House of Commons - Early contracts for renewable electricity

Early contracts for renewable electricity - Public Accounts Committee Contents

2 Protecting the interests of consumers

7. The Department considered that the early contracts provided inherently better value for consumers than the Renewables Obligation because the Department had set lower strike prices to reflect the lower cost of financing projects with a Contract for Difference.[20] The Department noted that it wanted as many projects to be supported through a Contract for Difference rather than the Renewables Obligation as quickly as possible. The Department had estimated that awarding early contracts to the eight projects would save consumers £2 billion compared to the cost of supporting these projects through the Renewables Obligation.[21] However, only two of the eight projects have target commissioning dates before 2017, so the other six projects might well not have been commissioned in time to have been eligible for the Renewables Obligation, unless it had been extended.[22]

8. The Department recognised that competition was likely to drive better prices for consumers, but it did not believe that it could have gone straight to competition for the early contracts.[23] In particular it did not believe the market for offshore wind was mature enough.[24] Accordingly, it had established a transitional system where the strike prices were administratively set. The Department did not negotiate strike prices with individual projects or attempt to investigate individual projects' costs and returns before it awarded the contracts.[25] The Department told us that the administrative prices had been underpinned by an extensive process in 2011 and 2012 to establish, with external expert input, the long-run costs of renewable technologies.[26] The Department stated that the UK administrative strike prices for offshore wind were lower than prices elsewhere in the world.[27] It accepted that its administrative price setting process meant that some projects might get a greater return than they potentially needed from those prices, but noted that when it released the administrative strike prices in 2013 some project developers had walked away on the grounds that they had not been sufficient to support their offshore wind projects. [28]

9. The Department noted that the UK needed to have a diverse set of generating assets and technologies to decarbonise the electricity sector and said that it was aiming to meet the target at minimum cost to consumers.[29] The Department has set caps on the combined cost of consumer funded schemes which support the development of renewable and other low carbon electricity generation, such as the Renewables Obligation, the Financial Investment Decision enabling for Renewables scheme and Contracts for Difference. The Department caps these schemes through a mechanism known as the 'Levy Control Framework' so that consumers are protected from the cost of supporting renewable electricity rising beyond pre-determined limits.[30] However setting caps does not in itself ensure consumers get the optimum value for money.

10. The Department told us that it had designed the selection process for the early contracts to support a mix of technologies. Five of the early contracts awards were for offshore wind, which at a strike price of £150 per megawatt-hour was significantly more expensive than both onshore wind and nuclear at £95 and £89.50 per megawatt-hour respectively.[31] The Department agreed that biomass conversions were cheaper to support than offshore wind projects and were a good reliable source of renewable electricity. The Department noted that it regarded biomass as a transitional source of renewable electricity, because biomass only reduces carbon emissions by 68% compared to coal, thus providing a lower level of carbon savings than offshore wind to meet long-term decarbonisation targets. The Department hoped that carbon capture and storage on gas or coal plants would be part of the mix, but at present this was considered to be the most expensive. [32]

11. The Department told us that the lengthy process of negotiating the terms of the early contracts, involving a great many advisers and conversations with multiple project developers, had in a sense been market testing of the contract.[33] The early contracts protect consumers by only providing the strike price for electricity produced and paying no compensation to project developers who cannot deliver their projects, for example, because they fail to obtain planning consent.[34] The contracts do not penalise project developers for not delivering the planned capacity, but do require them to come back with revised capacity figures within a year of receiving a contract so the allocated funding can be released for other projects.[35]

12. The early contracts' strike prices are indexed to the Consumer Price Index (CPI) rather than the Retail Price Index used in the Renewables Obligation scheme.[36] The Department told us that project developers would have demanded higher administrative strike prices had they not been linked to inflation.[37] The Department considered that renewable generation projects were fragile and that passing inflation cost pressures through to consumers rather than project developers had improved the chances of projects going ahead.[38]

13. The Department received representations that claw-back provisions should be included in the contracts to allow consumers to share in any excessive profits. However, the Department decided not to do this as project developers had repeatedly maintained that including claw-back clauses would have been a "red light" for them, something confirmed by independent financial advisers consulted by the Department.[39]

14. We asked the Department what consideration they had given to a claw-back clause for any re-financing gains. The Department considered that such a clause would have made the contracts 'uninvestable'. The Treasury agreed with the Department's judgement on this but noted that there was a difference in the risks involved between the first contracts let and those let further into a programme.[40] The Department promised to give further thought to how it should address the potential for project developers to make large refinancing gains through Contracts for Difference.[41]

15. The government owned Counterparty Body will need to actively manage contracts, to ensure claims for increases in strike prices are reasonable, to identify and apply reductions in strike prices, and to calculate who needs to be paid what and organise those payments. The Counterparty Body will also need to ensure that generators record and report their output accurately to protect consumers from paying for more output than is actually provided. For claw-back arrangements to operate effectively, contracts would need to include requirements on project developers to supply information to government on their actual costs and returns. This information would then need to be scrutinised by staff with appropriate expertise. The Department told us that it had recruited a Chair and was in the process of appointing a Chief Executive for the Counterparty Body which will have an independent board, and whose costs will be met by consumers through the Levy Control Framework.[42]

20 Qq 34, 133 Back

21 Qq 12-18 Back

22 C&AG's Report, figure 1 Back

23 Q 49 Back

24 Qq 49, 51, 56, 71 Back

25 C&AG's Report, paras 14, 3.28 Back

26 Q 24 Back

27 Q 45 Back

28 Qq 155, 58 Back

29 Qq 70-72 Back

30 Q 171 Back

31 Q 70 Back