The Policy Exchange report claims that the previous government’s “poor” handling of the levy control framework – which controls the financial support available from consumer bills – has “significantly underestimated” the cost of its existing policies, meaning it could wipe out the budget unless changes are made.
“The new Energy Secretary needs to take urgent steps to address this situation,” said the think tank’s head of energy Richard Howard.
“Decc must first recognize that the energy and climate budget has already been stretched to the limit – and factor this into its thinking, he added.
The levy control framework will be paid out to developers through the contracts for difference regime and was set at £4.3 billion in 2014/15, rising to £7.6 billion in 2020/21 which will be taken from energy consumer bills.
But Policy Exchange has identified three areas in which the government may have underestimated the amount that will need to be paid out from the fund:
Firstly, it argues that declining wholesale prices will increase the difference between the prevailing market rate and the set CfD strike prices, meaning the amount paid out to each low carbon project will swell too. In addition, the increased efficiency of onshore wind power technologies could mean that the projects will produce more power than expected, requiring higher payouts than the government bargained on.
Finally the amount needed to support small scale projects through feed-in tariffs has ballooned faster than predicted – it was expected to reach £60 million per annum to 2020, but the cost of the scheme has been growing at £160 million per annum to date, the report claims.
“The government then needs to shift rapidly to more cost effective ways of meeting energy and climate goals – for example focusing on mature low carbon technologies as well as energy efficiency – whilst halting the expansion of the most expensive policies and technologies,” Howard said.
Policy Exchange plans to publish a detailed report on its low cost recommendations in the near future.