CMA offers remedies to fix problematic Contracts for Difference mechanism

The Competition and Markets Authority report into the energy market has highlighted a number of failings within the Contracts for Difference (CfD) scheme, having warned that it could give rise to an adverse effect on competition.

The CMA this morning published its provisional findings from its long-standing inquiry into the energy market and narrowed in on the CfD mechanism, designed by the Department of Energy and Climate Change to replace the Renewables Obligation.

Having last year issued a number of concerns regarding the structure of the mechanism, today’s provisional report states that some elements of the process actually added to consumer bills.

Of particular contention was the decision to award eight contracts outside of the competitive auction process and under Final Investment Decision Enabling for Renewables (FIDeR). The CMA found these projects to have cost up to £310 million more per year than they would have done under the competitive auction, equivalent to roughly 1% of a consumer’s entire electricity bill.

The authority said this was evidence that “illustrates the significant impact that DECC’s decisions in this area can have on the costs faced by energy customers”.

“It is essential, therefore, when DECC makes such decisions in the future, that they are based on rigorous analysis, and that the impacts are communicated in a clear and transparent manner,” the report continued.

The two remedies recommended by the CMA include the provision that DECC undertakes and consults on an impact assessment before awarding any CfDs outside of the auction mechanism, and that it consults on an impact assessment prior to allocating the CfD budget to different pots and technologies.

Any analysis should also estimate short-run costs of supporting low-carbon generation and how they are affected by department decisions, and then weighed against long-run benefits to determine overall impacts to consumers.

The CMA has further recommended that DECC finalise proposals for future CfD rounds and budgets at least one year ahead of the auction, enabling potential bidders to make informed decisions about how, or whether to progress a project.

The report’s findings into the CfD process are conclusive, but would appear too late to resolve the problems with the mechanism given that it has all but been stripped down to purely support offshore wind.

Shortly after last year’s CMA report the mechanism was postponed indefinitely amidst the much-vaunted overspend within the LCF, and only resurfaced recently when secretary of state Amber Rudd revealed that three CfD auctions would be pencilled in for this parliamentary term.

These auctions would however be reserved for offshore wind only, and Rudd later confirmed that there were currently “no plans” for solar CfDs.

Solar Power Portal contacted the Department of Energy and Climate Change to enquire whether this report’s findings would be cause for it to rethink that decision, but the department has yet to respond.