In a report released on 8 February, the House of Commons Public Accounts Committee (PAC) said the LCF, which sets annual spending caps on renewables obligation (RO), feed-in tariffs (FITs) and contracts for difference (CfDs) costs, "has suffered from a lack of transparency, rigour and accountability".
It said costs forecasting had been poor and the Department for Business, Energy & Industrial Strategy (BEIS), which incorporates the former Department of Energy and Climate Change (Decc), expects to continue the overspend on its budget.
This is likely to add around £110 (€129) to a typical household’s yearly energy bill in 2020, putting it £17 a year beyond the original estimate.
Poor forecasting
A key conclusion is that Decc and BEIS failed to ensure forecasts were based on the best available evidence and beliefs.
In particular, its assumptions on the performance of offshore wind turbines were only updated after 18 months, causing cost forecasts to jump by £600 million in 2015.
As a result, in just four months, the total forecast costs of the three renewable energy schemes in 2020-21 increased by £2 billion.
The committee accepted that the department took corrective action to cut costs when the overspend came to light, but said this was "not sufficient to bring costs back beneath the budgetary cap".
BEIS must ensure it has access to adequate expertise and intelligence to inform its forecasting, it added.
The department should "review its market intelligence capability regularly to ensure it is doing enough to mitigate the risk of further forecasting failures", the report stated.
Oversight and communication
More broadly, the PAC report said governance responsibilities for the LCF were "badly defined" and "failed to provide sufficient oversight".
And the levy control board, which was set up to provide the treasury with oversight of the LCF, failed to meet from 2014 until July 2015; this was after the overspend was noticed, contributing to the crisis in that year.
PAC recommends the treasury and BEIS should review the governance arrangements for all consumer-funded energy schemes. These should ensure boards meet regularly and that sufficiently senior officials from both departments attend, it said.
Another criticism, particularly from investors, has been the lack of transparency on the LCF process. PAC noted that promised annual reports on the impacts of consumer-funded energy policies have not been published since 2014, and that it took 18 months for an internal review of the LCF failures to come to light.
PAC called for an annual report on the impact on bills to begin before April, together with clear information on assumptions behind forecasts.
The committee noted BEIS and the treasury are reviewing the future of the LCF. It said a weakness of the current LCF design is that it leads to high renewable costs when wholesale energy prices fall, and the review’s scope should therefore be set out and stakeholder concerns clearly addressed.
A BEIS spokesperson said: "The strong, decisive action we took reduced projected costs by over half a billion pounds to protect people’s household budgets and ensure value for money while delivering more environmentally friendly energy."
It stressed that the LCF overspend was highlighted by constant review, and that a projected overspend, within "headroom" agreed, had already been acted on swiftly.
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