Consumers are getting poor value for money out of contracts worth £16.6 billion given to renewable energy projects, without competition, by the UK government, according to MPs.
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In April, the government stepped in to offer contracts to eight projects – five offshore wind farms, one biomass combined heat and power plant and two coal plants set to be converted into biomass plants – in order to fill an investment gap.
It is anticipated that by 2020, the projects will provide up to £12 billion of private sector investment and generate around 4% of Britain’s energy mix, providing an important boost in the government’s decarbonisation efforts.
However, in a new report, the Public Accounts Committee (PAC) say the government failed to protect consumers’ interests while drafting the deals.
“Yet again, the consumer has been left to pick up the bill for poorly conceived and managed contracts,” said Margaret Hodge, the committee’s chair.
“The department argued that the early contracts were necessary to ensure continued investment. But its own quantified economic case shows no clear net benefit from awarding the contracts early.”
The government awarded the eight contracts without competition to avoid delays while its new contracts for difference (CfD) scheme remained in the pipeline.
CfDs offer a guarantee to generators of an agreed price for electricity. If the market price for electricity falls lower than the agreed “strike price”, then generators are subsidised. If it rises above it, generators pay back the difference.
Generators will have to compete for these contracts, securing a good deal for consumers.
But for renewable energy projects further along in their development and awaiting investment, the government launched an early form of CfDs – the controversial contracts offered to the eight new projects – with strike prices set without competition from other developers.
By giving out more than 55% of its renewable energy budget in these early contracts, the PAC say the government has left itself with insufficient funds for new deals, “reducing the opportunity to test the market and secure the best value for consumers”.
The MPs also criticised the lack of a “claw-back” clause, which means any excessive profits made by the projects will be kept by the developers.
“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.
“What is now needed is a shift to full price competition, contracts which allow some claw-back for consumers of any excessive profits, and a balance of technologies which hits climate targets at least cost for consumers.”
Energy secretary Ed Davey said, “We are transforming the UK’s energy sector, dealing with a legacy of underinvestment to build a new generation of clean, secure power supplies that reduce our reliance on volatile foreign markets.
“Average annual investment in renewables has doubled since 2010 – with a record breaking £8 billion worth in 2013. By making projects compete for support, we’re making sure that consumers get the best possible deal as well as a secure and clean power sector.”
However, critics say the system, which is weighted towards less established technologies, will significantly harm the UK’s solar industry.
Photo: Department of Energy and Climate Change via Flickr