Levy Control Framework (LCF)

15/12/16
Recently the Government published two reports on the LCF (the mechanism through which Government sets a cap on the forecast cost of certain policies funded through levies on energy bills). These reports covered:

  • Consumer-Funded Policies Report setting out the Government’s latest spend projections for the LCF. It forecasts that the annual budget will be overspent for each year to 2020/21 by between 5% and 15%, with the overall costs of the LCF to be £8.7 billion in 2020/21. However notably these assumptions do not take into account a number of recent policy changes, including the early closure of the Renewables Obligation scheme to onshore wind and solar PV.
  • Management of the Levy Control Framework: Lessons Learned Report and Government Response. Given the projected overspend, BEIS commissioned a lessons learned exercise to understand what caused the budget misalignment and how this could be better avoided in future. Government has published a response to the lessons learned report, accepting the recommendations made. Further details on the reports are available here.

Consumer-Funded Policies Report

  • The Report sets out the actual spend under each consumer funded policy as well as the Government’s latest spend projections.
  • Since November 2012, the LCF Framework has covered three schemes to support investment in low-carbon energy generation: the Renewables Obligation, Feed-in Tariffs and Contracts for Difference.
  • It sets annual caps on costs for each year to 2020-21, with a cap of £7.6 billion in 2020-21 (in 2011-12 prices).
  • Based on current assumptions, the total cost for the LCF is forecasted to exceed the annual budget for each year by between 5% and 15% and overall is expected to exceed the total cap and cost £8.7 billion in 2020/21
  • Significantly however the assumptions do not include savings to be made from the subsequent early closure for onshore wind (expected to save £20m per year) and closure of the RO to small scale solar PV (expected to save £60-100m per year) as these policies were introduced after the forecast assumptions were made.

Management of the Levy Control Framework: Lessons Learned Report and Government Response

  • A lessons learned review was commissioned by DECC (now BEIS) to understand the cause of the LCF forecast overspend and consider how it could be avoided in the future. The overall conclusion is that there was an underlying failure to match the inevitable and complex uncertainties involved in making policy with an adequate process of continuous assessment of the original assumptions made to form policy. In particular the following factors contributed to this:
    1. A fundamental fall in the price of wholesale electricity following the drop in the global price of fossil fuels which began in summer 2015
    2. A surge in demand for both the RO and FIT.
    3. Technological advances leading to a step change in the load factors for both existing and new offshore wind turbines
    4. The outcome of the above meant that while the drop in the wholesale price resulted in a reduction of £147 in consumers bills, by 2020/21, there will also be a requirement to pay £12 extra towards the cost of supporting renewables. Against that, the amount of energy sourced from renewables will be 35%, three percent more than the original forecast.

Government Response

As a consequence of the review the Government has accepted the recommendations made in the report. This includes:

  • Putting in place strengthened governance for the LCF to ensure there are LCF projections and reporting on projections and risks through to BEIS’ Executive Boards;
  • Further improving the internal reporting and the quality of data these reports contain;
  • Developing the Department’s LCF models to allow more detailed scenario planning, a wider range of sensitivity analysis and a better understanding of uncertainty across the schemes;
  • Ensuring transparency by publishing LCF projections routinely every six months.
  • Continuing to monitor the out-turn of actual deployment and generation.
  • Improving methodology on load factors).

BEIS may also consider, in the longer term, whether generation caps or a gain share mechanism should be introduced to mitigate the LCF impact of higher load factors.

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