The competition watchdog is calling on the UK Government to change the process for awarding clean energy contracts.
In its provisional findings following a long-standing investigation into the energy market, the Competition and Markets Authority (CMA) has highlighted a number of failings within the Contracts for Difference (CfD) scheme.
Under the CfDs, renewable developers are subsidised for low carbon energy generation.
The CMA believes the current allocation process potentially restricts competition in setting the level of support, which could result in higher bills for customers.
It comes as DECC awarded eight contracts outside of the competitive auction.
The inquiry found five of the offshore wind projects cost up to £310 million more per year than they would have under the auction, equivalent to 1% of customers’ electricity bill.
The CMA said there should be a “clear rationale” for the allocation of funding of different technologies and for the exceptional circumstances when competitive auctions are not used.
The report states: “This evidence illustrates the significant impacts that DECC’s decisions in this area can have on the costs faced by energy customers. It is essential, therefore, when DECC makes such decisions in the future, that they are based on rigorous analysis and that the impacts are communicated in a clear and transparent manner.”
However it adds there could be circumstances where it is justified to allocate contracts outside a competitive auction process: “For example, there may be cheap projects with a lifespan and other operating characteristics that are so different to the characteristics of potentially competing projects that it is difficult to compare them within an auction framework.”
It went on: “Since an element of judgement will be required in making these assessments we have not considered it appropriate to recommend imposing absolute rules determining the situations in which non-competitive allocation would be allowed.”
The competition watchdog recommends DECC to clearly set out an impact assessment on why it considers it is not feasible for the project to compete in the auction process.
It also suggests consulting prior to allocating CfD budgets to different pots and technologies and finalising proposals to future CfD rounds at least one year ahead of the auction to enable potential bidders to make informed decisions about how or whether to progress a project.
The CMA proposes costs for power transmission losses, which are currently allocated to generators and customers, should be priced on the basis of location.
It states 100% should be assigned to generators rather than the current 45% charging arrangement.
The Renewable Energy Association (REA) welcomes the recommendations to reform the CfD process, stating it has been “frustrated the government has created barriers to deployment” for some cost-competitive green technologies like wind and solar.
CEO Dr. Nina Skorupska said: “Compared to nuclear power from Hinkley C, renewables such as solar and wind represent a significantly lower cost alternative with shorter subsidy contracts. They can be deployed in a matter of months and the REA is concerned about numerous recent barriers that have been imposed that are unnecessarily limiting their deployment.”
However the trade body sees potential issues in the suggestion to have 100% of transmission losses charged to generators.
It states: “This could negatively affect the deployment of renewables, adding yet further costs to projects and could benefit fossil fuel generators over renewables.”
ELN has contacted DECC for a comment.
The CMA also found consumers are paying too much for their gas and electricity, with SMEs charged £280 million more per year from 2007 to 2014 and householders paying £1.7 billion more annually.