Contracts for Difference Scheme

Jeff Smith Excerpts

Thursday 19th October 2023 Westminster Hall

[Jeff Smith (Manchester, Withington) (Lab)]

It is a real pleasure to see you in the Chair, Dame Angela. I congratulate the hon. Member for Strangford (Jim Shannon) on securing the debate, and thank him and other hon. Members who have made such interesting contributions.

The contracts for difference scheme has been an important way of incentivising investment in renewable energy, and has played a key role in making renewable energy the cheapest form of electricity in the UK, and in supporting low-carbon electricity generation. We welcome clean power projects that have been delivered by the scheme and those that will start to generate power over the next couple of years. Labour’s aim is to deliver a cheaper zero-carbon electricity system by 2030: quadrupling offshore wind, aiming for 55 GW by 2030; expanding floating offshore wind, fast-tracking at least 5 GW of capacity; more than tripling solar power to 50 GW; and more than doubling our onshore wind capacity to 35 GW, in addition to ambitious plans for nuclear, carbon capture and storage, hydrogen, and long- term energy storage.

Successful administration of the contracts for difference scheme as part of a wider strategy will be important in achieving that aim. If we are to accelerate towards a clean power system—towards renewables that are cheaper and less volatile than fossil fuels—we need to ramp up that capacity year on year. We particularly need new offshore wind projects to come forward for investment. Offshore wind has been the dominant technology in previous contracts for difference auction rounds, but of course we have heard today the headline news from the recent AR5 round: the failure to attract any offshore wind bids—a major and avoidable failure by the Government.

The Minister has spoken in the House about learning the lessons of the failure of that recent round, and learning from those mistakes, but the truth is that Ministers were repeatedly warned about the impacts of higher inflation and setting an unrealistic strike price. In March 2023, RenewableUK said that

“the budget and parameters set for this year’s CfD auction are currently too low and too tight…We’re calling for the Government to revise the CfD budget so that we can stay on track to deliver on our renewable energy targets, as well as creating tens of thousands of high-quality green tech jobs and attracting billions in private investment in the years ahead”.

Then in July it joined with Energy UK and Scottish Renewables to make this warning:

“The current emphasis on securing renewable capacity at the lowest possible strike price, minimising expenditure rather than maximising benefit, risks creating a less attractive investment environment in the UK. The race to the bottom on strike prices incentivised by the current auction process is at odds with the reality of project costs and investment needs, jeopardising deployment targets.”

The Government had time to adapt, so why did they not heed those warnings?

Because of that missed opportunity, we will now be more dependent on expensive, insecure fossil fuels. No new offshore wind projects mean that families’ energy bills could be £2 billion higher, and our energy security will be weakened. Every wind farm that we fail to build leaves us more exposed to global instability. The Government are squandering the potential for offshore wind, just as they squandered our potential for onshore wind by effectively banning it. All of that results in higher bills, energy insecurity, fewer jobs and climate failure.

I welcome the projects that did come forward through CfD allocation round 5 but, because of the lack of offshore wind bids, the capacity awarded in this round was 7.1 GW less than in AR4—a drop of 66%. Now, the annual capacity expected to be added in 2027 has dropped because of the much lower capacity of bids successful in AR5. Future auction rounds could, in theory, increase the capacity of projects starting in 2027, but that is not likely to come from offshore wind, which has longer lead times. It is a missed opportunity when the offshore wind sector stands ready to deliver.

The Government might blame this failure on offshore wind on supply chain inflation and interest factors outside their control, but the reality is that investors and industry issued warnings all year. A similar auction held by the Spanish Government failed last year, while the Irish Government adjusted their price to account for the warnings and managed to have a successful auction. Offshore wind is so much cheaper than gas that the Government could have raised the price in the auction and it would still have saved billions of pounds for families.

Labour’s plan for a clean-power energy system will cut bills for the long term, while making the most of the opportunities brought about by jobs in the supply chain. We want them to be good jobs, and we want them to stay in Britain. We will allocate a fund of up to £500 million for each of our first five years in government to provide capital grants to incentivise companies developing clean-power technologies to target their investment particularly at the areas that most need it, investing in UK jobs, skills and supply chains—a British jobs bonus so that, as we take on the climate crisis, we also build a fairer, more prosperous country.

That will work by providing an incentive to winning bids in the contracts for difference auction to invest, create jobs and build supply chains in industrial heartlands and coastal communities of the UK, including communities with historical and current ties to fossil fuel production. There will be a clear and transparent incentive for companies to create good jobs in those areas. We hope that the benefits will be particularly felt in Scottish oil and gas communities, coastal communities and the north-east of England. Independent analysis suggests that that policy alone will create up to 65,000 jobs in clean-power industries by 2030.

The British jobs bonus will be separate to the contracts for difference so that the fundamental structure, which has successfully made developers compete on costs, would stay the same. The Government have themselves recognised that, while the contracts for difference scheme has successfully driven down renewable energy deployment costs, which is to be welcomed, it has not supported supply-chain investment in the UK. That could jeopardise energy security and our ability to hit deployment targets, given growing global bottlenecks.

The Government issued their call for evidence on including “non-price factors” in contracts for difference auctions, so can the Minister give us an indication of the action he will take in response to that to address supply-chain issues? And can he say anything on the timescale for the Government’s potential plans to reform CfDs? I again ask him, how does he plan to reach 50 GW of offshore wind capacity by 2030, and how does he plan to recover the progress that we need to make on offshore wind, following the setback of AR5?

It is essential for business and investor confidence that the move to annual CfD auctions does not create a boom-and-bust dynamic, so any suggestion that we can afford a missed year, and can just pick it up again in the next round, is complacency. We cannot afford for the transition to clean power to not be a success. We need that transition quickly to cut bills, boost our energy security, create good jobs and prosperity and tackle the climate crisis.