UK's renewable budget needs reform, says watchdog

UK: The UK government's levy control framework (LCF) has been poorly managed and needs reform, according to the National Audit Office (NAO).

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The framework was introduced in 2011 to set annual spending caps on renewable generation. It limits the spend on renewables obligation, contracts for difference (CfDs) and feed-in tariffs.

In the new report, "Controlling the consumer-funded costs of energy policies", the NAO said the LCF "was a valuable step forward in government's approach to controlling the costs of consumer-funded energy policies".

But, it concluded, the UK energy department took too long to discover it was on course to exceed the cap.

As a result of poor forecasting and management, the UK's annual cap of £7.6 billion (€8.5 billion) in 2020/21 is forecast to be breached by £1.1 billion (€1.2 billion) or 19.7%. This added £17 (€19) more to typical dual fuel bills in the UK than predicted, it said.

A big reason for this was an unpredicted fall in fossil-fuel prices. This meant higher payouts to meet guaranteed strike prices for generation under CfDs.

But even this only accounted for £300 million (€336 million) of the £2 billion (€2.2 billion) shift in costs forecast for 2020/21 in early 2015.

Weaknesses in forecasting and higher than expected budget allocation to April 2015 "resulted in a situation in which there is little unallocated budget left for new projects between now and 2020/21", the NAO said.

It suggested more of the budget should have been held back to take advantage of the falling costs of renewable technologies and the effect of price competition.

The report focused on the eight early contracts for large renewable projects — including five offshore projects — awarded in 2014, before the full CfD regime had been established.

The NAO accepted the early projects helped avoid a hiatus in investment and proved that CfDs were investable. But, it argued, this reduced potential for value for money in later projects.

It added that the offshore wind projects could be costing £300 million a year more than necessary.

The report also attacks the lack of visibility on long-term funding, noting that the LCF timescale to 2020/21 has yet to be extended. Investors frequently need to make decisions a decade ahead or more, and their confidence has been hit.

An extra £730 million in funding for future CfD auctions has helped visibility, but there is still uncertainty, not least over timing.

There is also a lack of lack of transparent reporting on LCF impacts on bills, which the NAO said has undermined accountability to parliament. It called for more regular reporting.

The report also noted the LCF only monitors the costs of renewable generation for consumers. It does not take into account high costs for fossil fuel generation capacity under the capacity market aimed at energy security.