Contracts for Difference (Allocation) and Electricity Market Reform (General) (Amendment) Regulations 2022

Lord Lilley Excerpts

Monday 13th June 2022 Grand Committee

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

My Lords, these regulations were laid before the House on 11 May 2022. The contracts for difference scheme is the Government’s flagship renewable energy support scheme. It is designed to offer long-term price stabilisation to low-carbon generators, bringing investment forward at a lower cost of capital and therefore at a lower cost to consumers. The scheme has been very successful in driving substantial deployment of renewables at scale in Great Britain and has made it cheaper to deliver low-carbon generation.

CfD applicants with a capacity of 300 megawatts or more are currently required to present a supply chain statement to the Electricity Market Reform Delivery Body as part of their application. A statement is provided if a developer can demonstrate to the Secretary of State’s satisfaction that the project is likely to make a material contribution to the development of relevant supply chains. The aim of the policy is to increase productivity, competitiveness and capacity in supply chains, promoting innovation and skills in the low-carbon electricity generating sector.

The current policy approach to CfD delivery and supply chain plans needs to be strengthened. This will also support the move to annual CfD allocation rounds, which the Government announced in February. This will ensure that the scheme continues to operate effectively, encourage low-carbon generation and provide confidence to investors and supply chain companies. It will support the delivery of those renewable technologies identified in the Net Zero Strategy and the British Energy Security Strategy that are key to decarbonising the power sector, such as offshore wind, onshore wind and solar.

I will take a moment to talk through what these regulations will do. They will make several amendments to the Contracts for Difference (Allocation) Regulations 2014 and the Electricity Market Reform (General) Regulations 2014. The amendments include changes to contracts for difference delivery and supply chain policy in preparation for the fifth allocation round. These amendments will help to bolster supply chain development in preparation for the next CfD allocation round, planned to open in March 2023, delivering on the ambitions set out in the Net Zero Strategy and the British Energy Security Strategy.

These regulations amend the current non-delivery disincentive exclusion period that applies if a developer fails to sign a CfD contract or the contract is terminated, so that an application cannot be made for the subsequent two applicable allocation rounds. This strengthens the current policy of excluding a site from only one subsequent allocation round. This change will ensure that the NDD exclusion period is aligned with the decision to hold allocation rounds on an annual basis from 2023, ensuring that the NDD remains an adequate incentive to deliver projects.

These regulations also bring alignment with a change introduced to the valuation formula in the CfD allocation framework for allocation round 4. For allocation round 4, the Government introduced changes to the valuation formula to reduce the complexity of the auction and to ensure that the earliest possible date of CfD payments is considered when calculating the impact on the budget. These regulations introduce this technical change, amending the corresponding contracts for difference allocation regulations to reflect the amended formula.

The regulations amend the validity period of a supply chain plan statement so that it is valid for nine, rather than 12, months. This ensures that, in practice, developers continue to submit individual supply chain plans for each CfD allocation round in light of the move to annual auctions. They also amend the requirement to provide a supply chain plan statement so that it applies to all floating offshore wind projects. This allows the Government to support the development of supply chains for the floating offshore wind industry as it approaches significant commercialisation and deployment. We seek to make these amendments now to give certainty to businesses that might be planning to take part in the next CfD scheme, which will open in March 2023.

We are proposing these legislative amendments following a public consultation, which ran from 4 February to 15 March and gave stakeholders the opportunity to scrutinise and test the policy proposals. The consultation generated 41 responses from a range of developers of renewable generating stations, trade associations and bodies, suppliers and public investment bodies. At the same time, officials engaged wider audiences through an online event.

Overall, the policy proposals received wide support. The consultation led to one policy change to the supply chain policy proposals in response to the feedback received. A minor adjustment was made to the proposal to introduce floating offshore wind projects into the supply chain plan process whereby a bespoke, less burdensome process will be required to account for the smaller size of their projects.

In conclusion, the Government have set out a clear vision for how we will transform the production and use of energy, in a decisive shift away from expensive fossil fuels. These regulations, together with annual CfD allocation rounds, will help support an increase in the pace of deployment of the new renewable electricity generation needed to achieve our ambitions while continuing to consider the likely cost to consumers, energy security, et cetera. Subject to the will of Parliament, we intend that these arrangements will come into force on the day after the regulations are made. I beg to move.

[Lord Lilley (Con)]

My Lords, I will ask some questions, because I do not fully understand all this and these SI debates are often a good opportunity to expand one’s knowledge.

First, I would be grateful if the Minister can explain how a shorter life validity of the supply chain plan acts as an incentive, and what it incentivises. What happens after the plan lapses? None of that is obvious to me from the not very helpful Explanatory Memorandum. Are these supply plans published? Can we all see them or are they private documents between the Government and the supplier? Overall, do they help us to estimate what percent of the value added in supply chains is generated within the UK? If so, I would be grateful to know what it is.

Can the Minister also confirm that although the newest offshore fields won the bidding process with low prices, they have not yet activated their contracts so they are able to sell their electricity at the very high prices now prevailing, making what most people might call a windfall profit? That is the sort of thing Governments love to tax but they seem to have got off scot free. I would be grateful to know whether that is the case and to what proportion of wind generation that applies.

I would also like to know what proportion of wind generation comes from the early contracts, which, if I have correctly understood it—that may well not be the case—got a variable price plus a bonus and therefore are getting not merely the current high price but the current high price plus something extra: jolly good for them, but not so good for the consumer. Again, that is something that Governments might like to tax but they do not seem to have done so in this case. I would like to know what proportion of the renewables supply that is. By deduction, that should tell us what proportion of the renewables supply is under CfDs and therefore is not going up with the gas price. It would be very helpful if the Minister could answer that.

If those questions identify an intrinsic problem in the present system, why does this measure not deal with it—unless it does and I have not been able to find it in the not very helpful Explanatory Memorandum? I will be grateful for the Minister’s replies.

[Lord Teverson (LD)]

My Lords, I start—partly related to what the noble Lord, Lord Lilley, said—by thanking the Minister profoundly. The last time we had a debate around CfDs, I asked a number of questions about the Low Carbon Contracts Company, which is wholly owned by the Government, and how much money it was making because of the energy price in relation to the strike price on CfDs. The Minister provided a comprehensive reply. Unfortunately, I do not have the numbers from it with me, but I thought it was extremely useful and I thank him for that. There is significant money coming back into the Low Carbon Contracts Company and, therefore, the public sector. Of course, the area that does not is the old ROCs regime, where I presume good profits are being made by those renewable companies that still operate under that system—although those presumably are starting to die out fairly quickly.