby an agreed ‘strike price’ is reached with low-carbon energy generators over a 15-year period to allow them to plan investments. 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 to the counterparty. Although firms can then recoup this in charges to consumers, the government has capped the total cost.

Ahead of the introduction of the new regime in April 2015, DECC awarded early contracts to five offshore wind farms, two projects to convert coal-burning power plants to biomass, and one purpose-built biomass plant, which were deemed to be at risk if they had to wait for agreement. The total cost to consumers of these contracts over their lifetime will be £16.6bn.

Auditor general Amyas Morse said: ‘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,’ he added.

‘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.’

Responding to the report, a DECC spokesperson said the government had been dealing with a legacy of 'underinvestment and neglect' in the UK's energy infrastructure.

'As the NAO’s report recognises, these early contracts are designed to offer better value to billpayers than the previous system and have reassured those we need to invest in our energy security,' he said.

'Without that investment, projects would have been unable to go ahead or been significantly delayed – putting our future energy security at risk.'


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