Contracts for Difference (Miscellaneous Amendments) (No. 2) Regulations 2025

Lord Wilson of Sedgefield Excerpts

Monday 23rd June 2025 Lords Chamber

Moved by

[Lord Wilson of Sedgefield]

That the draft Regulations laid before the House on 2 April be approved.

Relevant document: 24th Report from the Secondary Legislation Scrutiny Committee (special attention drawn to the instrument). Considered in Grand Committee on 17 June.

[Lord Wilson of Sedgefield (Lab)]

The House may recall that, on 12 February, the Government made a Statement confirming that we intend to introduce short-term support for large-scale biomass generators to ensure the UK’s continued security of supply. Following a robust public consultation process, we published our consultation response, which set out that legislative changes are needed to enable the Government to provide support to existing biomass generators through a new low-carbon dispatchable contract for difference. I should emphasise that while this instrument enables the provision of new support, the final decision on whether to do so will be made following the conclusions drawn from our thorough internal assessment and commercial negotiations.

The draft SI will enable a new low-carbon dispatchable CfD to be signed with existing biomass generators. That is not possible currently. It amends the Contracts for Difference (Definition of Eligible Generator) Regulations 2014 such that a person is eligible for a CfD in respect of a biomass station where it is intended that the existing biomass station will continue to generate electricity. As is the case today, the Low Carbon Contracts Company —the LCCC—will be the counterpart to any new CfD.

The second amendment in the SI relates to sustainability. The Government support only the use of sustainable biomass, and we continue to review sustainability requirements so that we can remain aligned to the latest evidence. This instrument will amend the Electricity Market Reform (General) Regulations 2014 to allow the Secretary of State to direct the LCCC to implement amendments relating to sustainability obligations within the new CfD. This will mean that the Government can make changes to sustainability requirements within the new contract to ensure that they keep pace with the latest evidence. I should note that these regulations were originally laid before the House on 11 March but were relaid on 2 April to correct minor drafting errors.

I would like to outline the Government’s carefully considered position on large-scale biomass generation, which provides around 5% of the UK’s annual electricity generation. Current support for these generators, under CfDs and the renewables obligation, ends in 2027. I assure the House that the Government maintain an unwavering commitment to our energy security, and we will do everything we can to secure a reliable energy system, for now and the future, even if it means making hard decisions.

My department considered a range of factors before deciding whether to provide further support for these generators. First, we took analysis from the National Energy System Operator and have concluded that without further support for large-scale biomass the country could face security of supply risks between 2027 and 2031. Relying on alternative options to come online in this timeframe, such as building new gas plants, would carry significant risks.

Secondly, we undertook comprehensive analysis of the costs of biomass against alternatives. Our central projections indicate that, on the right terms and if playing a much more limited role than today, biomass generation can be the lowest-cost option for bill payers during this period.

Lastly, we will introduce strengthened sustainability requirements from the outset of any new agreement. Importantly, this SI will also allow the sustainability measures to be enhanced throughout the duration of the contract, in line with the latest scientific evidence or global best practice. These factors represent a substantial shift from past arrangements on sustainability and value for money.

We have also listened to stakeholders and recognise the strength of concerns about the use of unabated biomass. It is not a long-term solution. When such decisions arise in future, the Government will not be left in similar circumstances. Therefore, we will undertake the essential work on strong and credible low-carbon alternatives to ensure that we have proper options in four years’ time.

I acknowledge that the amendment to the Motion tabled by the noble Baroness, Lady Bennett, focuses on concerns about Drax. Earlier this year, the Government confirmed that we had agreed heads of terms for a new CfD with Drax. This instrument would enable that CfD, should a final decision be taken to provide it, but it will equally enable similar agreements with any other biomass generators. It does not guarantee that a CfD will be offered to, or agreed with, any biomass generator, nor specify the contract terms, including time limits, for any individual company. These draft regulations are about ensuring we have the option available to respond to security-of-supply needs and deliver low-carbon electricity to the grid at the lowest cost to the consumer.

Let me be clear that the proposed agreement with Drax would limit generation to times when the system and in turn consumers most require it. When renewable power is abundant, Drax will not generate and consumers will benefit from cheaper wind and solar energy instead. This means that Drax will be supported to operate less than half as often as it currently does. As a result, the deal would halve the amount paid in subsidies compared with existing arrangements—equivalent to a saving of nearly £6 per household in annual bills. When compared with the alternative of procuring gas in the capacity market, it will save consumers £170 million in subsidies each year.

The agreement also introduces tough new measures on sustainability, and we will appoint an independent adviser to support the development of policy and practice in biomass sustainability and to ensure that these keep pace with the emerging science and international landscape. However, this debate is about the legislation and not about Drax.

I thank the Secondary Legislation Scrutiny Committee for its report on this instrument. As I mentioned, this instrument is not specific to Drax; instead, it will enable support to be provided to Drax, or to any other biomass generators, should a decision be taken to provide it. As I have already noted, if the Government decide to provide support to Drax, that will offer substantially better value for money for consumers.

On the Select Committee’s comments on sustainability, I can clarify that the KPMG reports are internal fact-finding documents commissioned by Drax on existing sustainability requirements. The reports do not belong to the Government or to Ofgem; they belong to Drax. It is for Drax to decide whether to release them. Furthermore, the Department for Energy Security and Net Zero is considering the report of the House of Commons Public Accounts Committee on biomass, including its recommendations on Drax’s sustainability assurances. Work is under way to strengthen the monitoring, reporting and verification arrangements, and the department issued a full response to the Public Accounts Committee report on 16 June.

In summary, these draft regulations represent an important step in ensuring our energy security and protecting bill payers now and into the future. They make the necessary amendments to enable support to be provided to biomass generators when existing schemes end in 2027. This will enable us to maintain the UK’s security of supply, deliver value for money for consumers and enhance sustainability requirements. I beg to move that these regulations be supported by noble Lords.

Amendment to the Motion

Moved by

--- Later in debate ---

[Baroness Finn (Con)]

My Lords, I am grateful to the Minister for setting out the provisions of the instrument for us, and to the noble Baroness, Lady Bennett, for bringing forward this amendment. I thank all noble Lords who have contributed to the debate. As the noble Lord, Lord Birt, said, we are a remarkably united House this evening.

At first glance, this statutory instrument appears to be a modest continuation of established policy, extending the contracts for difference schemes to support low-carbon electricity and to maintain energy security. However, the context in which this instrument is being brought forward raises several serious concerns that deserve the full attention of the House. The current contracts for difference in renewables obligation schemes for biomass are due to expire in 2027. This instrument effectively paves the way for a new subsidy agreement, likely to last until 2031.

The Drax Group in particular, although not explicitly mentioned by name, is expected to be the principal beneficiary. I hear what the Minister said about this being about the legislation and not about Drax, but this does seem a little disingenuous. As the noble Lord, Lord Kerr of Kinlochard, said, these regulations are really all about Drax. The fact that this is not disclosed in the legislation itself, nor even in the Explanatory Memorandum, is a point rightly criticised by the Secondary Legislation Scrutiny Committee.

When public money is involved on this scale and given to a corporate entity, transparency should not be optional. That omission is not merely a technical failing; it obstructs parliamentary scrutiny, undermines public confidence, and weakens accountability in a policy area already under significant environmental and fiscal scrutiny. We do not question the Government’s intent or commitment to safeguard energy supply, but we should be candid about the trade-offs. Biomass is not a low-cost nor a convincingly low-carbon option, and serious questions remain about its long-term sustainability and effectiveness, as well as its role in the energy mix.

A number of noble Lords spoke about the subsidies received by Drax, and my noble friend Lord Lilley laid out a compelling case. According to the think tank Ember, Drax received £869 million in subsidies for biomass in 2024 alone. The proposed strike price for biomass under the new contracts for difference is expected to exceed £160 per megawatt hour—more than twice the strike price for offshore wind in the most recent contracts for difference allocation round, which averaged £57 per megawatt hour.

These are not trivial differences. Ultimately, these subsidies are paid for by consumers through their energy bills. If affordability is a government priority then it is worrying that the numbers do not appear to have been considered more carefully.

The Government have stated that sustainability standards will increase, albeit only from 2027, and that Drax will undertake a full audit of its supply chains. Those intentions are welcome, but the delay is difficult to defend if, as the Government admit, the current sustainability criteria are already insufficient. Furthermore, Drax was criticised in the other place for alleged attempts to deliberately conceal, as a number of noble Lords have mentioned today, the unsustainable sources of its wood pellets, and has thus far not responded to calls to publish the 2022 KPMG report on where the wood has been coming from. I absolutely hear what the Minister said about these being internal documents but, given that Drax is in receipt of considerable amounts of public money, publishing the report would surely allay concerns, and it is disappointing that Drax has thus far failed to do so. As the noble Baroness, Lady Bennett, pointed out, the SLSC has called for the release of the report prior to the legislation passing.

The Government themselves have acknowledged that biomass is not a long-term solution, yet they now propose to extend generous subsidies through to 2031, well beyond the expiry of the current schemes. That contradiction prompts a broader question: what is the Government’s long-term energy strategy? Where is the sustained investment in cheaper, cleaner technologies such as offshore wind, solar, tidal and energy storage, all of which offer better returns for consumers and for the environment?

In the light of these issues, I would be grateful if the Minister clarified the following. Was a full cost-benefit analysis conducted ahead of these proposals and will it be published? Are further changes to biomass eligibility under contracts for difference under active consideration? Will the Government commit to greater transparency in future secondary legislation, particularly where identifiable corporate beneficiaries stand to gain? This is not about opposing low-carbon generation—far from it; we support it—but, when billions of pounds of public money is at stake, climate benefits are uncertain and the cost to consumers is high, we must demand full transparency and sound policy rationale. I very much look forward to the Minister’s response.

[Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)]

I thank the noble Baronesses, Lady Bennett and Lady Finn, and the noble Lords, Lord Kerr of Kinlochard, Lord Sikka, Lord Lilley and Lord Birt, and the noble Earl, Lord Russell, for their contributions, and I thank the Front-Benchers for their summing up.

We are where we are with this. We have to play with the cards we have, and we cannot restock the deck because we have been left with this. We do not believe that biomass is a long-term solution to the country’s energy problems, but we are faced with a dilemma at the moment regarding security of supply, whereby 5% of the energy we use is provided and produced by biomass. That is something we have to consider. We know it is not a long-term solution, so we need to look at other sources of energy to replace it. That is what the Government are actively doing—it is part of our net-zero ambitions to do that—but we need time to do it, and to fill the gap we need this statutory instrument in order to go forward and secure that.

This Government are steadfastly committed to maintaining our energy security and protecting bill-payers now and into the future. The instrument under discussion today will enable us to reduce risks to security of supply in the late 2020s and early 2030s by facilitating short-term support for biomass. If this is pushed to a vote, noble Lords will be voting against security of supply. Additionally, the regulations allow for the further strengthening of sustainability requirements, to reflect the latest evidence, during the delivery of any support.

I hope I can deal with all the questions raised, but if not, I am sure that we can write to Members. Why did we not mention Drax? Supposedly this is about Drax and nothing else, but in fact it is about any biomass facility that can help fill the gap, such as Lynemouth in Northumberland. Other, smaller producers of biomass around the country can also have access to this—I know there have been discussions with Lynemouth—so it is not just about Drax.

Why have the Government agreed a high strike price for this asset? The new arrangement halves the level of consumer subsidy compared to existing arrangements, equivalent to a saving of nearly £6 per household in annual bills. The agreement is for a substantially lower reduced load factor. We want seed to be used for 27% of the time as part of the baseload—

[Lord Kerr of Kinlochard (CB)]

The alleged saving is compared with the current price, which is astonishingly high. It is a saving because the wholesale price of electricity all over is going down. The contracts for difference for wind power are now being set at a level about two-thirds of where they were a couple of years ago. This minor saving compared with the previous exorbitant level of subsidy should not be exaggerated.

[Lord Wilson of Sedgefield (Lab)]

I thank the noble Lord for that intervention. We were not trying to exaggerate anything. We are comparing that with the fact that, if we do not do this, we will end up with the price of gas at £170 million per year compared with some saving to households. We have to bear that in mind as well.

There was talk about the outcome of Ofgem’s investigation into Drax. The recent comprehensive Ofgem investigation into Drax compliance entered its report in August 2024. It found no evidence that Drax had incorrectly received subsidy payments, and no subsidies were issued for unsustainable biomass. However, Drax accepted the findings of the investigation and made a redress payment of £25 million. Ofgem’s investigation was very comprehensive and included a careful review of the KPMG report, as well as a wider review of more than 3,000 other documents. Both the Government and Ofgem are confident in this conclusion. Moreover, Ofgem has required Drax to undertake a full international audit of the profiling data from its supply chain. I hope that answers the concerns that noble Lords may have.

To address the other points on the Ember report on Drax being Britain’s largest CO₂ emitter in 2023—this also answers the question about trees, and not all trees take four decades to grow—the carbon in biomass is emitted as carbon dioxide from the chimney of the power plant when the biomass is burned. However, the carbon dioxide emissions from sustainable biomass are part of the biogenic carbon cycle. Unlike fossil carbon, which was turned into gas or coal millions of years ago, the carbon released was recently absorbed from the atmosphere and is reabsorbed continuously through regrowth.

Woody feedstocks for bioenergy are typically low-value forestry—sawmill residue from trees that would have been felled regardless for higher-value usage. Therefore, in contrast with fossil emissions, we can consider sustainable biomass systems to be carbon neutral at the stack when taking forest growth, harvest and product use into account.

What you also have to realise with this SI is that one of the parts of it is about sustainability. Part of the contract is that biomass comes from 100% renewable sources, not 70%, so that is a massive increase. We will appoint someone to examine and look into the sustainability of the whole process.

We can have criticisms, and I think we all agree that we do not see this as the long-term answer to the energy problems that we have, but it is fair to say that we have to be realistic. We cannot be ideological purists. We could have an energy gap of 5%, and biomass provides 5% of our energy needs. We should not be blind to that fact. We are making improvements. It is about the regulations and not just about Drax; Lynemouth is talking about taking part in this process as well. It does not matter about the size of the biomass facility; they can all be part of this.

I finish by saying that the draft regulations in front of the House today will enable the Government to continue to deliver security of supply at the lowest cost for consumers, while protecting and enhancing vital sustainability measures. I commend the draft regulations to the House.

[Lord Birt (CB)]

There was a clear and welcome hint at the beginning of the Minister’s remarks that Drax was temporary, not here permanently. Are the Government considering framing an ordered plan, with a timeline to close down Drax?

[Lord Wilson of Sedgefield (Lab)]

I will get back to the noble Lord on that. I have said—and I think we all agree—that this is not the long-term future for our energy needs. But we have a shortage of supply, and this SI helps to fill that over the short term. In the meantime, we want to invest more in wind—offshore and onshore—tidal and all the other renewable energy sources. We need and want to do that, and this Government are committed to that.