Offshore Wind Developments

Mike Weir Excerpts

Tuesday 6th January 2015 Westminster Hall

[Mr Mike Weir (Angus) (SNP)]

I am pleased to have secured this debate and thank the Backbench Business Committee for recommending it.

Developing the United Kingdom’s offshore wind resource would provide a significant supply of clean, secure energy. Scotland, of course, has huge potential to provide a large proportion of energy from this source. There are proposals for a number of wind farms around our coastline, including three off the coast of my Angus constituency. Between them, the projects off the coast of Angus alone could supply more than 2 GW of electricity.

In addition, developing this resource could create a significant domestic manufacturing and export industry. RenewableUK has estimated that employment in the offshore renewable industry can grow from the current 13,000 jobs to over 44,000 by 2023. The Centre for Economics and Business Research has found that investment in offshore wind will deliver £8.4 billion of gross annual value added to the UK economy by 2020 and that the sector could boost exports by £18 billion a year by 2030.

This is not purely projection. As part of electricity market reform, the Department of Energy and Climate Change established a final investment decision enabling process—a bit of a mouthful, but never mind—which enabled a number of projects to move forward with investment decisions, having been awarded early contracts for difference. This enabled five offshore projects totalling nearly 3.2 GW of capacity to come forward. On the back of this, there was a significant boost to the offshore supply chain when Siemens, the dominant supplier of offshore turbines in Europe, confirmed that it would proceed with a major manufacturing facility in Hull for its new offshore turbines. This was a clear demonstration of the direct link between visibility of deployment at scale and securing wider investment in the supply chain, and it demonstrates that this is not just a Scottish issue; it applies also to the north of England.

If we are serious about the re-industrialisation of the UK, the “march of the makers”, or whatever slogan one wants to use, we need to ensure that we actually invest to get these industrial developments built and producing.

[Ms Margaret Ritchie (South Down) (SDLP)]

Is the hon. Gentleman aware that in Northern Ireland, there was an application to explore having offshore wind farms on the County Down coast, but that fell foul of electricity regulation rules and did not fulfil the time requirements? Does he agree that that was a lost opportunity for economic investment?

[Mr Weir]

I am not familiar with that case, but it sounds like it was. Offshore wind farms give the opportunity to provide not only clean energy, but employment. That is important for the hon. Lady’s area and mine, and for much of Scotland. That point was reinforced in a report from the think-tank Green Alliance, which found that CfDs form part of a strong new investment framework for offshore wind, but that a lack of clarity over post-2020 policy and funding

“is contributing to a shrinking of the offshore wind project pipeline”.

That seems to be the case in Northern Ireland, given what the hon. Lady said.

Clear decisions over future support for the sector will need to be taken in the early days of the next Parliament if the pipeline is to be sustained at levels necessary to support continued growth of the sector out to 2030. Specifically, the report finds that:

“The UK will need a minimum of 25GW of offshore wind by 2030, of which 10GW is projected to be in operation by 2020. Currently, 13GW of additional offshore wind projects are at an advanced stage of development, and a further 20GW have entered development.

Policy, regulation and funding challenges mean the pipeline is shrinking. 8.2GW of offshore wind projects were withdrawn in the 12 months to June 2014, with other projects since shelved. New projects must compete for government funding which will only be sufficient to deploy an additional 1.2GW in the five years up to 2020.

However greater policy stability could result in capital investment worth in the region of £1.8 billion a year between 2015-30 into the UK offshore wind supply chain, over three quarters of which is made up of small and medium sized UK companies.”

That shows the potential; at this stage, much of it is just potential.

Previously, of course, these developments were funded through the renewables obligation, under which developers built projects, gained accreditation and received a fixed sum on top of the market price. However, under the new system of contracts for difference introduced under the Energy Act 2013, projects must be developed to a point at which they have planning consent and a grid connection offer; then they can bid into a competitive allocation round to secure a contract for difference, which tops up the market price to a specified strike price.

I stress that this debate is not an attack on the change in the system. It is fair to say that most, if not all, parties in the House supported the change to contracts for difference.

[David Simpson (Upper Bann) (DUP)]

Although I support the hon. Gentleman’s message on this subject, a number of businesses and others in my constituency are concerned about the cost of green energy, and believe that it is not properly regulated. Does he agree that we need proper regulation to make it more efficient, and so that more companies can use it?

[Mr Weir]

Clearly, there is a balance to be struck between the interests of the bill payer and the interests of creating renewable energy. We all have to take that into account. My point is that as well as being clean, renewable energy also produces investment in industrial development and creates jobs. I agree that there is a balance to be struck. We must always bear in mind the impact on the bill payer of all these projects, and we must always seek value for money. The point that strikes that balance will vary over time.

[Mr Christopher Chope (Christchurch) (Con)]

Does the hon. Gentleman agree that there is much better value for money for the taxpayer in subsidising nuclear power than offshore wind?

[Mr Weir]

I am sure that the hon. Gentleman will be gobsmacked to know that I do not agree. I will mention that later. No doubt, he will make his own points on that subject.

When I served on the Energy Bill Committee, I raised concerns about the changeover process from renewable obligations to the contract for difference regime. That seems to be part of the problem that we are experiencing. The renewables obligation comes to an end in 2017. The difficulty arises because of the way that the CfD process is being introduced, particularly in respect of whether and at what level funds will be available in future years.

Two developments off the shores of my constituency have a combined total of 1,234 MW and both are bidding in the first round of contracts for difference. The Government are currently considering that first round of CfDs, which are due to be allocated, I understand, around the end of March. Therein lies part of the difficulty. New projects have to bid for contracts for difference through a competitive auction process, and offshore wind projects will compete not only with each other for the budget, but against other renewable energy projects. Offshore wind has been grouped with wave, tidal, biomass, combined heat and power and Scottish island wind. There is a total budget for all these technologies of £235 million, which is split between £155 million for 2016-17 and £80 million from 2017-18.

RenewableUK has estimated that this would be enough to bring forward around 700 MW of capacity—just over half of what could be produced by the two developments off Angus alone, never mind any others that might be in the pipeline. RenewableUK has estimated that up to 3.5 GW of capacity could have entered into the current allocation round, and by the time of the second allocation round, expected towards the end of this year, the number could rise to over 9 GW.

I am told that the amount of money allocated to the first round, which is under way, is significantly less than the industry expected, and that is causing considerable unease in the industry. It can be seen from the figures I have quoted that there is no way all three Scottish entrants could achieve a CfD. Indeed, given that there will certainly be bids from other parts of the UK, there is no guarantee that any of them will get a contract at all. That leaves the industry facing a dilemma. As Gordon Edge, director of policy at RenewableUK, put it:

“There is enough money on the table for 700-800MW in this allocation round if all the money in the ‘less established’ pot goes to offshore wind”,

which he considered likely. He said:

“There are a number of large offshore wind projects coming forward that are significantly larger than this. Developers of those projects are left with the choice of carving out a piece of their development to fit—which is likely to make the economics more challenging—or sitting it out in the hope of a better opportunity later. If the budget for the next allocation round is the same as the first round, then less than 10 per cent of capacity we project will be eligible to bid can secure a CfD. It can take hundreds of millions of pounds to get offshore wind projects through consent, which is why the industry is getting very hot under the collar.”

There is a real danger that some developers will begin to consider whether they are prepared to continue to pump large sums of money into projects if there is not at least a real chance that they will secure a contract for difference.

I raised that issue with the Secretary of State at the last Department of Energy and Climate Change questions. I said:

“Many offshore wind developers have expressed concern that owing to the structure of the current contracts for difference allocation round, only one development will be given a CfD, imperilling many of the others. Can the Secretary of State give them any reassurance that there will be greater consideration of offshore wind in future CfD allocations?”

The Secretary of State responded:

“First, it is worth putting it on the record…that Britain leads the world in offshore wind”—

that is perhaps true, and is welcome—

“with more offshore wind farms installed than in the rest of the world combined. In the current round of CfD allocations—of course, it has not been completed yet, so I cannot talk about the details—we have ensured that we have sufficient allocation for offshore wind, but we have also ensured that the levy control framework includes further allocations for it, so that the consumer can benefit from dropping prices.”—[Official Report, 18 December 2014; Vol. 589, c. 1551-1552.]

The difficulty with that is that the allocations for future rounds are not clear, and that is causing a great deal of concern in the industry.

What the Secretary of State said is all very well, but there is no certainty about the future budget, because the Government are giving no market signals about what the budgets are likely to be in future allocation rounds, and in future years, and there is no visibility beyond the current delivery plan, which extends to 2018-19. That uncertainty will almost certainly lead to developers looking again at developments. Without the confidence that budgets will be available, it is impossible for them to assess the allocation risk, and that will act as a deterrent to investors. Uncertainty could increase the cost of development, rather than create the savings that the Government are looking for.

For those projects that are not successful in the current round or whose capacity is too large to be supported within the available budget—the only definite figures that are available are under the current budget—lack of foresight could increase uncertainty yet further. The industry has suggested that it needs clarity on the frequency of allocation rounds and foresight of at least two allocation budgets at any time. Will the Minister say whether the Department is considering or is prepared to consider that in the near future?

[Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)]

I congratulate the hon. Gentleman on securing the debate. Given that there are some technologies for which the Government are prepared to agree contracts for many decades into the future, does he agree that the Minister should indicate whether they will take a similar approach to renewables?

[Mr Weir]

I should perhaps introduce the hon. Gentleman to the hon. Member for Christchurch (Mr Chope), who mentioned nuclear energy, and they could have a small debate on that point, which I will come to shortly.

[David Mowat (Warrington South) (Con)]

Perhaps to answer that point, the strike price at Hinkley Point was 50% lower than the strike price we are talking about with the offshore industry. Until that strike price comes down, the issue will remain.

[Mr Weir]

We are in danger of having a debate within a debate. I will return to the points I was making on offshore wind, although nuclear power does come into this to some extent. If we are serious about the long-term development of offshore wind, we need clear targets and commitments for developers and we need to ensure that we give certainty to support supply chain investment and development. That would undoubtedly also involve providing the necessary conditions for competition, innovation and cost reduction, all of which are supposed to be the Government’s aims. Instead, there are mixed messages on energy policy and continuing uncertainty. Strike prices are set only to 2018-19 and the levy control framework is set only to 2020. There is no real commitment to a decarbonisation target. RenewableUK described the 2020 deadline as being like a cliff edge, because of the uncertainty on what comes after.

Those points were also raised in the Green Alliance report I mentioned, which concluded:

“The research has identified five actions the next government should take to realise the industrial and decarbonisation potential of offshore wind:

1. Set a 2030 carbon intensity target for the electricity sector of 50gCO2/kWh”—

given the Government’s previous response to that, I am not holding my breath—

“2. Confirm the scale of funding available to support delivery of low carbon energy infrastructure during the 2020s under the Levy Control Framework.

3. Provide more certainty for low carbon generators by confirming the timing of funding allocation rounds for the rest of this decade.

4. Stabilise the supply chain by committing to minimum levels of offshore wind deployment in the 2020s (dependent on generators meeting cost targets).

5. Draw on international experience to derisk UK offshore wind development and ensure a robust pipeline during the 2020s.”

The hon. Member for Upper Bann (David Simpson) made a point about the impact on the bill payer, which we also have to take into account. We cannot say that we will just pump money into any sort of development, irrespective of the impact on bill payers. It is not necessarily about putting more money into offshore wind. As I have said, by investing in offshore wind, we get more than just clean energy; we get industrial investment, jobs and the economic regeneration that many of us are looking for in our areas. It is about certainty and giving the industry a clear signal that the huge amounts of money it is putting into developing these projects will not be wasted and that there is a plan beyond 2020 to ensure that these developments will come on stream, produce energy and increase industrial investment.

[Albert Owen (Ynys Môn) (Lab)]

I congratulate the hon. Gentleman on securing this debate. Is another big issue not the cost to projects of connecting to the national grid? Many of these offshore wind developments need new infrastructure and the grid. The grid has a long-term forward plan. If we have short-term CfDs, short-term investment needed for consent and no guarantees of grid connection, the whole situation is even more uncertain than he is outlining.

[Mr Weir]

The hon. Gentleman makes a good point. I have spoken on many occasions about the difficulties that grid connections pose for many renewable generators, particularly in more remote areas such as the north of Scotland. There are a huge number of issues in relation to that. To be fair, efforts are being made to address some of those problems with the proposals for new lines down the east and west coast of Scotland and various other connections, but those are long-term projects. They will not be done quickly. The point is also that although many of these offshore wind projects are looking for consents now, it will be several years before they come on stream. I understand that from getting a CfD, it can be up to three years before the first turbines are operating or in place. There is a long-term aspect, but it is not beyond the wit of regulators to bring the two together.

[Albert Owen]

I understand what the hon. Gentleman is saying, but the point I am trying to make is that each of the individual projects will have to meet the cost of grid connection. It would be better to have the national infrastructure of the National Grid acting in the national interest by ensuring that the cost is spread across the country and not met just by the individual projects. A new grid connection costs hundreds of millions of pounds, which can in many cases make a bid uneconomic. That is my point.

[Mr Weir]

Again, I do not disagree with the hon. Gentleman. He tempts me into a discussion about the postage stamp model of transmission charges, which is a similar issue, but I shall not go there because I am coming to a close and other people want to speak.

The industry also raised concerns about the levy control framework and called on the Government to address the political uncertainty about whether 2020 is a budgetary cliff edge. Offshore projects have a four to five-year horizon from being awarded a contract for difference to the commissioning of the first turbines. The industry is concerned that there is no clear indication about what will be available post 2020.

The Minister may say that it is difficult to give a clear indication about the future—indeed, we cannot be certain about what the Government will look like in six months, never mind six years—but giving some indication of the projected budgets and the intended direction of travel would go some way to addressing the industry’s concerns. Ministers have not been so reticent about nuclear energy. They have, in principle, agreed with EDF a contract for difference at Hinkley Point at a strike price of almost double the current wholesale price of electricity. That contract will last for 35 years—more than double the length for renewables. There seems to be a willingness to do more for nuclear than for offshore renewables, which provide a much better platform for clean energy and for the industrial regeneration that is required in many areas of our country.

[Peter Aldous (Waveney) (Con)]

It is a pleasure to serve under your chairmanship, Mr Gray. I thank the Backbench Business Committee for granting this debate, and I give special thanks to the hon. Member for Angus (Mr Weir) for playing a key role in securing it.

The offshore wind industry is an interest to me mainly due to the key role it can play in bringing jobs and prosperity to costal communities such as Lowestoft and Waveney, which I represent. With deference to my Scottish colleagues, the southern North sea is, in many respects, the best location for developing large-scale offshore wind farms. It has relatively shallow waters, the weather is more appropriate and it has the right environmental and geological conditions, so it is well suited for such developments. East Anglian companies have already played a key role in delivering the rounds 1 and 2 wind farms, such as Scroby Sands, Greater Gabbard, Thanet and Sheringham Shoal. Local businesses will be able to do even more if we fully realise the opportunities in round 3.

[Mr Weir]

I do not dispute the fact that the southern North sea is excellent for wind, but I hope the hon. Gentleman is not going to set it against other development locations. There is huge potential in Scotland, which has a rather windy climate, although there are great challenges in some of the surrounding deep water. We must look at all potential locations and not just concentrate on one.

[Peter Aldous]

I fully agree, but we East Anglians tend to hide our light under a bushel. The full potential of the southern North sea has not been fully realised, so we need to raise our heads above the parapet. I do not want to be divisive as I compare different areas and energy technologies. I believe in a mixed economy.

There is the potential to do even more in round 3. Offshore wind can play a vital role in providing a low-carbon, secure energy supply. It can also create jobs regionally, as we regenerate coastal communities such as the one I represent, nationally—as the hon. Gentleman said, there is the potential to increase significantly the number of jobs from the current 13,000 to more than 44,000 by 2023—and internationally by boosting exports. People working in the oil and gas sector anywhere in the world will hear Suffolk and Norfolk accents, as well as Scottish accents. That is something we must repeat with the offshore wind industry.

A lot has been done since 2010 to deliver that success. The Government put in place a framework to give the industry a long-term, sustainable future. Siemens will be manufacturing turbines at Humberside, the green investment bank is playing an important role in leveraging in private sector capital and the Catapult in Glasgow is doing important work with the industry to drive down costs. The Government have placed the right emphasis on maximising the UK content in contracts to ensure that jobs are not exported. A planning regime for offshore wind has been put in place, which works efficiently and fairly, provided that developers are proactive and engage with local communities. Finally, the Government are pursuing local supply chain initiatives that will help local communities, such as the one I represent, to get the most from these opportunities. Lowestoft and Yarmouth now has an enterprise zone and assisted area status, and the two ports have been designated centres for offshore renewable engineering. That designation is applied around the country; it is a national strategy.

As a result of those initiatives, the UK remains on track to being the most important market in the global offshore wind sector, with more capacity installed than any other country and with the largest volumes projected by 2020. We are moving in the right direction.

Electricity market reform and the contracts for difference regime are at the centre of the framework. The Government are right to apply a budget to ensure that policy and energy costs are affordable. The CfD regime has three benefits. First, it de-risks investment in asset ownership. Secondly, the competitive allocation will drive cost reduction. Thirdly, it recognises the need to cap costs through the levy control framework.

The transition to contracts for difference has not been straightforward. With the benefit of hindsight, we can see that things should have been handled differently. First, too large a budget was given to the Final Investment Decision Enabling for Renewables contracts without ensuring competition or price reduction. Too many of the FIDER contracts were placed with the same developer, which created risk for the entire sector. Secondly, the budget for the first competitive CfD allocation was too low, although I welcome the increase in round 2 from £155 million to £235 million. That low budget surprised investors and supply chain companies and led to projects becoming less competitive. Unfortunately, it sent out the wrong signal to the market. Thirdly, the three-month delay in the 2014 allocation round was unhelpful in achieving the stable, predictable regulatory environment that we all seek. Fourthly, money appears to have been held back for future allocation rounds, which has caused the worry that the levy control framework budget may not be fully utilised. Finally, I am concerned that by not giving indications of the less established 2015 budget, further uncertainty has been created.

Those are the problems we face, but I make those comments with the benefit of hindsight. However, we must move on, and the Government must have regard to two issues. First, they must have consistent policies so investors, industrialists and developers know where they stand. Secondly, they must articulate a long-term vision for the industry beyond 2020. As the hon. Member for Angus said, the industry currently views 2020 as a budgetary cliff edge.

I have four suggestions on how we can provide certainty and a long-term vision. First, the current allocation round should be concluded as soon as possible. Secondly, details of the timing and budget for the 2015 and 2016 allocation rounds should be published as soon as possible. Thirdly, details of the levy control framework in the second delivery period post 2020 should likewise be published as soon as possible. Finally, the industry must be provided with a clearer picture of its potential long-term size and where the Government see it going. That could be achieved by setting a clear-cut tariff reduction trajectory for offshore wind post-2020 and moving to a narrower carbon intensity range.

Since 2010 a great deal has been achieved in laying down a framework that gives offshore wind a long-term future. The move to CfDs is the most challenging part of the framework. Things have gone wrong in the past, but if we get it right now the industry can realise its full potential and play a full role in bringing jobs and prosperity to coastal communities such as the ones that I represent.

--- Later in debate ---

[Mr Wallace]

Well, Mr Gray, certainty is important to the issue of contracts for difference, and to whether investors are willing to invest in the British energy generation market. That certainty is obviously undermined by the potential to break the market in two and deny Scots access to some of the contracts for difference funding based on the fact that the subsidisers—the bill payers of the United Kingdom—are spread throughout the whole population. It is important to make the point that we are all looking for certainty, and I venture to say that separation is not the way to encourage that.

[Mr Weir]

Will the Minister give way?

[Mr James Gray (in the Chair)]

Order. I really would rather not go down this track.

--- Later in debate ---

[Mr Weir]

I will be brief, Mr Gray. I merely make the point that we are dealing with things as they are, and not how we wish they were. If the Minister is talking about certainty, he might care to comment on the effect of a proposed EU referendum.

[Mr James Gray (in the Chair)]

Order. I would very much rather the Minister did not. I think he should focus his remarks on the effect of the CfD allocation process on offshore wind developments.