Will offshore wind cost consumers £17 billion?
Government “blunders” over contracts for offshore wind farms will drive up energy bills, ultimately costing consumers £17 billion, according to the front page of both the Daily Telegraph and Metro yesterday. The Daily Telegraph says this will cost households £35 a year over the next twenty years – a figure that it repeats today in two comment pieces. So does this mean new and expanded costs for wind power?
What’s the criticism?
The stories source the £17bn figure to a report published yesterday by the House of Commons’s Public Accounts Committee, which criticises the government for being “too generous” to companies contracted to build and maintain power cables for offshore wind turbines. In the Telegraph, committee chair Margaret Hodge describes the contracts as a “licence for the private sector to print money at the expense of hard-pressed consumers”.
The contracts come from the Offshore Transmission Owner (OFTO) framework. The OFTO is a regulatory framework created by energy market regulator Ofgem and the Department of Energy and Climate Change (DECC), which guarantees an income over the next 20 years to companies delivering electricity infrastructure for offshore wind farms. Companies compete for contracts based on the price they can offer for the service – which Ofgem says will make the market more competitive and drive down how much consumers pay.
But the committee says the contracts are too complicated, and focus on benefiting investors rather than getting the best price for consumers. Ultimately, the report says,
“future payments to licensees â?¦ will amount to around £17 billion”.
It argues this cost will be passed through the National Grid onto energy companies, who will raise consumer energy bills to cover the extra expense.
Where does the £17 billion figure come from?
The committee’s report doesn’t cite the source of the £17 billion figure, which appears only in the summary. But a spokesperson told us it originated in a report the public finance scrutiny body the National Audit Office (NAO) published last June.
The NAO report was an ” early examination” of the new competitive contracts, after four licences had been awarded under the new system. It criticises how the contracts work and how much the system is likely to cost consumers, particularly the fact that the companies’ income is linked to inflation.
The NAO estimates that future payments to the companies “could be in the order” of £17 billion if the government delivers on its plans for future expansion of offshore wind. It reaches this conclusion by extrapolating from the cost of the four licences awarded so far.
£17 billion cost – the context
The NAO report recognises that the high cost of the original contracts was in part due to a series of teething problems, which might suggest an element of caution in referencing it. Some of the early issues are likely to be ironed out as the market develops and investors become more certain of the risks, the body suggests. It also points out that the contracts attracted investment during a period of financial uncertainty which will not necessarily continue in the long term. It says:
“As with any new market there are lessons from early transactions….If the lessons are absorbed, then, as the market matures, the continued competition from new entrants and increased confidence in the regime should drive down prices to the benefit of consumers.”
Ofgem makes a similar point in its response to the committee’s report – even down to using some of the same wording. It says:
“As with any new market, there are lessons from early transactions. The initial tenders were conducted under interim arrangements. It has always been Ofgem’s intention to refine the tender process to deliver greater efficiencies and further benefits to consumers.”
Last November, Ofgem released a consultation intended to investigate the different ways it could respond to the NAO’s criticisms and bring down costs for consumers, including addressing the question of whether the income should be linked to inflation.
The system also has its defenders: Ofgem argues that the competition system has saved “at least” £290 million for consumers, and trade body Renewable-UK has also responded, saying:
“[The Public Accounts Committee] did not consult the industry fully when it compiled its short report. Unfortunately the PAC did not allow itself sufficient time to hear the most up-to-date evidence.”
£35 a year?
But what could this mean for households? In its front-page article yesterday, the Telegraph say”if the cost of the latest energy deals is passed on in full to all households equally”it would add £35 a year to household energy bills for the next two decades.
A comment piece in the Telegraph today states – more definitively – that the deal will “add around £35 a year to bills”.
It appears to have arrived at the figure by dividing £17 billion by 25 million households in the UK, with the cost spread over 20 years. But as Greenpeace’s EnergyDesk pointed out yesterday, households account for only 30 per cent of electricity consumption, so it would be surprising if they bore all the cost directly. Greenpeace suggests that the figure is closer to £9.80.
It’s probably more complicated than that – there are arguments, for example, about how much businesses pass on the costs of electricity subsidies to consumers. But energy expert Dr Rob Gross described the Telegraph’s approach to us as “simplistic and potentially misleading”.
Who says what
What appears to be a fairly dry report is, of course, also the latest move in the ongoing political wrangle over wind power. The PAC’s 14 members include prominent anti-wind MP Chris Heaton-Harris as well as six other Conservative MPs who signed a letter opposing onshore wind power last year, and Heaton-Harris was briefing the Telegraph on the report yesterday.
Despite that, the £17 billion figure which became the report’s top-line is sourced to a reputable report by a government body and it’s been reported accurately. Dividing it up between households might be a bit more difficult to do. And as ever, predictions like this are based on a certain set of assumptions about the future, so beware – in the future, the value of your offshore valuation may go down, as well as up.