Draft Contracts for Difference (Sustainable Industry Rewards) Regulations 2024
(7 months, 2 weeks ago)
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The Committee divided: - Ayes: 13 / Noes: 1 - Question accordingly agreed to.
The Parliamentary Under-Secretary of State for Energy Security and Net Zero (Amanda Solloway)
I beg to move,
That the Committee has considered the draft Contracts for Difference (Sustainable Industry Rewards) Regulations 2024.
I apologise in advance for my loss of voice, which is a result of being rather enthusiastic at a Derby County football match on Saturday. The draft instrument was laid on 21 March 2024, and I acknowledge the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee, which have provided a helpful review of the regulations and have not drawn them to the special attention of this House or the other place.
The instrument amends regulations underpinning the contracts for difference scheme, which is the Government’s main mechanism for supporting new low-carbon electricity generation projects in Great Britain, and which has been hugely successful in driving down deployment costs. The amendments are about providing extra funding support through the CfD scheme so that we can better support offshore and floating offshore wind supply chains. This critical industrial sector has been hit hard by inflationary pressures and supply chain disruption resulting from the Russian invasion of Ukraine. Consequently, necessary investments in manufacturing and infrastructure have been delayed or abandoned altogether.
The CfD scheme currently focuses on only the price of deployment and no other factors, so offshore wind developers are incentivised to use the cheapest supply chain options available, regardless of where in the world they are or how dirty their means of production. We are therefore introducing sustainable industry rewards, or SIRs, to rebalance the CfD scheme so that it may help to address some of the supply chain challenges already causing bottlenecks in the supply chain, further increasing costs and slowing down deployment.
This policy intervention has been welcomed by supply chain companies and is intended to take effect for the seventh CfD allocation round, which should take place in 2025. So how does it work? The regulations require all offshore wind and floating offshore wind CfD applicants, as a condition of entry to the CfD, to obtain an SIR statement from the Secretary of State. Applicants who obtain an SIR statement will obtain additional revenue support through the CfD—a top-up, as it were—for investing in the economic, social and environmental sustainability of their supply chains.
SIR statements are obtained if the applicants make successful SIR proposals that fulfil one of two sustainability criteria:
“Investment in shorter supply chains in UK deprived areas”,
which means investing in manufacturing in the most disadvantaged places in the United Kingdom, or
“Investment in more sustainable means of production”,
which means investment in manufacturers that have signed up to the science-based targets initiative for the reduction of carbon emissions. The mechanism to allocate SIR funding will be a competitive auction just before the main CfD auction. An applicant who obtains SIR funding will then be contractually obliged to deliver their commitments. Undelivered commitments will be subject to a system of performance adjustments.
The Government are conscious that the extra support for offshore wind will have an impact on consumers’ electricity bills as SIRs—like the rest of the CfD scheme —will be funded through the existing electricity supplier obligation levy, which electricity suppliers pay. The actual budget for SIRs is still being discussed with the Treasury, but we estimate that it will be in the region of £150 million to £300 million a year for no more than three years, subject to the number of applicants. The impact on the consumer will be small, in the region of about £2 a year per consumer. Hopefully, hon. Members will agree that that is a small price to pay for the benefit that sustainable industry rewards could bring to UK communities by creating new and cleaner manufacturing facilities and highly skilled jobs in deprived areas and carving out opportunities for businesses to become part of the offshore wind supply chain.
To further ensure that the policy does not become a permanent burden on consumer bills, the intervention is time-limited for three years—it is there to address a specific market failure. CfD SIRs also complement other Government support for renewable supply chains, such as the £1 billion green industries growth accelerator, which runs to a similar timeframe. The explicit, detailed rules of the allocation are set out in the draft SIR allocation framework released in parallel with the regulations, which replace the current supply chain plan process for offshore wind and floating offshore wind. I commend the regulations to the Committee.
Dr Alan Whitehead (Southampton, Test) (Lab)
It is a pleasure to serve under your chairmanship, Ms Rees. The Opposition very much support the changes, which we hope will come in for allocation rounds 7, 8 and 9—it would be nice if they came in for AR6, but that is not in anyone’s gift to sort out right now. First, we think they will make a material change to the quality of the schemes supported by Government funding. Secondly, we think they will uprate the whole industry so that it is clear about what it is doing about UK-sourced materials for the schemes, arrangements for UK jobs and the sustainability of the whole supply chain and of the products themselves. So far, so good; we are fully behind the proposal to introduce SIRs as a replacement for the present arrangement, which is the sustainable supply chain declarations.
I ought to say before we proceed that my voice is not that great. I was also enthusiastically supporting my football team on Saturday, but unfortunately the result was not as positive as that for the Minister’s team, which I understand has now been promoted to the championship. If my team fails to get promoted through the play-offs this season, our two teams will play each other, so we will both have lost our voices if we meet again under those circumstances.
The problem with the regulations is one of potentially considerable detail. If I am wrong in my concerns, I would appreciate an explanation from the Minister of why I am wrong. Alternatively, if I am not wrong in my concerns, will she tell me what the Government are thinking of doing in the future to put right what I think is a potential problem for the process?
The problem is that both the allocation round and the new process that is to be introduced are competitive and have a budget, but one precedes the other, providing for the possession of a sustainable industry reward, or SIR, which essentially allows the company to go on to the full allocation round. If a company does not have an SIR, it cannot go into the main allocation bidding.
Once the SIR process is in place, companies bidding to go into the main allocation round have three possible outcomes. The first is that they have bid for an SIR and their bid has been ticked off—the Government have said, “Yes, your bid qualifies for SIR status, so you can through to the allocation round.” However, that company may not necessarily want to bid in that first round, prior to the allocation round, to get a funded SIR, because they may have ways of reaching what is in the SIR other than by going for a funded SIR. For example, a Danish offshore wind operator may be able to reach those arrangements through its own existing internal facilities. It may say, “Well, we are going to bid in without a funded SIR, but we have an SIR, so we can qualify for the eventual allocation round.” That is outcome No. 1. No. 2 is a straightforward process where a company bids for and gets a funded SIR, and then goes through to the allocation round with that funded SIR in its pocket.
The third possibility depends to some considerable extent on how the budgets are set, both for the SIR and the eventual allocation round. A company could have qualified for an SIR, with the Government having ticked off its proposals as SIR-qualifiable, but when it gets into the pre-allocation round competitive bidding, it may fail to get an SIR because of the budget constrictions in the SIR process—logically, because it is a competitive round, it is possible that some people will fail to get a competitively bid SIR to go into the allocation round. At that point, it is a company that had a bid process in at pre-qualifying, which allows it to be competitive against all those other bidders that have funded SIRs going into the actual allocation round. If a company has bid on the basis that it is likely to win some funding in the SIR allocation round, but it fails to win it, logically it has to readjust its bid, as if there was no SIR in place, in order to remain competitive in the actual allocation round.
As far as I can see, companies would not be denied access to the allocation round, because they did have a certified SIR in the first place. If they have bid and lost, as opposed to having decided not to bid, their bid will have to look different in the allocation round itself. Is it the case that the most advantaged people in the allocation round may well be those who have bid for an SIR and lost, and who have then readjusted their bid accordingly? Could it be that the smartest strategy for companies is to try to lose an SIR, while having indicated that they can, in principle, meet its terms? They can then bid more competitively than if they had had an SIR in the first place.
That is not to undermine the scheme as a whole, which is potentially very good, but there is a potential problem with the process of going between two separate competitive allocations to get to the eventual position of companies being in possession of a CfD, which is what we want to happen. That could distort the bidding process and could certainly lead to some lack of clarity about the principle of placing these additional requirements on bidders to secure the sustainability and so on of supply chains, which could potentially undermine the process.
Does the Minister therefore have any guidance she can give me to show that this is not really a problem, because of various issues that she can conjure up this afternoon, either on receiving inspiration or otherwise? Alternatively, if she cannot fully satisfy me that I need have no worries about this issue, which I quite understand, we could perhaps engage in correspondence subsequently.
Dave Doogan (Angus) (SNP)
I will speak with some reasonable volume; there is nothing wrong with my voice—I had quite a quiet weekend.
In the interests of collegiate working across the Floor of the Committee, let me say that contracts for difference are a useful mechanism and have demonstrated themselves to be so. They have delivered a systemic and substantial shift in the way that electricity is generated across the market in Great Britain.
What is proposed today is contingent on the CfD regime; it is an improvement to the regime—or rather an attempt to improve it. Criterion A is welcome, and in that respect the UK Government are nodding to what the Scottish Government have known for some time: that we should give priority to applying multiplier effects from substantial multibillion-pound investments in electricity generation from renewables to the supply chain at base in GB.
However, that is where CfD has largely fallen over—there have been a few notable exceptions, but systemic investment in the supply chain rooted in GB has not happened as a consequence of CfD. That is not to take anything away from the generation capacity that has been created from CfD and or even the funding mechanisms, which, like most funding mechanisms, are imperfect to a certain extent. However, it does signal that there is a substantial problem that Governments—both Scottish and UK—are trying to address.
I am pleased and proud that the Scottish Government have sought to address the issue in a substantially different way in terms of ScotWind’s focus on the strike price in the auction round, whereby it has prioritised a commitment from manufacturers to invest in the supply chain, rather than seeking the lowest possible price in the auction. CfD, however, continues relentlessly to pursue the lowest possible price, and we saw the Government come unstuck in auction round 5 with that approach. The way the Government have recalibrated that approach for auction round 6 is welcome, and I very much hope that it generates as much new capacity as possible in that auction round.
However, let me move on to the bit that the SNP fundamentally disagrees with. Criterion B for the sustainable industry rewards scheme is:
“Investment in more sustainable means of production, anywhere in the world.”
The Minister literally used the terms “means of production” in her speech, and I am glad she did, because it removes any doubt that she knows exactly what she is talking about. I would respectfully suggest that investing in another jurisdiction’s means of production is not the best use of bill payers money in the GB energy market. I do not think that the Government would find a great deal of support from ordinary bill payers in GB for using their standing charges to fund investments in the means of production in a foreign jurisdiction.
I am also concerned that the quantum that the Minister has set out, which I think is in the region of £1 billion over three years, will have an extremely marginal effect on GB’s manufacturing base by the time that it has been shared—potentially; we do not know in what proportion —with manufacturers in foreign jurisdictions. I am sure that Siemens Gamesa, Vestas and Hitachi are delighted with the UK Government’s largesse and ambitions to invest in other jurisdictions, despite that being the responsibility of Governments in those jurisdictions. Manufacturers and potential manufacturers here will take a much more jaundiced view, as the SNP does, of such a misplaced ambition to invest in potentially any market across the world.
With that, I decline to support the measure. I emphasise to the Minister that if the basis of what we are discussing today was simply criterion A, I would be happy to nod the regulations through, because that is a cogent and reasonable ambition for manufacturing in GB and, in particular, Scotland. However, that is not the case, and the regulations are somewhat—fatally, actually—undone by the provisions in criterion B.
Amanda Solloway
I thank the hon. Members for Southampton, Test and for Angus for their contributions. I will endeavour to answer the questions as fully as possible, but if I fail to answer them all, I am incredibly happy to have further meetings on the subject, as suggested, although this issue is not in my portfolio.
All companies need to meet a minimum standard of investment before they bid into the CfD, so there is a level playing field for everybody. Companies will know if they have been allocated an SIR before they bid in. If they fail to get a CfD, their budget will be reallocated to those who were successful. As I have indicated, however, if I have not fully understood the question, I am happy to clarify further.
On the point raised by the hon. Member for Angus, the UK does not manufacture all the components required to build a wind farm. We do not expect to make everything, and it would not be legal to mandate UK content. Where investment goes beyond the UK, we want that to go to cleaner, net zero-consistent firms that support our net zero commitments.
The contracts for difference are a key pillar for our energy security, but they need to adapt to changing market conditions. We are determined to make offshore wind deployment a success story and we are willing to take innovative steps to make that happen. Sustainable industry rewards have been deployed with industry input. They will provide much-needed support to an industry that has faced a tough economic environment and supply chain disruptions.
That support should trigger significant investment in expanding the supply chain’s capacity and capability in many deprived coastal areas around the UK and in new, cleaner manufacturing processes. The investment will help to deliver our levelling-up agenda and will positively impact communities that host large infrastructure projects by providing new, well-paid, high-tech manufacturing jobs, as well as by maintaining existing jobs. New offshore wind manufacturers from Britain and overseas are already looking at the UK, thanks to our package of supportive measures. It is true that the measures will have an impact on consumer bills, and we are talking to the Treasury to get the balance right between what realistic sustainable industry rewards can achieve, through targeted revenue support to get investment in the supply chain back on track, and the cost to the consumers.
These measures will also put us on an equal footing with our direct competitors in the EU and the US, who are investing heavily in their offshore wind supply chains. Considering how much deployment and potential we have, it is only right to try to attract and support as much of the supply chain as possible. It is key, though, that we provide the support in a targeted, proportionate way.
As many hon. Members will know, allocation round 6 of the CfDs is now live. The budget for allocation round 6 was announced as part of the Chancellor’s spring Budget. At over £1 billion, it is four times larger than for the previous round.
Dr Whitehead
The Minister is giving a good response to this afternoon’s debate, but I do not think that she addressed the detail of the particular point that I raised. It is not a question of reallocating CfDs but of how we go about a competitive allocation round if we have people in different circumstances, albeit with an SIR, leading up to that allocation round. I would appreciate an opportunity—outside this Committee, if possible— to get to the bottom of that particular problem.
Amanda Solloway
I would, of course, be delighted to facilitate that, either with me or the relevant Minister.
Although that budget does not include the SIRs, it is none the less a crucial step in our renewable energy deployment plans and demonstrates the Government’s commitment to ensuring that the UK remains one of the world’s leaders in renewables. The Secretary of State will decide in due course whether to increase the budget later this year. I commend the regulations to the House.