Auditors probe £16bn green energy contracts

By Matt McGrathEnvironment correspondent, BBC News

The government may have failed to protect the interests of bill payers when awarding green energy contracts, says the National Audit Office (NAO).

Eight long-term deals worth £16.6bn were signed earlier this year to secure projects said to be at risk of cancellation.

The NAO says too much money was awarded to these renewable sources “without price competition”.

It is concerned that this could ultimately increase costs to consumers.

Under an EU directive, the UK government is committed to producing 30% of electricity from renewable energy sources by 2020.

To drive investment in this area, the government has long operated a system of subsidising generators.

In an effort to improve efficiency and value for money, the Department for Energy and Climate Change (DECC) embarked on a series of reforms to the electricity market over the past two years.

The major change has been the introduction of Contracts for Difference.

This is a two-way system where the government sets an agreed price for electricity and the generators either receive a subsidy or have to pay money back depending on the state of the market.

Ultimately, the idea is that generators would bid for these contracts, guaranteeing that consumers would get green energy at the most competitive price.

But with the system not fully up and running until April next year, DECC was faced with the tricky problem of how to fund enough renewables to meet 2020 targets.

Limiting opportunities

Its solution was to award early contracts to five offshore wind farms, two coal plant conversions to biomass and one biomass combined heat and power plant.

However the NAO is not satisfied that the way these contracts have been awarded is good for consumers and the long-term health of the renewables industry.

“Our view is that awarding £16.6bn of contracts has limited the opportunities to secure better value for money through competition under the contracts for difference regime, due to start this year,” said Jill Goldsmith from the NAO.

The NAO highlights the fact that the money will generate just 5% of the renewable electricity required by 2020.

It is also concerned that the department made its decision to commit consumer funding, not on the basis of price competition but with a weighting for the likely impact on the project of any delay or “hiatus”.

Willow can be chipped and burned for energy in a biomass plant

“The qualification rule around hiatus required confirmation that the project would be put back if they didn’t get funding,” said Jill Goldsmith.

“It was a kind of yes/no qualification criteria which was largely based on confirmation from the project’s board that this was the case.”

The government watchdog is concerned that the prices that have been agreed for energy under these contracts “may provide higher returns than needed to secure the investment”.

The report suggests that the projects were likely to make money but the government did not ask for any information on projected costs and profits in the bidding process.