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Mr Ben Wallace (Wyre and Preston North) (Con)
Mr Gray, I wish you and all other Members a happy new year. It is a pleasure to serve under your chairmanship. I congratulate the hon. Member for Angus (Mr Weir) on securing this debate through the Backbench Business Committee. I used to represent a similar part of Scotland in the Scottish Parliament, so I am well aware of the pressures and the demand for offshore wind in his part of the world. The north-east coast of Scotland is a beautiful part of the country.
What I am hearing in this debate is similar to what I heard in my previous work in aerospace. That industry had long lead times and required certainty, and that is also true of the renewable energy industry. There is a constant play-off between new investment in new technologies and mature and maturing technology elsewhere. The hon. Member for Edinburgh North and Leith (Mark Lazarowicz) made the point clearly that often there is a tension between maturer technologies and those seeking a fair audience, such as wave, solar or tidal energy. In my previous life before entering the House, in early 2003, I was part of a process of trying to get funding for tidal energy off Britain’s shores, and I remember being crowded out of the debate.
Decisions between investment in technologies and certainty are always subjective and never satisfy all, but we should not forget that more immature technologies are also helped elsewhere in Government through research and development tax credits, the patent box for matured technologies and other incentives in other parts of this Government’s business policy.
I hear loud and clear the point about having certainty when it comes to strategy, including certainty about what the British Government and Britain want for our energy mix and renewables obligations. Such certainty, and indeed a timetable, are important to investors. I point out to the hon. Member for Angus, however, that the Scottish National party does not add to that certainty by creating a debate about breaking up the United Kingdom.
Mr James Gray (in the Chair)
Order. Clearly that is slightly wide of the mark.
Mr Wallace
Well, Mr Gray, certainty is important to the issue of contracts for difference, and to whether investors are willing to invest in the British energy generation market. That certainty is obviously undermined by the potential to break the market in two and deny Scots access to some of the contracts for difference funding based on the fact that the subsidisers—the bill payers of the United Kingdom—are spread throughout the whole population. It is important to make the point that we are all looking for certainty, and I venture to say that separation is not the way to encourage that.
Mr James Gray (in the Chair)
Order. I would very much rather the Minister did not. I think he should focus his remarks on the effect of the CfD allocation process on offshore wind developments.
Mr Wallace
As hon. Members will know, the Government will support low-carbon technologies in future through new contracts for difference, which we have debated today. The total amount of support that will be paid for by consumers is capped by the levy control framework. Support for projects, whether onshore or offshore, biomass or solar, will have to fit within the overall cap. We cannot worry about the standard of living of our constituents and the pressure on their bills on the one hand, and give a blank cheque to renewable projects, through their bills, on the other. We have to make sure that we balance that, which is why the cap for the current funding round is at £235 million for offshore wind generation. We need to ensure that we balance the need to get the investment in and the need to protect the people who are paying the subsidy—the bill payer.
Low-carbon electricity projects will compete at auction for the contracts, which will deliver new capacity much more cheaply than the previous arrangements. Recent studies have shown that compared with the renewables obligation scheme, the current scheme produced a difference of £19 per MW when it came to the pricing of this energy. That is important to recognise. It is estimated that the reforms to the electricity markets will mean that average annual household electricity bill will be around £41 lower over the period from 2014 to 2030 than if we decarbonised without making these changes.
As the CfD allocation round is ongoing, I cannot comment directly on what projects might have applied or who might be awarded a contract at the conclusion of the process. It is important that the Government are not directly involved in making those decisions. However, it might be useful to explain to Members the process of awarding these contracts.
Projects submitted applications to the National Grid, which is the electricity market reform delivery body, in October. National Grid assessed each application against the eligibility criteria. Any applicants judged as not meeting the criteria and therefore not qualified to participate were given the opportunity to appeal. Following the first appeal, National Grid has determined that at least one applicant has not qualified to participate in the auction. Those applicants have the opportunity to appeal to Ofgem, which they have done.
Ofgem is currently considering any appeals received and will take as much time as necessary to assess the appeal. However, the Secretary of State reserves the right to step in 30 days after Ofgem begins assessing the appeal and to direct National Grid to move to the auction process if the appeal has not been resolved. Once all appeals have been considered, National Grid will assess the value of all applications against the available applicable budget, taking into account technology pots, minima and maxima. If all the applicants can be satisfied within the budget, under the constraints of any minima and maxima, all the applicants will be allocated a CfD. If there is insufficient budget to satisfy all bids, or maximum constraints are exceeded, an auction will apply to the relevant bids and National Grid will invite those eligible applicants to submit sealed bids.
The timing of further stages in the allocation round depends on how long it takes Ofgem to process any appeals. If Ofgem takes 30 days, the auction notice is likely to be issued on 17 February and the sealed bid submission window will run between 18 and 24 February. National Grid would then notify the Low Carbon Contracts Company and applicants of the outcome of the allocation process on 18 March. The Low Carbon Contracts Company would then have 10 working days to prepare contracts and send them out for signature. Applicants would have a further 10 days to sign contracts, with the window for contract signature closing on 17 April for this round. If Ofgem processes the appeals sooner, all that will, of course, be brought forward. National Grid will continue to provide updates on timings as key milestones are met.
My right hon. Friends the Secretary of State for Energy and Climate Change and the Minister of State and I are aware that some offshore wind projects may end up disappointed at the end of the CfD allocation process and may need to wait for future rounds. It is not possible yet to say for certain which technologies will bid lowest and therefore win the auctions. However, if for example, offshore wind won the whole of the £235 million in the less established pot, that could lead to around 700 MW to 800 MW, depending on the clearing price, which answers the question from the hon. Member for Sunderland Central (Julie Elliott) about the assessment of how much it could do. I should point out that we are making a substantial amount of budget available in this autumn’s allocation of contracts, and we increased the budget for both pots over the summer.
The offshore wind pipeline is currently strong, and the Government have taken the decision to hold budget back for future CfD allocation rounds. A number of offshore wind projects are not eligible to bid in this round but could be eligible to bid in future rounds. We do not want to allocate the whole budget in one allocation round; we need funding available for projects that cannot participate this autumn, to avoid a boom-and-bust investment cycle.
It is important to recognise that we need to ensure that the industry is taking the subsidy and then continually trying to drive down the cost of its technologies and the overall cost of the projects. If it were just to take the subsidies and carry on at the same level, we would not be getting the bill payer good value for money. Whether the window is five years, as it is currently, or whether there is, as hon. Members wish, a longer time scale, I hear loud and clear the valid point that we should at least see how it progresses.
I also note that the Government have taken decisions to support much more offshore wind than any other country in the world. The UK has around 5 GW installed or under construction and another 3 GW of projects have early CfDs. We are well on the way to 10 GW by 2020. The challenge is now for the developers to demonstrate that they can bring the cost of offshore wind down and build a UK-based supply chain.
In answer to hon. Members’ points about the supply chain, I refer to my experience of aerospace. It is simply not good enough for a generator to bring over a turbine, stick a few things on it and say that it is made in the UK. When we talk about a desire for a proper supply chain, we are talking about a desire for a proper development of technologies, a skill base and the actual manufacturing. It is important that we do not all fall into the trap of claiming, if someone opens a park and assembles the final pieces, that that is some great final achievement. The challenge is to make sure that in 2020, the industry is in a good place to take advantage of opportunities.
I take on board, from all Members here—there are too many to list in a short time—that the loud and clear message is about certainty, time frame, technologies and strategy. I will make sure that my right hon. Friend the Secretary of State and the Treasury hear that loud and clear in the long term. However, we have a considerable amount of money still to allocate under the framework—up to £1 billion—and as soon as we can, we hope to inform the industry and the public.
In conclusion, I thank colleagues for bringing this issue to the House’s attention, and for the desire to recognise that offshore wind plays a real role in meeting our obligations on renewables. We are on track to meet those targets in 2020.
Mr James Gray (in the Chair)
Although it would be in order to continue with the next debate, the Minister is not yet here, so I suggest that we suspend the sitting until 11 o’clock, when we will commence, whether or not she is present.