UK government underestimated effect of renewable incentives
Post Date: 18 October 2016
The NAO report on the national Levy Control Framework says that the UK government failed to control the levies paid by energy companies (and their customers) to incentivise the development of renewables such as wind and solar power.
The government has missed opportunities to exploit the full potential of the Levy Control Framework and this has contributed to decisions which have not secured value for money, according to the NAO report.
The Levy Control Framework was established by the former Department of Energy & Climate Change and HM Treasury in 2012 to set a cap for the forecast costs of policies such as the Renewables Obligation, Feed-in Tariffs and Contracts for Difference, which are funded through levies on energy companies and ultimately paid for by consumers. It sets annual caps on costs for each year to 2020-21, with a cap of £7.6 billion in 2020-21 (in 2011-12 prices).
However, according to the latest forecast, the schemes are expected to exceed the cap and cost £8.7 billion in 2020-21. This is equivalent to £110 (around 11 per cent) on the typical household dual fuel energy bill in 2020, £17 more than if the schemes stayed within the cap.
The NAO concludes that weaknesses in forecasting and in the government’s approach to allocating the Framework budget up until April 2015 mean there is little unallocated budget left for new projects between now and 2020-21.
The report also finds that the Framework has not met its potential to support investor confidence because of its short and decreasing timeframe and a lack of transparency over forecasts and how the budgetary cap would operate.
The NAO recommends that government needs to do more to develop a sufficiently coherent, transparent and long-term approach to controlling and communicating the costs of its consumer-funded policies. This should include providing an updated report on the impact of its energy policies on bills, as the relationship between Framework costs and the affordability of energy bills is not straightforward.
Amyas Morse, head of the National Audit Office, said: “Government’s forecasting, allocation of the budget and approach to dealing with uncertainty has been poor, and so has not supported value for money.
“In addition, a lack of transparency over the Framework and expected future energy bills has undermined accountability to Parliament and consumers."
The NAO last reported on the Framework in 2013. However, progress since then in decarbonising electricity has been faster than government expected, and energy markets have been profoundly affected by a significant fall in fossil fuel prices.
In February 2015 the Department forecast that 2020-21 costs would be £7.1 billion, half a billion pounds below the Framework cap. Four months later, in June 2015, it had revised its estimates dramatically, to £9.1 billion in 2020-21, £1.5 billion above the cap. This prompted widespread changes to Framework schemes to cut costs, which have reduced forecast costs but not brought them within the budgetary cap.
Morse concluded: “I look forward to BEIS [the recently formed Department for Business, Energy and Industrial Strategy] building on recent improvements it has made to the governance of the Levy Control Framework.”
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