Contracts for Difference (Allocation) (Excluded Sites) Amendment Regulations 2016

Tuesday 22nd November 2016 Lords Chamber

Motion to Approve

15:09

Moved by

[Baroness Neville-Rolfe]

That the draft Regulations laid before the House on 11 October be approved.

[The Minister of State, Department for Business, Energy and Industrial Strategy (Baroness Neville-Rolfe) (Con)]

My Lords, the regulations amend a statutory instrument made under the Energy Act 2013. The instrument makes some straightforward amendments to the current regulations to strengthen the non-delivery disincentive mechanism. This mechanism is an important part of the CfD scheme. It encourages developers to stick to the delivery milestones in their contracts and sets a penalty for developers who apply for, and win, a CfD but then either fail to sign the contract or terminate it early. In the first CfD round, two small solar projects failed to sign their contracts. Both had bid at a price that was considered by the industry as not economically viable at the time. It is right that we tighten up the regulations to ensure that such speculative projects are not able to enter future rounds. Two others did not meet their milestone requirements in the view of the LCCC—the Low Carbon Contracts Company, not, of course, Leicestershire County Cricket Club.

Before I go into more detail about how the mechanism currently works and how we propose to change it, I will touch briefly on the latest developments around the CfD scheme. On 9 November we published further details on the second contracts for difference allocation round. This has put an end to the uncertainty that the industry was facing and is a key plank in our commitment to move to a low-carbon energy mix, help tackle climate change and meet our carbon budget requirements. In the announcement, we gave investors, developers and the supporting supply chain the certainty necessary to drive forward investment. Some £290 million of the annual support for new renewables projects has been allocated to the upcoming round.

The noble Lord, Lord Grantchester, will be pleased, in view of what he said in our previous debate, that we have also reaffirmed that £730 million per year will be available to support renewables through the CfD during this Parliament. In our announcement we also set out key parts of the allocation process, including strike prices and supply chain guidance. The supply chain guidance is an important part of the package. It is a compulsory requirement for projects of 300 megawatts and over, and means that projects must provide the Secretary of State with a “good degree of confidence” that the project will make a material contribution to the development of the supply chain. That is all part of the Government’s commitment to growing and strengthening the industrial base.

We have already seen a number of positive developments, particularly in the offshore wind industry, where investment is supporting long-term supply chain development, which is also of lasting value to the UK economy and helps to build a competitive supply chain that is ready to export. This has included investment in the ports of Great Yarmouth and Lowestoft to support Greater Gabbard and East Anglia ONE, as well as the development of the Siemens blade factory in Hull.

This draft instrument will help to strengthen the next CfD allocation round by making sure that developers who win a contract face an appropriate penalty if they do not deliver it. The non-delivery disincentive sets out a penalty for developers who apply for and win a CfD but then either fail to sign the contract, or terminate it early. This may prevent other potentially viable projects receiving a CfD and tie up budget that could otherwise have been used to deliver our objectives. It is right and proper that this behaviour should be discouraged and developers should pay a price. The non-delivery disincentive exclusion already prevents developers from applying to any subsequent round in respect of the same site for 13 months after a CfD is awarded. The intention is to prevent companies who fail to deliver on contracts from entering a future round with essentially the same project. This amendment will extend this exclusion to include the first of any rounds occurring in the following 11 months, so up to a maximum of 24 months. It allows us the flexibility to run rounds less frequently but maintain the same protection against developers gaming the system.

15:15

We consulted on these changes earlier in the year and had 21 responses from a range of stakeholders. I am grateful for all the responses we received. A couple of respondents called for more stringent powers, notably performance bonds or similar financial penalties. We considered this approach but decided against it, as we are keen not to prevent smaller developers with less-deep pockets from being able to participate in auctions.

In addition to extending the exclusion period, we propose some further, minor changes. First, these changes will clarify the description of the site to which the exclusion will apply, to make it clear that the site which will be excluded is limited to that of the main generating structures of the CfD unit that failed to deliver its project. For example, if a developer won a CfD for an offshore wind farm extension and failed to deliver it, the exclusion would apply only to the extension, not to the entire offshore wind farm. Secondly, the changes will amend the non-delivery rules to bring the point at which a site becomes excluded by reason of non-delivery into line with the point at which it becomes excluded for failure to sign the CfD contract. Thirdly, following alterations to the termination events in the CfD terms and conditions, these amendments will extend exemption protection to projects terminated due to a sustainability change in law. This gives developers an important protection and was supported in the consultation. I commend these important draft regulations to the House.

[Lord Grantchester (Lab)]

My Lords, I thank the Minister for her introduction of these regulations, which are limited in scope and technical in nature. As she says, they will deter non-delivery of contract projects by excluding participants from taking part in future periodic allocation rounds should they not fulfil certain aspects of their projects. I am happy to agree to the regulations today as they would deter applicants to the CfD scheme from making speculative bids for projects that are unlikely to be delivered, thereby tying up parts of the budget for the scheme so that it cannot be delivered. As allocation rounds are being run less frequently than originally anticipated, this would ensure greater delivery of the wider objectives of investment in power-sector decarbonisation.

The Minister has already spoken of some of the effects in the first round but perhaps she could clarify a little further why these measures are being introduced. Can she explain the overall difficulties seen in the evidence from the non-delivery of projects in the first round of contracts for difference allocation? Has there been a certain amount of “hogging” or poor fulfilment of the projects by some participants in the first round? The Explanatory Memorandum was relatively quiet on the consultation outcome and reported generally supportive responses.

I am grateful to the Minister for confirmation that the sum coming forward to support renewable investments in the second round will be the one that has been widely reported. Is she satisfied that there is an adequate appeals process should the applicant consider that he or she has been unfairly treated? Are there adequate provisions for genuine non-compliance should circumstances out of the applicant’s control result in poor fulfilment? Is she satisfied from the experience of the first allocation round that interpretations of what it means not to have delivered are adequately defined?

I would like to follow up on one further aspect of these regulations. What happens to projects that make slow progress or are even abandoned? Can that part of the budget be reallocated to a later round, or are there some residual rights of the applicant to fulfil the project? It is not clear from the memorandum whether the CfD is terminated as a consequence such that it could not be recycled in an orderly manner. The impact assessment considers the overall CfD scheme, objectives and process without considering these regulations specifically. Is there a risk that exclusions to future bidding rounds could give rise to a series of legal actions that could undermine the allocation process more generally?

I would be grateful if the Minister could clarify those aspects of how the regulations might work in practice so that the operation of CfDs will continue to bring forward schemes at least cost to the electricity consumer over the longer term.

[Baroness Neville-Rolfe]

I thank the noble Lord for his helpful remarks and his welcome for these regulations. As I said earlier, the contracts for difference scheme is designed to incentivise the significant investment we require in our electricity infrastructure to keep our energy supply secure, to keep costs affordable for consumers and to help meet our climate change targets. The instrument being debated today enables us to maximise the effectiveness of future CfD allocation rounds by increasing disincentives for non-delivery and preventing those who have failed to deliver a project in the past from gaming the system.

In my opening remarks I ran through the reasons for the failure of the two small solar projects and the other two projects that failed to meet the milestone requirements of the LCCC. I am satisfied in general that the contractual details and exemptions before us are fit for purpose, especially as amended by these regulations.

The noble Lord asked about using up proceeds of frozen CfDs. We always keep under review the total budget allocated to CfD projects. If any projects that are successful in the next auction fail to sign their contracts or have their contracts terminated we will consider—I think this is probably what the noble Lord wants to hear—the possibility of recycling budget to future auctions. This decision will, however, depend on factors including the pipeline and what will ensure the best value for bill payers. We do not expect this to be significant. In the first auction, as I have said, there were the two small solar projects that failed to sign their contracts and the two projects that had their contracts terminated out of a total of 25. I think I explained last time that there was an overspend against the levy control framework for that period so there was no scope for recycling on that occasion.

On legal action—which is always something I am rather cautious about commenting on—complaints can be made to the LCCC. Ultimately, judicial review would be the legal remedy and there is normally an appropriate and narrow window for this.

As I think we are agreed, this is another step—a small but important technical milestone—towards getting the next CfD auction going. I look forward to the work on the supply chain in the new year and to the auction commencing in April. In the meantime, I commend these regulations to the House.

Motion agreed.