PAC: UK Govt’s Poor LCF Forecasting Burdens Consumer Bills

The UK Public Accounts Committee (PAC) has released a report examining the Levy Control Framework (LCF), saying that the government must do more to demonstrate the value for money of consumer-funded energy schemes.

The LCF sets yearly caps on the forecast costs of the Renewables Obligation, Feed in Tariffs, and Contracts for Difference—schemes funded through levies on energy companies and ultimately paid for by consumers via energy bills. The PAC concluded the LCF has “suffered from a lack of transparency, rigour and accountability” and that forecasting of its costs has been poor.

The government department responsible – the Department for Business, Energy & Industrial Strategy (BEIS), formerly the Department of Energy & Climate Change (DECC) – significantly underestimated the costs of the three LCF schemes, adding an estimated GBP 17 to the typical household’s yearly energy bill in 2020, the report said, adding that the department did not do enough to ensure its forecasts were based on the best available evidence.

During 2015, in the space of just four months, the forecast costs of the schemes in 2020–21 increased by £2 billion, as the Department came to realise many of the assumptions underpinning its forecasts were likely to be inaccurate.

These included its assumptions on the performance of offshore wind load turbines which, when updated after a gap of 18 months, led to a GBP 600 million increase in forecast costs.While the department did take corrective action to reduce costs when the forecast overspend came to light, this was not sufficient to bring costs back beneath the budgetary cap. As a result, households will have to pay extra on their energy bills every year, with the amount reaching GBP 17 per household in 2020, according to the report.

“We are concerned that the problems with forecasting reflect a culture of optimism bias in the Department,” the committee said.

The PAC recommended the BEIS to ensure it has access to the right expertise and intelligence to ensure its forecasts are based on the best available evidence. It should review its market intelligence capability regularly to ensure it is doing enough to mitigate the risk of further forecasting failures.

The committee has also urged the BEIS to “foster a culture of openness and transparency” around its consumer-funded energy policies and work with HM Treasury to demonstrate the schemes provide value-for-money.