Draft Contracts for Difference (Miscellaneous Amendments) Regulations 2018

Alan Brown Excerpts

Wednesday 11th July 2018 General Committees

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Andrew Griffiths)]

I beg to move,

That the Committee has considered the draft Contracts for Difference (Miscellaneous Amendments) Regulations 2018.

The draft instrument makes three separate changes to the existing contracts for difference regulations. First, it amends the Contracts for Difference (Allocation) Regulations 2014 to establish remote island wind projects as a category of technology that is eligible to take part in the CfD scheme and compete alongside other less established technologies. In doing so, it delivers on a manifesto and clean growth strategy commitment.

Secondly, the regulations remove 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. That minor amendment will facilitate the delivery of future CfD allocation rounds and is not otherwise expected to impact on the operation of the CfD scheme.

Thirdly, the regulations update the definition of “waste” in the definition of eligible generator regulations. That ensures that generators are not incentivised to intentionally modify or contaminate biofuels in order to avoid the application of sustainability criteria that would otherwise apply.

We are proposing the legislative changes following a 12-week public consultation earlier this year, during which they 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—something I think we would all welcome.

The scheme typically sees support contracts awarded in a competitive auction process, which ensures that costs to consumers are kept to a minimum. The technologies that are eligible to take part in the CfD scheme are categorised in two distinct groups or pots, as they are known. Pot 1 contains the more mature technologies, such as solar PV, which typically require less support, whereas pot 2 contains the less mature technologies, such as offshore wind, which typically require more support.

The scheme has been successful in bringing forward significant new investment in large-scale renewable generation. The two previous CfD auctions should deliver more than 5 GW of renewable electricity capacity by the early 2020s, helping us to meet our decarbonisation targets. We plan to open the next one in spring next year and are laying the regulations today to give certainty to businesses in advance of that.

I will briefly describe each of the three amendments in turn. The first amendment will make remote island wind projects eligible for pot 2 auctions. The Government confirmed in the clean growth strategy our intention that wind projects on remote islands that are expected directly to benefit local communities would be eligible for the next pot 2 auction.

Those projects have certain unique characteristics that 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 that is subject to its own administrative strike price—a maximum price—and eligible to take part in pot 2 auctions, alongside other less established technologies.

The regulations set out the criteria that projects must satisfy to constitute a remote island wind project for the purposes of the CfD scheme. Those 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 to increased network-related costs.

Allowing remote island projects to compete alongside other less established technologies in pot 2 would allow developers to build on the falling cost of onshore wind and provide a further boost to the supply chain. More than 750 MW of wind projects in the Western Isles, Orkney and Shetland could be eligible for the next auction. If successful, they could deliver long-term benefits to the UK.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

I welcome those opportunities for the Scottish highlands. Will the Minister give us the timescale for when the next pot 2 auction will open?

[Andrew Griffiths]

Indeed, I will come to that in the course of my speech.

The second amendment will remove the requirement for certain generators to intend to accredit their projects under the combined heat and power quality assurance standard. The CfD scheme currently supports only two types of projects—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 require developers of such projects who want to be eligible to apply for CfDs to intend to accredit their projects under issue 6 of the combined heat and power quality assurance standard, usually referred to as the CHPQA. I have tried to eradicate TLAs—three-letter abbreviations—within the Department, Sir David, but they do creep into the speech. I am sure you will understand.

The Department recently launched and responded to a consultation on options to replace issue 6 of the CHPQA standard. The incoming replacement will include increased efficiency reference values against which future CfD-supported CHP projects will be assessed. The regulations will remove the requirement to intend to accredit from the legislation. Developers will still have to accredit their projects under the CHPQA standard to receive CfD support, but that will instead be specified in the contract terms with which developers have to agree and comply to receive CfD support.

The amendment will not have a practical impact on the CfD scheme’s operation, because in practice a developer’s intention to comply with the CHPQA’s requirements is not capable of being meaningfully tested at this stage in the CfD application process, long before a plant is built.

The hon. Member for Kilmarnock and Loudoun asked for the timescale for the next pot 2 allocation, which is of particular interest to him and his colleagues north of the border. We have put on record, and I am happy to confirm, that the next pot 2 auction will be held in spring 2019. That gives the industry enough time to be aware of the auction, put schemes together and make sufficient proposals. It also shows an urgency to support those remote islands with cheap renewable energy.

The third and final amendment concerns a minor change to the definition of the term “waste” in the Contracts for Difference (Definition of Eligible Generator) Regulations 2014. It is relevant only to technologies that may use waste as a fuel to generate electricity. The amendment simply makes it clear that substances that are deliberately modified or contaminated to try to bring them within the definition of waste will not constitute waste. That prevents the gaming of the system and will ensure that we do not inadvertently encourage generators to modify or contaminate biofuels to avoid the application of sustainability criteria that would otherwise apply.

The legislative changes in the regulations 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, the regulations will come into force on the day after they are made. I commend them to the Committee.

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[Alan Brown]

It is a pleasure to serve under your chairmanship, Sir David. We certainly welcome the changes, particularly to remote island wind, which the Scottish National party has been calling for for a while. I am pleased that the Government have listened and are taking action on that. If I were churlish, I would say that it is not before time, but anyone who knows me knows that I am not churlish, so I will not complain about the timeframe.

The Minister explained how the evolution of technologies has brought down the costs of capital, and I completely agree. It has been great to see the cost of onshore and offshore wind decrease dramatically, but we have to look at that in the context of Government policies on nuclear and its astronomical costs. In a Westminster Hall debate this morning, I highlighted that we are stuck with £120 billion of decommissioning costs, of which £91 billion are at Sellafield. We have got the Hinkley Point C project, which has a strike price of £92.50 per megawatt-hour for 35 years. That compares with a strike price of £57.50 for a 15-year CfD at the last offshore auction. It is clear that renewables are much more cost-effective and are completely green, rather than just reducing carbon, as nuclear does.

The hon. Member for Southampton, Test certainly worked his way around his assessment of the remote island wind definition. I am not too fussed about that, so long as the Scottish highlands get a bite of the cherry. That is all I care about, and I look forward to that. I certainly do not have any concerns about state aid. If Hinkley can pass EU state aid rules, I am sure the islands can. In the long run, it would be good to see Government assistance on and investment in additional interconnector cables between the remote islands and the mainland, because that would free up additional opportunities and help support the mainland national grid.

I have one question for the Minister. At Scottish questions this morning, I asked about onshore wind in Scotland being able to bid in future auctions. The response I got was that there would be an announcement soon. Can he provide some clarity? I welcome the changes and look forward to the remote islands benefiting.

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[Andrew Griffiths]

I thank the hon. Gentleman not only for his comments, but for his wholehearted support for these measures.

He raised some important questions. He asked whether we will need state aid approval for remote islands. I am the Minister responsible for competition policy in the Department for Business, Energy and Industrial Strategy, and I confirm that we have state aid approval for the inclusion of remote island wind as defined using this criteria. He asked whether the Commission had granted that. It has granted that state aid approval; that was published by the Commission in February of this year. I hope that reassures the hon. Gentleman on any concerns he has about the approval process for state aid.

The hon. Gentleman also asked about the definition of remote islands and whether that excludes English islands. As he will know—I am sure he has seen the map in the consultation document published in December—a small number of remote islands off the coast of England and Wales could satisfy the criteria, but we do not envisage at this stage more projects coming forward. In practice, the only planned projects that we are currently aware of that might meet the definition of remote island wind are in Orkney, Shetland and the Western Isles.

The hon. Gentleman alluded to pot 1 and onshore wind. No decisions have been taken on running another allocation round for pot 1 technologies at present.

[Alan Brown]

The Minister is saying that no decision has been made about pot 1 future auctions. Does that mean that the response I got at Scottish questions today about possible onshore wind in Scotland being eligible for future auctions was not correct?

[Andrew Griffiths]

I am not saying that at all; I am saying that I am not in a position at this stage to give the hon. Member for Kilmarnock and Loudoun the reassurances he seeks. I absolutely understand why he asked the question, and his aspirations in relation to those projects, but I am unable to give him the solution he seeks at this present time.

Successful remote island wind projects will require the construction of new transmission links. The point that the hon. Member for Kilmarnock and Loudoun makes about interconnectors is a salient one. It is one that the Department is well aware of and it is looking at. Transmission links that wave and tidal projects would also be able to use are important. Establishing new transmission routes could therefore help unlock the potential of other innovative new technologies. The Government clearly have to be the catalyst to bring on those disruptive technologies.