1 The Levy Control
Framework
What
is the Levy Control Framework?
1. The Government has placed the obligation
of financing a number of its energy and climate change policies
onto energy companies, rather than funding the schemes directly
through general taxation. Energy companies then in effect recover
the cost of these levy-funded schemes from consumers through bills.
2. The Levy Control Framework (LCF)
was established by the Department of Energy and Climate Change
(DECC) and HM Treasury (HMT) in 2011 in order to cap the cost
of levy-funded schemes and ensure that DECC "achieves its
fuel poverty, energy and climate change goals in a way that is
consistent with economic recovery and minimising the impact on
consumer bills".[1]
HMT has put a limit on the amounts that can be raised and spent
through this mechanism. The limit for 2013-14 is set at £3.184
billion, but is set to rise to some £7.6 billion by 2020-21.[2]
There are currently three components to the LCF:
- Renewables Obligation (RO);
- Feed-in-tariffs scheme (FITs); and
- Warm Home Discount (WHD).[3]
The RO and the FITs scheme are DECC
initiatives to increase the use of low-carbon technologies to
generate electricity. The WHD is designed to help low-income and
vulnerable households meet energy costs. DECC has yet to clearly
define the future scope of the LCF and whether or not it will
include other levy-funded schemes such as the "capacity mechanism",
which aims to provide an insurance policy to reduce the likelihood
of future blackouts and to ensure a reliable electricity supply
to consumers.[4]
Accounting for Levy Control Framework
spending
3. The Office for National Statistics
(ONS) has classified the largest element within the LCF-the RO-as
notional (or "imputed") taxation and public expenditure,
even though the money does not at any point directly pass through
government hands. This is because such spending, and the revenues
which are raised to support it, share features common to other
forms of taxation and public spending. Essentially the levies
and the nature of the spending are obligations imposed on energy
companies-and ultimately the consumer-by government.
4. The ONS decision led the Government,
from 2011-12, to include spending within the LCF (and related
revenues) within both DECC's Annually Managed Expenditure (part
of Treasury's budgetary totals for government) and the DECC Main
Estimates (the Parliamentary approval mechanism). However, the
National Audit Office (NAO) has taken the view that including
these items within the end year Departmental Accounts, which report
on all spending authorised by the Estimates, would be inconsistent
with International Financial Reporting Standards and likely to
lead to delays or qualifications to the Departmental Accounts.[5]
For these reasons in each year since 2011-12, DECC has subsequently
obtained a derogation from HMT to remove the expenditure and revenues
from its Supplementary Estimates and hence has not reported on
either this spending or these revenues in the Department's end
year Accounts.
5. The Chief Secretary to the Treasury
wrote to us and to other interested committees, including the
Liaison Committee, on 5 November 2013 about this issue proposing
an alternative way forward. The Chief Secretary proposed that
LCF spending and revenues should continue to be included within
Annually Managed Expenditure, but should not in future be included
in Main or Supplementary Estimates or Departmental Accounts. Instead
DECC would report levy spending and revenues in other reports
to Parliament, and ensure that these reports are accessible to
and relevant to those who wish to use them. These reports would
also be audited.
6. We responded to the Chief Secretary's
proposals on 18 December 2013. While recognising the difficulties
that continuing inclusion of LCF spending and revenues within
Estimates would cause for the Departmental Accounts, we made a
number of suggestions, building on the approach proposed by the
Chief Secretary, for enhanced future reporting and approval of
spending under the LCF. These suggestions are now reproduced in
this report as follows.
7. There should be a single annual
report covering all the DECC levy-funded schemes along with other
Government initiatives which affect energy bills but which fall
outside of the Levy Control Framework (LCF), such as the Energy
Companies Obligation (ECO). This report should contain:
- Future plans, and comparisons
of agreed budgets and final spend (outturn) for each funding stream
and/or programme and energy company;
- Easily identifiable "costs
per customer" for each scheme on a consistent basis across
years and between reports, including information on the impact
that government decisions have upon requirements over time. This
information is not provided currently; and
- Measurable outcomes achieved
through spending, including as a minimum the progress made against
carbon targets and any other specified objectives of the schemes,
and the impacts on consumers. This should include an appraisal
of the relationship of the LCF to its overall policy targets.
8. We consider that the effective
spending and taxation proposed should be subject to some level
of Parliamentary authority before it arises. While we understand
the difficulties that including the items within Estimates could
cause for the Departmental Accounts, we believe it would be highly
desirable that there should be a means for Parliament to express
its views from time to time on the sums involved and the purposes
for which they are intended, despite the fact that no monies are
actually issued from, or surrendered to, the Consolidated Fund.
The Government should look further into how this might be achieved.
Wider assessments of the LCF
9. On 27 November 2013, the NAO published
a report reviewing the operation of the LCF assessing "its
effectiveness for providing control and accountability to Parliament
for levies and levy-funded expenditure".[6]
The NAO's overall conclusions and recommendations are reproduced
below:
In establishing the Framework, the
government has rightly recognised the importance of monitoring
and controlling the considerable cost of energy schemes that consumers
fund through their energy bills. The Framework has prompted the
Department to monitor actual and expected costs closely and consider
its response to unexpected increases in costs of schemes charged
to consumers.
However, the operation of the Framework
has not been fully effective in some key areas. The joint Treasury
and departmental governance board for the Framework has not strongly
linked spending and outcomes in its deliberations. Reporting on
Framework schemes has not supported effective public and parliamentary
scrutiny of the overall costs and outcomes from levy-funded spending.
The Framework does not cover the consumer-funded Energy Companies
Obligation scheme and it is not yet clear whether it will cover
the new Capacity Market scheme, including Electricity Demand Reduction
measures. As consumer-funded spending increases and new schemes
are introduced, the Department needs to assure Parliament and
the public that it has robust arrangements to monitor, control
and report on all consumer-funded spending, and the outcomes it
is intended to secure.
The Department and HM Treasury should
keep in mind the underlying objective of the Framework and aim
for transparency and accountability when deciding which schemes
to include within the Framework. The Department has processes
in place to monitor costs to consumers of the Energy Companies
Obligation and is considering measures to control the cost of
the Capacity Market scheme. If these schemes are not covered by
the Framework, the Department should explain how it will control
the aggregate costs of consumer-funded schemes and assess whether
together these schemes are achieving the outcomes needed to meet
its objectives.
The Department should develop its
testing of the modelling results used to inform the Framework
and develop the capability to allow more sophisticated analysis
of the probability of different scenarios. The Department should
continue to address weaknesses in its quality assurance of the
forecasting model. This should include a review of the outputs
from the most recent version of the model to gauge its accuracy
against known outcomes and explain any discrepancies.
The Department must ensure that
it monitors the risk of under- or over-allocating available budgets
for Contracts for Difference. In particular, it will need to
consider:
how to allocate budgets over
time so that best value is achieved from the available budget;
and
the continuing risk of breaching
its spending cap if the wholesale price falls.
The Department and HM Treasury are
proposing to supplement existing public reporting on individual
Framework schemes by reporting routinely to Parliament on spending
on levy-funded schemes. These reports should cover past and future
spending across all the schemes within the Framework and the outcomes
achieved or expected. This reporting should also provide appropriate
independent assurance on reported figures and the effective operation
of controls. In particular, the Department should do the following:
Establish a bespoke process
allowing Parliament to scrutinise actual and forecast committed
levy-funded spending, since it falls outside the established financial
accounting and reporting framework for the Department.
Conduct or commission appropriate
independent assurance of the robustness of data on actual and
forecast Framework spending and outcomes.
Indicate how and when controls
have been applied and the impact on outcomes and costs.
Ensure that any costs reported
under the Framework can be reconciled with those reported
by government-owned counterparty or settlement bodies for the
same schemes.[7]
10. On 28 November 2013, we held an
oral evidence session with DECC officials to discuss publicly
some of the concerns raised in the NAO's report. The full transcript
of the session is published on our website.[8]
1 HM Treasury, Control framework for DECC levy-funded
spending, March 2011, para 1.1 Back
2
DECC, Control framework for DECC levy- funded spending: Questions
and Answers, December 2011, p 4; and DECC, Annex D: Levy control
framework update: extending the framework to 2020/21, July 2013,
p 2 Back
3
DECC, Control framework for DECC levy- funded spending: Questions
and Answers, December 2011, p 4 Back
4
Q 6 (John Fiennes, DECC) Back
5
NAO, The Levy Control Framework, November 2013 Back
6
NAO, The Levy Control Framework, November 2013, Summary, para
3 Back
7
NAO, The Levy Control Framework, November 2013, Executive Summary Back
8
Energy and Climate Change Committee, Oral evidence: Levy Control
Framework, HC 872, Thursday 28 November 2013 Back
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