The expected future cost of subsidies for renewables has increased, previously unpublished government forecasts show.

The figures appear in a National Audit Office (NAO) report that finds household energy bills will be £268 lower than expected in 2020/21, as well as falling compared to current levels. The NAO says low-carbon subsidies in 2020/21 will amount to £8.7bn, down £411m against previous estimates.

Within that falling total, however, subsidies for renewables are expected to be higher than thought, despite a series of cuts designed to “control the costs of renewable energy”. Instead, the fall in subsidies is largely explained by the decision to end support for carbon capture and storage (CCS).

The NAO report calls for greater government transparency over its forecasts for low carbon support, in a report which echoes many of the issues raised by Carbon Brief earlier this year, following a long-running freedom of information request.

Framework forecasts

Since 2011, subsidies for low-carbon energy have been capped under the Levy Control Framework (LCF). The framework was designed to limit the impact of subsidies on consumer bills, while also providing confidence to industry on the amount of support that would be available.

The cap was set at £7.6bn in 2020/21, with 20% “headroom” for temporary breaches. If forecasts showed the cap might be breached, BEIS was expected to take action to reduce costs.

In early 2015, the department’s forecasts showed support would remain within the LCF cap. However, from April that year, revised forecasts showed a £1.5bn overspend in 2020/21.

The government has never clearly set out why there was such a large change in its forecasts, leaving a series of unanswered questions over the process. The NAO report goes a long way to answering those questions, as well as backing calls for greater transparency. It says:

For example, the department did not state publicly that it had changed the basis of its wholesale energy price forecasts, moving from using its “central” price projections to its “low” figures. BEIS makes changes to its projections several times each year, but only publishes them annually.

The NAO says changes in wholesale price projections made in the first half of 2015 added £320m to LCF forecasts, equivalent to 15% of a £2bn increase in expected costs. Earlier this year, Carbon Brief found wholesale changes over a longer period had added around £0.5bn to the LCF.

Other significant changes behind the dramatic increase in forecast costs included an increase in the expected output of offshore windfarms, adding £610m, the NAO says. Raised forecasts for deployment of wind added £570m and for solar £130m.

Government had previously pointed to these issues when explaining the LCF overspend. However, it had not put specific numbers against them, despite having figures available.

The NAO says BEIS was slow to react to foreseeable technological and cost changes, resulting in over-generous support and faster than expected deployment. The department failed to update its estimates for long periods and failed to use independent sources of market information.

These problems are now less likely, the NAO says, because BEIS has introduced tighter oversight and a reporting system under the Levy Control Board, which meets at least quarterly.

The NAO says:

Low-carbon cuts

In response to its forecasts of an LCF overspend, the government announced a series of changes to renewable energy support. This included the early closure of the Renewables Obligation (RO) and reduced subsidies under Feed-in Tariffs (FITs) for small-scale renewables.

Ministers have repeatedly said  that the cuts are protecting consumers from higher energy bills. A BEIS statement responding to the new NAO report reads: “Our actions have reduced projected costs on the Levy Control Framework”. It goes on to cite the changes to renewables support.

Yet the government’s own forecasts appear to show that these changes failed to reduce costs. In June 2015, prior to the changes, the RO and FITs were expected to cost £6.4bn in 2020/21.

The government’s latest outlook, from July 2016 and after the changes had been implemented, shows this figure increasing to £6.5bn, as the chart below shows. The expected cost of supporting renewables under the Contracts for Difference (CfD) schemes has also increased.

The decision to end support for CCS is, therefore, the only reason that expected costs under the LCF have decreased. The government had expected CCS projects to receive CfD payments worth £570m in 2020/21, though contracts had yet to be signed. Now, it expects them to receive nothing.

It isn’t only the expected costs of renewables that have increased. In July 2016, BEIS was forecasting that more windfarm capacity would be built by 2020/21 than it had expected in June 2015. Expected wind capacity is up by 356 megawatts (MW).

The forecasts show lower expected totals for solar, down 1,873MW in 2020/21 to 14,588MW. Within this total, large solar schemes under the renewables obligation are expected to be up by 2,178MW while small schemes under FITs are down 4,021MW. Small hydro is also down 347MW.

Annex Three of the NAO report (see below) sets out in detail when and why these government forecasts changed. It includes figures for expected spending per technology, support scheme and year.

Factors include expected surges in deployment in response to policy changes, the impact of the changes themselves and the cancellation of an offshore windfarm. Further changes in wholesale price projections also had an impact, the NAO says.

Wholesale change

The link to wholesale energy prices makes LCF spending unpredictable. The Committee on Climate Change has recommended linking the LCF to the price of new gas generation facing its full carbon costs, as this would better reflect the alternatives to supporting low-carbon energy.

The NAO report says:

This lack of predictability “could lead to a ‘stop start’ approach which undermines investor confidence” policy, the NAO warns, where support for low carbon is cut or boosted in response to wholesale price changes “regardless of whether that is the best decision in terms of longer term value for money”.

In the wake of cuts made during 2015, there were widespread fears that investor confidence would be damaged, potentially raising long term costs as investors demanded higher returns to compensate for the risk of further changes in policy.

The NAO says:

While it says it found little evidence of increases in borrowing costs resulting from reduced confidence, it says any impact could have been masked by other factors, such as the historically low interest rates that have persisted in the wake of the financial crisis.

It says the current visibility for investors is too short and that BEIS is failing to measure the impact of the LCF on investor confidence, despite that being one of its stated aims.

Uncertainties for investors include: the fact that the LCF extends only until 2020/21; that FITs may not continue beyond 2019; and that the government has yet to comment on whether it will continue to support biomass, solar or onshore wind in the 2020s. The NAO says:

“The positive effect the Framework could have on investor confidence has been limited by the decision not to extend it beyond 2020-21, and by a lack of transparency.”

Another problem with the LCF is that it excludes wholesale cost reductions induced by higher wind and solar generation, as well as costs imposed on the power system by the need to balance their intermittent output.

The NAO assumes wind and solar will create wholesale price reductions worth nearly £1bn in 2020. It notes other estimates, which say the effect was already worth more like £1.5bn in 2014. This higher figure depends on different assumptions about what would have happened if renewables had never been built, and has been replicated in unpublished BEIS analysis.

Overall, the NAO says energy bills will fall by 2020 to £991 per household, despite the expected overspend against the LCF. This total is £268 lower than expected in the most recent government estimate, which was published in November 2014.

The NAO says:

The government should publish annual estimates of the impact of its policies on bills, the NAO says.

Conclusion

The NAO report answers many of the questions set out by Carbon Brief earlier this year.  It shows how and why BEIS forecasts have changed rapidly, detailing 26 substantive changes to government assumptions made between June 2015 and July 2016.

It calls for greater transparency on forecasts and on plans for the future, noting that additional support will be necessary in the 2020s to reach government forecasts for low carbon generation.

Yet in its response to the report, BEIS fails to mention the most important reason for reductions in LCF spending, namely the scrapped CCS programme. It also repeats that future CfD auctions will be held this year, despite widely published reports that the auction has been delayed until 2017.

As the NAO notes, Cabinet Office guidance suggests there should be a “presumption in favour of disclosing information”.

Update 19/10/16 13:20 – An earlier version of this article stated that the published version of the report differed from that sent to journalists. This was incorrect.