Engineering news
The government has missed opportunities to exploit the full potential of the Levy Control Framework – it’s budget for renewables – which led to decisions that have not secured value for money and knocked investor confidence, according to a report from the National Audit Office.
The Levy Control Framework (LCF), established by the former Department of Energy and Climate Change (DECC) and HM Treasury, set a cap for the forecast costs of certain policies funded through levies on energy companies - ultimately paid for by consumers.
Since November 2012, the LCF has covered three schemes to support investment in low-carbon energy generation: the Renewables Obligation, Feed-in Tariffs and Contracts for Difference. It sets annual caps on costs for each year to 2020-21, with a cap of £7.6 billion in 2020-21 (in 2011-12 prices).
The National Audit Office (NAO) report is critical of the management of the LCF, which resulted in a sudden increase of costs to £9.1 billion between January 2015 and June 2015. This in turn led to sharp cuts to support for renewable energy, including for solar and wind.
According to the latest forecast, the schemes are expected to still exceed the cap, but at a lower cost of £8.7 billion in 2020-21. This is equivalent to £110 (around 11%) on the typical household dual fuel energy bill in 2020, £17 more than if the schemes stayed within the cap.
The NAO said that the introduction of the LCF in 2011 was a “valuable step forward” in government’s approach to controlling the costs of consumer-funded energy policies. However, weaknesses in forecasting and in its approach to allocating the budget up until April 2015 have meant that there is little unallocated budget left for new projects between now and 2020-21. The report said that holding back more of the LCF budget and allocating it later would have been more cost-effective because the costs of renewable energy sources have fallen.
According to the NAO, the government failed to fully consider the uncertainty around its central forecasts and “define its appetite for the risks associated with that uncertainty”. It claimed that the risk of significantly exceeding the LCF’s budgetary cap could have been reduced if the DECC and HM Treasury had questioned whether its forecasts or key assumptions were wrong.
The report added that the LCF “has not met its potential to support investor confidence because of its short and decreasing timeframe and a lack of transparency over forecasts and how the budgetary cap would operate”.
However, it is acknowledged that the DECC has since improved its scrutiny and challenge of LCF costs, using commercial specialists to collect market intelligence more frequently.
The NAO has recommended that government needs to do more to develop a “sufficiently coherent, transparent and long-term approach” to controlling and communicating the costs of its consumer-funded policies. This should include providing an updated report on the impact of its energy policies on bills, as the relationship between LCF costs and the affordability of energy bills is not straightforward.
Amyas Morse, head of the NAO, said: “The Levy Control Framework has helped make some of the impacts of renewable energy policies on consumers clearer. But government’s forecasting, allocation of the budget and approach to dealing with uncertainty has been poor, and so has not supported value for money. In addition, a lack of transparency over the Framework and expected future energy bills has undermined accountability to Parliament and consumers. I look forward to BEIS building on recent improvements it has made to the governance of the Levy Control Framework.”
Chief executive of the Solar Trade Association, Paul Barwell, said: "The unexpected growth in solar power was repeatedly fingered as a key reason for the overspend on renewables. In fact NAO analysis shows solar accounts for only 6% of the overspend - but solar has borne the brunt of corrective measures. That's a great shame when the technology has become so popular and is now so affordable. We hope the new department [BEIS] will take stock of the low cost impact of solar and act to restore confidence to the sector."