A change in the rules of auctions designed to encourage more low-carbon generation will cost consumers and companies £100m a year in higher bills, the National Audit Office said.
An investigation by the NAO found that rule changes introduced by the Department for Business, Energy and Industrial Strategy last year favoured smaller, more expensive projects over bigger schemes that would have generated more electricity at a cheaper price per unit.
As a result, the contracts awarded will cost energy users — industrial as well as consumer — around £1.5bn more over the 15-year life of the schemes and could lead to higher electricity bills. The extra cost is in exchange for only a small amount of additional generating capacity according to the NAO, compared with what would have happened if the rules had not been changed.
Meg Hillier, MP and chair of the Committee of Public Accounts, said BEIS had “once again …neglected to put the interests of service users at the forefront of its thinking”.
Subsidy auctions to support investment in renewables have been a central part of energy policy as the government tries to meet tough carbon-reduction targets.
Under so-called “contracts for difference”, developers are guaranteed a minimum price for the electricity they generate called the strike price. Energy users pay a top-up if the market price falls below this amount.
The NAO’s investigation is focused on last September’s auction when 11 contracts were awarded to projects which will collectively generate 3.3GW of electricity.
Most of the electricity — 3.2GW — will be generated by three offshore wind projects. The remaining eight contracts were awarded to smaller projects using certain technologies including biomass systems that create electricity as well as heat.
Although the contracts were awarded at much lower prices than the government had expected because the costs of offshore wind farms had fallen significantly, the watchdog found that the auction will nevertheless cost consumers more relative to the additional capacity it secured.
It blames the government’s decision to cap the amount of generating capacity that could be awarded to projects using less established types of technology. The change meant that the smaller technology projects, in effect, pulled up the price for projects that had already been accepted, the NAO said.
BEIS said the 2017 auction had saved £528m per year compared with the absence of competition. It had reviewed the change in the rules with regards to smaller technologies and would not apply a cap in the next auction round.