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Contracts for Difference (Miscellaneous Amendments) Regulations 2021

Volume 812: debated on Thursday 10 June 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Contracts for Difference (Miscellaneous Amendments) Regulations 2021

My Lords, I beg to move that the draft Contracts for Difference (Miscellaneous Amendments) Regulations 2021, which were laid before the House on 12 May this year, be approved.

This draft instrument makes a number of amendments to three separate contracts for difference regulations: the Contracts for Difference (Definition of Eligible Generator) Regulations, the Electricity Market Reform (General) Regulations and the Contracts for Difference (Allocation) Regulations. These amendments will help to support the ambition for the next contracts for difference auction, planned to open in December this year, and will make progress towards our 2050 net-zero target.

The amendments include adding and removing technologies from the list of technologies eligible to compete in a contracts for difference round, strengthening the supply chain plan process and extending the delivery years that can be set for successful projects. They also include some small technical amendments to the non-delivery disincentive rules and capacity cap rules, as well as technical changes to improve the operation and clarity of the allocation regulations. We are proposing these legislative amendments following two public consultations of 13 and nine weeks respectively, in 2020 and earlier this year, during which our proposals received broad support.

The CfD scheme is designed to offer long-term price stabilisation to new low-carbon generators, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. The scheme typically sees support contracts awarded in a competitive auction process, which has been successful in driving substantial deployment of renewables at scale in Great Britain while rapidly reducing costs to electricity consumers.

The most recent allocation round in 2019 saw contracts awarded to 5.8 gigawatts of new renewable energy projects, with the costs of offshore wind falling by around 30% from the previous allocation round in 2017. This is the first time that renewables are expected to come online below predicted market prices—meaning, of course, a better deal for consumers. The next CfD auction, which is the fourth to date, is planned to open in December 2021. It will be available to both established technologies, such as solar PV and onshore wind, and less established technologies, such as floating offshore wind. Offshore wind will sit in its own newly created third pot.

In October 2020, the Prime Minister announced new plans to accelerate the UK’s progress towards net-zero emissions while making the UK a world leader in clean wind energy. This included the ambition to secure up to 12 gigawatts of renewable electricity capacity in this round, subject to the pipeline of projects expected to bid, which is double that secured in the last round held in 2019. We are laying these amendments today to give certainty to businesses about the basis on which projects will be eligible to take part in the next CfD scheme in advance of the round opening in December.

CfD applicants with a capacity of 300 megawatts or more are currently required to present a supply chain statement to the EMR Delivery Body as part of their application. A statement is provided if a developer can demonstrate to the Secretary of State’s satisfaction that the project will make a material contribution to the development of relevant supply chains. The aim of the policy is to encourage the effective development of open and competitive supply chains and the promotion of innovation and skills in the low-carbon electricity generating sector. The Government believe that the current policy approach needs to be strengthened to boost competitiveness and productivity in places that stand to benefit the most and to harness innovation and invest in skills while driving progress towards the UK’s 2050 net-zero target.

These regulations revise the criteria that the Secretary of State must consider when assessing an application for a supply chain statement. In addition, they create a new stage in the process, requiring a CfD generator to apply for a supply chain implementation statement to demonstrate the extent to which they have delivered on the commitments set out in their original supply chain statement, setting out the process for providing or refusing a supply chain implementation statement.

This supply chain implementation statement will enable an CfD generator to fulfil an operational condition precedent required under a CfD contract. The Low Carbon Contracts Company, as CfD counterparty, may terminate the CfD if this operational condition precedent is not fulfilled by the CfD long-stop date. This requirement will be inserted into the CfD standard terms and conditions for new CfDs awarded from the fourth allocation round.

Biomass conversions have played a material role in helping to meet the UK’s 2020 renewables targets by replacing coal-fired power stations with renewable energy generation. However, as electricity generation has become less carbon intensive, we have reviewed the role of biomass conversions. These regulations remove biomass conversion projects from the list of technologies eligible to apply for a CfD in future allocation rounds.

Allocation rounds, and their associated budgets, can be made available only for projects commissioning in set periods, known as delivery years, which are set before each round opens. In order to run allocation rounds with delivery years after 31 March 2026 and to further provide necessary flexibility to support the level of ambition needed to meet the 2050 net-zero target, we are extending the CfD scheme delivery years until 31 March 2035.

The Government have confirmed a series of more ambitious targets for offshore wind, including a boost to the Government’s previous target to deliver up to 30 gigawatts of offshore wind to delivering 40 gigawatts by 2030, and a new ambition for 1 gigawatt of this 40 gigawatts target to come from floating offshore wind. This is due to widespread agreement that floating offshore wind will play an important role in helping the UK to meet its longer-term decarbonisation targets.

This technology is in an earlier phase of development, making it currently more costly than offshore wind that is attached to the seabed. It is therefore appropriate for floating offshore wind projects to be recognised as a distinct technology within the CfD scheme; one subject to its own administrative maximum strike price and eligible to take part in pot 2 auctions alongside other less-established technologies. These regulations therefore establish floating offshore wind projects as a category of technology eligible to take part in the CfD scheme and compete alongside other less-established technologies. In doing so, we deliver on one of our manifesto commitments.

The UK’s new 2050 net-zero emissions and carbon budget 6 targets mean that we will continue to require substantial amounts of new, low-carbon power sources to be built before 2050. These changes ensure that CfD allocation rounds can best support an increase in the pace of deployment of new renewable electricity generation needed to achieve our ambitions while continuing to consider value for money for consumers. Subject to the will of Parliament, these arrangements will come into force on the day after the regulations are made. I commend the regulations to the House.

My Lords, I feel privileged to be in this very elite grouping discussing this statutory instrument. However, the limited number of us participating should not take away from the importance of what is proposed here. I hope the Minister will be pleased that I welcome these regulations without a “but”. I have an “and” and some questions, but overall I think the regulations are very welcome.

As the Explanatory Memorandum points out, the private-law contract nature of CfDs provides the certainty needed for investment in these green technologies. It is very important that we get this part right. It is the CfDs that have led to such a dramatic reduction in the cost, for example, of offshore wind.

I welcome the fact that the regulations will remove biomass conversion from future allocation rounds, which seems sensible, and that floating offshore wind will be put into a separate pot. I hope that, in future, CfDs may be extended beyond just this sector so that we can look at how they—or similar mechanisms to provide certainty—might be applied to technologies such as green hydrogen. That is an important thing for the Government to look into.

The regulations, as the Minister pointed out, strengthen the supply chain policy, which is aimed at a more open and competitive supply chain and at promoting innovation and skills. I welcome that but, given that the Secretary of State has the power to refuse to provide an eligible generator with such a statement, can the Minister give us some understanding of the basis on which such refusals would be made?

Paragraph 7.11 of the Explanatory Memorandum explains:

“These Regulations also extend the confidentiality provisions relating to the disclosure of information that may damage the commercial interests of any other person”.

I do not think the Minister touched on this in his opening remarks; can he explain why that change is felt to be needed now? I am suspicious of extending confidentiality provisions beyond what is absolutely necessary.

I was going to criticise the lack of clarity in paragraph 7.12 of the Explanatory Memorandum, which seemed almost incomprehensible to me, but then the Minister read it out almost word for word. I do not think that particularly helped to explain anything. Can he perhaps ensure that these Explanatory Memoranda explain things a bit better?

I have a couple of further points. Paragraph 7.27 states:

“These Regulations amend the Allocation Regulations by amending the way the budget operates to provide the flexibility to decide … whether each capacity cap, maximum and/or minimum … would be applied as a ‘soft’ or as a ‘hard’ constraint.”

What will the considerations be in determining whether a hard or soft constraint will be applied, as that was not clear to me?

Finally, paragraph 7.30 makes it clear that the regulations are amended to make it

“explicit that the overall budget, both monetary and capacity may be varied using a budget revision notice.”

Can the Minister tell us what that does for the level of certainty he referred to in his statement as being extremely important for industry? I note from the consultation responses that there was a good deal of concern about this change. The Government argue that it is not a change but simply makes something explicit. I am a little sceptical about that argument on the basis that, if the Government had the power to do it anyway, I suspect they would not be giving themselves the power to do it. Can he give us some more information on that?

However, as I said at the start, on behalf of the Liberal Democrats, we welcome these proposals. We welcome the extension of the period, which will give greater certainty, and are pleased that the regulations have been brought before the Grand Committee.

Once again, I thank the Minister for his explanation of the regulations before the Committee today. They amend a number of regulations covering contracts for difference, as well as the general regulations for electricity market reform.

The aforementioned contracts for difference cover the definition of eligible generator by removing biomass as a qualifying generation to apply for a CFD. I welcome this change, as biomass has largely fulfilled its purpose of replacing coal-fired power stations with renewable energy fuel. Now that electricity generation has become less carbon intensive, continued supply of woodchip has caused controversial activity to be reassessed.

In relation to contracts for difference regulations, these regulations also amend the allocation regulations by including floating offshore wind as eligible to apply for CfD funding. Through the consultation process, other minor improvements and better drafting to aid clarity have also been identified, such as supply chain plans and period definitions to application rounds to provide better certainty to applicants. Thus these regulations bring many improvements and developments to the CfD process. As an initiative to incentivise investment in low-carbon electricity generation and bring forward renewable sources of energy while improving affordability for consumers and maintaining energy security during energy market reform, the CfD regime has been largely a huge success. While there has been controversy over the setting of strike prices for specific technologies, the mass deployment of renewables has led to more competitive renewable generation and better energy efficiency. The consultation process has been very productive and the resulting redrafting of guidance is also very welcome. Can the Minister give any indication of when National Grid and the Low Carbon Contracts Company will publish their updates to reflect these changes? In turn, the Minister’s department intends to publish an updated version of its supply chain plan guidance. Will the Minister commit to publishing it well in advance of the next CfD allocation round?

Floating offshore wind is an interesting development that the Government have identified as potentially a very productive new source of energy generation. Will the Minister expand a bit on the operation of pot 2 as a separate budget for less-established technologies to which floating offshore wind will have to apply? What is the size of this pot in relation to the more recognised pot to which established technologies would apply? What have been the relative awards total between the two pots in the past and what is the breakdown of those awards? I will be happy to receive a letter with more detailed information from the Minister rather than take up the Committee’s time now. I merely wish to understand how new technologies are supported in relation to the generality of technologies and when a new technology will graduate, and by what defining characteristics, from one pot to another. Can the Minister say in any meaningful way at the moment what strike price might be awarded to offshore floating wind in relation to strike prices for the various stages of conventional fixed offshore wind? With that, I approve the regulations before the Committee.

I thank both noble Lords, the gallant duo, for turning up to debate an important statutory instrument this afternoon. As I set out in my opening speech, decarbonising the power sector is a vital part of the UK’s effort to meet its world-leading net-zero target. While we cannot, of course, predict exactly what the generating mix will look like in 2050, we can be fairly confident that renewables will play a key role alongside firm or flexible low-carbon generating capacity, such as carbon capture, usage and storage technology and nuclear power. Net zero defines what we must achieve by 2050 but, as pointed out in the previous debate, not how to get there. We must take the necessary decisions now to deliver the resilient, low-cost, low-carbon power system that we will need to reach net zero.

The noble Lord, Lord Oates, asked about the circumstances should a developer not obtain a supply chain plan statement. If a developer fails to make ambitious, feasible and measurable commitments in a supply chain plan, it may not receive an SCP statement. However, it will have the opportunity to resubmit its application before the auction begins. Subsequently we expect that commitments made should be met. If a developer fails to implement the majority of its commitments in a supply chain plan, its CfD contract may be terminated. However, the termination of a CfD contract is very much a last resort. The purpose of the monitoring process is to support the implementation of a supply chain plan commitment that developers have freely entered into. It is in the best interests of both the Government and the developer that that chain plan commitments are implemented.

In response to the question on making explicit powers under the budget revision, we are seeking to make explicit our existing powers and not to add any new powers. Although in the May 2020 consultation we proposed making changes to clarify our ability to amend the overall budget—meaning the monetary budget—and add the ability to amend a supply cap, on reflection, we consider that we already have the power to amend the capacity cap due to the fact that the definition of “overall budget” includes both the monetary and capacity budget. Therefore, both proposed changes would make explicit existing powers which, although they exist, we consider not clear enough for stakeholders.

The noble Lord also asked about soft constraints. When deciding whether a capacity cap—maximum or minimum—should apply as a soft or hard constraint in an allocation round, we will consider what we are trying to achieve from the round generally or for specific individual technologies, including in terms of how much new capacity is supported. We also want to ensure value for money by creating competitive tension between bidders.

The noble Lord, Lord Grantchester, asked about the strike price for FOW. We will publish specific allocation round parameters in due course. We typically announce the auction parameters four to six months in advance in a draft budget notice and draft allocation framework although, of course, the exact timing differs between rounds.

On the noble Lord’s question about SCP guidance, that has been published in draft and a final version will be published in the next couple of months. The noble Lord asked a couple of other questions but, if he will forgive me, I will write to him with more detailed answers.

The changes in these regulations are varied but they are essential to ensure that CfD allocation rounds can best support the increase in the pace of renewable deployment needed to achieve our net-zero ambitions, while continuing to consider value for money for consumers. They must be made now ahead of the next CfD allocation round, which is planned for December this year, so that developers have certainty as to who will be eligible to take part and on what basis. I therefore commend the regulations to the Committee.

Motion agreed.

Committee adjourned at 5.02 pm.