The Competition and Markets Authority (CMA) has criticised elements of the Department of Energy and Climate Change’s (DECC) Contracts for Difference (CfD) process, claiming it has “given rise” to an adverse effect on competition.
The CMA has today published a report following a year-long inquiry into the UK’s energy sector and its dominance by the Big Six, which has otherwise expressed concern about the “high cost of low carbon electricity”.
But the authority has also reserved criticism for the way in which some of the CfD mechanisms have been allowed to work, especially the allocation of the CfD pot for separate technologies and the way in which the Final Investment Decision enabling for Renewables (FIDeR) was allowed to award contracts for renewable projects away from the competitive tender process.
Confirming that CfDs were an otherwise “positive step towards ensuring an efficient allocation of support”, the CMA study found that the FIDeR scheme had resulted in consumers paying “substantially higher costs” of between £250 million and £310 million per year for 15 years, equivalent to a 1% increase in retail prices.
FIDeR was launched in March 2013 as an early form of CfDs to renewable generation projects, designed to avoid investment delays caused by the transition away from the RO process which was to be phased out.
However FIDeR was a non-competitive process and allowed some projects – particularly offshore wind – to strike deals that the CMA concluded to be between 30 to 60% higher than the support granted to similar offshore wind projects awarded through the competitive allocation which occurred several months later.
“This provides a stark illustration of the additional costs that can be expected if the competitive process is circumvented,” the study found.
Another area of the CfD process the CMA has criticised is the division of the budget into separate pots for specific technologies, a move which DECC has previously said would help ensure a range of renewable energy sources would receive the required support.
However the CMA is less convinced, stating that decisions made would “influence the intensity of competition” and that the authority had not received any analysis undertaken by DECC on its rationale on how to allocate the budget between the different pots fairly.
“Going forward, we believe it is important that DECC regularly monitors the division of technologies into pots and provide for each auction a clear justification for the allocation of budgets between pots to ensure that an appropriate amount of support is allocated to technologies at different stages of development,” the CMA said.
Energy and climate change secretary Amber Rudd has responded to the report’s findings, stating that it was the department’s “priority to keep bills down” and that it “won’t hesitate to take further action”, however the renewables industry has echoed criticism of the CfD process.
REA chief executive Nina Skorupska said: “The CMA interim report highlights concerns we have had for some time, that decisions made by DECC over early investment contracts and the allocations made for the different Contract for Difference pots were flawed in terms of value for money and lacked transparency.
“These decisions were clearly not made with cost effectiveness as a primary concern, with cheaper technologies such as solar, onshore wind, and in particular biomass, overlooked.
“It is essential in the coming year that DECC explain their decisions, and any moves against cost effective technologies are justified clearly. We have to hit our targets with consumers bills in mind, the industry is determined to drive down costs but we need clear, stable and common sense policy to get there.”
And Leonie Green, head of external affairs at the Solar Trade Association, highlighted how the eight FIDeR projects that received support under the LCF budget diminished support prospect for the more cost-effective solar projects. “We would of course support the CMA recommendation going forward for a better balance of funding between the CfD pots, with greater funding for the cost-effective Pot 1. CMA are right to stress value for money, and that is why well-sited and responsibly managed solar farms should continue to be supported,“ she added.
However Dale Vince, founder of renewable utility Ecotricity, said the report had missed certain factors of the industry that needed tighter regulation, particularly distribution companies that he argued had been allowed to form monopolies with profit margins of up to 30%, far higher than the 5% margin the CMA has argued should apply to utilities.
“Ofgem have allowed these monopolies to continue for years and as a result I would have expected the CMA to have analysed the role of the regulator itself in their report – we need proper regulation in the industry to stop these kind of abuses,” he said.