Why did the Levy Control Framework become ‘a missed opportunity’?

The Levy Control Framework was designed to set out the scale of investment required to meet the UK’s Fifth Carbon Budget, as well as reconciling the dual challenges of security of supply and affordability.

This week’s National Audit Office report, covered extensively by the media (here in the Daily Mail, AOL and Guardian), shows it has failed to meet all of these objectives.
In fact, the report said:

“The government has missed opportunities to exploit the full potential of the Levy Control Framework.”

The confidence provided by a robustly-managed LCF should have been central to securing the UK’s low-carbon electricity future.

Instead, the UK Government, in response to a projected overspend identified by the Office of Budget Responsibility in July 2015, has left the two cheapest forms of low-carbon generation (onshore wind and solar) with no route to market beyond 2021.

They have also significantly undermined investor confidence in the LCF mechanism.
Contrary to some of the media coverage on the NAO’s report, what happened to the LCF before the identification of the projected overspend in 2015 should not be ascribed to the actions of the renewables industry.

Instead, the NAO report says, Government had “failed to fully consider” issues with the LCF – not updating inputs regularly enough, or assessing the risk that input assumptions were wrong and that Officials failed to gather market intelligence frequently enough.

In July, Scottish Renewables provided evidence for the National Audit Office’s review of the LCF.

In it, Director of Policy Jenny Hogan argued:

“It is clear that the LCF has the potential to serve as a cornerstone of today’s electricity market by providing necessary, stable and long term signals to investors. However, in order to do this, it must be able to withstand changes to market forces that are outwith the control of Government.”

And that:

“Scottish Renewables supports the work of the National Audit Office to examine the reasons for the changes in forecast expenditure and assess how the governance, quality assurance and reporting arrangements of the then Department of Energy and Climate Change have changed in response to previous recommendations and internal reviews.

“Overall it is our view that further reform of the LCF is necessary to ensure that the framework is stable, transparent and robust.”

The fruits of the NAO’s review are now public knowledge: too much was spent too early, DECC didn't predict the overspend, then slammed on the brakes causing damage to the sector of which we are yet to see the full effects.

We would urge the UK Government to reflect on the NAO report and continue to reform the LCF system accordingly.

Doing so should realise the potential of the LCF as a tool for setting the scale of our low carbon ambitions, supporting policy and providing the market with necessary confidence.

Blog by Michael Rieley, Senior Policy Manager, Scottish Renewables.