Contracts for Difference Scheme

Peter Aldous Excerpts

Thursday 19th October 2023 Westminster Hall

[Peter Aldous (Waveney) (Con)]

It is a pleasure to serve with you in the Chair, Dame Angela. I congratulate the hon. Member for Strangford (Jim Shannon) on securing the debate. His case was very much location-specific, and I thought he made it well. I will not dwell on it any longer, and I will wait with interest to hear the response from my right hon. Friend the Minister. The debate is timely, because it comes in the wake of a disappointing and unsuccessful auction round 5, and ahead of the publication next month of the draft allocation framework for auction round 6.

Contracts for difference have been around for a very long time. They were originally developed in the UK in 1974 as a way to leverage gold. The context in which we are considering them today is their use as a means of supporting new low-carbon electricity generation, as introduced by the Energy Act 2013. Over the past decade, they have been remarkably successful. They have enabled the UK to become a global leader in the offshore wind sector, which will be the focus of my attention over the course of the next few minutes.

CfDs have been the foundation stone for securing significant inward investment into coastal communities all around the UK, including Lowestoft in my constituency, and the first four allocation rounds were remarkably successful. Unfortunately, this undefeated run came to an end with round 5, when no offshore wind bids were submitted, as the core parameters did not take into account the changed geopolitical situation in the light of covid and the war in Ukraine, and the uncertain and inflationary global economic outlook that has ensued.

It is vital that lessons are learned and that we get back on track ahead of allocation round 6. The work to do this should be set in the context of the UK providing a response to the US’s Inflation Reduction Act, and I suggest that that should come in the Chancellor’s autumn statement next month. I shall say a few words about that later, as the energy industry is globally footloose. Although the UK has been very attractive to investors—in many respects, it has been the come-to place—we cannot rest on our laurels, and we are now in danger of being overtaken. As Keith Anderson, the chief executive of Scottish Power, has said of the US:

“We can’t possibly hope to outspend them. What we can do is outsmart and outpace them.”

After the failure of auction round 5, it is vital that auction rounds 6 and 7 are successes. One failure is a blip, but two risk setting a trend that will send a negative signal to developers and investors, and the situation could then become very difficult to retrieve. This is particularly important for the continued development of the offshore wind industry off the East Anglian coast, with ScottishPower Renewables and Vattenfall’s forthcoming projects in mind. The parameters that the Government should take into account are as follows. First, there is a need to provide more clarity, consistency and certainty with regard to the longer-term pipeline of projects. That will give developers, supply chain businesses and infrastructure providers the confidence to invest, often way ahead of demand. A clear pipeline will help to deliver long-term apprenticeship initiatives, optimise the cost profile of development and better facilitate strategic investment in the national grid.

We also need to improve the way we incentivise developers to commit to invest in UK infrastructure and supply chains. This can be achieved through non-price factors in the CfDs, provisions in seabed auctions and improved collaboration in supply chain plan delivery. Dusting off and reviewing the offshore wind sector deal, which was originally signed in Lowestoft in 2019, would be very welcome.

The feedback I am receiving, which is welcome, is that ahead of the draft allocation framework for allocation round 6 being published next month, there is positive and ongoing engagement between the Department, trade associations and developers. I would suggest that the key points that need to be addressed are as follows. First, the administrative strike price must be set at a level that takes account of market pressures, so that this time, developers do actually bid. Secondly, so as to give certainty to the market, there should be a ringfenced pot for offshore wind. That is vital, taking into account the targets that Government have set for offshore wind delivery. Thirdly, taking into account the missed opportunity with allocation round 5, the pot budget and parameters should be set so as to reflect the pipeline that is now available in order to secure maximum capacity through allocation round 6.

Work along those lines is necessary so as to correct the mistakes that were made in allocation round 5. However, at the same time, we cannot ignore the new world order. As I have mentioned, we cannot and should not get into a subsidy race to the bottom with the likes of the US, but what we can do is work faster and smarter, building on the foundations that have been laid over the past decade.

In the upcoming autumn statement, our energy policy framework should be adjusted to include the following initiatives: first, expanding reforms to capital allowances and introducing new tax incentives and grants; secondly, supporting the UK supply chain through multi-year co-funding for the industrial growth plan; and finally, as we discussed yesterday in the Westminster Hall debate led by my right hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb), we need policies that unlock private investment in port infrastructure.

We invariably herald offshore wind as a great British success story, and indeed, the way that the industry has developed over the last decade has been remarkable. Contracts for difference have been the cornerstone on which this success has been built. They have the advantage that they are flexible and can be adapted. Unfortunately, that did not happen for allocation round 5. It is important that this mistake is not repeated in round 6, and I hope that the Minister will provide the assurances that the industry is seeking. It is vital that he does, as offshore wind is bringing significant benefits to coastal communities such as Lowestoft, and it is imperative that it continues to do so.

--- Later in debate ---

[The Minister for Energy Security and Net Zero (Graham Stuart)]

It is a pleasure to serve under your chairmanship, Dame Angela. I join others, and not least on this occasion the Scottish National spokesperson, the hon. Member for Coatbridge, Chryston and Bellshill (Steven Bonnar), in applauding his favourite Unionist—sitting behind him there—the ever-present, ever-active and ever-decent hon. Member for Strangford (Jim Shannon).

As the hon. Member for Strangford knows, and as he has mentioned, he and I have communicated extensively over the past year or so on the question of extending the GB contracts for difference scheme to Northern Ireland. He has asked questions in Parliament about this issue, most recently last month. I believe we know each other’s positions very well by now. Let me say at the outset that I admire his tenacity in continuing to raise this matter with me, which I know he does with the best interests of his constituents and the people of Northern Ireland in mind. However, I am afraid I have to say to him again that I do not believe that what he proposes is feasible—although I understand why he proposes it and why he hopes to find a solution—and nor would it lead to renewables or their associated benefits being delivered faster for Northern Ireland, as he hopes. I will explain why I believe that shortly.

First, though, to set the context, I would like to say a few words about the CfD scheme. The scheme was introduced in 2014 and is the Government’s main mechanism for supporting new low-carbon electricity generation projects in Great Britain. CfDs are awarded through competitive auctions that, from this year, are held annually. The lowest-priced bids are successful, which drives efficiency and cost reduction and is a low- cost way to secure clean electricity.

It is an interesting—but not necessarily surprising—fact that in every single year that the CfD has existed, industry has said that the prices we have suggested are too low, so this year is no different. I suppose it is also unsurprising that His Majesty’s Opposition should always speak up for the producer interest and be so indifferent, if not deaf, to the interests of the consumer, around whom we should build policy.

Winning projects are guaranteed a set price per MWh of electricity for 15 years, indexed to inflation. That provides income stabilisation, making projects that have high up-front costs but long lifetimes and low running costs attractive to investors and lenders. Importantly, the CfD also protects consumers when electricity prices are high, as it did last year. Understandably, this Conservative Government are extremely proud of the CfD scheme and its effectiveness, in not only securing clean generation but doing so at the lowest possible price to consumers—that is what has triggered the 70% reduction in costs for offshore wind. As I say, industry has always suggested that it wants to be paid more, and we have heard from His Majesty’s Opposition that they would be delighted to do so at the expense of ordinary consumers.

It was in the light of the challenge of setting the parameters of each CfD that we decided to move to an annual system. The hon. Member for Manchester, Withington (Jeff Smith)—he is not my favourite Unionist, but he is one of my favourite members of the shadow team—seems to have been deliberately innumerate. He will be aware that AR4 covered three years, and AR5 was the first annual auction. Like me, he will be able to divide by three the total generation that was in AR4, and to divine that in terms of annualised generation AR5 was the most successful round of the CfD that has ever existed. I would even gently chide my always loyal and fair colleague, my hon. Friend the Member for Waveney (Peter Aldous), for buying into the idea: at a time when other countries’ rounds have failed, we generated 3.7 GW. We supported geothermal and tidal and, I think, saw a near doubling of onshore wind.

That is not to say that I do not regret, and have not previously publicly regretted, the fact that in a highly turbulent geopolitical situation the window for offshore wind did not ultimately allow bids to come in from industry. However, that was one of the key reasons why we decided to move to an annualised system, so that we could quickly move forward. Of course, unlike a solar scheme, for example, these schemes are not things that are brought up quickly: they are developed over many years, with parameters informed by the behaviour of the industry.

We always gather the data each year from the industry—companies sign non-disclosure agreements with us and we commission external research—but the most important of all the data we use is behaviour in auctions, because we need that real-world data to inform the parameters we set. It is exactly that process—unchanged but better informed by behaviour in AR5—by which we will set AR6’s parameters, and I am confident that it will be successful.

[Peter Aldous]

rose—

[Graham Stuart]

I see that, having been chided, my hon. Friend is looking to intervene on me.

[Peter Aldous]

I was listening with interest to what my right hon. Friend was saying. To a degree, I hear what he says, but does he not agree that with offshore wind not being successful in AR5, the costs go up in future allocation rounds? It was ready to go, and there were economies of scale that it was ready to take full advantage of, but it was not able to go. The feedback that I am getting from industry is that these things cannot take place in a vacuum, ignoring what is going on throughout the world. Does my right hon. Friend not agree with me that it would have been much better if offshore wind had been successful in AR5?

[Graham Stuart]

Having been chided, my hon. Friend is of course—quite rightly, and characteristically—straining to justify his position, and I have a lot of sympathy with it. I have said that we would ideally have got the window in a way that better matched that reality. But there are reasons for having the annual auction. We always come up with a window that industry says is not enough. We have managed to bring down the costs by 70%. It is hard to overestimate the importance of this. This country, the CfD mechanism and, I have to say, this Government have transformed the economics of offshore wind—not just to the betterment of UK consumers, but to the benefit of the whole world. It is only because of what has happened here with this approach, which every year is in a state of tension with industry, that we have been able to show and reveal these prices. We are now able to export our expertise to the north-east of the United States, to the Gulf, to Taiwan—all over the world—as a result of this process.

I said that I wished we could have better attuned the window to the realities—they changed even after we set the prices in November. That was precisely why we decided on having an annual auction. To put it another way, if what someone offers is always accepted, they might want to consider whether they are overpaying. That is not to say that I in any way revel in the fact that we did not get offshore wind in that round, but I am glad that we had the foresight to move to an annual system and that we are able so swiftly to move on. It will just be the middle of next month when we set out the core parameters for the next round, which will happen next year.