Draft Contracts for Difference (Sustainable Industry Rewards) Regulations 2024
(Limited Text - Ministerial Extracts only)
Read Full debateThe 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.
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.