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

Greg Hands Excerpts

Tuesday 28th June 2022 General Committees

[The Minister for Energy, Clean Growth and Climate Change (Greg Hands)]

I beg to move,

That the Committee has considered the draft Contracts for Difference (Allocation) and Electricity Market Reform (General) (Amendment) Regulations 2022.

It is a pleasure to serve under your chairmanship, Mr Robertson.

The regulations were laid before the House on 11 May 2022. The draft instrument makes a number of amendments to the Contracts for Difference Regulations 2014 and the Electricity Market Reform Regulations 2014. Those amendments include changes to contracts for difference delivery and supply chain plan policy in preparation for the fifth allocation round. They will help support the ambition for the 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” to make progress towards the 2050 net zero target.

The CfD is the Government’s flagship renewable electricity support scheme. It is designed to offer long-term price stabilisation to new low-carbon generators, bringing investment forward at a lower cost of capital, and therefore at a lower cost to consumers. The scheme has been hugely successful in driving substantial deployment of renewables at scale in Great Britain while rapidly reducing costs to electricity consumers. CfD applicants with a capacity of 300 MW 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 our supply chains, promoting innovation and skills in the low-carbon electricity generating sector.

On 9 February 2022, the Government announced that CfD allocation rounds will run annually. The increased CfD round frequency underlines the Government’s commitment to achieving low-carbon electricity generation to achieve a fully decarbonised electricity system by 2035, subject to security of supply. The current policy approach to CfD delivery and supply chain plans needs to be strengthened in the context of annual allocation rounds. That will ensure 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.

The regulations amend the current non-delivery disincentive—NDD—exclusion period so that an application cannot be made in respect of an excluded site in the subsequent two applicable allocation round. That will strengthen the current policy of excluding a site from only one subsequent allocation round. That is a consequential effect of moving to annual options. The change will ensure that the NDD exclusion period is aligned with the decision to hold allocation rounds on an annual basis from 2023, ensuring the NDD remains an adequate incentive to deliver projects.

The regulations also bring alignment with a change to the valuation formula introduced to the allocation framework for allocation round 4. For that round, 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. The regulations now introduce this technical change—amending the corresponding Contracts for Difference Allocation Regulations to reflect the amended formula.

Changes to supply chain plans include amending the validity period of a supply chain plan statement so that it is valid for nine months rather than the previous 12 months. That ensures that in practice developers continue to submit individual supply chain plans for each CfD allocation round in the light of the move to annual auctions.

We are also amending the requirement to provide a supply chain plan statement so that it applies to all floating offshore wind projects. That allows the Government to support the development of supply chains for the more nascent floating offshore wind industry as it approaches significant commercialisation and deployment. We seek to make those amendments now to give certainty to businesses that might be planning to take part in the next CfD scheme opening, as I said, in March 2023.

We are proposing the legislative amendments following a public consultation that ran from 4 February to 15 March, which 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 and investment bodies. Officials also 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.

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. The regulations, together with annual CfD allocation rounds, will help to support an increase in the pace of deployment of new renewable electricity generation needed to achieve our ambitions, while continuing to consider the likely cost to consumers and energy security. Subject to the will of Parliament, the arrangements will come into force on the day after the regulations are made.

Achieving our carbon budget and net zero targets will require deployment across a range of home-grown, green technologies at an unprecedented scale and pace that will support our transition from reliance on fossil fuels. Therefore, I commend the regulations to the Committee.

--- Later in debate ---

[Greg Hands]

I thank the hon. Members for Southampton, Test and for Kilmarnock and Loudoun for their good, detailed questions and contributions.

I welcome the broad support of the hon. Member for Southampton, Test. It is worth noting that arrangements for one CfD application can be rolled over, but that does not obligate a supply chain plan to be unamended. Most would probably evolve their supply chain over the period, which is valid for nine months and not 12, to reflect the move to annual auctions. That will ensure that applicants reflect changes in their commercial arrangements, and seek to innovate year on year, and not simply roll over supply chain plans. Industry acknowledged that and were supportive of the Government’s proposals.

The hon. Gentleman asked why floating offshore wind generation has been brought into the supply chain process. I think that is incredibly important. It is a relatively nascent industry, and ensuring that there is a good supply chain right from the beginning, and doing what the Government can do to steer it in that direction, is really important. Contrary to the hon. Gentleman’s suggestion that perhaps we should adopt a laissez-faire approach, I think there is a good reason for Government to be there right at the beginning to make sure that there is a strong supply chain for the UK to cement its place as a world leader in floating offshore wind, as we have been a world leader in fixed-bottom offshore wind, with Europe’s largest installed capacity.

[Dr Whitehead]

For the sake of clarity, I certainly do not wish to propose a laissez-faire regime for floating offshore wind generation. I am not arguing that there should not be a good regime, but how that regime is brought in as that nascent industry develops. I certainly think it should be subject to either a reduced threshold or it should conform with the 300 MW. I would entirely support that, because supporting the supply chains as the industry develops is clearly a positive and good idea—as the hon. Member for Kilmarnock and Loudoun said.

[Greg Hands]

I am glad that we are in alignment on the need for supply chain plans. It is key to note that in its first phases, floating offshore wind will typically consist of significantly smaller projects. Therefore setting a different limit at which the supply chain must be submitted makes perfect sense if we are to capture floating offshore wind projects and make sure that there is taxpayer value for money. That is in all of our interests, not just the Government’s. We must make sure that we able to develop and cement our advantage in the UK. We have a fantastic technological advantage when it comes to wind. To start with, we have a fantastic geographic advantage, and making sure that we can cement our world leader position will depend upon making sure that there are good supply chains for those projects, which are necessarily smaller than fixed-bottom offshore projects. That is the reason for the different threshold.

Floating offshore wind is a technology on the verge of significant commercialisation and deployment within the next five years. Being at a key juncture in terms of its deployment means that certain emerging technologies, like floating offshore wind, have the potential to play a really important role in helping us to meet net zero. Bringing those projects into the supply chain process will allow BEIS to support the development of the associated supply chain at the earliest stage, by encouraging the industry to invest in competitive supply chains and accelerate cost reduction.

The hon. Member for Southampton, Test asked about engagement with the Crown Estate. I engage with it all the time, probably on a weekly or almost a fortnightly basis. I am happy to consider his specific point about the Celtic sea. That sea will be very important for us. At the moment, offshore wind has been a huge success for this country, but it has been predominantly an east coast and Irish sea phenomenon. It is very strong in Scotland, the north-east of England, Yorkshire, Humberside, East Anglia, the Irish sea, and north Wales gets a piece of the action. But the developments in the Celtic sea enable us to bring extra places around the United Kingdom, most importantly south Wales and the west country of England, into the offshore wind industry. Our position as the world leader, and as Europe’s largest installed capacity for offshore wind, is one of this country’s really great success stories of the past 10 years. To bring the Celtic sea into that development will help to level up and make this an all-UK effort.

[Alan Brown]

I do not have a problem with the development of the Celtic sea, but obviously we cannot forget about the North sea. For the record, there has been a discussion about the Crown Estate of England and Wales allowing for the generation of 4 GW, and there is also Crown Estate Scotland and the ScotWind leasing round. That latter round had bids for 25 GW of offshore energy, but National Grid ESO is only allowing for 10 GW of that in its forward planning, so that is a real disconnect. Will the Minister allow for the full deployment of that 25 GW of ScotWind leasing?

[Greg Hands]

The hon. Gentleman is quite right; BEIS and the UK Government put a lot of effort and support into the ScotWind process. Of course offshore wind off Scotland is incredibly important to the country as a whole, and floating offshore wind will be a big part of that. On Crown Estate Scotland, the hon. Gentleman may be aware that I was involved in a lot of the legislation for the devolution of the Crown Estate to Scotland under the Scotland Act 2016. I am familiar with a lot of the issues in relation to Crown Estate Scotland. We have an excellent relationship with it. While recognising that Scotland has been a massive part of the delivery of our fixed-bottom offshore wind, and will be a massive part of the delivery of offshore floating wind, it is good to get all of the UK in on the action when it comes to offshore generation.

We are investing up to £160 million for new, large-scale floating offshore wind ports and manufacturing. That is a big investment of Government money to make sure that we have a great future when it comes to floating offshore wind. The funding, boosted by private sector investment, will develop port infrastructure capable of mass-producing floating offshore wind turbines and installing them out to sea, reducing the need to import from overseas. That will create thousands of new jobs in the UK’s industrial heartlands and around our coasts. We have recently announced £31 million of UK Government funding to be matched by industry for research and development in this sector.

The hon. Member for Southampton, Test asked about the light-touch regime. Again, I think it is a question of balance. For the smaller projects, and to start with it will be predominantly smaller projects, we want to look at their supply chains. That is really important to us, but, equally, we do not want to make a regime that is too onerous on those smaller projects. That is why there is a lighter touch regime and questionnaire, but a deeper down, if you like, in terms of the size of the companies that must make supply chain plans. The consultation on the new supply chain questionnaire closed on 14 June. The Government’s response detailing the new approach will be published in due course, and the updated questionnaire and guidance will be published this summer.

I think I have covered the removal of the 300 MW threshold from floating offshore wind. I think I have answered a few of the points raised by the hon. Member for Kilmarnock and Loudoun, and I think the anticipatory grid will be a key part of the debate. The criticism is that National Grid does not currently allow for anticipation of when projects will come on and provide for the grid. Ofgem is actively looking at that, and I expect that might be a key part of future debate. There will be a big scale-up in electricity generation, especially as our electricity demand will double by 2050. We need to have more grid, more network, more transmission network and more distribution network to make that happen. To make sure that our system is fit for that will be a key part of the energy security Bill to be considered in this parliamentary Session.

I hope that my responses have provided the necessary assurances so that Members can approve the SI. The changes in the regulations are essential to ensuring that the next CfD allocation round, which will start in March 2023—the first annual round—is a really important reform to drive through more renewable energy in this country. The regulations will help to make sure that our supply chains and other parts of the process are as best supported as possible, to make sure that we support the pace of renewable deployment while continuing to ensure value for money for consumers. That is why I urge the regulations to be made now, ahead of the next CfD allocation round in next March, so that developers have certainty as to who will be eligible to take part and on what basis. I therefore urge the Committee to agree to the regulations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Contracts for Difference (Allocation ) and Electricity Market Reform (General) (Amendment) Regulations 2022.