Contracts for Difference (Miscellaneous Amendments) (No. 3) Regulations 2025
(1 day, 19 hours ago)
Grand CommitteeRead Hansard Text Read Debate Ministerial Extracts
Lord Wilson of Sedgefield
That the Grand Committee do consider the Contracts for Difference (Miscellaneous Amendments) (No. 3) Regulations 2025.
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, the Government have committed to achieving clean power by 2030 and the contracts for difference—CfD—scheme will play a key role in achieving that ambition. The clean power action plan, published in December last year, outlined several key reforms to the CfD scheme ahead of allocation round 7 opening this August. Following a robust public consultation process, we published our consultation response, which set out that legislative changes are needed to enable the Government to reach clean power 2030 and enable a fair price for consumers.
The draft SI will enable changes to the allocation process to ensure that our clean power 2030 ambitions are met and that consumers pay a fair price. It amends the Contracts for Difference (Allocation) Regulations 2014 budget publication process and the information that the Secretary of State will have access to during the allocation round. With access to anonymised bids and by changing the budget publication process, the Secretary of State will be able to set budgets for CfDs that maximise good value capacity deployment for clean power 2030 and avoid the outcome seen in allocation round 6, where an unspent budget for fixed-bottom offshore wind meant that a potential opportunity to secure additional projects at a good price was lost.
These amendments mean that the Government can bring forward renewable capacity that represents value for money, which will benefit consumers by moving the country away from volatile fossil fuel prices. The instrument also amends regulations to enable the costs of the clean industry bonus to be included in the Ofgem price cap. There needs to be a specific provision in the relevant regulations that allows the CIB to be counted as a specific bill cost as part of wider CfD costs. This is a technical change; the rest of the CIB regulations are already in place. It will ensure that the price cap captures all the relevant factors that might impact on it.
These draft regulations represent an important step in ensuring that we achieve clean power 2030 and protect bill payers now and into the future. They make the necessary amendments to enable the CfDs to adapt as we head towards clean power 2030. This will enable us to maximise renewables deployment at a fair cost to consumers. I beg to move.
Lord Frost (Con)
My Lords, I declare an interest as an unpaid director of the campaign group Net Zero Watch. I think the Secretary of State for Energy is at the moment giving a Statement in the Commons on the state of the climate and energy in which he promised—or, at least, briefed—that there would be some radical truth telling. It may be useful to do a bit of that ourselves in this discussion. In particular, there are two areas of concern before I come on to the detail of this instrument.
First, the Government’s policy is based on the incorrect belief that renewables are cheaper than gas. There are different figures out there, of course, but independent commentators show that if you include all the subsidy costs, grid balancing costs and capacity market costs, onshore wind is about twice as expensive per megawatt hour as gas, offshore wind is two and a half times as expensive, and floating offshore is three times as expensive. Even solar, which is perhaps the most of viable of any of these renewables, is 50% more expensive. That is the first incorrect belief.
The second incorrect belief is that prices will go down rather than up, which has been very well debated recently. According to data from the International Energy Agency, Britain had, as is well known, the most expensive industrial and domestic energy prices in 2023. The data for 2024, in so far as we have it, shows that we have the most expensive industrial energy prices in Europe, and now only the fourth most expensive domestic energy prices. However, gas prices are about average for Europe, which strongly suggests that, contrary to everything that is said, gas prices are not driving the high costs. In fact, it is the subsidy, the balancing costs, the capacity market and the inflated capital costs—all of which, by the way, the OBR predicts will increase rather than decrease over the next few years. All those are driving higher prices.
The Government have to pretend to believe the things that I just outlined; I do not know whether they really believe them, but they certainly have to pretend to. The problem is that doing so makes it difficult to run a proper renewables policy, and that is why AR6—allocation round 6—was such a fiasco. As the Explanatory Memorandum says, AR6 constituted a
“budget underspend for offshore wind”.
Alternatively put, renewables producers would not supply at the prices that were offered, so there was an underspend. If renewables are as cheap as the Government say they are, why should that be the case?
Therefore, the Government badly need AR7 to be a success. They need this vast expansion of renewables, whatever the cost, if they are to decarbonise by 2030. But developers are getting cold feet; we saw it in AR6, and we have seen the cancellation of projects since then. Hence this statutory instrument is a different approach. It is very complex and obfuscatory, in the way we have come to expect, and there are many technicalities, but the core of it, as various commentators have set out, is that instead of setting a budget and seeing what capacity the Government can get for the money, they are setting a capacity ambition, seeing what bids come in and then seeing what they have to pay to get that capacity. That is why the Secretary of State needs this anonymised data early and why they need to delay publishing the budget until all this has been assessed. The Government hope that no one will notice what is going on if it is done in this technical way in the statutory instrument, but I am afraid it is a scandal, because we will see prices and budgets go up, and we will not get a proper explanation for it.
I have two other points to make on the instrument. The consultation on it, which the Minister referred to and described as “robust”, involved developers, electricity traders—I quote the Explanatory Memorandum—
“businesses operating in the offshore wind sector”
and “environmental groups”. Those, of course, are all producers. What about actual businesses that have to use energy or electricity and have to deal with the increased energy costs and complexity that come as a result? We know what the consequence is and we know why they did not consult them. It is because they know that prices will go up. We know that because, in the industrial strategy announced a couple of weeks ago, the Government have had to pick sectors and subsidise their energy costs to make their operations viable.
My second point is about the security risk of all this. We all saw what happened in Iberia a couple of months ago as a result of excessive reliance on renewables. The Government say that they are investing in nuclear, gas and, to the extent they can, storage, but, of course, none of this will be ready by 2030.
I shall finish with three questions. First, can the Minister tell us how much the Government expect to spend on the AR7 budget? If prices are falling, why will it not be less than AR6? Can he tell us how much consumer prices are expected to fall as a result of the constant fall, as we are supposed to believe, in the cost of renewables? Secondly, if they did not consult consumers of electricity on this SI and the new methodology, can they commit to doing so in future on similar instruments? Thirdly, can the Government tell us how they expect to fill the gap in production that renewables create before the new gas, nuclear and storage come online well after 2030?
Earl Russell (LD)
My Lords, before I turn to the SI, I will respond to a couple of the points the noble Lord, Lord Frost, has made. We shared a Select Committee, so I absolutely respect the noble Lord’s right to say what he wants to say. The noble Lord argued for the need to include all costs, but part of the calculations of using or continuing to use fossil fuels is that we do not continue to account for all the consequences of burning fossil fuels. The OBR has just this week said that that far outweighs any cost that we might spend on renewable energy. Prices are going down: solar and wind are the cheapest forms of energy, and they provide constant energy security. The noble Lord knows that gas sets the market price 96% of the time.
On the regulations, we broadly welcome this plan to bolster our nation’s energy security and accelerate the transition to clean power. We commend the Government on their intention further to update and reinforce the contracts for difference process that has been the backbone of our nation’s renewable energy transition. These draft Contracts for Difference (Miscellaneous Amendments) (No. 3) Regulations 2025 represent an important update intend to fine-tune the CfD process to bring about a more efficient use of budgets, improve the bid management process and consider extra support for the UK industry.
We particularly welcome the continued focus on boosting our domestic industry through the clean industry bonus, CIB, referred to in these regulations as the “sustainable industry reward”. The first round of the CIB was a success, more than doubling its budget from £200 million to £544 million and leveraging up to £9 billion of investment in UK supply chains.
I agree with the Government: this is an unprecedented amount earmarked for UK factories and ports, particularly in our country’s poorest areas, fostering jobs and growth through the supply chains. We also support the intention for these costs to be accurately included in the Ofgem price cap, as these regulations ensure, which aids future transparency and fair accounting.
The regulations make three main changes. First, they amend the contract budget notice publication process for price and pot notices and the final contract budget notice signing within the allocation framework. Secondly, they amend the information that the Secretary of State has access to. The Secretary of State now gains access to anonymised strike price bids at any time, supported by an estimated budget to improve budget management and help prevent underspend. Finally, they include clean industry bonus payments in the Low Carbon Contracts Company’s calculations.
We generally welcome the spirit behind these notifications. I have some questions for the Minister. The first seeks to ensure that we get value for money and consumer costs. The changes will allow the budgets to be set at a price that balances value for the consumer with the development ambitions. However, given the significant investment involved—allocation round six was a record-breaking £1.5 billion for 127 projects generating 7.2 gigawatts, and AR7 is due to be even larger—how will Ministers ensure that the new-found flexibility generally translates into lower strike prices for offshore wind and ultimately lower costs for consumers? How can we be certain that value for money is not sacrificed in the rush to pursue record capacity?
Turning to competitive tensions and the risk of bid inflation, while the Government intend to review anonymised bid information and maintain anonymity, there is a risk that bidders might aim to obscure true costs and competitive tensions could be perceived as lacking, potentially leading to higher clearing prices, especially if there is a perception of an unlimited budget for AR7. Will the Government clarify what controls there are on the powers to mitigate any possible negative impacts from these changes?
Finally, turning to monitoring, evaluation and swift course correction, the Explanatory Memorandum details plans and processes for evaluations, robust monitoring and a post-implementation review five years after these changes take place. Five years is a long time in a rapidly evolving marketplace. I ask the Minister for reassurance about the specifics on the key performance indicators that will be rigorously tracked to assess the effectiveness of these legislative changes after each allocation round. How will any insights from each round and their implications lead to changes in processes before the next round?
We need to be careful that we do not get any market distortions from these regulations. I do not think that will be the case, but there is a need within the evaluation process to check that that is not happening.
We support the ambition to make Britain a clean energy superpower. This will help bring down bills, provide energy security, green jobs and growth and help get us off the rollercoaster of dependence on international gas markets. The Government need to bring forward proposals to lower energy bills, although that sits outside this SI. I simply seek reassurance on the points I have raised with the Minister.
The Earl of Effingham (Con)
My Lords, I thank the Minister for setting out the purpose of this instrument. These regulations make what may be described as technical adjustments to the CfD regime. However, in practice, they signal significant changes to the principles that underpin the scheme’s operation: transparency, predictability and fairness. The CfD mechanism has been a cornerstone of our low-carbon transition, driving record levels of renewable deployment, while securing value for consumers. That credibility depends on its rules being clear, impartial and competitively neutral.
This instrument makes three changes that in His Majesty’s loyal Opposition’s view merit particular scrutiny. First, as highlighted by my noble friend Lord Frost, it allows the Secretary of State to view anonymised bid data before finalising the budget for an allocation round. This breaks the long-standing principle that all participants bid on a level playing field based on pre-published terms. Ministerial discretion inserted into the process after seeing how the market has responded risks undermining confidence in the integrity of the auction.
Secondly, as also flagged by my noble friend Lord Frost, by delaying the publication of the final budget until after that review, the Government will have the ability to shape outcomes post hoc. However well-intentioned, that is potentially a slippery slope. It introduces uncertainty, opens the doors to perceived political interference and may ultimately deter long-term investors who value predictable rules-based frameworks.
Thirdly, the decision to reclassify the costs of the sustainable industry reward so that they are now recovered through Ofgem’s price cap means that these costs will be passed directly on to consumers. At a time when the cost of living is rising and households are under pressure, the perception is that a stealth measure introduced without full parliamentary scrutiny or a fully transparent impact assessment should not be made. What safeguards will be put in place to ensure that this new discretion over budgets does not distort the process or erode trust among participants? Has the department undertaken any modelling of how these changes might affect bidding behaviour, strike prices or project delivery timelines? What assurances can be given to consumers that the inclusion of new costs in the price cap calculation will not place additional upward pressure on their energy bills?
In conclusion, although these changes may be framed as flexible and technical, they represent a shift in the balance of power from an impartial auction model to one in which Ministers can influence the outcome after bids have been seen. That raises fundamental questions about fairness, efficiency and consumer protection. We urge the Minister to explain why such discretion is necessary and how its use will be accountable to Parliament.
Lord Wilson of Sedgefield (Lab)
My Lords, I thank noble Lords again for a good debate, with some incisive observations made by noble Lords opposite. This Government are steadfastly committed to deploying renewables in order to achieve our ambition for clean power by 2030 and to protect bill payers both now and in future. The instrument under discussion today will enable us to adapt CfDs so that they can support the delivery of our ambition for clean power by 2030 at the lowest cost to consumers.
Having said that, let me respond to the questions posed by the noble Lord, Lord Frost. In an unstable world, the only ways both to guarantee our energy security and to protect bill payers permanently are to keep energy bills down for good and to speed up the transition away from fossil fuels towards home-grown, clean energy. During periods when wholesale electricity prices are higher than the fixed CfD strike price awarded, generators pay the difference back into the scheme, which can help reduce energy bills. This happened when wholesale electricity prices spiked during the energy bill crisis of 2022-23; over that winter, CfD payments reduced the amount needed to fund government energy support schemes by around £18 for a typical household. The budget underspend that has been referred to is a result of the allocation—
Lord Wilson of Sedgefield (Lab)
To continue with my response to the noble Lord, Lord Frost, on the budget underspend referred to as a result of the allocation round process, budgets had previously been set without knowing how much capacity can be procured, creating uncertainty around the renewables capacity and the price at which it can be secured. These reforms respond to that challenge. The parameters for allocation round 7 will be published in the coming weeks. As part of our consultation process, we engaged with consumer groups to ensure we obtained a wide range of views on the impact of these changes.
The noble Lord mentioned that the Secretary of State is giving a Statement today. I also draw the noble Lord’s attention to a speech the Secretary of State gave at the recent Global Offshore Wind conference, where he noted the importance of securing fair prices for consumers through AR7 and beyond.
To answer the points from the noble Earl, Lord Russell, to ensure value for money, we have consulted on several reforms for AR7 so that competitive tension is maintained. The response to this consultation will be published soon. We will also publish our auction parameters in the coming weeks, which will aim to ensure consumers get the most value from this round. We will review the specific policy after the conclusion of AR7 and inform stakeholders of our use of these powers for future allocation rounds.
In answer to the noble Earl, Lord Effingham, key parameters such delivery years and strike prices will be published before the opening of the allocation round. Developers will still have the key information they need to submit their minimum viable bid. We will be publishing how we intend to use these powers for AR7 in the forthcoming government response, alongside other measures to drive value for money.
The playing field remains level. The auction will remain entirely impartial, and bids seen will be entirely anonymous. This allows current powers to revise the budget to be used in a targeted and careful manner, with specific consideration given to the cost to consumers.
On the noble Earl’s point about transparency, this proposal has been subject to a full consultation in which the Government engaged with consumer groups, developers and other key stakeholders. We also published our impact assessment for these regulations in May alongside our response. The key considerations for the CfD are set out in the Energy Act. They will still be to ensure that costs to consumers are minimised, that we have security of supply and that we decarbonise the electricity system.
The draft regulations before the Committee today will enable the Government to achieve clean power by 2030 at a fair cost to consumers.