Contract for Difference

Energy Bill [Lords] – in a Public Bill Committee at 12:30 pm on 4 February 2016.

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“After section 13(3) of the Energy Act 2013 insert—

“(3A) An allocation round must be held at least once in each year in which the carbon intensity of electricity generation in the United Kingdom exceeds 100 grams per kilowatt hour.””.—

This new Clause would compel the Secretary of State to hold a Contract for Difference allocation round at least once in each year that the carbon intensity of electricity generation in the UK exceeds 100g per kilowatt hour.

Brought up, and read the First time.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

I beg to move, That the clause be read a Second time.

With this it will be convenient to discuss the following:

New clause 6—Contract for Difference: devolution—

“In Section D1 of Part 2 of Schedule 5 of the Scotland Act 1998, in the exceptions, insert—

“Exception 2: The subject-matter of Chapter 1 of Part 2 of the Energy Act 2013.””

This new Clause would devolve control of Contract for Difference in Scotland to the Scottish Parliament.

New clause 12—Contracts for Difference—

“After section 13(3) of the Energy Act 2013 insert—

“(3A) An allocation round must be held no less than annually in each year in which the UK is not on target to meet the 2020 EU renewable energy target.””

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

I thought that we were having another vote, so I was not quite ready. You have taken me by surprise, Mr Davies, but I shall soldier on valiantly.

Many of our discussions during the last few days of this Committee have been about subsidies for onshore wind and how they can best be dealt with. I am not sure that we have dealt with them in the best manner possible, but there we are. The Minister has said today, in debate between her and the hon. Member for Norwich South, that as the costs come down, so should the subsidies. The renewables obligation was not perfect in its operation. That is probably widely accepted and why it was replaced with a much better form of subsidy or price control or stabilisation mechanism—whatever one wishes to call it. I am referring to contracts for difference. That model has provided a competitive option whereby energy producers’ projects come forward and suggest a price that they can provide their electricity at. That has brought a greater sense of competition and a greater bearing down on costs. It is an important part of the development of the industries to enable us to meet our carbon commitments and, I would argue, to deal with our security of supply issues in a cost-effective manner.

New clause 5 suggests that there should be a CfD allocation every year in which the carbon intensity of electricity generation in the United Kingdom exceeds 100 grams per kWh. That figure comes from the policy recommendations from the Committee on Climate Change in “The Fifth Carbon Budget: The next step towards a low-carbon economy”. One of its recommendations was that the Government should develop policy approaches consistent with reducing the carbon intensity of the power sector to below 100 grams of CO2 per kWh in 2030. That compares with 450 grams in 2014 and the projection for between 200 grams and 250 grams by 2020. That last point indicates that significant and welcome progress is being made on reducing the carbon intensity of the power sector in terms of electricity generation, but it suggests that there is still a long way to go.

Why is it important that we hold auctions annually, in terms of the CfDs? I think it comes back to what has been another key theme of this debate, the need for investor certainty and investor confidence. I believe that this would provide that. While there is a requirement to decarbonise the electricity sector, there must be a clear path for us to do so and a clear indication given to businesses that scale up their investment, if they put forward the proposals that are required—the research and development, the site appraisal work and all that is needed to bring forward whatever it is, whether it is a solar farm, a wind farm, offshore wind or other technologies, including tidal, perhaps, which is further from the market but I hope will play a considerable part in electricity generation, certainly by 2030, given the potential that we have to do it.

That potential is important. The certainty that this new clause would provide would enable the significant investment that needs to come from the sector following the Paris agreement and in terms of meeting our own climate change commitments. By providing the certainty that there will be a market, that there will be potential for projects to be deployed, provided they are cost-competitive, that will, in itself, drive down costs. So it is good for the Government, in terms of meeting their climate change commitments, but it will also ultimately be good for the consumer.

New clause 6 suggests the devolution of the contract for difference mechanism to Scottish Ministers. The operation of the renewables obligation had been dealt with by Scottish Ministers previously and in discussions I have had with many in the industry in Scotland they were very pleased with how the Scottish Government approached the renewables sector. There was the kind of clarity I have just discussed. We need to recognise that there are differing means and differing desires in the different nations of the United Kingdom about how we are to meet our electricity needs and our carbon-reduction targets. This Government legitimately wish to pursue nuclear, which is not something I advocate, largely on a cost basis. That is their right. I do not oppose the principle of their pursuing that, should they wish. I have issues around costs, which will be borne by GB consumers as a whole, but it needs to be recognised that if parts of the UK wish to pursue one form of energy policy, it is legitimate that other parts should be able to pursue a distinct process.

Photo of James Cartlidge James Cartlidge Conservative, South Suffolk

It is a national grid, is it not? I am not stating the obvious, but Scotland, for example, cannot cut itself off from the electricity generated by nuclear power in other parts of the country. So we still need a UK-wide policy on the fundamental supply. They may take a different view on onshore wind, but on the fundamentals it is a UK grid.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

It is a GB grid—I do not mean to be pedantic and split hairs. At this moment, yes, I agree with that. What I am asking for is the replication of what happened previously with the renewables obligation. There was a process by which differing processes were put in to manage that form of support for renewables, and I think that could be replicated in the round. I think National Grid is comfortable with different forms of electricity generation in different parts of the country.

We have heard that National Grid views the concept of traditional base-load to be somewhat outdated: it is about balancing and managing the reserves, providing it knows what there is to be developed in different parts. It would require considerable engagement, should this happen, between both Governments and between each and National Grid in order to work out how it would be developed. I see the Minister champing at the bit to come in.

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change 12:45, 4 February 2016

On a point of clarification, is the hon. Gentleman suggesting that National Grid could somehow prevent electricity generated from a nuclear power station from going to Scotland?

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

Absolutely not, no. I am talking about how Governments in the different jurisdictions are allowed, in collaboration with each other and National Grid, to pursue different energy policies. It would be unwise to suggest that power generated in any parts of these islands should not sensibly be allowed to flow in any way dependent on need. Through the Irish interconnector there is collaboration with the Republic of Ireland and likewise with the French and Dutch interconnectors. The move is towards greater interdependence, but that still allows a degree of autonomy in how the individual parts pursue their policies.

It will come as no surprise that I would like to see Scotland have greater control over large aspects of our lives. That is my party’s position.

Photo of Chris Heaton-Harris Chris Heaton-Harris Conservative, Daventry

I did not mean to interrupt the hon. Gentleman right in the middle of that point, but earlier he mentioned that his main argument was about cost and in the three contract for difference competitions that will be open, the strike price will be far higher than the cost of nuclear. I believe that the price for offshore wind is about £145 at the moment.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

The price of offshore wind is coming down and I think the Government have suggested that, if further offshore wind contracts for difference are to come forward, it needs to do so significantly. The curve is downwards and the point of the contracts for difference mechanism and the competitive process is to allow for active discussions and bidding to drive down costs, but I am not clear that that there has been such an open, transparent process in the strike price at Hinkley.

Photo of Phil Boswell Phil Boswell Scottish National Party, Coatbridge, Chryston and Bellshill

Does my hon. Friend agree that that some of the offshore wind strike prices have been as low as £80, which is considerably below £92.50? Does he believe that the implementation of transmission charges differentiated geographically in Great Britain has rendered Longannet uneconomical and its closure effectively some four years early could turn Scotland from being a net exporter of energy to a net importer? That would be to Scotland’s disadvantage, so we should have more local input.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

I think my hon. Friend was referring to the strike price for onshore rather than offshore wind. On transmission charging, that does not help how we in Scotland would wish to form our energy supply. We have limited control over that and the cost of producing a gas-powered plant in Scotland, as opposed to within the M25, is prohibitively expensive. I do not think that the process is working, because I do not see a whole new fleet of gas plants being built in close proximity to London and if we do operate a GB grid, that should be done on a level playing field.

Photo of James Cartlidge James Cartlidge Conservative, South Suffolk

I do not want to labour the point, but I would like to clarify why I asked that question and why I think the Minister is supportive. When we were discussing amendment 14 or 15, whereby the SNP wanted the power to operate the renewables obligation in Scotland, I asked the hon. Gentleman if his party would be prepared to pay for that and he said that it would not. However, on the nuclear price he said that that must be paid for and that balances it. The SNP seems to assume that Scotland can cut itself off from the nuclear-generated electricity coming into the GB grid, to which presumably Scotland wants access. With respect, it seems that the SNP wants to have its cake and eat it.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

I have been trying to get on to funding for some minutes but I keep being intervened on. I would like to see developed at a much greater level better connections between not only Scotland and England, which are coming on in terms of the grid, but the British Isles and the continent. The way forward has to be much greater interconnection throughout Europe. That argument has been put forward by the Secretary of State, which is welcome, but it should not be seen as interconnection for the sake of getting energy from elsewhere.

We, as a nation, have issues in terms of the balance of trade, and relying more than we do now on imports of energy would be detrimental. If we can unlock the huge potential we have, particularly of renewables and particularly in Scotland, there is the potential to be a net exporter, though not at all times; the new clause would play a part in that. That should be the ambition, in my view. If we are going to have a European grid, we should not limit our ambitions to being an importer.

We need to respect the differing modes and choices of the people of these islands, if we are a family of nations that respects our divergent views. If England chooses to produce nuclear, that is fine. Whatever the relationship between the two countries, I see a point where there will be a need for nuclear from England, but likewise, there is a need for energy from Scotland at times. That is the level of co-operation.

Photo of Jonathan Reynolds Jonathan Reynolds Labour/Co-operative, Stalybridge and Hyde

I think I am right in saying that the SNP’s position is that even in an independent Scotland, there would be a common GB energy market; it would effectively be the same as it is now. What I cannot quite follow—I am not against the hon. Gentleman’s new clause; I am just trying to follow the logic of it—is why this measure would be in Scotland’s interest. If Scotland is exporting electricity to the rest of the UK, or certainly to England, why have two different support regimes for the subsidy to be paid by the Scottish Government? Surely, if it is one common energy grid, it should have one set of support behind it.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

I am not suggesting there should be different funding—I am still trying to get on to the issue of financing but am being deterred from doing so. I envisage the pots being one. Let us take the two issues together. If we had an annual CfD allocation, there would need to be discussions. I imagine those discussions being conducted similarly to those we debated yesterday, in terms of the fiscal agreement from the Scotland Bill. Agreements would be made about what proportion of the pots could and should go to Scotland and/or anywhere else. That would give the Scottish Government the ability to tweak that support and tailor it to our specific needs and aspirations.

The UK rightly lauds the success of the deployment of offshore wind. That is a good thing, but because of the technology and the different costs, it is easier to do that in the shallower waters off the shores of England than in the deeper water off the shores of Scotland. The wind resource, I am reliably informed, is greater, but the initial costs and the curve of diminishing returns requires a higher level of support initially.

Should there be a desire in Scotland for greater support for offshore wind in deeper waters—the global potential of that is enormous, given that most coastal waters are deeper than the ones we have here—that would be a benefit for not only Scotland but the UK, in terms of developing a supply chain for it. That can be looked at in different ways. A one-size-fits-all approach to renewables might work in the short term, in terms of deployment, and it has worked well, but we need a more nuanced approach and a long-term vision of the opportunities. New technologies—offshore wind in deep water is one, but there is also tidal and wave energy—are there to be exploited, should the support mechanisms be right.

Photo of Jonathan Reynolds Jonathan Reynolds Labour/Co-operative, Stalybridge and Hyde

I want to be sure I understand. Is the hon. Gentleman saying there would effectively be different rates for contracts for difference in Scotland and the rest of the UK? There would be different rates for different technologies, depending on which side of the UK they were on.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change)

I am saying that there would be a different bidding process, so that we could allocate the contracts differently. The bids may all come in the same. We cannot predict the outcome of a competitive auction before we have held it, but we must allow such nuancing of the competitive auction.

In summary, while we are pushing toward the targets set out in the Climate Change Act 2008 and waiting to see what comes from the fifth carbon budget, we need to provide certainty to industry that will enable it to plan for the future. That is what new clause 5 would deliver. New clause 6 would deliver the ability, through collaboration between both Governments, to unlock what is still a considerably untapped enormous resource in Scotland in the renewables sector. That would be beneficial to Scotland and to the United Kingdom as a whole.

Ordered, That the debate be now adjourned.—(Julian Smith.)

Adjourned till this day at Two o’clock.