The analysis by Policy Exchange concluded the Department of Energy and Climate Change (Decc) had mismanaged the funding available to low-carbon technologies and called for an immediate change to government policy.
"Any commercial organisation with a multi-billion pound budget would pay far more attention to how it is being spent. Decc now needs to take urgent steps to address what looks like an almost inevitable overspend, and to recognise the limitations on the remaining budget," the report said.
Policy Exchange said the energy department has overspent on the budget set by the Levy Control Framework by as much of 20%. The Levy Control Framework's budget was designed to minimise the impact on consumers' bills.
The report suggests a greater focus of spending should be placed on "mature low-carbon technologies", including onshore wind, because costs are lower.
"Solar PV and onshore wind have achieved cost reductions in recent years, particularly under the Contracts for Difference (CfD) model, and are projected to achieve further cost reductions in the future. Studies point to both technologies reaching cost parity with fossil fuel generation by around 2020. The argument that subsidies for these technologies should be removed now is false: they still require support to proceed, although the amount of support is diminishing," the report argued.
The new Conservative government has announced plans to end Renewables Obligation support for onshore wind by April 2016, a year earlier than planned. The government has also hinted it will prevent onshore wind projects from entering the CfD auction scheduled for October, the support mechanism that replaces the outgoing Renewables Obligation.
"It is cheaper to meet decarbonisation goals using mature technologies than immature technologies: reprioritising the CfD budget towards mature technologies could save up to £600 million per annum by 2020," the report added.
Renewable Energy Generation CEO Andrew Whalley, a member of the British Wind partnership said: "For a Government apparently committed to keeping down energy costs for the consumer, to ignore the evidence presented by one of the UK's leading think tank smacks of putting the views of a minority of backbenchers before the majority of bill payers — 65% of whom support onshore wind."
The report said CfD auctions were effective in bringing down the price of wind energy. However, it said the government had underestimated the output from offshore wind, meaning more money will be required to meet the contract terms.
"Decc assumes a load factor for new projects of 37.7%. This assumption is based on the average of all of the projects already operational in the UK. However, newer projects are already achieving much higher load factors (43% for Walney and Sheringham Shoal), and this could increase further to 45–50% for projects delivered towards the end of this decade."
Because the subsidy is paid per MWh, higher output rates would mean further support needing to be paid. Policy Exchange predicts CfD-only spending could be £200 million more in 2020/21 than Decc predicted.
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