A business model of competition to award licences for the transmission of electricity from offshore wind farms has been praised by a UK National Audit Office report.
But it also warns that consumers face being locked into 20-year deals where they will pay increasing prices whether the offshore assets are used or not.
The UK government wants 15 per cent of Britain’s energy to come from renewables by 2020.
The Department for Energy and Climate Change (DECC) estimates that offshore wind farms could contribute between 8-15 per cent of this target.
Based on government forecasts to 2020, investment of around à‚£8bn ($12.5bn) will be needed to connect the offshore sites to the national grid.
The NAO report examines a model ” which has involved four rounds of licences ” developed by DECC and the Gas and Electricity Markets Authority (GEMA) for using competition to license transmission from offshore wind farms to the grid.à‚
It concludes that it has already delivered benefits and has the potential to deliver more. There was strong interest in the first four licences, despite financial market volatility, with competition holding down prices in these deals which were for assets worth a total of à‚£254m.
In establishing this new market, however, the GEMA guaranteed the licensees a 20-year inflation-proof income. This may help to attract interest from long-term investors, such as pensions and infrastructure funds seeking protection from inflation risk. But it also guards licensees and generators of offshore electricity from reductions in usage of the transmission assets and leaves consumers with long-term inflation risk.
The NAO also found that transaction costs have been high and the extent of savings from the arrangements is not clear cut. It states that further work is also needed to establish robust benchmarks to ensure the amounts paid for transmission construction costs are not excessive.
Amyas Morse, head of the National Audit Office, said: “These new deals bring the benefit of competition but lock consumers into 20-year deals to pay prices increasing each year with inflation, whether the assets are used or not.
“Competition brings pressure to bear on the levels of those prices, but the terms of future deals will have to be refined to make sure consumers get best value in return for these long-term commitments.”à‚