NAO questions award of £16.6 billion renewable energy contracts without competition

Will Green is news editor of Supply Management
26 June 2014

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27 June 2014 | Will Green

The National Audit Office (NAO) has questioned the government’s strategy around awarding early contracts to supply renewable energy without competition.

The NAO said the Department for Energy and Climate Change (DECC) awarded eight contracts worth £16.6 billion to projects “at risk of investment delay”, but this “may have increased costs to consumers” and “it is not clear that the full scale of these commitments was needed so soon to meet the UK’s 2020 renewable energy target”.

The contracts were awarded under the DECC’s Final Investment Decision enabling for Renewables (FIDeR) scheme, which paid generators "administratively-set strike prices" and was designed to prevent a “hiatus” in investment in renewable energy. FIDeR will be replaced later this year by the Contracts for Difference scheme, under which low carbon electricity generators will compete for contracts to supply electricity at an agreed strike price.

A newly-formed 'counterparty body' will pay generators the difference between the market price and the strike price, where the strike price is higher, but if the market price is higher than the strike price, generators will pay the difference to the counterparty body.

The NAO said: “The department proceeded with the FIDeR scheme to secure continuing investment in new renewable generation, despite acknowledging that competitive pricing might reveal subsequently that its administratively-set strike prices in some cases were too high.”

Amyas Morse, head of the NAO, said: “The DECC awarded the early contracts without price competition to avoid an investment gap. The investments supported should contribute towards the UK 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.

“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.”

A DECC spokesperson said: “The government has been dealing with a legacy of underinvestment and neglect in our energy system, meaning we’ve needed to drive through reforms to secure investment in new generation to keep the lights on in the years and decades ahead while decarbonising our electricity supplies, and getting the best possible deal for consumers.

“As the NAO’s report recognises, these early contracts are designed to offer better value to bill-payers than the previous system and have reassured those we need to invest in our energy security. Without that investment projects would have been unable to go ahead or been significantly delayed – putting our future energy security at risk.”

Under an EU directive the UK is committed to ensuring 15 per cent of energy is from renewable sources by 2020. The NAO said the eight contracts would generate an estimated 5 per cent of total electricity in 2020.

 

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