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Contracts for Difference (Allocation) (Amendment) Regulations 2016

Volume 776: debated on Tuesday 25 October 2016

Motion to Approve

Moved by

My Lords, the proposed regulations amend a statutory instrument made under the Energy Act 2013. The instrument being debated today makes a simple amendment to the current regulations in order extend the contracts for difference scheme. Under the current regulations, the Government have the power to run an allocation round and allocate budget for renewables projects commissioning up to 2020. The proposed amendment extends the date for projects commissioning to 2026.

As noble Lords will see, the regulations are short but sweet. They are uncontroversial and are not of themselves trail-blazing. They passed through the Joint Committee on Statutory Instruments and Secondary Legislation Scrutiny Committee without note, and were welcomed yesterday in the other place. Members of the House with a keen eye for matters such as a common commencement date will note that the regulations do not come into force on one of the set dates for common commencement. That is because they fall outside that scheme, as the impact of these specific regulations on business, charities and voluntary bodies is negligible. However, it is right that attention is drawn to the costs to consumers and businesses of the broader operation of the contracts for difference scheme, which is why the draft Explanatory Memorandum includes the impact assessment for the scheme as a whole.

It is timely that we are debating this today, given that the National Audit Office published its report on its inquiry into the levy control framework last week. Clearly, a lot of that report focuses on the past. One of the things that it recognises is that we now have a much more robust process in place. In fact, the NAO says that it is a model we should apply more widely, and we will look into doing so. However, there is always room for further improvement and we are considering the NAO’s recommendations carefully. The Public Accounts Committee will discuss the report with officials from my department at the end of November.

There are two points that I would like to touch on. On the first, investor confidence, Bloomberg New Energy Finance rated the UK fourth globally for new investment in renewables for 2015, and there is a healthy pipeline of projects, suggesting that investors see the UK as a good place to invest. At Budget 2016 we gave investors the longer-term certainty they need by announcing £290 million of annual support for the next contract for difference allocation round for projects commissioning from 2021-22 onwards. The instrument being debated today enables us to deliver on that and enables future allocation rounds to take place. This demonstrates our continued commitment to contracts for difference and the renewables sector.

On value for money, the early investment contracts examined in previous NAO reports proved to be more expensive than the projects which came along later as part of a competitive process. Here we are focusing on contracts for difference for renewables which drive competitive tension, resulting in a reduced price and better value for money for household bill payers. They also give eligible generators increased price certainty through a long-term contract. Investment should therefore come forward at a lower cost of capital and at a lower cost to consumers.

The contracts for difference scheme is designed to incentivise the significant investment required in our electricity infrastructure in order to keep our energy supply secure, keep costs affordable for consumers and help meet our climate change targets, playing our part in working towards the 2050 targets on climate change agreed in Paris and reinforced at the G20.

We plan to run the next allocation round soon. As noble Lords will be aware, the first CfD allocation round was held in October 2014, leading to contracts being signed with 25 large-scale renewable generation projects, at significantly lower cost than those projects would have cost under the renewables obligation scheme—a total of £105 million less.

I am glad to say that, in June 2016, Charity Farm solar park in Shropshire was connected to the grid, becoming the first project under contracts for difference to begin generating power. The 12 megawatt project will provide enough power for more than 4,000 homes, and a further 360 megawatts of capacity is on track to commission by spring 2017 from three other projects.

I commend these important draft regulations to the House.

I thank the Minister for her explanation of the regulations before the House this evening. On behalf of these Benches, I welcome the regulations, which are short and, as the Minister stated, somewhat uncontroversial. They simply extend the period for the allocation of contracts for difference from the current end date of 31 March 2020 to 31 March 2026. Yet, importantly, in doing that, they begin to answer the questions regarding future support for renewable technologies and investment in low-carbon electricity generation post-2020. All 24 responses to the consultation were in favour and several respondents provided valuable additional views, especially concerning the lead-in times for less established technologies.

However, I have a few questions for clarification around the framework for the mechanism and funding. First, can the Minister close the potential gap that might have opened up? Paragraph 7.2 of the Explanatory Memorandum states that the annual support for projects announced in Budget 2016 will be for the period 2021 to 2026, but the previous funding end date was 31 March 2020. I presume that there is not a gap of a year in that funding. However, the implications for spending are considerable and certainly reflect more concern than is implied in the three short paragraphs 10.1, 10.2 and 10.3 on the impact of the regulations. Paragraph 10.2 is particularly curious when it states:

“This amendment does not change the costs to the Government, the LCCC or the Delivery Body”.

It goes on to add:

“Any costs to the consumer of holding CFD rounds are subject to limits on the overall volume of costs in a given year … as a consequence of Government decarbonisation policies”.

The memorandum concludes in paragraph 10.3 that the impact of this particular instrument is negligible. There is no mention of the levy control framework that since 2012 has capped the cost of three schemes to support investment in low-carbon technologies: the renewable obligation, feed-in tariffs and contracts for difference. This framework has hit caps in costs for each year to 2021, which is where my confusion in the memorandum might come from. At this point the Minister needs to clarify whether at paragraph 7.2 the Budget 2016 announcement of up to £730 million of annual support for the period 2021 to 2026 is outwith the levy control framework.

At the beginning, I stated that this order begins to answer what is envisaged for incentivising low-carbon generation post-2020. Can the Minister clarify the application of the LCF to new generation projects post-2021? However this annual expenditure of up to £730 million is framed, this potential cumulative extra total of nearly £4 billion can hardly be categorised as negligible in the impact assessment, yet be significant enough to merit attention in the Chancellor’s 2016 Budget. I will welcome any clarity the Minister can give me as the levy control framework runs only until 2020.

At this stage it would be helpful if the Minister were to make some remarks about the Government’s thinking on the levy control framework. During 2015, the department began to project significant potential overspends, with costs rising to £9.1 billion in 2021, which is some £1.5 billion above the cap. The Government rightly raised the impact of spending on consumer bills. Is the LCF fit for purpose? Exceeding of the cap prompted widespread changes to framework schemes, which severely damaged investor confidence. Can the Minister confirm whether this overspend will result in a clawback of some of the £730 million annual spend?

The department and the Treasury established the LCF as the preferred way of monitoring and controlling the impact of all levy-funded energy schemes on consumer bills, yet they have not clarified why other levy-funded schemes, such as the capacity market, are not included in spending caps, despite the substantial associated costs to consumers. To many investors the calculations are opaque, unsubstantiated and based on poor forecasting.

As the Minister rightly said, on 18 October the National Audit Office published a damning report on the levy control framework, which confirms my questions. It comments that,

“government should report regularly on the full costs and impact of all its levy-funded schemes, but it has not done so since 2014. This reporting is important because the relationship between Framework costs and the affordability of consumer bills not straightforward”:

It is notable that framework schemes can reduce energy costs as well as increase them and that reduced energy prices can increase LCF costs but reduce costs of consumer bills overall. Do the Government intend to respond more publicly to this report or merely to enter into a dialogue through the PAC? Will they accept one of the recommendations: to report to Parliament every year on the impact their policies have on consumer bills? The memorandum mentions that under Section 66 of the 2013 Act, the Secretary of State must report to Parliament by the end of 2018. Will the Minister consider whether her department can rise to this challenge and report annually?

Lastly, returning to paragraph 7.2 of the memorandum, this potential £730 million of annual support is for offshore wind and other less established renewable electricity generation technologies. Do the Government intend to list the technologies that they regard as less established and those they consider more established that need not apply? I am sure that this would be crucial to investors coming forward with their schemes.

This order should begin to lay out the Government’s intentions towards incentivising projects that are vital to deliver a low-carbon future. Investors need the certainty of stability in government policies for long periods ahead to plan and deliver that. I support approval of the order tonight in the expectation that the noble Baroness and her department will be able to—and indeed must—provide the clarity needed for a successful energy transition.

I thank the noble Lord for his helpful remarks and for the welcome he has given the order this evening. As I said earlier, the regulations that the Government seek to amend through this instrument affect the contracts for difference scheme designed to incentivise the significant investment required in our electricity infrastructure to keep our energy supply secure and the costs affordable for consumers, and to help meet our climate change targets. The instrument being debated today enables us to continue to deliver on that by allowing future allocation rounds in order to deliver new renewable generation capacity into the 2020s and to give confidence to investors for the future, which the noble Lord rightly emphasised.

The noble Lord was kind enough to mention his concerns about the dates in the Explanatory Memorandum. In particular, he asked why there is an apparent gap—from 2020 to 2021—in paragraph 7.2. The levy control framework presently runs until 2021. He is right to note that there are different periods, and that is in fact intentional. The regulations relate to the legal power to open up delivery years. We have already ensured investor confidence by announcing at Budget 2016 £730 million of support for projects commissioning —that is, delivering—between 2021 and 2026. We have made a conscious decision not to have a CfD round for less-established technology projects that start to generate electricity before 31 March 2021 because of the potential overspend in the current LCF period, which runs until March 2021. We are of course committed to delivering our decarbonisation objectives but not at any cost. Therefore, we are not planning to offer more CfDs for deployment within the current LCF period.

Paragraph 10.2 of the Explanatory Memorandum covers the administrative costs of running the scheme, not the subsidy being provided to developers through CfD auctions.

Turning to the levy control framework, we are within the headroom permitted under the LCF and, as the noble Lord knows, we have already taken action to reduce spend by around £520 million up to 2020. The levy control framework covers the renewables obligation and the feed-in tariff, as well as CfDs. Our focus on supporting new renewables is through the contracts for difference scheme using competitive tendering, as I said in my introduction, to drive down prices and therefore the costs to consumers. The Treasury announcement focused on that CfD scheme, which is giving investors the confidence they need going forward. It did not mention clawback. We have not taken a decision on the future of the levy control framework beyond 2021. The National Audit Office has recommended the extension of that framework beyond 2020. In response to the noble Lord’s question, we are considering that and the NAO’s other recommendations, and we will respond in due course.

Finally, the noble Lord mentioned the requirement to report after five years. There is a duty to report after five years on a wide range of matters, including CfDs, and I will certainly make sure that I personally look at that in the light of the points that he has raised this evening.

This is a non-controversial and important proposal. The time is late and I commend the regulations to the House.

Motion agreed.

House adjourned at 8.25 pm.