Contracts for Difference (Miscellaneous Amendments) Regulations 2018

Lord Henley Excerpts

Monday 9th July 2018 Lords Chamber

Moved by

[Lord Henley]

That the draft Regulations laid before the House on 6 June be approved.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, the draft instrument makes three separate changes to existing CfD regulations. First, it amends the Contracts for Difference (Allocation) Regulations 2014 to establish remote island wind projects as a category of technology eligible to take part in the CfD scheme and compete alongside other less established technologies. In doing so, it delivers on manifesto and Clean Growth Strategy commitments.

Secondly, the SI removes from the Contracts for Difference (Definition of Eligible Generator) Regulations 2014 the requirement for certain generators to intend to accredit their project under the combined heat and power quality assurance standard. This minor amendment will facilitate the delivery of future CfD allocation rounds and is not otherwise expected to impact upon the operation of the CfD scheme.

Thirdly, the regulations update the definition of “waste” in the Contracts for Difference (Definition of Eligible Generator) Regulations 2014. This ensures that generators are not incentivised to intentionally modify or contaminate biofuels to avoid the application of sustainability criteria which would otherwise apply. We are proposing these legislative schemes following a 12-week public consultation earlier this year, during which our proposals received broad support.

The CfD scheme is designed to offer long-term price stabilisation to new low-carbon generators, allowing investment to come forward at a lower cost of capital, and therefore at a lower cost to consumers. The scheme typically sees support contracts awarded in a competitive auction process, which ensures costs to consumers are kept to a minimum. The technologies which are eligible to take part in the CfD scheme are categorised into two distinct groups, or pots. Pot 1 contains the more mature technologies, such as solar PV, which typically require less support. Pot 2 contains the less mature technologies, such as offshore wind, which typically require more. The scheme has been very successful, bringing forward significant new investment in large-scale renewable generation. The two previous CfD auctions should deliver over 5 gigawatts of renewable electricity capacity by the early 2020s, helping to meet our decarbonisation targets. We plan to open the next one in spring next year and are laying these amendments today to give certainty to businesses in advance.

I will briefly describe each of the three amendments in turn. The first amendment is to make remote island wind projects eligible for pot 2 auctions. The Government confirmed in the Clean Growth Strategy that it was our intention that wind projects on remote islands, where they are expected to directly benefit local communities, would be eligible for the next pot 2 auction. These projects have certain unique characteristics which set them apart from wind projects elsewhere in the UK, including higher costs. It is therefore appropriate for remote island wind projects to be recognised as a distinct technology within the CfD scheme, one subject to its own administrative, maximum strike price and eligible to take part in pot 2 auctions alongside other, less established technologies.

These regulations set out the criteria that projects must satisfy to constitute a remote island wind project for the purposes of the CfD scheme. These criteria have been carefully selected to ensure that remote island wind projects are sufficiently remote to be subject to more challenging operating conditions, as well as increased network-related costs. Allowing remote island wind projects to compete alongside other less established technologies in pot 2 will allow developers to build on the falling cost of onshore wind and provide a further boost for the supply chain. More than 750 megawatts of wind projects in the Western Isles, Orkney and Shetland could be eligible for the next auction. If successful, these could deliver long-term benefits to the UK.

The second amendment is to remove the requirement for certain generators to intend to accredit their project under the combined heat and power quality assurance standard. The CfD scheme currently supports only two types of project, namely dedicated biomass and energy from waste, if they are built with combined heat and power. The Contracts for Difference (Definition of Eligible Generator) Regulations 2014 currently require developers to those projects who want to be eligible to apply for a CfD to intend to accredit their project under issue 6 of the combined heat and power quality assurance standard, usually referred to as CHPQA. The department recently launched and responded to a consultation on options to replace issue 6 of the CHPQA standard. The incoming, replacement issue of the CHPQA standard will include increased efficiency reference values, against which future CfD-supported CHP projects will be assessed.

These regulations will remove the requirement to intend to accredit from legislation. Developers will still have to accredit their projects under the CHPQA standard to receive CfD support, but this will instead be specified in the contract terms that developers have to agree to, and comply with, to receive CfD support. This amendment will not have a practical impact on the operation of the CfD scheme because, in practice, a developer’s intention to comply with the CHPQA’s requirements is not something which is capable of being meaningfully tested at this early stage in the CfD application process, long before a plant is actually built.

The third, and final, amendment that we propose concerns a minor change to the definition of “waste” in the definition of eligible generator regulations. This amendment is relevant only to technologies that may use waste as a fuel to generate electricity. It simply makes clear that substances will not constitute waste where they have been deliberately modified, or contaminated, to bring them within the definition of waste. This will make sure that we do not inadvertently encourage generators to modify or contaminate biofuels to avoid the application of sustainability criteria which would otherwise apply.

These legislative changes need to be made ahead of the next CfD allocation round, which is planned for spring 2019, so that developers have certainty as to who will be eligible to take part, and on what basis. Subject to the will of Parliament, these arrangements will come into force on the day after the regulations are made. I commend these regulations to the House.

[Lord Redesdale (LD)]

My Lords, although we support these minor amendments, I have two questions for the Minister. First, there is talk of making sure that there is no contaminated feedstock for combustion. Is this as a result of a particular action, or is it looking forward to a potential breach of the rules? Secondly, CfDs have had one benefit, although they have often skewed the marketplace rather badly: they have shown, through the auction prices, that offshore wind is one of the most economic ways of generating, and that onshore wind is even better at generating power at the lowest cost to consumers. In the light of that, will the Government reconsider their position on onshore wind?

[Lord Grantchester (Lab)]

My Lords, once again I thank the Minister for his explanation of these regulations, which in general we support. I understand that the Government are beginning to be congratulated on allowing onshore wind, in some shape or form, to finally compete in the marketplace for renewable generation. We note that the Conservative Party manifesto introduced a ban on onshore wind and are pleased to be able to welcome this small element of it coming on to the market, albeit in a highly constrained way. These remote islands must, by definition, be 10 kilometres off shore; over 50 kilometres of cabling must be used, of which 20 kilometres must be under sea. I was wondering how important it was that these so-called onshore wind turbines must not be seen and whether I would be able to see them if I went to the top of Blackpool Tower. I am teasing the Minister, but this seems to be a risible attempt to allow some kind of offshoring of onshore wind. I am sure we could all enjoy some of the programmes which could be made around these regulations.

To be more serious, because of these definitions, we feel that we are looking at a more expensive offshoring of onshore wind being favoured over the less expensive contribution of near-to-onshore wind. Regrettably, the costs to the consumer will therefore be more than if the Conservative Party had been able to allow onshore wind to compete openly and genuinely in the marketplace. With that, I approve the regulations.

[Lord Henley]

My Lords, I am grateful to the noble Lords, Lord Grantchester and Lord Redesdale, for their comments and general welcome to the SI. I am also grateful to the noble Lord, Lord Grantchester, for reminding the House of the figures which I did not give. The remote islands in question are at least 10 kilometres off the mainland and connected to it by at least 50 kilometres of cabling, of which 20 kilometres are under water. He then referred to ascending Blackpool Tower. That is something which I have not done for over 50 years because—sadly—neither we nor the party opposite still go to Blackpool for our party conference. Perhaps that might change, but I do not have any current plans to ascend the tower. When I do next get an opportunity to do so, I will see what I can see from there, particularly in relation to offshore wind.

I am also grateful to the noble Lord, Lord Redesdale, for reminding the House how effective and useful wind, particularly offshore wind, can be and—as I made clear in my Statement on Swansea the other day—how its cost has come down well below nuclear. However, we have no plans to reconsider our position on onshore, other than in relation to the remote islands referred to in these regulations which are suffering from particular problems. These are places which are over 10 kilometres and 50 kilometres of cabling away from the mainland. The wind there can be very good but the costs can be greater and some help is therefore needed. The noble Lord, Lord Redesdale, also asked whether we were aware at the moment of problems with contaminated feedstock and biofuels. We are not aware of anyone currently doing this, but there is obviously a potential for it. We therefore considered it necessary to take action; I am sure he would agree.

I think I have dealt with the questions raised by both noble Lords and commend these regulations to the House.

Motion agreed.