Viscount Hanworth
Main Page: Viscount Hanworth (Labour - Excepted Hereditary)
Baroness Worthington
My Lords, the amendment would add a new subsection to Clause 6. We now come to the meat of the Bill: the contracts for difference, which it is proposed will restart investment in low-carbon energy. I think that this is the bit of the Bill that we all share a desire to see succeed and do exactly as we hope.
The reason for my tabling the amendment, which, again, is very much a probing amendment, is for us to have a brief debate about the transition from the current support mechanism for the renewables obligation and the proposed contracts for difference. We will have an opportunity to discuss this further when we come on to the parts of the Bill that deal with the transition, but I have put the amendment here because it is important to highlight how important the strike prices will be in the new mechanism for supporting renewables.
The renewables obligation, which this replaces, had within it a mechanism that created a demand for renewables—an obligation on suppliers to go out and source renewable obligation certificates. That was seen as an essential part of moving us into a low-carbon system at a time when we had a perfectly well functioning system of high carbon. It was accepted that, to create the space for these new sources of power, we needed there to be an obligation to drive that market. We are moving away from that to a system whereby the contracts will be offered and strike prices published but there is no obligation on anybody to come forward and bid for them.
I am very grateful for the information that has been provided by the Minister recently, showing that a number of applicants have come forward for the financial investment early decision contracts. I think that 50 projects have come forward, with 18 potential gigawatts of capacity. So clearly the draft strike prices are driving interest and have given people a reason to come forward with projects, which is very encouraging. It would be useful to have something in the Bill that ensures that that is the situation going forward. It has been mentioned on a number of occasions that one problem we have is that, beyond 2020, there does not appear to be very much certainty for investors in renewables. There are a number of reasons or that. It is partly because the legally binding renewables targets set at a European level stop in 2020. Let us be honest in saying that that is what drives the majority of interest from the Government in seeking renewables, although I also acknowledge that the benefits that renewables bring in diversity of supply and potential cost reductions for consumers are also sought by government.
It is true—and I do not think that it would be particularly controversial to say—that there appears to be some mixed messages coming from the Government that some parts of government are less enamoured of the benefits of renewables than others. So there is this potential issue post-2020. The levy control framework will dictate a large part of how the contracts of difference work, and that, too, only has a time horizon to 2020. So there is understandable nervousness in the industry. I do not want to go over old ground, but we have had lengthy debates about the need for decarbonisation targets post-2020 to try to give back some confidence. In the absence of such targets, we are reliant at the strike prices being set at a favourable level to bring forward interest. That is why we have tabled this amendment—on the off-chance that there should be a moment in future when the Government are slightly less enamoured or, potentially, more hostile to renewables, and that there will not be the ability to kill off this market by simply offering very low and unattractive strike prices. That was not possible within the RO, because it had an inbuilt mechanism to keep demand growing for those technologies. Here we are very much more reliant on a planned, administratively and government-controlled mechanism. For that reason, we have sought to clarify that the purpose of the strike prices is to ensure that they are sufficiently attractive that investors will come forward.
This amendment also gives me an opportunity to comment on the strike prices. Those that were published are subject to consultation, and I am sure that the Government are busy receiving evidence from participants in the market and potential investors. I have heard that the offshore renewable community do not consider the proposal for offshore wind to be sufficient. Again, I think that that highlights how important the strike prices now are. The concern is that the length of contract is too short, that the digression in prices kicks in too soon and that the cost reductions expected are just not realistic. That further underlines why we need to get the strike prices right.
The amendment needs to sit alongside the amendment that we will come on to debate about an expert panel. I know that an expert panel is already in existence and has been helping the Government, which we acknowledge has been a useful part of this process. We will come on to discuss how that could be maintained and even enhanced by making it a more visible part of the infrastructure of the Bill.
I also take this opportunity to say—this is slightly technical so I apologise in advance—that the way in which the supply obligation created in Clause 9 also interplays with the strike prices is important. I am stretching the amendment a little too far, maybe, to talk about this here, but it is worth noting that how you construct the obligation on suppliers to pay towards the strike prices could have quite an impact on the incentives that the suppliers have to then go forward and seek CFDs. If you constrict the supplier obligation in one way where the suppliers are directly exposed to the prices set in CFDs, they will have a greater incentive to go forward and seek those CFDs. If, however, it is a levelised, averaged-out cost to which they are not able to hedge their position through their own participation, it dilutes that signal.
I apologise, but that is all wrapped up in our concern to get the strike prices right. We will, I hope, soon discuss the technical expertise needed to make sure that that happens. I have mentioned why I think something should be in the Bill because it acknowledges the different system that we are moving to from a situation where the RO had an in-built guarantee that there would be demand for these projects to one where we are very reliant now on getting the price right. I beg to move.
Viscount Hanworth
My Lords, we know that strike prices will differ across various technologies but I query whether that degree of flexibility is sufficient. There may be a case for varying the strike prices to cater for the different components of the same technology. I am thinking, for example, of the differences within the technology of gas powered LGC generation between the base load CCGT plant and the plant that is devoted to satisfying peak demand, which may be OCGT.
The cost profiles of the two varieties may be very different as will the wholesale prices commanded by their outputs. Should they be subject to the same market reference price and the same strike price? I am asking that question, in all innocence; it is not a tendentious question. But I have observed that the Minister has indicated or implied that there may be special accommodations within certain technologies for interconnection. If I am making any assertion, it is that we need a lot more detail and I am not sure that it has yet come forth. We need a lot more detail that would address the realities of electricity generation.
Lord Teverson
While I am sympathetic towards this, I have the impression that if the Government do not want this to work they will find a way to make it not work. Such an amendment is probably not the thing that saves this. Therefore, I am not sure that this works, but in terms of trying to make sure that there is some commitment to this form of energy generation in the future, I understand the motivation entirely. However, I suspect that any future Government who did not want to do this would find another way around it.
Baroness Verma
My Lords, I thank the noble Baroness, Lady Worthington, for her amendment and for prompting the debate on strike prices for CFDs. Amendment 55ZC raises the important point that the draft strike prices we published on 27 June must be set at a level capable of incentivising investment. This is extremely important, and I am grateful for the opportunity to reassure noble Lords. As they will be aware, the draft strike prices were published on 27 June with their supporting detail for consultation in the draft EMR delivery plan on 17 July.
I would like to provide reassurance to the Committee that the Government have put extensive effort into ensuring that strike prices are set to balance the objectives of EMR stated in the Bill we are debating currently. They are to drive the necessary investment to meet our important targets while ensuring security of supply and value for money for consumers. The Bill ensures that all the functions exercised under it will take these important objectives into account. I therefore reassure the noble Baroness that the intent of this amendment is being achieved without the need for a further statutory requirement.
Further, we are working hard to ensure the process through which final strike prices are set is transparent, robust and informed by a full range of expert input, including from consumer groups. Our reason for consulting on the draft strike prices is to allow industry and all other stakeholders to scrutinise the figures and the evidence used to develop them and provide us with feedback to inform the final strike prices.
The strike prices proposed by the Secretary of State in the draft delivery plan were informed by two pieces of independent advice: first, analysis provided by National Grid to help the Secretary of State understand the potential impacts on the Government’s objectives, including the potential generation mix that the decision may incentivise, from different strike prices; secondly, that analysis has been subject to independent scrutiny by a panel of technical experts, as the noble Baroness said. Both these reports were published alongside the draft EMR delivery plan and copies were deposited in the Libraries of this House and the other place.
Turning to the setting of strike prices for investment contracts, as we set out in our update on Final Investment Decision Enabling for Renewables, which was published on 27 June 2013, strike prices for renewables generation will use the strike prices published in the final delivery plan. The potential terms, including the strike price, for any investment contract for Hinkley Point C will be set through bilateral negotiation, with specialist advice sought as appropriate and rigorous scrutiny of proposals.
I will write to the noble Baroness regarding the supplier obligation. I hope that she will withdraw her amendment.
Baroness Verma
I am having an amnesia moment. Will the noble Viscount remind me?