A competitions watchdog has warned that Contracts for Difference (CfD) may not lead to efficient energy projects.
The Competition Market Authority (CMA) said the mechanism, introduced last year as part of the government’s energy market reforms, could suffer from a lack of competition.
Its comments came in an update into its ongoing investigation into the energy markets in Great Britain.
Brought in to replace Renewable Obligation Certificates, CfD pay green energy generators the amount between a market price and an agreed ‘strike price’.
But the CMA said: “There may be a risk that a lack of competition in the CfD allocation mechanism may mean that CfDs are not allocated to the most efficient projects or at least cost to energy consumers.”
The National Audit Office last summer questioned the government decision to award CfD to an initial eight power schemes without any competition in a bid to speed up investment in renewables.
The CMA said these deals represented a lifetime cost of more than £16bn – half the available budget for CfD to 2020.
It added: “The secretary of state has the power to direct the CfD counterparty to award additional CfDs in a non-competitive manner in the future. By being awarded outside of a competitive process, there are risks that such contracts will unduly raise prices for consumers.”
The first competitive allocation round for CfDs is being held this month.
But the CMA warned: “We are concerned that some elements of the allocation process may restrict the use of competition in setting the strike price.
“First, dividing the CfD budget into three separate pots runs the risk that projects from one pot may be displaced by more expensive projects from another.
“Further, the fact that potential bidders for CfD contracts still have the option of seeking support for their projects under ROCs until March 2017 risks placing an effective floor on bids for CfD contracts, reducing the effectiveness of the competitive process.”
Energy secretary Ed Davey said: “The CMA is looking at whether consumers get a fair deal from energy companies - and that’s exactly why we’re backing their investigation. We’ll be looking at their initial report in detail.
“The thrust of the report seems in tune with the action we are already taking to drive competition in the energy sector. Our reforms to the market have all been about greater choice, backing new firms challenging the Big Six and putting pressure on energy companies to put their customers first.”