Contracts for Difference (Allocation) (Amendment) Regulations 2026

Wednesday 10th June 2026 Grand Committee

Considered in Grand Committee

18:40

Moved by

[Lord Whitehead]

That the Grand Committee do consider the Contracts for Difference (Allocation) (Amendment) Regulations 2026.

[The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)]

It is unfortunate that your Lordships have me again for this SI, but I hope I can be brief and to the point on this one. I believe that this particular SI produces a number of fairly technical but pretty minor changes to the way contracts for difference are bid for and allocated, and I hope we will gain the approval of noble Lords this afternoon.

These regulations were laid before the House on 20 April 2026. As I alluded to, the statutory instrument makes several minor and technical amendments to improve the operational efficiency of the contracts for difference scheme during the assessment of applications. Subject to Parliament, the Government intend to introduce these targeted and practical measures in time for allocation round 8, which opens to applications on 20 July—so there is some haste in this procedure this afternoon.

The contracts for difference scheme is the Government’s flagship policy for supporting new low-carbon electricity generation in Great Britain. CfDs are awarded through annual, competitive auctions, with the lowest-priced bids being successful. In March, the Energy Secretary outlined a package of measures to go further and faster on clean power in response to events in the Middle East. That included bringing forward the opening of AR8 to July to provide certainty for clean energy investors.

The most recent allocation round, allocation round 7, alone secured 14.7 gigawatts of clean, homegrown generating capacity, across 201 new projects. AR7 built on the success of AR6 in September 2024, which secured over 7 gigawatts of renewable capacity across Great Britain. It is worth just looking at the upward curve of the amount of capacity procured in those two rounds. We will not go back to allocation round 5, but certainly in those two rounds there was a very successful allocation outcome.

Indeed, AR7 was the most successful renewables auction in European history. The AR7 reforms we introduced to boost competition and investor confidence secured renewable capacity at strike prices 40% lower than the cost of building and operating a new gas power plant. These achievements show how central the CfD scheme is to our mission to deliver clean power by 2030 and strengthen Britain’s energy security.

The Government keep the CfD scheme under review to ensure that it remains fit for purpose. The regulations will make the following three amendments to improve the future operation of the scheme.

First, they will enable the National Energy System Operator, NESO, which is responsible for the allocation round process, to correct certain types of errors it makes during the assessment of applications by issuing new or amended qualification decisions where evidence supports this. NESO, in its role as the CfD delivery body, assesses applications against the eligibility criteria and determines whether applicants qualify to participate in the competitive allocation process.

As the CfD scheme has grown in popularity, the volume of applications has increased significantly, with several hundred submitted in recent allocation rounds. Although eligibility checks are very robust, a larger number of applications increases the risk of errors in assessment decisions, and this amendment will ensure greater consistency and fairness in how the CfD eligibility requirements are applied.

18:45

Secondly, the regulations will enable NESO to consider additional information or documentary evidence submitted by applicants when examining appeals from non-qualification decisions—that is, where an applicant has been thrown out of the process because it is considered they did not qualify. This change will help avoid projects being disqualified for minor or trivial omissions in their applications. It should streamline the process and ultimately increase the number of participants in the auction, driving greater competition and better value-for-money outcomes for bill payers.

Thirdly, the regulations clarify how NESO is to treat applications when eligibility has not yet been decided by the point at which the regulations require NESO to proceed with the auction. This will be a very rare occurrence but is nevertheless something we need to consider. In the light of operational experience from AR7, this amendment will remove some ambiguity in the current regulations.

Finally, the regulations provide for procedures or information relating to the implementation of several of the measures that I have just described to be set out in the contract allocation framework. This is a statutory document which contains the eligibility criteria and rules governing how NESO must allocate CfDs in an allocation round. The Government published a draft of the contract allocation framework, setting out the proposed requirements of AR8 on 1 June, inviting stakeholder views, and the final version will be published in early July, before the round opens to applications.

As for the process of those who are perhaps coming into the allocation round, or having their eligibility queried and then coming into the round at the end of the process, if noble Lords would like a complete explanation of how that works, that can be given but it will take us several hours of further discussion. I therefore hope they will take it from me that this does actually work in terms of making sure that we do not have unforeseen outcomes when the allocation round process takes place.

These amendments received strong stakeholder support in a recent public consultation. There was broad stakeholder recognition that the changes will improve the experience of applicants during the assessment process, support more effective competition and help to secure better value for money for consumers. This approach reflects the department’s continued close engagement with industry in the development of the CfD scheme. By building on the foundations laid in AR7, these regulations will, I believe, help strengthen procedures, simplify the operation of the scheme and introduce provisions that drive progress towards the 2030 clean power target, while securing better value for money for bill payers. I therefore commend these regulations to the Committee and beg to move.

[Lord Teverson (LD)]

My Lords, it is a great pleasure to listen to the Minister. He is the one Minister who, I know, if we asked for a one-and-a-half-hour explanation, he would be able to do it without notes because of his deep knowledge. When I looked at the Explanatory Note, I saw that it said that these regulations concern arrangements for determining whether renewables projects qualify for contracts for difference. I want to address that theme about a specific area.

The Minister mentioned AR5. Of course, AR5 was pretty disastrous, generally, but there was a bright spot in it. It is an area where I have to congratulate the previous Government on a very wise decision in including geothermal energy for the first time. I was privileged, three months ago, to officially open the United Downs geothermal electricity station down in Cornwall, near where I am resident. I have been a proponent of geothermal for some time.

I have a question for the Minister in that area, about determining which renewables qualify for CfD rounds. Obviously, the great by-product of some of this technology is the critical mineral of lithium, which is really important to our future industrial success in this country. Do the Government envisage geothermal continuing to be one of the areas that is ring-fenced as a technology in future rounds?

My second question for the Minister goes back to his past when he was a Member of Parliament in Southampton, where geothermal energy was important for heating. Given the Government’s strong will to broaden the application of CfDs, geothermal in many ways is even more suited for district heating, beyond combined heat and power schemes, which can be CfD related. What is the Minister’s view as to whether the Government see geothermal heating being part of a future CfD round?

[Earl Russell (LD)]

My Lords, I thank the Minister for his introduction—clearly, this stuff is more complicated than eBay. I also thank my noble friend for raising important questions about geothermal that I hope the Minister will come to answer, but we support the inclusion and further development of that technology within our renewables energy mix.

These regulations are modest but worthwhile technical reforms to the contracts for difference scheme, and they have our support. As we know, auction rounds are the central part of our drive to clean energy, the energy transition 2030 and net zero by 2050. As the Explanatory Note sets out, competition has grown, so it is essential and welcome that, between rounds, the Government are undertaking these fundamental reviews of the way in which these complicated auction rounds work in practice. We welcome the fact that that has happened with stakeholders and that the Government are looking to improve and streamline these systems.

I turn to the reforms themselves, the first of which involves NESO reviewing the process for non-qualification decisions, as the Minister set out. Applicants will now be able to submit new evidence when requesting a review. We welcome this; it is overdue and is clearly a sensible reform. When an applicant has got so far in the process, it would be silly not to do that for the sake of one mistake on the form. As the Minister said, we know that many AR7 applications failed due to very minor omissions, so this is welcome. Allowing corrections at review stage will reduce unnecessary exclusion and improve fairness.

The second reform allows the delivery body to amend non-qualification decisions where the framework permits. This introduces much-needed flexibility into what was previously a perhaps overly rigid process and enables errors to be corrected without needing to process further to costly appeals.

Thirdly, Regulations 7 and 8 strengthen the treatment of pending applications. The definition is extended so that those still within appeal windows can submit sealed bids, while Regulation 8 ensures that those bids cannot be disclosed. This is an important safeguard for the integrity of the auction process. I will not ask the Minister to give us a two-hour explanation.

Taken together, these changes are administrative but meaningful and they will help make the process more streamlined and efficient. They reduce barriers, improve fairness and strengthen confidence in the system. As the Minister said, they come at a significant moment in our transition. As he pointed out, allocation round 7 was a landmark—the largest in European history, with 14.7 gigawatts across 201 projects and over £22 billion of investment, and the largest of our rounds to date. Of course, coming after the problems we had with a previous round, it was extremely welcome that it was successful.

I also welcome the fact that the Government have made the decision to bring AR8 forward to July 2026. That maintains momentum and sends a clear signal of the UK’s commitment to the clean power 2030 ambitions. That is, in turn, good for industry and for showing a clear path to investment in our renewable future.

I have a couple of questions generally, since we are here debating this. On contract length for CfDs, we welcome the fact that the Government have already extended the contracts from 15 to 20 years. The Minister will be aware that it is my party’s policy that we would like to see those CfDs extended further, to 25 years, with the asset lifetime stretching from 25 to 30 years. Are the Government open to and actively considering that? Is it on the agenda?

Obviously, the strike prices at the last auction were above those in previous rounds of auctions. There are several reasons for that, primarily global inflation pressures. There is a need in the next round to make sure that we set a competitive price, one that recognises that inflation is there, so I have a quick question for the Minister about the calculations that the Government are making for AR8, because obviously inflationary pressures are still there—in fact they are exaggerating a bit—while making sure that we get a successful auction at a good price.

It was in the press today, and I presume it is accurate, that the Government have now secured grid connections for half of the projects needed to get us to clean power 2030, so I am pleased to see that the grid reforms are having an impact and that we are making that progress. But we have a lot coming through the system, so I ask for reassurance from the Minister: a lot of projects are bunched together, so I want to be sure that a product of our own success is not that we create bottlenecks in the system.

In the last round, AR7, we actually secured only 1.3 gigawatts of onshore wind. I recognise that the Government have removed the effective planning restrictions that previously existed. To my mind, there is more to do. A bit like my noble friend who raised geothermal, I wanted to ask the Minister a quick question: what more can be done to further kick-start onshore wind and onshore wind investment? In particular, what is the Government’s thinking on AR8?

To conclude, these regulations are sensible and proportionate. The Government have clearly worked with stakeholders and have stakeholder support. We welcome the regulations and are pleased to see that really detailed reviews are happening between these essential and important auction processes.

[Lord Moynihan (Con)]

My Lords, I thank the Minister for his very kind opening remarks, which I greatly appreciate. It is good to be back for what is, as he says, always a constructive and convivial exchange of views with him. I am sure that that will continue to be the case, even in the very late nights that I anticipate we will spend debating the energy Bill when it comes before the House. In the four or five months that I did this job before leaving the House to come back in a new incarnation, I was deeply grateful to his private office as well for always being highly professional and responding quickly to any requests from this side of the House. I would be grateful if he could pass that on.

I am also grateful to the noble Lord, Lord Teverson, except that I want to correct him on one point, which is very difficult, because his knowledge is as extensive on the subject of energy as the Minister’s. When I was Minister for Energy, back in 1990, we launched the first support for geothermal energy. It was part of the non-fossil fuel obligation, which was a precursor of the current regimes. We had a series of technology bands, and one of them was geothermal. We felt it was very important that it should be recognised as an important part of the renewable energy programme moving forward. It was a long time ago, and it may not have made huge progress in the intervening decades, but nevertheless it was certainly identified as an important part of that work at that time. I echo what he says about its continued importance in the context of renewable energy.

19:00

I appreciate that this statutory instrument has not been written by the Minister. For once, the Minister will not be in a position to say to me that I have gone beyond the brief, in terms of what is in front of us, because I have no intention of doing so. This is purely a NESO error primer. If you look at the Explanatory Note at the end of the SI, you see that Regulations 3 to 7 all refer to the fact that, where NESO makes errors in the highly complicated system that the Government have asked it to study, there are measures and procedures by which it can correct those errors.

These regulations allow NESO, the National Energy System Operator, to issue amended non-qualification determinations to correct its own errors. The primary impact is that NESO can now disqualify projects previously approved by it in error, injecting project risk—significant risk, I might add—for investors and those putting the proposals forward. How will this impact on developers? It is clear in the statutory instrument: there is a retroactive disqualification risk. NESO is now empowered to issue corrected notices to projects that were wrongly deemed qualified at the assessment stage, stripping away previously approved allocation status. There are reinstated appeal rights: if a developer receives an amended non-qualification determination, they maintain their legal right to challenge the decision via the standard two-tier appeal system. There are also contractual safeguards. On those, I ask the Minister: what about projects that are ultimately caught in reshuffling delays or queues due to NESO’s wider connection reform programme?

This error primer is recognised as such very early on in the bold headline under Regulation 4:

“Delivery body error in notices of determinations”.

The reason why the industry is pleased about this is that at least we now have a framework to go back to NESO should errors have been made in the process of the CfD applications. It allows NESO to consider additional documents—additional documentary evidence or information —when considering appeals from applicants whose applications have been determined by NESO to be non-qualifying. It also clarifies how NESO should treat pending applications where decisions on the eligibility of those applications remain undetermined at the point at which the regulations require NESO to proceed with the contract allocation process—in other words, to commence the process leading to the decision on the award of contracts to successful applicants.

I am absolutely in favour of recognising that a government body will make mistakes. There needs to be a framework to address those mistakes, and potential applicants need to be aware of them. But I am quite surprised because I have never known, in 40-odd years, a statutory instrument that effectively says, “By the way, this is what we’re going to do when we make mistakes”. But at least it is clear to the industry, and I am not surprised that the majority supported it. I looked at all the responses from different industry members. Their support for these changes was not unanimous by any means, but I was left with the thought that NESO is providing itself with a shovel to dig itself out of a hole.

On the subject of mistakes, I decided to have a good look at NESO’s website. On the front page, it says that the average tenure of employees is 5.9 years, but I thought that it was only established on 1 October 2024 —so perhaps there is a whole other series of errors that need to be addressed by NESO.

This SI does not inspire confidence. One would have hoped that there was a proper framework already established to address any appeals that come forward on this extremely important policy, which, in the words of the Minister himself, is a flagship government policy. It is a great pity that, only after a whole series of errors—the Minister called them minor errors but there is no guarantee that they will be minor; they could be significant—anybody who is in receipt of an approval may now be told that NESO has just had another look and it is not going to be approved. That is not a minor error; it is a matter of real concern with major financial consequences.

I realise the need to have put this into an SI. I have never seen it before. It is an extraordinary primer. With that in mind and with the recognition that the Government have opened up, accepted that this is happening and put forward proposals to remedy it, it will meet with the agreement of this side of the Committee. However, it is an extraordinary admission by a Government who have had to come forward with a specific statutory instrument to address all the errors that their own flagship body is making.

[Lord Whitehead (Lab)]

I thank noble Lords for their very constructive and interesting contributions. I will attempt to address them as best I can. I do not think that I will have to write to anybody but, if necessary, I will make sure that it is done.

I have worked very successfully with the noble Lord, Lord Teverson, over a number of years in all-party groups and as shadow Energy Minister, and have always found him to be very constructive and helpful. He has been particularly helpful today by raising geothermal, which for a long time has been one of the issues closest to my heart. The Southampton geothermal scheme came in seven years before the Government recognised that geothermal had some interest and future. I acknowledge that this was in 1990, but the Southampton scheme had been up and running for seven years before that. However, that is a very minor point.

The noble Lord put important points forward concerning what is likely to happen to geothermal. Do we think that it is a very important technology for the future? Yes, and it is a very important technology in terms of the rollout of heat networks that is taking place. Also, being one important low-carbon source for informing those heat networks, it is pretty good for ensuring that, if you have a low-carbon alternative to what is normally the case in heat networks—a high-carbon gas engine—going into the scheme, geothermal can be a very efficient, long-lasting and virtually permanent alternative to that gas engine putting the heat around the network.

There are questions to answer about the capex involved with that process and how that is undertaken—whether jointly with the heat network or in addition to a heat network that is already existent. There are also questions on how geothermal may or may not be eligible for the AR process. The noble Lord knows that geothermal is not just one thing. Sedimentary geothermal is normally drilled at shallower depths, gets heat up from aquifers and associated activities and then goes through a heat transfer arrangement. Then you have much deeper geothermal, which can go far deeper and penetrate, for example, hot rocks. That is what is happening in Cornwall, which the noble Lord opened up. I was unfortunately unable to be there on the opening day, but I was very glad that he was the person chosen to open those proceedings.

The noble Lord will know that those particular schemes, of which there are three—one of them is now operational—are all about producing mainly electricity with, interestingly, lithium extraction as a by-product, but they are not strictly comparable with sedimentary geothermal, which is all about heat elsewhere in the country. Indeed, there are much greater prospects than were hitherto thought for both sedimentary thermal and hot rocks. As the noble Lord mentioned, it was almost a lucky accident of AR5, you might say, but the miserable outcome of AR5 was tempered somewhat by the fact that, because there were no bids in the main pot, geothermal actually managed to get its bids in at that particular point.

Bringing that together for AR8 and future allocation rounds, clearly, allocation rounds are based on the production of electricity, so purely heat-based geothermal would not qualify and would need to be supported— if it is to be supported—by means other than the allocation round process. So, as far as AR8 is concerned, the question of the pots and so on is still being determined, but it is certainly the case that purely heat-based geothermal will not qualify in future. Then we have the question of the United Downs schemes. We await the outcome of the other two schemes. Of course, they have a great deal on their plate at the moment, so I am not sure whether they will be bidding for a lot more schemes right this minute, but that is where we stand as far as geothermal and allocation rounds are concerned.

The noble Earl, Lord Russell, was concerned about the extension of the CfD from 15 years to 20 years in the most recent rounds. I note his party’s policy to take that even further. The extension from 15 years to 20 years was certainly a measure to make sure that those people who are bidding into the system have good, regulated cover for their product for a reasonable number of years; obviously, that then reflects on to the amortisation of the capital process and the security that that gives. Clearly, that was a factor in making sure that so many people got into the allocation rounds, bid and succeeded.

Whether that 20-year figure needs extending further, as far as offshore wind is concerned, will need to be looked at in terms of the experience of AR8 and, possibly, AR9—and, indeed, the practical outcome of AR7. So, it appears at first sight that it has been a very positive extension, but, of course, as the noble Earl will know, there were different levels of CfD provision for, for example, Hinkley. So it is not the case that CfDs are “one size fits all” as far as those terms are concerned.

The noble Earl also asked what is being done about onshore wind. There is a lot happening as far as onshore is concerned, in addition to offshore, in terms of its access to the AR process, from which it was previously banned, in effect, and in terms of not just powering new onshore schemes but repowering existing onshore schemes. He will know that the intention is to bring repowering into the AR process, if that can be done, which would in itself be a considerable step forward—for example, in the threefold additions that one can get from repowering on sites that have hitherto worked to a much lower capacity in the past. I think I have responded to the points from the noble Earl, Lord Russell, but if he does not think so, I can certainly take them up in writing.

19:15

I guess that the noble Lord, Lord Moynihan, is right, pretty much: this is not exactly a primer in covering up one’s mistakes, but it is certainly a recognition that what we have to do, as far as future allocation rounds are concerned, is make sure that no one who is applying and coming into the scheme is thrown out for trivial reasons or finds that they have a non-qualification result that is overturned later on appeal to a qualification but they are then too late for an allocation round to consider them. The noble Earl mentioned the question of sealed bids being suspended, as it were, while those appeals take place. One of the mechanisms in here is to make sure that someone who has previously not qualified but then decides to qualify, while the allocation process goes on in the meantime, does not land in the middle of the qualification process in a way that disrupts the rest of the process. In theory, if someone comes into the system, say, between results and declaration, they would splash into the system in such a way that other people who had previously been allocated would find that their allocation had been disallowed.

That is a process of the bidding system, but what these changes do—I promised that this would not be two hours—is make sure that the system overall is not discomfited by that sort of process, rare though it may be, and that it is fair to those people who have already qualified in the system. Yes, mistakes will happen. The large number of applications means that, occasionally, mistakes will need to be rectified, but the purpose of these changes is to make sure that that rectification is as positive as it can be for the process as a whole and that people get fair outcomes regardless of the way in which they have travelled to get the allocation approved in the end.

I hope the noble Lord will accept the positive outcome of these changes and what they will mean for the allocation process in the future. I am very pleased that he has given his support to the changes, but I hope that it is positive support on the grounds of the way in which the system will work in future, to the benefit of all. I commend these regulations to the Committee.

Motion agreed.

Committee adjourned at 7.19 pm.