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UK spending watchdog slams energy officials over renewables funding

Britain’s National Audit Office (NAO) has sharply criticised the former Department of Energy and Climate Change for allowing the Levy Control Framework (LCF) cap to be exceeded, mainly due to excessively high offshore wind costs.

The LCF – the overarching funding mechanism used to pay for renewable subsidies through small additions to electricity bills – is currently expected to exceed its £7.6bn ($9.3bn) cap and cost £8.7bn in 2020-2021.

The NAO report, Controlling the consumer-funded costs of energy policies: The Levy Control Framework, found that the now defunct DECC had taken too long to discover that it was on course to exceed the LCF cap.

“One reason for increased forecast costs was the global slump in fossil fuel prices, a development which energy market experts in general were not expecting,” says the report. “But this explains only £300m of the £2bn shift in forecast 2020-2021 costs that took place in early 2015.

“Other assumptions became outdated because market intelligence was not gathered frequently enough. One of DECCs crucial assumptions, the load factor of newbuild offshore wind turbines, was not updated for 18 months, despite indications during this time it may have been contributing to an underestimation of costs.

“Between 2013 and 2015, there was a two-year break between substantive exercises to gather data on technology costs. This was despite the fact that during this time DECC entered into £615m of new commitments under the LCF by auctioning off Contracts for Difference.”

Former energy secretary Amber Rudd had consistently claimed in 2015 that the LCF budget was overspent, and could reach £9.1bn a year by 2020-2021, higher than the original proposed £7.6bn.

Rudd used the LCF “overspend” to justify severe subsidy cuts to onshore wind and solar arguing that it had become easier for parts of the renewables industry to survive without subsidies.

The NAO report said “the government has missed opportunities to exploit the full potential of the LCF and this has contributed to decisions which have not secured value for money”.

The NAO concludes that the introduction of the LCF in 2011 was a valuable step forward in the government’s approach to controlling the costs of consumer-funded energy policies.

However, weaknesses in forecasting and in its approach to allocating the LCF budget up until April 2015 have resulted in a situation in which there is little unallocated budget left for new projects between now and 2020-2021.

“The LCF has helped make some of the impacts of renewable energy policies on consumers clearer. But the government’s forecasting, allocation of the budget and approach to dealing with uncertainty has been poor, and so has not supported value for money,” says Amyas Morse, head of the NAO.

RenewableUK’s chief executive Hugh McNeal said: “The NAO is right to highlight the need to budget carefully for decarbonisation. The businesses which I represent are committed to working with government to drive down the cost of energy for consumers.

“As the NAO report makes clear, by 2014 households were already benefiting by annual savings of up to £16 on their bills, as renewable electricity pushed out more expensive generation. This will continue as we modernise the way we generate electricity. Offshore wind costs are plummeting and onshore wind is now the cheapest way Britain has for generating new power.”

The Solar Trade Association (STA) says, for the first time, the NAO report provides a very clear breakdown for the reasons for the apparent overspend on the LCF,  which the STA and parliament’s Climate Change Committee, amongst others, have sought transparency on.

The NAO analysis shows that solar contributed £130m, or just 6% of the sudden £2bn increase in expenditure between January and June 2015.

“The unexpected growth in solar power was repeatedly fingered as a key reason for the overspend on renewables,” says Paul Barwell, STA chief executive. “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.”