Changes to low-carbon energy auction costing £100 million a year

The National Audit Office has found that by changing auction rules and limiting the participation of biomass projects to 150MW, contracts for renewable power capacity are costing consumers £100 million more each year. As these contracts typically cover a 15-year period, the total cost is expected to be £1.5 billion over their lifetime.

The auction the NAO investigated was for Contracts for Difference (CfDs). These contracts are the principal way the government encourages investment in new green power generation.

Generators compete in the auction by submitting the lowest fixed price (known as a ‘strike price’) possible in their application for CfDs. They are then paid this price consistently rather than at fluctuating market rates. The project with the lowest price is chosen first, then the second lowest and so on until a project is added and it exceeds the scheme’s budget limit. In the end all generators are given the same strike price: that of the last project to win a CfD.

Participation for biomass electricity in the 2017 auction was capped at a total of 150MW. A large project that exceeded the cap could be disqualified from the auction, while a smaller biomass project that came under the cap but charged a higher rate for its power could still receive a CfD. In this way as much capacity is contracted under the cap as possible.

According to the report, at the time the Department made the decision to cap biomass, it was “unsure whether large-scale, long-term support of fuelled technologies (such as biomass and ACT) would contribute effectively to its broader strategic objectives.”

The higher per-unit prices of the smaller biomass facilities drove up the strike price for the rest of the CfD recipients. The NAO assessed that the increased strike price caused by the cap will cost £100 million (€114 million) more per year. Over the 15-year period that these contracts are valid, this adds up to £1.5 billion (€1.7 billion).

When BEIS changed the rules, there were some projected scenarios where the alterations would have been beneficial. But the NAO found that the likelihood of these circumstances was not tested before committing to the change.

The contracts awarded in 2017 were at lower prices than the government expected, however, with the costs of wind farms having fallen significantly—as much as 50% according to BEIS. The auction also secured more generating capacity than expected.

Out of the 11 contracts awarded, three windfarms will produce 3.2GW of the 3.3GW in capacity secured.

In its report, the NAO says that BEIS has recognised that the outcome of the auction was ‘suboptimal’. The Department says that it will not apply the cap in the same way. Previously, once a project reached the technology cap, applications for that technology were closed. The rule was changed in 2015.

Commenting on the NAO investigation, head of policy and external affairs at the Renewable Energy Association James Court said: "This NAO report is confirmation of the industry’s concerns that Government intervention in the CfD auctions is raising costs for consumers. While this report focuses on fuelled technologies such as biomass and biomethane, similar reforms have unnecessarily excluded low-cost solar and onshore wind from competing.

“The fuelled technology cap was an unnecessary intervention. It created a restraint on technologies which can deliver cost effective power and heat, and the policy did not take into full account the wider benefits derived from more sustainable waste management. It additionally could have been designed in an alternative way to deliver more capacity at lower cost, as we made clear in our consultation response.

“In our view there should be no cap in the next auction, scheduled for spring 2019, and this report adds to that view.”

In an emailed statement, a BEIS Spokesperson emphasised the good that CfDs have done for the renewables sector: “The generation of offshore wind in the UK is a success story—with 15% of our electricity coming from our powerful turbines. This has meant that the price of offshore wind has dropped by more than half—and we are getting more clean power for less as part of our ambitious modern Industrial Strategy. In light of this success, following a review, changes have been made to the rules for the next Contracts for Difference auction to ensure that we continue getting best value for money for consumers.”

The Department also says that the competitive nature of the auction has saved an estimated £528 million per year.