PAC: Government must show energy schemes are good value for customers

Government must do more to demonstrate the value for money of consumer-funded energy schemes, the Committee of Public Accounts says today.

The recommendation comes in a Report examining the Levy Control Framework, which is intended to help control the costs of three government schemes to support low-carbon generation.

The Framework sets yearly caps on the forecast costs of the Renewables Obligation, Feed in Tariffs, and Contracts for Difference – schemes funded through levies on energy companies and ultimately paid for by consumers via energy bills.

The Committee concludes the Framework has “suffered from a lack of transparency, rigour and accountability” and forecasting of its costs has been poor.

The government department responsible (formerly the Department of Energy & Climate Change, now the Department for Business, Energy & Industrial Strategy) continues to expect to overspend the Framework budget.

The Report states that as a result, these costs are likely to add around £110 to the typical household’s yearly energy bill in 2020, £17 more than budgeted for.

The Committee is concerned there is a “culture of optimism bias” in the Department, having also highlighted “wildly optimistic” forecasts of demand for Green Deal loans in its Report from July last year, Household energy efficiency measures. 

It urges the Department to “foster a culture of openness and transparency” around its consumer-funded energy  policies and work with HM Treasury to demonstrate the schemes provide value-for-money.

The Report states: “In July 2014 Government agreed to provide Parliament with an annual report on the impact of policies on energy bills, but has not done so since 2014.

“The consumer-funded policies report which the Department published a few days before our evidence session on the Framework is not an adequate substitute for a full report on consumer bills: for example, it does not show the net impact of policies once cost-saving effects are included.”

The Committee’s conclusions and recommendations, together with background on energy policies and the Levy Control Framework, are set out in detail below.

Meg Hillier MP, Chair of the PAC, said today: “Bill-payers deserve to know whether or not the energy schemes they fund represent good value.

“The Government has failed to meet its commitment to report annually on the impact these policies are having on bills. Current arrangements just aren’t good enough.

“At the same time, the Government expects the cost of levies to continue to bust the budget – meaning customers will pay more than expected.

“This is a result of poor forecasting and further evidence of excessive optimism in the implementation of energy policy.

“Government must take action to address this and also ensure customers can see clearly what they are paying towards existing and future schemes through their bills.”

BACKGROUND

Our electricity system is undergoing a radical transformation in response to two challenges: the need to maintain a secure energy supply and the need to reduce carbon emissions.

These challenges arise because demand for electricity is expected to increase over the next two decades while many of the UK’s existing coal and nuclear power stations will shut.

At the same time, government wants a growing proportion of electricity to come from low-carbon sources like wind, solar energy and nuclear power to meet its climate change targets.

Most government policies to promote and manage this transition involve placing obligations on energy suppliers with the resultant costs being funded by consumers through their energy bills.

To help control these costs, in 2011 HM Treasury and the Department (formerly the Department of Energy & Climate Change, now the Department for Business, Energy & Industrial Strategy) created the Levy Control Framework.

The Framework sets yearly caps on the forecast costs of three government schemes to support low-carbon generation that are funded by consumers: the Renewables Obligation, Feed in Tariffs, and Contracts for Difference.

The Framework requires the Department to take early action to reduce costs if forecasts exceed the cap. The cap is £4.9 billion for 2016-17 rising to £7.6 billion for 2020-21. In 2016 Framework costs constituted £64 of the typical household’s yearly energy bill.

PAC REPORT SUMMARY

Government’s management of the Levy Control Framework (the Framework) has suffered from a lack of transparency, rigour and accountability.

Forecasting of Framework costs has been poor, and the Department (formerly the Department of Energy & Climate Change, now the Department for Business, Energy & Industrial Strategy) continues to expect to overspend the Framework budget. 

As a result these costs are likely to add around £110 to the typical household’s yearly energy bill in 2020, £17 more than budgeted for.¹

We are concerned that the problems with forecasting reflect a culture of optimism bias in the Department.

We reported earlier this year that the Department’s forecast of demand for Green Deal loans had been “so wildly optimistic it gave a completely misleading picture of the scheme’s prospects to Parliament and other stakeholders”.²

The Department must now foster a culture of openness and transparency around its consumer funded energy policies and together with HM Treasury, it must do more to demonstrate that these schemes are providing value-for-money for consumers.

¹All figures in this report are in 2011-12 prices as that is the basis on which the Framework budget is set.

² Committee of Public Accounts, Household energy efficiency measures, Eleventh Report of Session 2016-17, HC 125, 20 July 2016, Conclusions and recommendations, para 2.

CONCLUSIONS AND RECOMMENDATIONS

The Department significantly underestimated the costs of the three Framework schemes, adding an estimated £17 to the typical household’s yearly energy bill in 2020. The Department did not do enough to ensure its forecasts were based on the best available evidence. During 2015, in the space of just four months, the forecast costs of the schemes in 2020-21 increased by £2 billion, as the Department came to realise many of the assumptions underpinning its forecasts were likely to be inaccurate. These included its assumptions on the performance of offshore wind load turbines which, when updated after a gap of 18 months, led to a £600 million increase in forecast costs. This forecasting failure was similar to a previous failure of the Department to accurately forecast uptake of solar panels in 2010 and 2011. While the Department did take corrective action to reduce costs when the forecast overspend came to light, this was not sufficient to bring costs back beneath the budgetary cap. As a result, households will have to pay extra on their energy bills every year, with the amount reaching £17 per household in 2020.

Recommendation: The Department must ensure it has access to the right expertise and intelligence to ensure its forecasts are based on the best available evidence. It should review its market intelligence capability regularly to ensure it is doing enough to mitigate the risk of further forecasting failures.

The Department had not prepared properly for the possibility that its forecasts were wrong,  and as a result, had to take quick corrective action that may have undermined investor confidence unnecessarily. Prior to the forecast overspend emerging, decision-makers focussed too heavily on the central forecast. If the Department had considered the possible implications of its forecasts being wrong, and put in place a contingency plan for controlling the schemes at the outset, it might have avoided the need for the abrupt scheme changes that it made in 2015 to cut costs. The changes included closing the Renewables Obligation to wind and solar projects a year earlier than previously expected, and imposing new limits on the amount of renewable electricity Feed-in Tariffs would support. These risked harming the confidence of businesses looking to invest in this sector in the UK. The UK’s position on the EY renewable energy country attractiveness index fell from eighth in 2015 to 13th in May 2016. 

Recommendation: The Department and HM Treasury should assess the uncertainty surrounding forecasts of energy schemes, and put in place proportionate back-up plans for controlling scheme costs and outcomes in the event that central forecasts prove incorrect.

Governance responsibilities for the Framework were badly defined, and HM Treasury failed to provide sufficient oversight. Poor communication between senior officials and those responsible for carrying out analysis contributed to the forecasting problems in 2015.  The Levy Control Board, which was set up to provide HM Treasury oversight of the Framework, stopped meeting after 2013 and did not reconvene until July 2015, after the overspend emerged. It is vital that HM Treasury challenges departments’ consumer-funded spending to the same extent as exchequer-funded spending. 

Recommendation: The Department and HM Treasury should review the governance arrangements for all consumer-funded energy schemes, and write to us with the outcome of the review. Governance arrangements should ensure boards responsible for the schemes meet regularly and include sufficiently senior officials from both departments. 

The Department does not publish enough information on the Framework and it has not produced, as promised,  annual reports on consumer-funded energy schemes. Businesses in the renewables sector consider that greater transparency of the forecasting assumptions used would help the Framework achieve its objective of supporting investor confidence. The Department commissioned an internal review into the forecasting problems identified in 2015, which provided a clear account of how and why the forecasts shifted, yet it failed to publish the review for 18 months. In July 2014 Government agreed to provide Parliament with an annual report on the impact of policies on energy bills, but has not done so since 2014. The consumer-funded policies report which the Department published a few days before our evidence session on the Framework is not an adequate substitute for a full report on consumer bills: for example, it does not show the net impact of policies once cost-saving effects are included. 

Recommendation: The Department should report much more openly and regularly on the Framework and also publish a consumer prices and bills report annually in an easily understandable format so that consumers can see clearly what they are paying. The next edition should be published before April 2017. It should also publish a clear account of the assumptions underpinning Framework forecasts each time those forecasts are published.

The review of the Framework needs to address drawbacks in the current design to avoid it becoming increasingly ineffective at controlling costs to consumers and supporting investor confidence. The Department and HM Treasury are reviewing the future of the Framework, but have not set out the scope of the review in detail. The Treasury will not be consulting formally on the future of the Framework relying instead on engaging stakeholders including through roundtable discussions. Renewable energy associations have called for the timeframe of the Framework to be extended and have highlighted several drawbacks to the current design in need of review. These include the way the Framework measures the costs of public support for renewable energy. The current approach means that Framework costs go up when wholesale prices of energy go down, which could incentivise decision makers to cut support for renewables at the point when energy is most affordable.

Recommendation:  In reporting the results of the review the Treasury should set out in detail how the future Levy Control Framework or its successor will operate. It should also demonstrate how stakeholders’ concerns were identified and addressed in the new arrangements, including regarding the way costs are measured.

Other schemes that impact on energy bills are not included in the Framework. The Framework places a cap on energy schemes that support low-carbon generation, but these are not the only policies that affect energy bills.  It does not cap the costs of the Capacity Market, for example, which is likely to cost consumers around £1 to £3 billion a year from 2017-18 and it does not reflect the potential for energy efficiency standards for new homes to cut energy bills by reducing the need for heating.  There is therefore a risk that decision makers could lose sight of the significant impacts of these other schemes on the affordability of energy bills. 

Recommendation: As part of reviewing the future of the Framework the Department should ensure it has appropriate arrangements to monitor and control the costs of all consumer-funded energy schemes.