Consumer-funded energy policies Contents

Conclusions and recommendations

1.The Department for Business, Energy and Industrial Strategy (the Department) significantly underestimated the costs of the three Framework schemes, adding an estimated £17 to the typical household’s yearly energy bill in 2020. The Department did not do enough to ensure its forecasts were based on the best available evidence. During 2015, in the space of just four months, the forecast costs of the schemes in 2020–21 increased by £2 billion, as the Department came to realise many of the assumptions underpinning its forecasts were likely to be inaccurate. These included its assumptions on the performance of offshore wind load turbines which, when updated after a gap of 18 months, led to a £600 million increase in forecast costs. This forecasting failure was similar to a previous failure of the Department to accurately forecast uptake of solar panels in 2010 and 2011. While the Department did take corrective action to reduce costs when the forecast overspend came to light, this was not sufficient to bring costs back beneath the budgetary cap. As a result, households will have to pay extra on their energy bills every year, with the amount reaching £17 per household in 2020.

Recommendation: The Department must ensure it has access to the right expertise and intelligence to ensure its forecasts are based on the best available evidence. It should review its market intelligence capability regularly to ensure it is doing enough to mitigate the risk of further forecasting failures.

2.The Department had not prepared properly for the possibility that its forecasts were wrong, and as a result, had to take quick corrective action that may have undermined investor confidence unnecessarily. Prior to the forecast overspend emerging, decision-makers focussed too heavily on the central forecast. If the Department had considered the possible implications of its forecasts being wrong, and put in place a contingency plan for controlling the schemes at the outset, it might have avoided the need for the abrupt scheme changes that it made in 2015 to cut costs. The changes included closing the Renewables Obligation to wind and solar projects a year earlier than previously expected, and imposing new limits on the amount of renewable electricity Feed-in Tariffs would support. These risked harming the confidence of businesses looking to invest in this sector in the UK. The UK’s position on the EY renewable energy country attractiveness index fell from 8th in 2015 to 13th in May 2016.

Recommendation: The Department and HM Treasury should assess the uncertainty surrounding forecasts of energy schemes, and put in place proportionate backup plans for controlling scheme costs and outcomes in the event that central forecasts prove incorrect.

3.Governance responsibilities for the Framework were badly defined, and HM Treasury failed to provide sufficient oversight. Poor communication between senior officials and those responsible for carrying out analysis contributed to the forecasting problems in 2015. The Levy Control Board, which was set up to provide HM Treasury oversight of the Framework, stopped meeting after 2013 and did not reconvene until July 2015, after the overspend emerged. It is vital that HM Treasury challenges departments’ consumer-funded spending to the same extent as exchequer-funded spending.

Recommendation: The Department and HM Treasury should review the governance arrangements for all consumer-funded energy schemes, and write to us with the outcome of the review. Governance arrangements should ensure boards responsible for the schemes meet regularly and include sufficiently senior officials from both departments.

4.The Department does not publish enough information on the Framework and it has not produced, as promised, annual reports on consumer-funded energy schemes. Businesses in the renewables sector consider that greater transparency of the forecasting assumptions used would help the Framework achieve its objective of supporting investor confidence. The Department commissioned an internal review into the forecasting problems identified in 2015, which provided a clear account of how and why the forecasts shifted, yet it failed to publish the review for 18 months. In July 2014 Government agreed to provide Parliament with an annual report on the impact of policies on energy bills, but has not done so since 2014. The consumer-funded policies report which the Department published a few days before our evidence session on the Framework is not an adequate substitute for a full report on consumer bills: for example, it does not show the net impact of policies once cost-saving effects are included.

Recommendation: The Department should report much more openly and regularly on the Framework and also publish a consumer prices and bills report annually in an easily understandable format so that consumers can see clearly what they are paying. The next edition should be published before April 2017. It should also publish a clear account of the assumptions underpinning Framework forecasts each time those forecasts are published.

5.The review of the Framework needs to address drawbacks in the current design to avoid it becoming increasingly ineffective at controlling costs to consumers and supporting investor confidence. The Department and HM Treasury are reviewing the future of the Framework, but have not set out the scope of the review in detail. The Treasury will not be consulting formally on the future of the Framework relying instead on engaging stakeholders including through roundtable discussions. Renewable energy associations have called for the timeframe of the Framework to be extended and have highlighted several drawbacks to the current design in need of review. These include the way the Framework measures the costs of public support for renewable energy. The current approach means that Framework costs go up when wholesale prices of energy go down, which could incentivise decision makers to cut support for renewables at the point when energy is most affordable.

Recommendation: In reporting the results of the review the Treasury should set out in detail how the future Levy Control Framework or its successor will operate. It should also demonstrate how stakeholders’ concerns were identified and addressed in the new arrangements, including regarding the way costs are measured.

6.Other schemes that impact on energy bills are not included in the Framework. The Framework places a cap on energy schemes that support low-carbon generation, but these are not the only policies that affect energy bills. It does not cap the costs of the Capacity Market, for example, which is likely to cost consumers around £1 to £3 billion a year from 2017–18 and it does not reflect the potential for energy efficiency standards for new homes to cut energy bills by reducing the need for heating. There is therefore a risk that decision makers could lose sight of the significant impacts of these other schemes on the affordability of energy bills.

Recommendation: As part of reviewing the future of the Framework the Department should ensure it has appropriate arrangements to monitor and control the costs of all consumer-funded energy schemes.

6 February 2017