Norfolk MP warns Treasury over windfarm contract errors
13:04 14 January 2013
A Norfolk MP has warned The Treasury not to “make the same mistakes all over again” after it emerged that families could be burdened with higher energy bills because of errors made with windfarm contracts.
Richard Bacon, MP for South Norfolk, said the taxpayer should benefit rather than be hit by new markets set up by the government – including deals for offshore windfarms.
It comes after the House of Commons Public Accounts Committee said that deals worth £17 billion agreed with firms for transmitting electricity to the mainland were too generous.
And it also said the government had failed to learn from poor PFI contracts and that the costs would eventually be passed on to consumers.
The criticism came in a report on the “elaborate” new system that licences companies to operate assets bringing power onshore.
Mr Bacon, commenting on the House of Commons public accounts committee into the licensing regime for offshore electricity transmission, said: “The Department for Energy & Climate Change and the Gas & Electricity Markets Authority offered licensees extremely generous terms which guarantee an index-linked income for 20 years, regardless of whether the investor’s assets are used.
“Licensees also face negligible penalties when their assets are unavailable and they don’t have to share any refinancing gains or excessive profits with taxpayers.
“If this all sounds very familiar, it should. It is very similar to how early PFI deals were done.
“Despite all the hard-won experience from the Private Finance Initiative, the Treasury now appears on the verge of making the same mistakes all over again. The licensing regime is little more than ‘Groundhog Day’ for PFI.
“The Treasury must make sure that, when new markets are set up by government, they are shaped by hard-won previous experience and that taxpayers get a far bigger slice of the profits”.
The Department for Energy and Climate Change (DECC) hopes that offshore windfarms can provide up to 15pc of electric needs by 2020.
But that will require around £8bn of investment in transmission infrastructure such as platforms, cables and substations.
The committee said the long-term licences awarded so far “appear heavily skewed towards attracting investors rather than securing a good deal for consumers”.
The companies are guaranteed an RPI inflation linked income for 20 years regardless of how much the infrastructure is used, and the estimated returns of 10-11pc on the initial licences “look extremely generous given the limited risks”.
Penalties for failing to provide the transmission facilities are limited to 10pc of expected annual income, and the firms do not have to share any windfalls from refinancing.
Committee chairman Margaret Hodge said: “Not only is it unlikely that this new licensing system for bringing electricity from offshore windfarms onto the national grid will deliver any savings for consumers, it could well lead to higher prices.
“Indeed the terms of the transmission licences appear to have been designed almost entirely to attract investors at the expense of securing a good deal for consumers.
“Licensees and their investors are provided with a guaranteed income, increasing annually in line with RPI, for 20 years regardless of the extent to which the assets are used.
“Future payments to licensees are estimated at around £17bn, and this will ultimately be funded by customers who could well end up paying higher electricity prices.”
The Labour MP said DECC and the Gas and Electricity Markets Authority had wanted to create a “competitive market” for offshore transmission, but the first six licences were awarded to just two firms - Transmission Capital Partners and Macquarie.
“In setting up this new market the Department and Authority ignored vital lessons from previous government experience of PFI, such as the need to share refinancing gains, and it is shocking that the Treasury allowed it to proceed,” Mrs Hodge went on.
“The Treasury’s defence, that it did not want to introduce any limitations on investors, does not cut it.
“It used a similar argument in relation to early PFI deals, only to reverse its position later. The Treasury must ensure that lessons from PFI are passed on and applied across government.”
A DECC spokesman said: “The offshore electricity transmission regime harnesses competitive forces to drive value for money for consumers. Potential licence holders bid against each other on price in the context of the licence terms.
“With six licences now granted, now is the right time to re-examine some of the terms. We therefore welcome Ofgem’s current consultation on them.
“In addition to savings through competition, last year’s offshore transmission co-ordination project identified a set of measures that could deliver up to £3.5bn in further savings.
“We will respond to the detailed points made by the Public Accounts Committee in full in due course.”