House of Commons - Early contracts for renewable electricity

Early contracts for renewable electricity - Public Accounts Committee Contents

1 The need for early contracts

1. On the basis of a Report by the Comptroller and Auditor General[1], we took evidence from the Department of Energy and Climate Change (the Department) on early contracts for renewable electricity. In April 2014, the Department announced the award of contracts to eight renewable electricity projects.[2] These contracts are early 'Contracts for Difference' under which the Department fixes the price which renewable electricity generators can receive for each unit of electricity they produce, known as the 'strike price'.[3] The Contracts for Difference scheme replaces the Renewables Obligation as the Government's main approach to securing new renewable electricity generation. Unlike the Renewables Obligation which allows all eligible projects to receive support at a fixed rate set by the Department, the Contracts for Difference scheme enables the Department to limit the number and scale of projects receiving support and to allow price competition for contracts.[4] The Department awarded eight early contracts which could in total cost consumers some £16.6 billion over the 12 to 15 year terms of the contracts.[5]

2. The Department launched the selection process to award early Contracts for Difference to renewable electricity generation projects in March 2013, to address the risk of a hiatus in investment in renewable electricity generation during the transition to the main Contracts for Difference scheme, now expected in late 2014.[6] The Department told us that it had considered a number of alternatives to awarding early contracts. It decided in 2011, following discussions with project developers, that doing nothing other than continuing to make the Renewables Obligation available to new entrants to April 2017 would be insufficient to address the uncertainty for investors and the potential investment hiatus. A large number of project developers had suggested extending the Renewables Obligation from 2017 to 2020.[7] The Department told us that it had also considered offering "letters of comfort" that might reassure project developers that their projects would be eligible to apply for a contract in due course. However, its discussions with project developers indicated that full early contracts were necessary for investment to continue.[8]

3. The Department's economic analysis showed no financial benefit from proceeding to award contracts early, compared to scenarios where the same projects were delayed, and so went ahead under the main Contracts for Difference regime, or were cancelled. The Department explained that it went ahead with the early contracts because it expected them to achieve wider benefits on which it could not put a monetary value[9] including demonstrating the operability of the contracts, mitigating the risk of the UK not meeting its 2020 EU renewable energy target, and benefits to the renewable electricity supply chain.[10]

4. The Department noted that some of the wider benefits from awarding early contracts were already emerging. It told us that early contracts for offshore wind projects had helped to secure planned investment by Siemens in new wind turbine production facilities in Hull, with knock on effects beyond the Humber region. The Department also noted that Drax, which has received an early contract for one of its biomass conversion units, is also investing in the supply chain and has arranged for the design of new train wagons from UK-based companies. [11] The Department told us it estimated that the early contracts would support 8,500 jobs in and outside the UK, based on project developers' application information and the Department's own wider industry knowledge. The Department expected to monitor actual jobs supported within its evaluation of the early contracts, in liaison with the Department for Business, Innovation and Skills, UK Trade and Investment and project developers.[12]

5. The Department considered that it had needed to move quickly to meet its legally binding renewable energy and greenhouse gas emissions targets. Although it had made good progress on increasing renewable electricity to meet the UK's EU target to produce 15% of its energy from renewable sources by 2020 and it had hit its interim target in 2011-12, the UK has to do better to meet the next interim target.[13] The Department also noted that the UK's EU renewable energy target is for electricity, vehicles and heat. As a result, any underperformance in either heat or vehicles would require more electricity from renewable sources to make up the shortfall. The Department also emphasised that action was needed now to meet challenging long-term targets. The Climate Change Act 2008 target to cut greenhouse gases by 80% by 2050 requires the complete decarbonisation of the electricity sector in the long-term.[14] The Department's data on renewable electricity projects which are under construction, awaiting construction or seeking planning permission suggests there could be much more new renewable generation capacity than is needed to meet the 2020 target. However the Department considered this capacity may not all be built so early contracts were important for supporting the continued development of the renewables industry.[15]

6. The eight early contracts will take up 58% of the budget for all renewable contracts for the period 2015-16 to 2020-21.[16] The Department agreed that if less funding had been devoted to the transitional regime then more would be available for the competitive regime that it is now intending to apply.[17] The Department told us it was currently assessing the demand for future contracts from different renewable electricity projects and the budgets which it would allocate, and it planned to move to competition for all technologies as quickly as possible.[18] It said that without awarding early contracts on this scale it would not have been able to move so quickly to price competition. The Department maintains that its transitional arrangements have encouraged other project developers to progress their projects and build supply chains to a point where the market may be ready for price competition under the main Contracts for Difference scheme.The Department noted, in particular, that they were on track to move faster than anywhere else in the world to compete for offshore wind.[19]