UK: CfD rules redo raises extra £1.5 billion cost

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Investigation into the United Kingdom’s 2017 auction for low-carbon electricity generation contracts has revealed that the rule changes to the auction process will increase costs for energy users by around £100 million a year.

According to the investigation carried out by the National Audit Office (NAO), the contracts awarded in the 2017 auction will cost energy users around £1.5 billion extra over the contracts’ 15-year life, for only a small amount of additional capacity, compared with what would have happened if the Department for Business, Energy and Industrial Strategy (BEIS) had not changed the rules on how a capacity cap would apply.

In April 2015, BEIS changed the rules on how a capacity cap would apply in future auctions, which meant smaller, more expensive projects could be awarded contracts ahead of projects generating more electricity but at a cheaper price per unit, NAO said.

BEIS subsequently decided to cap the amount of generating capacity that projects using ‘fuelled technologies’ could be awarded in the September 2017 auction at 150MW, meaning the new rule would apply.

In September 2017, BEIS awarded 11 Contracts for Difference (CfD) through an auction to low-carbon electricity generation projects. CfDs fix the price that generators receive for their electricity for a set period, with energy users paying a top-up if the market price falls below this amount.

Despite the additional costs, the contracts awarded in the 2017 auction were at lower prices than the government had expected, with the costs for offshore wind farms having fallen significantly, according to NAO.

The auction also secured more generating capacity than the government had expected. National Grid forecasts that the cost to energy users of top-up payments for the winning projects will be less than the annual budget cap BEIS had set of £290 million per year.

However, NAO stated that BEIS did not highlight the rule change to its program management board or test whether it was likely to lead to unintended consequences. In some situations, the design change could have produced better value for money for consumers, but BEIS did not assess how likely these were to occur in practice, according to NAO.

The 11 contracts awarded in 2017 by BEIS are for projects capable of providing electricity to around 3.6 million homes with their 3.3 GWof capacity.

The majority comes from three offshore wind projects at 3.2GW total, while the remaining eight contracts were awarded to smaller ‘fuelled-technology’ projects.