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

Lord Teverson Excerpts

Monday 13th June 2022 Grand Committee

[Lord Lilley (Con)]

My Lords, I will ask some questions, because I do not fully understand all this and these SI debates are often a good opportunity to expand one’s knowledge.

First, I would be grateful if the Minister can explain how a shorter life validity of the supply chain plan acts as an incentive, and what it incentivises. What happens after the plan lapses? None of that is obvious to me from the not very helpful Explanatory Memorandum. Are these supply plans published? Can we all see them or are they private documents between the Government and the supplier? Overall, do they help us to estimate what percent of the value added in supply chains is generated within the UK? If so, I would be grateful to know what it is.

Can the Minister also confirm that although the newest offshore fields won the bidding process with low prices, they have not yet activated their contracts so they are able to sell their electricity at the very high prices now prevailing, making what most people might call a windfall profit? That is the sort of thing Governments love to tax but they seem to have got off scot free. I would be grateful to know whether that is the case and to what proportion of wind generation that applies.

I would also like to know what proportion of wind generation comes from the early contracts, which, if I have correctly understood it—that may well not be the case—got a variable price plus a bonus and therefore are getting not merely the current high price but the current high price plus something extra: jolly good for them, but not so good for the consumer. Again, that is something that Governments might like to tax but they do not seem to have done so in this case. I would like to know what proportion of the renewables supply that is. By deduction, that should tell us what proportion of the renewables supply is under CfDs and therefore is not going up with the gas price. It would be very helpful if the Minister could answer that.

If those questions identify an intrinsic problem in the present system, why does this measure not deal with it—unless it does and I have not been able to find it in the not very helpful Explanatory Memorandum? I will be grateful for the Minister’s replies.

[Lord Teverson (LD)]

My Lords, I start—partly related to what the noble Lord, Lord Lilley, said—by thanking the Minister profoundly. The last time we had a debate around CfDs, I asked a number of questions about the Low Carbon Contracts Company, which is wholly owned by the Government, and how much money it was making because of the energy price in relation to the strike price on CfDs. The Minister provided a comprehensive reply. Unfortunately, I do not have the numbers from it with me, but I thought it was extremely useful and I thank him for that. There is significant money coming back into the Low Carbon Contracts Company and, therefore, the public sector. Of course, the area that does not is the old ROCs regime, where I presume good profits are being made by those renewable companies that still operate under that system—although those presumably are starting to die out fairly quickly.

--- Later in debate ---

[Lord Callanan (Con)]

I thank all the three noble Lords for their contributions. They were raising wider concerns about how the process works; I do not think anybody objected to the SI itself, so I thank Members for their support. The points that were raised demonstrate the need for these regulations—they are technical changes—and the support for introducing them.

As I said at the start of the debate, these changes are essential to ensure that the next CfD allocation round, which will be the first annual one, can best support something we all want to see: an increase in the pace of renewable development and the deployment needed to help us achieve our net-zero ambitions and get the price of electricity down in the longer term. At the same time, they help to achieve our legal net-zero commitments.

My noble friend Lord Lilley was right to point out the need to consider the likely cost to consumers, the impacts on energy security, et cetera. These regulations must be made now, ahead of the next CfD allocation round, which is planned for March next year, as I said, so that the developers have certainty as to the legislative framework for the next round.

Dealing with some of the questions raised, my noble friend Lord Lilley asked me to explain how a shorter validity acts as an incentive and what happens after the supply chain lapses. He also asked whether supply chain plans are published. The answer is that they are. They set out how they will improve the capacity of the supply chain. The noble Lord, Lord Teverson, touched on the reason and I need to be slightly careful here. We are endeavouring to ensure that—how should I put this?—as much of the supply chain as possible is located in the United Kingdom, without breaching our legal obligations, which nobody would want to see us do. We are subject to legal action from the European Commission in the WTO, at the moment.

My noble friend Lord Lilley also asked what the Government are doing to stop CfD generators delaying their start dates so they can benefit from high energy prices. First, the vast majority of operational CfD projects are, happily, paying back into the system, due to the current high energy prices. I set out those figures in a letter to the noble Lord, Lord Teverson. Subject to his agreement, I would be happy to send a copy to my noble friend.

In essence, in April this year, the Low Carbon Contracts Company, which is responsible for administering this system, returned £108.3 million to GB suppliers in respect of payments made by generators since last autumn. However, my noble friend is correct, and the Government are aware of a small number of projects that have delayed their contract start dates to try to benefit from current high wholesale prices. Legally, CfDs are private law contracts between the Low Carbon Contracts Company, the CfD counterparty and generators. The Government are not legally a counterparty to those contracts. However, we have raised the matter with the industry and made it clear that, in our view, this practice is not within the spirit of the scheme, which is intended to deliver benefits to both consumers and developers. While operating on commercial terms, these developers will not receive CfD payments. We are examining possible changes to the scheme to prevent future CfD projects acting in this way. While this practice is regrettable, it is important to remember that CfDs have played a significant role in massively bringing down the cost of offshore wind in recent years.

My noble friend also asked about capacity. The CfD scheme currently supports 16 gigawatts of new capacity, of which 13 gigawatts is offshore wind. Only two projects, totalling 1.4 gigawatts, have delayed their contract start dates in order to sell their electricity on the open market.

Turning to the slightly problematic area which concerns the noble Lord, Lord Teverson, reflecting the concern of the EU that we are breaching WTO rules, my legalistic response to this is that in the supply chain plans we do not require developers to use UK content. The supply chain plans are there to encourage them to invest in creating competitive, capable and efficient supply chains which are, of course, necessary for us to deliver net zero, taking into account our national obligations.

[Lord Teverson (LD)]

May I say to the noble Lord that that is highly commendable?

[Lord Callanan (Con)]

I thank the noble Lord for his comments. The noble Lord also asked why there is discrimination against floating offshore wind in terms of the 300-megawatt capacity. The answer is that this technology is at a key juncture in terms of its deployment, and we think that certain emerging technologies—such as floating offshore wind—have the potential to play an important role in the future in helping us to meet net zero. Bringing them into the supply chain process now will allow BEIS to support the development of the associated supply chain at an early stage by encouraging the industry to invest in competitive supply chains and—as has happened with offshore wind—to accelerate the cost reduction, by which we are now all benefitting.

There were also a number of technical questions raised by the noble Lord, Lord McNicol. This SI is not affected by the detailed questionnaire that was issued. On his other questions, it may be better if I reply to him in writing, if he will allow me to do so. With that, I commend this draft instrument to the House.