Solar subsidies could fall foul of LCF overspend, report says

Subsidies earmarked for solar could be cut as the Department of Energy and Climate Change (DECC) battles to keep Levy Control Framework (LCF) spending under control, a new report issued by market intelligence firm Cornwall Energy has claimed.

The ‘Counting the cost’ report, issued today, estimates that DECC could have spent the entire LCF budget and actually record an overspend of £1 billion by 2020, a figure which would require urgent action.

“Based on our projections of continuing spend under the RO and small-scale FiT we have come to the conclusion that there might not be any money left to spend in any of the future CfD delivery years as a result of overspend against DECC’s original forecasts,” the report states.

And in order to secure funding for future CfD allocation rounds, other subsidies such as the small-scale feed-in tariff could find themselves on the cutting board.

Cornwall Energy suggests that not only has solar’s meteoric rise in Q1 2015 – Solar Intelligence has calculated that 2.5GW was installed in this period alone – caught DECC by surprise, but that the department has made several underestimations in calculating factors that contribute towards LCF spending.

The report argues that DECC has underestimated the cost of subsidy schemes under the LCF umbrella, future load factors and wholesale power prices, all of which contribute to greater costs under the fixed cap.

Cornwall Energy also states that this could be exacerbated by the closure of the RO to onshore wind, announced to much criticism last week. While DECC has estimated that 2.9GW of capacity will be completed during the year-long grace period, Cornwall Energy suggests this figure could be as high as 3.7GW.

Offshore wind capacity is also likely to continue to increase with a number of developers intending to complete sizeable installations prior to the end of the RO in 2017, and the new Conservative government is a huge proponent of offshore wind.

“Based on our assumptions of wholesale prices and load factors, the committed CfD spend is £200 million higher than the latest DECC assumptions released to the market,” the report states, adding that DECC would have to explain to the Treasury how the department intends to reduce spending.

The department would seemingly have to remove budgetary support from other technologies - particularly if the Swansea Bay tidal lagoon comes onstream in 2018 as has been suggested – in order to secure future CfD rounds.

“It is a matter of time before DECC argues that, with falling costs, solar should stand on its own. We estimate that if the small-scale FiT budget were to stop growing in 2016-17, there could be an extra £650 million to spend on CfDs in 2020-21.

“It is clear, no matter what the actual numbers, that the subsidy buffet is oversubscribed and action will have to be taken by DECC to limit some technologies in order to ensure that we can continue to invest in others over the rest of the decade,” the report added.

That the LCF budget could be much tighter than expected has been rumoured for some time and think-tank Policy Exchange is due to publish a report on the matter imminently.