Contracts for Difference (Miscellaneous Amendments) Regulations 2016

Lord Bourne of Aberystwyth Excerpts

Tuesday 5th July 2016 Grand Committee

Moved by

[Lord Bourne of Aberystwyth]

That the Grand Committee do consider the Contracts for Difference (Miscellaneous Amendments) Regulations 2016.

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change and Wales Office (Lord Bourne of Aberystwyth) (Con)]

My Lords, before turning to the detail of these regulations I would like to make clear that this Government’s commitment to delivering the secure, affordable and low-carbon energy supply that this country needs, and which the Secretary of State set out in her reset speech in November of last year, remains constant. The vote to leave the European Union does not change this Government’s approach to these challenges, and we remain fully committed to delivering on our priorities, including encouraging the development of offshore wind where we see great potential—and where good progress is already being made—to get costs down and to deploy at scale. In fact, I met with representatives of the offshore wind industry this morning to discuss the opportunities that exist. The ability to provide good-quality jobs and apprenticeships and to support industrialisation of the whole supply chain, including United Kingdom companies, is just one of the elements that makes the industry attractive. We are proceeding with plans to hold a competitive allocation round for “less established” technologies later this year and hope to announce the details of this as soon as practicable.

The regulations that are the subject of this debate will amend regulations concerning the contracts for difference scheme. The contracts for difference scheme is designed to incentivise the significant investment required in our electricity infrastructure, to keep our energy supply secure, to keep costs affordable for consumers and to help meet our decarbonisation targets. Contracts for difference, or CFDs, give eligible generators increased price certainty through a long-term contract of 15 years. This allows investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. Participants in the scheme bid for support via a competitive allocation, which ensures costs to consumers are minimised. We plan to run the next allocation round in late 2016—details, although not yet published, will be brought forward shortly.

As noble Lords will be aware, the first CFD allocation round was held in October 2014, leading to contracts being signed with 25 large-scale renewable generation projects, at significantly lower cost than those projects would have cost under the renewables obligation scheme. While this scheme is operating successfully, the Government are looking to make a number of minor amendments: first, to ensure that an application for a CFD cannot be made where there is a pending application for a capacity agreement in respect of the same unit, which would potentially distort the allocation for both processes; and, secondly, to improve the efficacy of the allocation process, including by making available non-price bid information to enable evaluation of the allocation rounds—information that would be held by National Grid and would be made available to the Secretary of State.

In order to implement our proposed amendments, four sets of regulations will need to be amended by this instrument: the Contracts for Difference (Definition of Eligible Generator) Regulations 2014; the Contracts for Difference (Allocation) Regulations 2014; the Contracts for Difference (Standard Terms) Regulations 2014; and the Electricity Market Reform (General) Regulations 2014. The instrument under consideration—that is, the Contracts for Difference (Miscellaneous Amendments) Regulations 2016—makes a number of minor and technical amendments to the current regulations. I will aim to run through these technical amendments briefly.

The amendments are designed to improve the effectiveness of the CFD scheme. The most significant of these amendments are: first, to ensure that an application for a CFD cannot be made where there is a pending application for a capacity agreement in respect of the same unit. This will ensure that an applicant cannot apply to participate in the CFD and capacity market auction at the same time and then make a choice of scheme, potentially distorting the allocation for both processes.

Secondly, the regulations set out the connection requirements applicable to generators who connect to the national transmission or distribution system, or to a private network, to align with the allocation framework. These are key qualification requirements for applicants who connect to the grid in this way, and having the detail in regulations will provide greater certainty to generators in advance of a future allocation round.

Thirdly, the regulations refine the procedures that apply when there is a need to delay or rerun the auction or allocation round, leading to greater clarity for investors.

Fourthly, they make a distinction between confidential price information and non-price information in a sealed-bid submission, which will ensure that the Secretary of State is able to obtain information relating to non-price sealed-bid data to evaluate the efficacy of the allocation round—non-price information could, for example, include the ratio of successful to unsuccessful projects or the number of bids in each delivery year.

Fifthly, they enable unincorporated joint ventures to participate in the CFD regime.

Sixthly, they ensure that only those bank holidays observed in England and Wales are considered within the definition of a “working day”. The proposal to focus on a single jurisdiction to define a “working day” allows for consistency of time periods and deadlines throughout the CFD regime.

Finally—seventhly—they allow for the Secretary of State to issue a direction to the CFD counterparty to amend signed CFD contracts where the sustainability criteria have been altered in subsequently published versions of the CFD.

All of the proposals being implemented by this instrument were publicly consulted on and received a largely favourable response. Some concern was expressed about the proposal to split non-price data from confidential price information in a sealed-bid submission. We are confident that the non-price data can be effectively disaggregated from confidential price information and anonymised in such a way that individual projects cannot be identified. This will enable us to evaluate the efficacy of the allocation round.

As a final point, I would like to take the opportunity to assure noble Lords that the Government will continue to evaluate and monitor the reforms following implementation, making sure that the measures put in place remain effective and continue to represent value for money to the consumer. I beg to move.

[Baroness Jones of Whitchurch (Lab)]

My Lords, I am grateful to the Minister for his explanation this afternoon. We accept that most of these changes appear to tidy up minor issues which have cropped up after the initial allocation rounds. Arguably, some of those problems might have been anticipated, but I will not make an issue of that this afternoon.

The most important amendment is to Regulation 14, seeking to extend the exclusion from possible conflict between CFDs and capacity agreements to cases where an application has been made for a capacity agreement but has not been determined. Therefore, as the noble Lord said, the new rules would stop duplicate applications to both allocations at the same time. I understand that this type of gaming is not desirable, although I also understand that the Minister in the other place admitted this had not ever happened in practice. In the meantime, can I clarify whether, under the new regulations, this prohibition works equally for both schemes, so that you cannot apply for either one while the other application is being processed?

Also, while we understand that the Government would not want to reward one company applying under both schemes, is there not some scope for companies to make some sort of initial application, on the basis that the applications take time to go through the several stages and be considered, before that company works out for itself which is the most right and appropriate application to pursue? I just wonder whether we are being rather too stringent on this and whether there ought to be some more flexibility for an initial application to be made before the final application is followed through. I think companies may find that that process makes it easier for them to decide what is in their best interests in the longer term.

Perhaps the noble Lord could give some clarification on these points, but I would make it clear that, in principle, we support the amended regulations.

[Lord Bourne of Aberystwyth]

My Lords, I thank the noble Baroness, Lady Jones, for her contribution and her general support for this instrument. As she rightly said, and as was stated in another place, there have not been any overlapping applications for CFDs and capacity market agreements so far. This is therefore a pre-emptory move to ensure that such overlaps do not happen. She is right to suggest that the prohibition would work equally for both schemes and in both directions.

On the noble Baroness’s point about flexibility being desirable, so that a company might choose, it is our view that the details of the schemes are available and, obviously if they do not overlap, it is possible to apply for one and subsequently for another if the first application was unsuccessful. However, it appears to us—although we will keep it under review—that it is absolutely right that people make that choice. After all, the CFD and the capacity market are for different purposes. We believe that this is the right approach, but I assure the noble Baroness that we will keep her point under review and thank her for raising it.

With that, I commend the regulations to the Committee.

Motion agreed.