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Public accounts watchdog slams early CfD schemes

The Department of Energy and Climate Change (DECC) has been criticised for awarding “poorly conceived and managed contracts” as part of an initial Contract for Difference (CfD) provision in April.

DECC failed to secure “best value” for consumers as it granted up to £16.6bn to renewable electricity projects without price competition, the Public Accounts Committee (PAC) has concluded after an inquiry into the matter.

“Quite simply, the department failed to defend consumers’ interest under the terms of these contracts,” said Margaret Hodge MP, chair of the committee.

The contracts were awarded to eight schemes, including two biomass conversions and a combined heat and power plant.

They have been dubbed “early contracts” because they preceded the opening of the first competitive allocation of CfD and were aimed at “avoiding gaps” in investments between the new subsidies and the previous Renewable Obligation regime, according to DECC.

With CfDs, the Government commits to provide renewable energy generators with a variable subsidy to top-up electricity market prices if they fall below a pre-agreed level, called the “strike” price.

PAC has criticised the early contracts for two main reasons.

First, it argued that DECC was “too ready” to accommodate developers’ requests that the strike prices should have been fully indexed to the Consumer Price Index, resulting in energy consumers rather than project developers to bear the risk of high inflation.

The department also decided not to include provisions which would have ensured project developers shared excessive profits with consumers, according to PAC.

Second, PAC pointed out that DECC has awarded too large a share of its budget, or 58% at the time, to the early contracts, meaning less money was available for the competitive regime.

The committee has recommended the Government take such considerations into account the next time it embarks on “major” subsidies reforms.

“What is now needed is a shift to full price competition, contracts which allow some claw-back for consumers of any excessive profits, and a balance of technologies which hits climate targets at least cost for consumers,” said Hodge.

The first round of applications for CfDs will open at the end of October. DECC has recently announced that the budget for the scheme has been increased to £300m from an initial £205m.

The Renewable Energy Association (REA) has defended DECC’s backing of biomass conversion projects, but has questioned the CfD regime.

“What should really worry consumers and minister alike is that the main CfD scheme doesn’t work for many technologies, doesn’t deliver value for money and doesn’t help new entrants enter the market,” said REA chief executive Nina Skorupska.

“The CfD allocation process is still too risky and complicated for most of the renewable energy independents and SMEs that are trying to break into the UK’s consolidated energy market.”

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