Calls for LCF clarity and possible investigation grow after wholesale price forecasts revealed

  • DECC.

Calls for the National Audit Office to investigate the Levy Control Framework (LCF) and assumptions made within it have intensified after it was revealed DECC expects wholesale energy prices to tumble.

Today, Carbon Brief published a report stemming from a long-running freedom of information request battle with the Department of Energy and Climate Change, which has revealed a significant decrease in its projections for the wholesale energy price.

The story reveals that in May 2015 DECC forecasted that by 2020 wholesale energy prices would have fallen to below five pence per unit, some 10% lower than estimates previously made by the department. While this will be largely attributable to a fall in fossil fuel prices, it is widely considered the addition of cheaper, renewable energy generation to the grid will also play a significant role in that falling price.

That decrease means that by 2020 average annual energy bills will have in fact fallen to around £1,222, seven percent lower than the £1,319 forecasted a year prior despite the significant deployment of renewable energy.

DECC has continually argued that its renewable subsidy reset – completed with last month’s feed-in tariff overhaul – was enacted in order to protect consumers from spiralling bills. The revelation that DECC actually expects bills to fall over the next five years would appear to seriously undermine its justification for such a reset and heap yet more scrutiny on its use of the LCF as a budgeting tool.

Former energy and climate change secretary and current Mongoose Energy chairman Sir Ed Davey has repeatedly poured scorn over assumptions made within the LCF and labelled suggestions of an overspend within it as “outright lies”.

Davey’s comments stem from how the actual LCF budget figure is given as a gross spend on renewable subsidies rather than a net spend. The Merit Order Effect shows that as more, cheaper renewable capacity is added to the grid the wholesale price of energy falls, meaning that bill payers could eventually benefit from subsidised renewable deployment.

The newly revealed data reinforces Davey’s previous suggestions. In a statement circulated in the wake of Carbon Brief’s story this morning, Davey said that the lack of openness surrounding the LCF was “scandalous”.  

And speaking to Solar Power Portal at the time of the feed-in tariff cut announcement last month, Davey said: “They [the government] are trying to say the budget is justifying their cuts, but it clearly isn’t. They won’t admit it and it’s time the MPs on the select committee expose this nonsense.”

“They haven’t told us the assumptions that they use to make their calculations. Once you start thinking about what those assumptions are, you can then find out whether you think they’re being truthful or not.

“If they’re refusing FOIs, if they’re not publishing assumptions in the first place which is not actually that usual, if they’re not answering questions in letter then they are hiding something… It’s so obvious what they’re doing,” he added.

The LCF has also proven to be a subject the ECC select committee has sought to shed light on. During a hearing last month, NextEnergy Capital’s Abid Kazim, Solar Trade Association chief executive Paul Barwell and Lightsource chief Nick Boyle discussed the LCF and a purported overspend within it at length.

Kazim stressed the need for the net cost of the levy to be taken into account rather than “just the gross cost” and argued that the levy “potentially is equalised through the whole mechanism”. Barwell added: “Unfortunately the levy control framework is not currently going to be fit for purpose if they continually lower the forecast on the wholesale electricity price.”

During the same session select committee chair Angus MacNeil suggested that the LCF was a “major area” that “perhaps the National Audit Office should have a look at”. This morning a spokesman for the National Audit Office (NAO) informed SPP that while an investigation into the LCF was not currently ongoing, it was “on the radar”.

The National Audit Office is an independent parliamentary body established solely for auditing the work of central government departments while also conducting value for money audits of national policy. While the NAO usually undertakes investigations on its own accord, calls for it to scrutinise the LCF and the assumptions made within it have intensified with today’s report.

The NAO did publish a report on whether or not the LCF had proven effective in meeting its objectives in November 2013, ultimately concluding it to be a “valuable tool” for supporting cost control but also considered that the levy control board had focused on cost control and “not the associated impacts on energy policy outcomes”.

The report also warned DECC that it required greater quality assurance over its forecasting models and over-allocating available budgets for CfDs, therefore breaching its spending cap if the wholesale price fell.

Mike Landy, head of policy at the Solar Trade Association, also echoed renewed calls for greater clarity. He said: “For too long the government’s calculations that underlie the LCF have been shrouded in obscurity. In particular the sudden increase in projected 2020 spend under the LCF that took place in the four months between the March and July 2015 budgets needs explanation. 

"We call on the government to provide clarity and transparency on the way in which the LCF caps have been calculated, as well as forward visibility on the LCF beyond 2020. The LCF needs to be adjusted annually in line with changing wholesale price projections, otherwise the goalposts will keep moving for renewables. 

"In the short term we need to know the Government’s intentions for solar under CfDs between now and 2020. Recent evidence shows that solar’s cost to consumers through the LCF is offset by its effect reducing the wholesale electricity price – so effectively placing no additional cost on consumers," he said.

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