Contracts for Difference Scheme

Graham Stuart Excerpts

Thursday 19th October 2023 Westminster Hall

[The Minister for Energy Security and Net Zero (Graham Stuart)]

It is a pleasure to serve under your chairmanship, Dame Angela. I join others, and not least on this occasion the Scottish National spokesperson, the hon. Member for Coatbridge, Chryston and Bellshill (Steven Bonnar), in applauding his favourite Unionist—sitting behind him there—the ever-present, ever-active and ever-decent hon. Member for Strangford (Jim Shannon).

As the hon. Member for Strangford knows, and as he has mentioned, he and I have communicated extensively over the past year or so on the question of extending the GB contracts for difference scheme to Northern Ireland. He has asked questions in Parliament about this issue, most recently last month. I believe we know each other’s positions very well by now. Let me say at the outset that I admire his tenacity in continuing to raise this matter with me, which I know he does with the best interests of his constituents and the people of Northern Ireland in mind. However, I am afraid I have to say to him again that I do not believe that what he proposes is feasible—although I understand why he proposes it and why he hopes to find a solution—and nor would it lead to renewables or their associated benefits being delivered faster for Northern Ireland, as he hopes. I will explain why I believe that shortly.

First, though, to set the context, I would like to say a few words about the CfD scheme. The scheme was introduced in 2014 and is the Government’s main mechanism for supporting new low-carbon electricity generation projects in Great Britain. CfDs are awarded through competitive auctions that, from this year, are held annually. The lowest-priced bids are successful, which drives efficiency and cost reduction and is a low- cost way to secure clean electricity.

It is an interesting—but not necessarily surprising—fact that in every single year that the CfD has existed, industry has said that the prices we have suggested are too low, so this year is no different. I suppose it is also unsurprising that His Majesty’s Opposition should always speak up for the producer interest and be so indifferent, if not deaf, to the interests of the consumer, around whom we should build policy.

Winning projects are guaranteed a set price per MWh of electricity for 15 years, indexed to inflation. That provides income stabilisation, making projects that have high up-front costs but long lifetimes and low running costs attractive to investors and lenders. Importantly, the CfD also protects consumers when electricity prices are high, as it did last year. Understandably, this Conservative Government are extremely proud of the CfD scheme and its effectiveness, in not only securing clean generation but doing so at the lowest possible price to consumers—that is what has triggered the 70% reduction in costs for offshore wind. As I say, industry has always suggested that it wants to be paid more, and we have heard from His Majesty’s Opposition that they would be delighted to do so at the expense of ordinary consumers.

It was in the light of the challenge of setting the parameters of each CfD that we decided to move to an annual system. The hon. Member for Manchester, Withington (Jeff Smith)—he is not my favourite Unionist, but he is one of my favourite members of the shadow team—seems to have been deliberately innumerate. He will be aware that AR4 covered three years, and AR5 was the first annual auction. Like me, he will be able to divide by three the total generation that was in AR4, and to divine that in terms of annualised generation AR5 was the most successful round of the CfD that has ever existed. I would even gently chide my always loyal and fair colleague, my hon. Friend the Member for Waveney (Peter Aldous), for buying into the idea: at a time when other countries’ rounds have failed, we generated 3.7 GW. We supported geothermal and tidal and, I think, saw a near doubling of onshore wind.

That is not to say that I do not regret, and have not previously publicly regretted, the fact that in a highly turbulent geopolitical situation the window for offshore wind did not ultimately allow bids to come in from industry. However, that was one of the key reasons why we decided to move to an annualised system, so that we could quickly move forward. Of course, unlike a solar scheme, for example, these schemes are not things that are brought up quickly: they are developed over many years, with parameters informed by the behaviour of the industry.

We always gather the data each year from the industry—companies sign non-disclosure agreements with us and we commission external research—but the most important of all the data we use is behaviour in auctions, because we need that real-world data to inform the parameters we set. It is exactly that process—unchanged but better informed by behaviour in AR5—by which we will set AR6’s parameters, and I am confident that it will be successful.

[Peter Aldous]

rose—

[Graham Stuart]

I see that, having been chided, my hon. Friend is looking to intervene on me.

[Peter Aldous]

I was listening with interest to what my right hon. Friend was saying. To a degree, I hear what he says, but does he not agree that with offshore wind not being successful in AR5, the costs go up in future allocation rounds? It was ready to go, and there were economies of scale that it was ready to take full advantage of, but it was not able to go. The feedback that I am getting from industry is that these things cannot take place in a vacuum, ignoring what is going on throughout the world. Does my right hon. Friend not agree with me that it would have been much better if offshore wind had been successful in AR5?

[Graham Stuart]

Having been chided, my hon. Friend is of course—quite rightly, and characteristically—straining to justify his position, and I have a lot of sympathy with it. I have said that we would ideally have got the window in a way that better matched that reality. But there are reasons for having the annual auction. We always come up with a window that industry says is not enough. We have managed to bring down the costs by 70%. It is hard to overestimate the importance of this. This country, the CfD mechanism and, I have to say, this Government have transformed the economics of offshore wind—not just to the betterment of UK consumers, but to the benefit of the whole world. It is only because of what has happened here with this approach, which every year is in a state of tension with industry, that we have been able to show and reveal these prices. We are now able to export our expertise to the north-east of the United States, to the Gulf, to Taiwan—all over the world—as a result of this process.

I said that I wished we could have better attuned the window to the realities—they changed even after we set the prices in November. That was precisely why we decided on having an annual auction. To put it another way, if what someone offers is always accepted, they might want to consider whether they are overpaying. That is not to say that I in any way revel in the fact that we did not get offshore wind in that round, but I am glad that we had the foresight to move to an annual system and that we are able so swiftly to move on. It will just be the middle of next month when we set out the core parameters for the next round, which will happen next year.

[Mr Carmichael]

Will the Minister give way?

[Graham Stuart]

I will make a little more progress, if I may.

The CfD scheme is a major UK success story. It has secured more than 30 GW of capacity, including 20 GW of offshore wind, since 2014. It has driven down the price of offshore wind by about 70% in that time, helping to grow the industry and its supply chain both in the UK and globally, although as the hon. Member for Manchester, Withington says, I have previously publicly expressed the desire to do more. We are coming forward with non-price factors as a way of encouraging more of the supply chain to be in the UK. But have no doubt: this has been a phenomenal success for us, for British jobs, for British consumers and for the world. We have the four largest offshore wind farms in the world, with more than 14 GW already in operation and a further 77 GW in the pipeline. It is a pleasure for me that of course the largest offshore wind farm in the whole world is Hornsea 2, named after a small town in my constituency. The UK is a world leader in floating offshore wind, with one of the largest amounts of operational capacity anywhere in the world, at 80 MW to date.

The hon. Member for Strangford says that the results of allocation round 5, which concluded in September, were disappointing because the total capacity secured was less. As I have said, I do not accept the characterisation of that round, because it has in fact realised the highest amount, on an annualised basis, of any of the rounds we have ever run. It resulted, in fact, in more projects—95—than we have ever seen successfully done, even though it covered just a one-year window. The round delivered a combined total of 3.7 GW, which is enough to power the equivalent of 2 million homes. As I have said, there was more than double the number of onshore wind projects. We also secured—I have touched on this already—another good result for solar, and four times as many tidal stream projects as AR4 did.

I pay tribute to the right hon. Member for Orkney and Shetland (Mr Carmichael) for his doughty support for the sector. I did not realise that his involvement had stretched to 20 years, but when I visited his constituency he was there to characteristically champion the industry. For the first time in our CfD, we had success with geothermal. This vital new renewable capacity was procured in a competitive auction set against, as I say, a backdrop of highly challenging macroeconomic conditions.

[Jim Shannon]

I thank the Minister for that clear achievement. I remind him that the key technology for Northern Ireland is onshore wind. There have been some advances, and I attended a meeting in Bangor, in the neighbouring constituency of North Down, where an offshore wind turbine was put forward as a possibility for the future. We cannot be part of that process unless the Minister’s Department can reconsider the fact that there is an absence of a functioning Northern Ireland Executive. Northern Ireland’s renewables projects are being uniquely disadvantaged. There is an opportunity to go forward—I am ever mindful of time, Dame Angela; please bear with me one second—and in 2013-2014 a decision was made. That was changed by the consultation process in 2019-2021. The recommendation was endorsed by 93% of the respondents. I gently ask the Minister that with that unique and changing position, there is a chance now and we should be looking at how we can better move forward together.

[Graham Stuart]

I thank the hon. Gentleman for that intervention. I will return to the issues relating to Northern Ireland, if I may. I entirely forgive the hon. Member for Coatbridge, Chryston and Bellshill, who is always a very genial Member, and anyone who has such a high opinion of the hon. Member for Strangford as he does is always welcome in this Chamber as far as I am concerned. This is not what the hon. Member for Coatbridge, Chryston and Bellshill does as a day job, so perhaps that explains the nature of his speech.

Let me dispense once again with the suggestion that consumers are £2 billion a year worse off because we did not secure any offshore wind in AR5. That figure is entirely wrong and misleading, because it does not take account of future wholesale energy prices. Projects that were unsuccessful in AR5, or chose not to bid, can participate in AR6 in 2024, which is just five months away. Having annual rounds means that there will be minimal delay to deployment at minimal or no additional cost to consumers.

The hon. Member for Coatbridge, Chryston and Bellshill highlighted the broader point that the UK, alone among major economies, has halved its emissions since 1990. It can be argued that it is alone among major economies on its path to reach net zero. It is important to note that if we are to stay on track to net zero, which is one of the reasons why the hon. Member for Strangford is so passionate, and he knows this, we need Wales, Northern Ireland and Scotland alongside England to make the appropriate changes. The hon. Member for Coatbridge, Chryston and Bellshill may or may not be aware, given that this is not his day job, that Scotland is behind the curve on performance. It is high on ambition, low on delivery relative to England, and he might want to bear that in mind and have slightly more—

[Dame Angela Eagle (in the Chair)]

The hon. Member for Coatbridge, Chryston and Bellshill came in at short notice to deal with an issue, and the Minister ought to be more sensitive to that in his remarks.

--- Later in debate ---

[Dame Angela Eagle (in the Chair)]

That was not a point of order.

[Graham Stuart]

Whoever comes into this Chamber, I would always take your advice, Dame Angela, but of course the hon. Member represents his party, and when he make allegations against the Government that are unfounded, and when his own Government are failing to deliver on their ambitions and are, in fact, behind the trend for England, it is only right and proper in the spirit of honesty and transparency that that is properly exposed. I know the hon. Member for Coatbridge, Chryston and Bellshill, who himself is not normally a shy person in the Chamber or otherwise, is someone who can easily take it, so I am pleased about that.

I will take no lessons either from Labour, which had only 5.4 GW of wind power when it left government in 2010. The Government have more than five times that amount, at more than 28 GW of wind power, and the four largest operational offshore wind farms in the world. It may be difficult for some to hear, but we know that Labour’s record on renewables is truly dismal. When Labour was in power, as recently as 2010, renewables made up less than 7% of our electricity mix; in the first quarter of this year, we had reached nearly 48%. Lessons will not be taken from His Majesty’s Opposition, let alone the Scottish Government, on this front.

The absence of offshore and floating offshore wind from AR5 was, as I have said, regrettable. These are challenging times for the offshore wind sector, with increasing global demand putting pressure on supply chains at the same time as increasing costs and core materials, resulting in price uncertainty both here and abroad. As both the Secretary of State and I have repeated on many occasions, our ambition for 50 GW of offshore wind, including up to 5 GW of floating by 2030, remains. I indicate to Members to look at the 77 GW of pipeline that we can see ahead. We are listening to the sectors and, as I have said, the annual auctions mean that we can respond quickly and incorporate learnings into the next round. We will publish the core parameters, including the administrative strike prices and pot structure, for allocation round 6 in the middle of next month.

I will turn to the main focus of the debate for the hon. Member for Strangford: the GB CfD scheme being extended to Northern Ireland. When the CfD scheme was being developed around 10 years ago, it was originally intended that it should extend to Northern Ireland as well as GB. For various reasons, which I will not go into here, that did not happen. In December 2021, the Northern Ireland Executive published their energy strategy, the “Path to Net Zero Energy”, in which they set out the intention to implement a support scheme to bring forward investment in renewable electricity generation in Northern Ireland. The strategy indicated that the Northern Ireland Executive were, at that time, exploring with the UK Government the possibility of extending the GB CfD scheme to Northern Ireland, with a view to the inclusion of projects from Northern Ireland in the 2023 allocation round. If that was not possible, the strategy said that the Executive would seek to put in place an alternative support mechanism for investors.

In January 2022, the Northern Ireland Executive published the first of their two action plans, outlining progress towards implementing their net zero strategy. In it, the Executive said that they would consult on proposals for a renewable electricity support scheme for Northern Ireland. In February this year, the Executive made good on that commitment and published a consultation inviting views on design considerations for a renewable electricity support scheme for Northern Ireland. The consultation closed in April, and the Northern Ireland Executive are currently undertaking follow-up work on the scheme’s design, informed by the consultation responses they received.

I understand that officials in the Northern Ireland Department for the Economy aim to publish the design of the scheme this year, as committed to in its 2023 energy strategy action plan. The consultation clearly sets out the direction of travel: Northern Ireland wants to have its own bespoke support scheme for renewables. In June 2022, Northern Irish and UK Government Ministers agreed that the significant challenges of integrating Northern Ireland into the CfD scheme meant that Northern Ireland would be better off pursuing its own scheme. That objective had cross-party endorsement in the Northern Ireland Executive before they dissolved last year.

I believe that the hon. Member for Strangford and I agree that a bespoke support scheme for renewables is the preferred means of securing investment in renewables for Northern Ireland. However, he has argued that the Northern Ireland support scheme cannot be implemented while the Northern Ireland Executive are suspended. If I am putting words in his mouth that he does not agree with, he will intervene on me. He believes that allowing Northern Irish projects access to the GB CfD scheme is the best available option for delivering investment and faster deployment of renewables in Northern Ireland. He knows that I do not agree with him on this.

I do not believe that integrating Northern Ireland into the GB CfD scheme is viable. There are several significant challenges to integration, including systemic and technical barriers incorporating the characteristics of the single electricity market into the GB CfD model, as well as the reforms being considered in the GB review of electricity market arrangements. Furthermore, integration would require complex changes to the CfD payment mechanism, secondary legislation and industry codes, and would likely take several years to complete. Integration therefore would not lead to faster delivery of renewable energy in Northern Ireland, which I know the hon. Member for Strangford so fervently hopes for.

[Jim Shannon]

The Minister is summing up very well his opinion and my opinion. What we do not have is an agreement on how we take this forward. I know the Minister recognises that Northern Ireland is disadvantaged at the moment. What I was trying to seek was a method and a way forward. For that to happen, perhaps further discussions are needed with the Department of Enterprise, Trade and Investment to get its opinion. I feel that there is a consensus of opinion among those who wish to see that investment coming through. Perhaps what I am really asking is for the Minister to explore those possibilities as a potential way forward.

[Graham Stuart]

The hon. Gentleman always makes an extremely plausible and effective advocate for the ideas that he espouses. I—and the Government, I am sure—will remain open to discussions with those in Northern Ireland and with the hon. Gentleman to find solutions. We talked about some of the challenges of staying on the overall net zero pathway. Of the four Administrations, Northern Ireland is potentially the most off track, so there is a real need to find solutions and we always stand ready to work constructively to find the best way forward.

I continue to believe, however, that the development of a bespoke support scheme offers the best and quickest way for Northern Ireland to secure the investment in renewable electricity generation that it needs to achieve its net zero goals. I have not said it explicitly but, of course, energy is devolved, so we are looking to the institutions in Northern Ireland, on behalf of the people of Northern Ireland, to take this on. That is what we would profoundly like to see. I commend the work done by the hon. Gentleman and the Department for the Economy so far, and I encourage us all to support their efforts.

I will try—I hope reasonably briefly, with your permission, Dame Angela—to respond to a few of the other points that have been made. My hon. Friend the Member for Waveney chided me in return, to ensure that we do not rest on our laurels and that we respond appropriately to IRA and perhaps EU initiatives in the space. He talked about creating incentives, picking up on the supply chain development issues that many Members have touched on, and ensuring that seabed auctions are a good place to do that. As he knows, I set out the work that the Crown Estate is already doing to put conditions on at that stage, in addition to changes to the CfDs.

I take on board my hon. Friend’s points about the administrative strike price, and ensuring that we get it in the right place in order to balance keeping costs down for consumers with getting the generation that we want and need. We will set out the pot details in just a few weeks, so I will leave commenting on his appeal for a ringfenced pot for offshore wind. On his request for the pot to reflect the pipeline, that is the mechanism we use for the CfD. That is one of the reasons for setting out the core criteria in November and providing more details in March—precisely so that we can match the budget and the other elements that make up the CfD with a realistic assessment of the pipeline in place. His Majesty’s Treasury and the Chancellor will have heard my hon. Friend’s points on the issues that, sadly or otherwise, sit with the Treasury rather than my Department.

From the right hon. Member for Orkney and Shetland, I heard, as ever, his espousal and support for tidal, and he talked about setting a target for that. The Government remain open and we will continue to consider that, but we have not yet made a decision on whether it would be the right thing to do. It is about doing the right intervention at the right time, based on the stage of development of a particular technology. However, like him, I am proud of the fact that we have been able to see it come on, and see some of the developments in his constituency. The hope to see those operationalised and scaled up here in the UK, with a big and strong domestic supply chain, is one that gives real optimism for the future.

[Mr Carmichael]

I was minded to offer myself as a mediator between the Minister and the hon. Member for Waveney, but they seem to have found a better pitch since that stage in the debate.

On the point of the 1 gigabit target by 2035, does the Minister not take on board the fact that this is now the only technology that does not have such a target? It was sustainable to argue his position in AR4; it is more difficult in AR5, and with every round it will become more difficult still. I say to the Minister again that this is an opportunity to talk to the industry, and engage in a way that works to his advantage by restoring some of the damaged engagement credibility.

[Graham Stuart]

I can go no further than to say that the right hon. Gentleman, as so often, makes a very strong argument. We will continue to engage and will come forward with any decision on that in due course, if that was thought appropriate.

The Opposition spokesman, the hon. Member for Manchester, Withington, talked a little about being able to bring hope to oil and gas communities around the United Kingdom. That is ironic considering the ambition of any Labour Administration, were one to be elected, would be to strangle that industry. Even though, as of last year, we are the most decarbonised major economy on earth, we are still 77% dependent on oil and gas for our primary energy needs.

Over the coming years, due to the precipitous fall in production because of the maturity of the basin in oil and gas production from the North sea, and those expected falls in Norwegian production, our dependence on LNG imports and the like is expected to increase. Having seen the price spikes of the last two years and the risks and issues that arise from not having reliable and ideally domestic energy, the Opposition want to put at threat 200,000 jobs supported by the oil and gas industry —cheered on, bizarrely, by the fortunately ever less popular Scottish Nationalist Government—through wanting to stop any new licences. That is despite the fact that the only alternative realistically available is LNG, which the North Sea Transition Authority recently announced had embedded in it four times the production emissions of domestically produced gas. It is environmentally nonsensical and disastrous for 200,000 jobs. Just as a small addition, the industry is expected to bring in £50 billion of tax revenue over the next five years—goodbye to that as well.

It is absolutely crazy to have an Opposition spokesman saying he is here on the side of oil and gas communities—he absolutely is not. We have an integrated energy system encapsulated within a legal framework in the Climate Change Act 2008, which means we are making the transition. We are leading the world on making that transition, but we will not speed it or help it, but in fact weaken it, if we do not support new oil and gas licences in order to minimise the necessary inevitable reduction in oil and gas production in our waters. It is bad for jobs, for the environment, for the economy and for tax. On no front does it make any sense at all.

I have gone on long enough. I thank everyone for their contributions, not least the hon. Member for Strangford who led the debate. I am happy to keep engaging with him. I admire his tenacity. I recognise what drives him to want to find a solution in Northern Ireland and I entirely share that desire to see something happen. I am confident in our CfD system. It has been a world leader. AR5 was a success even though it did not deliver the way I would like it to have done in offshore wind. I am extremely confident about AR6, where we will again balance getting the generation we seek with ensuring that we look after the interests of consumers and the long-term interests of the United Kingdom.