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Contracts for Difference (Allocation) (Amendment) Regulations 2015

Volume 760: debated on Thursday 19 March 2015

Motion to Consider

Moved by

That the Grand Committee do consider the Contracts for Difference (Allocation) (Amendment) Regulations 2015.

Relevant document: 25th Report from the Joint Committee on Statutory Instruments

My Lords, we are today considering an instrument which amends the Contracts for Difference (Allocation) Regulations 2014, which came into force last summer, implementing electricity market reform. The powers to make this secondary legislation are found in the Energy Act 2013.

This reform, as noble Lords will be aware, is designed to encourage the necessary investment in secure low-carbon electricity generation through contracts for difference, or CFDs, which provide long-term price stabilisation to low-carbon plant, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. In brief, a contract for difference is a private law contract between a low-carbon electricity generator and a Government-owned company that provides the generator with greater certainty and stability of revenues, resulting in lower borrowing costs. This saving is passed on to consumers in the form of lower support costs to low-carbon generators.

As the Committee may be aware, the result of the first CFD allocation round was announced on 26 February. Twenty-seven contracts were offered to projects aiming to deliver 2 gigawatts of low-carbon energy capacity across England, Scotland and Wales. Together, these projects have the ability to power 1.4 million homes. The competitive CFD auction has successfully driven down the costs to consumers, resulting in the capacity costing up to £110 million per year less than it would have in the absence of competition.

Before we commence the debate, I will briefly describe the amending instrument. The draft Contracts for Difference (Allocation) (Amendment) Regulations 2015 amend the instrument that came into force last summer which governs the way in which applicants to the CFD are treated for the purposes of contract allocation. These amendment regulations, which the industry has been consulted on, implement a non-delivery disincentive to the CFD scheme. The amending provisions are aimed at preventing gaming and speculative bidding behaviour in CFD allocation, ensuring that only projects that intend to deliver and are capable of it participate in CFD allocation rounds.

The amending instrument sets out a consequence in relation to the site of the main generating structures of a generating station where either an applicant has been offered a CFD and fails to sign or a CFD was entered into but was terminated on a date less than 13 months from the date when the CFD notification in respect of that CFD was given. Applications in respect of such a site will be temporarily excluded for a period of 13 months from the date on which the relevant CFD notification was given. Unless an exemption applies, an applicant will not be able to make a CFD application in respect of the same site during that temporary exclusion period. This will help to ensure that only legitimate projects which are able to deliver low-carbon energy capacity participate in a CFD allocation round.

The amending regulations also set out a process for granting exemptions. This process is to be administered by the Secretary of State in accordance with the time periods set out in the regulations. The amending regulations also set out the grounds on which an exemption to the temporary site exclusion may be available. These are as follows—first, when an applicant can demonstrate that an application is in respect of a site that is not materially the same as the site to which a temporary site exclusion applies. Materiality limits are specified in the amending legislation. Secondly, it is when an applicant can demonstrate that it held a relevant property interest in the site prior to 14 October 2014, the date when stakeholders should have been aware of the detail of the NDD policy. This ground also requires that the applicant is not, and is not corporately associated with, the person who caused the temporary exclusion to apply by not signing or having their CFD terminated. Thirdly, it is when an applicant can demonstrate that it agreed a relevant property interest with a landowner prior to 14 October 2014. This ground also requires that the applicant is not, and is not corporately associated with, the person who caused the temporary exclusion to apply by not signing or having their CFD terminated. Fourthly, in relation to a non-signature case only, an exemption may apply when an applicant can demonstrate that relevant court proceedings, as defined in the instrument, are ongoing at the time of signature and the applicant’s ability to comply with the terms of the CFD would have been materially adversely affected. Relevant court proceedings include a judicial or statutory review of a planning consent applicable to the relevant project. The final ground on which an exemption may apply, which applies only to a non-delivery case, is when an generator’s CFD contract is terminated as a consequence of a qualifying change in law or relevant construction event, as defined in the CFD itself.

When the Secretary of State is satisfied that an exemption applies, an exemption certificate may be issued by them to a prospective applicant, allowing a CFD application in relation to that site to be made by that prospective applicant in the next allocation round. Once these amending regulations are in force, the Low Carbon Contracts Company will maintain and update a publicly available list of any excluded sites setting out the site, the name of the person who caused the temporary exclusion to apply by not signing or having their CFD terminated, and the period for which a temporary exclusion applies to each site. Implementation of the non-delivery disincentive into legislation will inspire further confidence in the robust CFD allocation process, which has already demonstrated an ability to drive down prices and deliver value for money for consumers. I commend the regulations to the Committee.

My Lords, I am grateful to the Minister for presenting these regulations. Given that this might be the last time we meet over the Dispatch Box after what has been an interesting four and a half years of energy policy development, these regulations give us an opportunity to take a step back and reflect on how things are going with the energy market reforms introduced in the Energy Bill.

Here we have what seems to be quite a technical, small regulation that is being implemented, but at the heart of it is something quite significant; that is, that we have moved into a world where, rather than the private sector having overall responsibility for the delivery of projects and the decision-making processes, as you would have in an open and liberal market, by and large it falls on the Secretary of State to cause investment to happen in low-carbon energy.

That is quite a fundamental shift and one that has quite a few challenges attached to it, one of which is that, in the interests of containing price rises, we have introduced a levy control framework that sets a nominal budget for how many low-carbon projects will be signed and then, I hope, delivered. This is not an easy task, and these regulations hint at some of the complexities. It might well be that in the nice confines of Whitehall we are able to sit down with a plan and try to estimate how much low-carbon energy we need, which projects are the best and how we go forward with those that we deem to be cost-efficient, but out in the real world there can be unforeseen circumstances that cause things to change. The difficulty will be having all that responsibility resting on the shoulders of the Secretary of State and the Civil Service. Are we confident that we have the right information and skill sets and a sufficient degree of detailed understanding of the energy system to ensure that we do not pursue projects, or seek to have projects come forward, that ultimately are not delivered?

I suspect it is clear what I am hinting at here: the ongoing concern over the Hinkley Point nuclear power station. If the Minister will forgive me, I have a series of questions relating to that contract. Part of the impetus for introducing energy market reform in the first place was a desire to see nuclear power stations once again being built in the UK. The decision was taken by the Secretary of State that we would pursue contracts for difference as the means to make that happen. That is what lay behind the entire Energy Bill: a desire for the confidence for investors to make a large-scale capital-intensive project like Hinkley possible in the UK. We heard an awful lot about it and discussed it at length, and yet in the Chancellor’s Budget yesterday there was not one mention of the project. Why is that? Why is such a huge project—let us be honest about this, it is massive; it is a huge infrastructure project with a huge budget attached—not something that the Chancellor felt it wise to mention, and indeed simply glossed over? He referred instead to a tidal lagoon project in Swansea Bay that does not have a CFD and is only just entering into negotiations. The one project that has been central to all government thinking on energy policy has been Hinkley, yet it gets scarcely a mention. I worry about why that is. It concerns me that we have a system set up that is now not sufficiently subject to market forces, and we might find ourselves taking decisions and picking apparent winners that turn out not to be the winners that we thought. That is at the heart of this new system.

On a positive note, one of the side-effects of the intervention to make Hinkley happen has been the introduction of competitive auctions for renewables. The department should be commended for bringing forward the timetable for those competitive auctions, and we have seen those auctions deliver cost savings in the strike prices that we were anticipating for established renewables. So there is some good news, but almost as a by-product of what the original intention was. I am concerned about the silence, and I have questions. How are we doing regarding the timetable that the department expected the Hinkley project to follow? When do we now expect to see a contract signed, and when will it ultimately deliver low-carbon electricity, which of course is the end that we want to achieve? Will that be in time for the closing down of some of our older capacity in the early 2020s? The concern was always that we were going to lose some thermal capacity as a result of tightening air quality standards, and we needed new, clean, large-scale nuclear to bridge that gap. Indeed, some of the nuclear will be going off in that timescale too. Where are we at? When will we know whether that contract will be pursued? It was my understanding throughout our debates that it would be a fairly quick decision and that we would see EDF go ahead with the build and the signing of the contract early this year, with the NAO poised to scrutinise the contract, yet we have seen nothing.

Why is all this relevant to the regulations? It is because here we have regulations designed to prevent companies gaming or occupying the space under the LRF that would then preclude others from bidding in. I am not accusing EDF of gaming—far from it; I do not think that this is a premeditated attempt to pretend that it can do something that it cannot—but it is subject to circumstances outside of its control. It represents a huge chunk of that LRF and the signs are that it is not now on track for the delivery schedule that it anticipated. It is a significant issue, not just because of the need for capacity but because of the scale of this one project. If it were not to go ahead, we would have to rethink our strategies for other technology groups and projects and hope to bring those forward to replace the gap that would be created. That is why I am interested in what the non-delivery disincentive is for those big projects.

Do the regulations apply to Hinkley? I suspect, on some of the grounds outlined by the Minister, that they do not. There is a reference under ground 4 to “relevant court proceedings”. Austria is pursuing a court case, which I understand Luxembourg has now joined, in which it is challenging the state aid rulings for the Hinkley Point decision in the EU. Does that count as “court proceedings”? Does it mean that the Hinkley project would be exempt from the disincentives? The Minister referred to those projects bidding in to the auction rounds, but the Hinkley project was a bilaterally negotiated contract. Do the regulations cover bilaterally negotiated contracts? If they do not, what measures is the department considering to avoid this cuckoo-in-the-nest problem whereby the expectation is that the arrangement will deliver, yet circumstances beyond the control of government mean that it ultimately will not, putting significant pressure on departmental structures and the energy system?

Perhaps we should have considered these instruments in the opposite order because then we could have ended on a high. Throughout our debates, we have raised our concerns about the degree to which interventions change the balance between government control and the market’s ability to find the right solutions. We obviously want new nuclear power stations to be built in Great Britain but we need some early clarity from government on the status of the project, and a definitive answer on whether it is going ahead and when it is likely to start delivering us the low-carbon energy that we will need to keep the lights on. I look forward to the Minister’s response to those questions.

My Lords, I hope that we end on a happy note. The noble Baroness and I have had wonderful discussions at the Dispatch Box, which have ended with us agreeing that the interest of the country is more important than our political spats.

I will first give a general overview, because the noble Baroness took the discussion slightly away from the regulations in front us, and then draw her neatly back to her question. On coming into office in 2010, it was obvious that 20% of our energy would be going offline by 2020 and that we needed to take certain measures to fill that gap. We also knew that we were being dictated to by a very small group of operators, so that choice and competition were lacking. That needed to be realigned and redressed. Since 2010, with the measures and the legislation that we have introduced, we have seen greater competition. We now have not just six generators, but a great number of smaller, independent generators that have driven competition into the marketplace, which is a uniquely good point for the UK consumer.

The second thing we needed to ensure was energy security. That is crucial if we do not want the lights to go off: we have to make sure that we take all the various measures and meet our emissions obligations, which are very important to all of us. We all signed up to the Climate Change 2008 and the principle that we should have a wide range of energy sources. Nuclear energy at Hinkley Point C of course plays a part in that.

On the noble Baroness’s question about Hinkley Point C, the non-delivery disincentive measure will prevent speculative bidding. That is what we are trying to ensure here. However, it will not apply to CFDs that are bilaterally negotiated with the Secretary of State. Neither of these requirements of a non-signature case—the requirement for an offer to lapse in relation to a successful application or, in a non-delivery case, a requirement linked to a CFD notification being given—relates to a bilaterally negotiated offer. Hinkley Point C is, uniquely, a bilaterally negotiated CFD. The noble Baroness talked about the uncertainty of the response. The Commission has given state aid approval, but as the noble Baroness is fully aware, the processes at Commission level take time. They are not driven by one country but by a great range of 27 other countries. We are waiting for responses on that.

Let us look at the wider picture. The noble Baroness mentioned Austria, but we have not yet received a legal challenge from Austria. All the information and detail that the Commission wanted was provided and the case was therefore approved. Now we just have to wait, as always with these processes, which take a little time. However, the fact that we have investors wanting to come to Moorside and to Wylfa, that we have seen over £45 billion of investment in the energy sector, particularly around renewables, and that we have seen an increase in the jobs in the sector gives us reasonable confidence that our measures have resulted in the energy sector being in a much better place than it was when we came into office in 2010. That is my starting point in rebutting some of the noble Baroness’s commentary.

Going forward, we have to take into account that we cannot be held to ransom by external forces. It is crucial that we focus on ensuring that our own home-grown supplies are supported but that we are mindful that the huge impact this may have on the consumer is not at any cost. This is the argument that I have led through the House throughout my time in this role. This is about the important balance of making sure that we have a fair, competitive marketplace, which is not open to gaming or speculation, and a firm response to give certainty to investors on one side while justifying our commitment to the consumer on the other. The noble Baroness obviously wants to raise another point.

Maybe the noble Baroness cannot answer this directly, but my main concern is that we are given information as early as we can about when we can expect Hinkley Point C to be signed or not signed, so that if we get a no, or decide not to pursue it, we can pursue other alternatives. The noble Baroness is completely right that there are other nuclear projects that are more developed now than they were when we started this process and which might be able to replace the capacity almost as quickly. We cannot just let this drift. My reference to the budget was to make the point that we cannot just keep chasing these shiny new projects, such as the lagoons. Last year it was fracking; the year before that it was Hinkley. We have to see some of these things be grounded in reality. It worries me when we do not talk about these projects. We need to get a yes or no, and then we can move on.

I wish the noble Baroness could see how much determination there is in the department to speed up processes in relation to Hinkley Point C. However, certain processes have to be followed. As soon as we know the outcomes, I will make sure that the noble Baroness is the first to get that information. However, she also has to agree that we have been consistent in this regard by looking at fracking as another potential source of energy for the country. It is not that we keep finding shiny new energy sources, but we have to look at different sources in the round so that we do not become dependent on any one of them. During the passage of the Infrastructure Bill, the noble Baroness took us through a gruelling procedure with regard to fracking. If we are to have a reasoned, sensible debate on these things, we have to be responsible for making sure that the legislation passes smoothly through both Houses of Parliament when it comes before us. I agree with the noble Baroness that sometimes we want to respond more quickly. The Government work incredibly hard to respond in a timely fashion, but ultimately the response has to go through the proper processes and channels.

Motion agreed.