Contract for Difference

Energy Bill [Lords] – in a Public Bill Committee at 12:00 am 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.””—(Callum McCaig.)

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 for the First time, and Question proposed (this day), That the clause be read a Second time.

Question again proposed.

I remind the Committee that 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 Chris Heaton-Harris Chris Heaton-Harris Conservative, Daventry

I want to make a short comment on new clause 5. [Interruption.] There is so much barracking, Mr Bailey. It is unbelievable.

You could have changed your mind.

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

That is what my wife says.

I believe that new clause 5 is incompatible with the Government’s stated objective of affordable decarbonisation. I want to take the opportunity to ask the Minister how the Government are progressing towards their goal of having a truly competitive single pot for each of the contract for difference auctions, and how the Government will try to encourage investment in new, consistent and dispatchable renewable energy.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

As we heard this morning, new clause 12 approaches similar aims, though in a slightly different way, from the clauses put forward by the hon. Member for Aberdeen South this morning. It concerns the allocation rounds for contracts for difference and the extent to which they should be held on an annual basis.

I appreciate that the Government have indicated in principle that there will be further allocation rounds, although we are still waiting to see what might be in them. For example, would onshore wind be included in allocation rounds in future? In the context of the levy control framework, which I am pleased to see is now being investigated by the National Audit Office, we are not sure whether there will be any substance in those allocation rounds. We are not sure whether there are any allowances in the pot that can be put into the allocation rounds in order to make them realistic for operators to bid into them.

We also understand that the process for bidding in allocation rounds means, as we heard this morning, that what comes out as the auction strike price will not be the same as the allocated strike price originally announced for various different categories of renewables. While that suggests that there should be an annual allocation round in each year where the UK is not on target to meet the 2020 EU renewable energy target, what those allocation rounds actually cost would be a variable factor. The suggestions that went around a little while ago on the possible emergence of subsidy-free CfDs could mean that the allocation rounds could be held with little or no effect on the levy control framework. Can the Minister say whether subsidy-free CfDs are a current question in her Department? If there are future allocation rounds, might they be a part of the allocations? If no clear answer is forthcoming this afternoon, perhaps it would be easiest for her to consult her departmental adviser who, I know, had a substantial hand in advancing the idea of subsidy-free CfDs before he became an adviser. I am sure his expertise on this issue could be put to good use on CfDs.

The issue with holding allocation rounds annually is not necessarily or even reasonably disposed of by the idea that this is simply about keeping control of how much money goes out under the levy control framework, because there are ways to hold an annual contract round without overthrowing those arrangements. The new clause would ensure that the issue of frequency of allocation rounds was about what it should be about—the extent to which CfDs drive the deployment of renewables towards the goal of achieving our renewable energy targets. That has been publicly stated as one of the goals behind the working of the levy control framework. We have not heard about this yet, but there is also the possible allocation of further targets after 2020, so the proposal could continue to drive forward the deployment of renewables and ensure that those targets were reached.

We have also discussed what we mean by reaching the 2020 EU renewable energy targets. We have emphasised that that means the discharge of the obligatory target agreed by the UK for the provision of 15% of energy from renewable sources by 2020. In turn, that means that the sub-targets that were set in the UK but nevertheless contribute towards the overall EU target should themselves be either on target or be underpinned by other areas being on or above target. The letter from the Secretary of State to other Departments in October set out precisely what that means and I trust that on this occasion the Minister has a copy easily to hand, which would be a good step forward. It states that the trajectory towards reaching those EU targets “increases substantially” after 2017-18 and

“currently leads to a shortfall against the target in 2020 of around 50 TWh (with a range of 32 - 67TWh) or 3.5%-points (with a range of 2.1 - 4.5% points) in our internal central forecasts (which are not public).”

So the Secretary of State emphasises that the trajectory and the shortfall are not public but goes on to say:

“Publically we are clear that the UK continues to make progress to meet the target.”

I trust that the Minister, now having a copy of that letter, will agree that that is an accurate depiction; the Secretary of State was clear that we are on target not to be on target as far as EU 2020 goals are concerned. Although the fact that we are on target not to be on target has not been made public, nevertheless, that very clear conclusion stems from departmental trajectories and is robust in terms of what the departmental modelling represents.

I take that internal observation as the starting point for this amendment and I hope that the Minister will confirm it to be the case. Secondly, I hope she will be able to change the status of those internal central forecasts, on which this is based, from not being public to being public. That would be very helpful to our discussions in the longer term. The idea that the UK is not on target, overall, to meet the EU 2020 renewable energy targets—and, as the letter makes clear, it is largely not on target because of factors relating to quite substantial failures in heat and transport—suggests, among other things, that in order to make sure that the Government are on target, other areas perhaps need to over-perform, and among those would be those projects which would be in line for contracts for difference through the allocation auctions.

Of course, I remind the Committee that that is not about onshore wind or renewable obligations, it is about a variety of renewables that may qualify for those contracts for difference—biomass, offshore wind, other forms of renewable energy which, together, could make a contribution to getting to the target by overachieving in that area. So it is a mechanism, essentially, to ensure that we are straining every sinew to get to that EU target and using the devices that we already have available to us to get there through a competitive process that ensures best value for money in the process. I therefore commend this amendment to the Committee and trust that the Minister will take it on board.

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

New clauses 5 and 12 seek to amend the Energy Act 2013 so as to require contracts for difference, or CfDs, allocation rounds to be held at least once a year. This would be either when the carbon intensity of electricity generation in the UK exceeds 100 grams per kilowatt hour or when the UK is not on target to meet the 2020 EU renewable energy target. I completely acknowledge that it is important that developers and investors have some foresight as to the frequency of CfD allocation rounds. However, this must be balanced with levy control framework budget availability, which, as hon. Members know, is funded by a levy on consumer bills.

I will answer a couple of specific questions. My hon. Friend the Member for Daventry asked how CfDs will include less developed technologies. As the Secretary of State said last November, the current intention is to hold the next CfD allocation round for “less established” technologies, which are defined as pot 2, in late 2016. We are currently working with the Treasury to finalise the budget as part of discussions on the next levy control framework period. We will set out details on that as soon as we can.

The hon. Member for Southampton, Test put the question of whether the levy control framework would be updated post-2020. I can assure him that that is something we are looking at now. He also asked about our work on market-stabilising CfDs, effectively subsidy-free CfDs for onshore wind. That is something that we are continuing to look at and would be delighted if industry or hon. Members want to provide input to that discussion, as it is something we are very interested in.

Photo of Callum McCaig Callum McCaig Shadow SNP Westminster Group Leader (Energy and Climate Change) 2:15, 4 February 2016

I welcome that statement from the Minister but I want to ask about the process. What kind of information is she looking for, from whom and when?

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

Through normal channels. Discussions on the early closure of the onshore wind subsidy included lots of bilateral stakeholder meetings. Some industry workshops were held. If the hon. Gentleman wanted to submit information to me or my Department, we would be delighted to hear from him, his party or companies he is aware of that are interested. We are very interested to hear views on that, though we obviously want to make progress with it at the same time.

Coming back to the LCF, its function is to limit the amount paid by consumers. It is crucial that the Government are able to take account of the latest evidence and use the LCF budget in light of latest evidence around deployment projections and costs. The hon. Member for Aberdeen South talked a lot about the difference in cost of different types of CfDs. He will be aware that we are talking with the Scottish Government about the remote highlands and islands and the potential for onshore wind projects there, which by nature of their remoteness would have big transmission costs that might make them more akin to offshore than onshore wind.

The hon. Member for Coatbridge, Chryston and Bellshill mentioned that onshore wind CfDs are around £80 and for offshore wind, as hon. Members pointed out, they are still well in excess of £100, some at £145 and so on. Our hope and expectation is that those costs will come down. That is a key reason why my right hon. Friend the Secretary of State set out in her policy reset speech that we would look to the offshore wind industry to bring their costs down in order to participate in further auctions, which we think is achievable.

Hon. Members have reflected that, when looking at the budget for the levy control framework, which is how consumers pay for all of this, and the CfD pots that add costs to the LCF, we must look at the latest evidence and technologies and have a proper balance.

To answer the hon. Member for Southampton, Test, the UK is continuing to make progress towards the 2020 renewables target of 15% of final energy consumption from renewable sources. Renewables accounted for 7% of energy consumption in 2014, up from 1.3% in 2005. We have exceeded both our 2011-12 and our 2013-14 interim targets.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Energy and Climate Change)

I am sorry to have to tell the Minister, but that was exactly what the Secretary of State’s letter stated would be said in public on targets. Although I appreciate what the Minister is saying, it does not add anything to the core of the letter that, while Ministers may say something in public, something else is the correct position in private.

Photo of Andrea Leadsom Andrea Leadsom The Minister of State, Department of Energy and Climate Change

I have to disagree with the hon. Gentleman. The Secretary of State has set out that we are making progress. As Ministers do, she was talking about what needs to be done next. Since then, we have had the spending review, where the renewable heat incentive scheme budget was confirmed to March 2021, rising each year to a total of £1.15 billion.

That is in excess of where we are today and goes a good way towards meeting some of our heat targets, which were referred to in the letter as needing those decisions. Life is not static and for the Secretary of State to write to colleagues saying what needs to be done is not tantamount to saying that we have no plans or efforts in place to meet this. I am sure that the hon. Gentleman would acknowledge that.

We are also making progress in decarbonising the power sector. Investors want to know that we have clear, credible and affordable plans for the sector. That is what the Secretary of State set out in her speech in November, highlighting the important role that gas generation, nuclear power, offshore wind and innovation can all play. For example, as we have discussed, we have a world-leading offshore wind industry, with the UK making up about half of all deployed offshore wind in the world. This is an area where the UK can help to make a lasting technological contribution to supply chains, and certainly to the UK supply chain, supporting a growing installation, development and blade manufacturing industry in the UK.

By committing to annual CfD allocation rounds, the new clause would inhibit the Government’s flexibility to apply appropriate mechanisms to achieve renewable and decarbonisation targets. The Government should retain their ability to respond to evidence on technology cost reductions, costs to consumers and of course opportunities in other sectors such as heat and transport. The hon. Gentleman’s proposals would unnecessarily tie the Government into a course of action that may neither benefit the consumer nor provide any certainty to renewable energy generators or investors. We are committed to our energy and carbon targets and continue to make strong progress towards meeting them. For that reason, I cannot accept the amendments but I hope that I have addressed his concern and that he will be content to withdraw them.

New clause 6 seeks to devolve the matter that, when exercising electricity market reform functions under the Energy Act 2013, including in respect of contracts for difference, the Secretary of State should consider matters specifically in respect of Scotland. It also seeks to devolve annual reporting on how the Secretary of State has carried out the functions under part 2 of the Energy Act 2013 during each year. EMR, including CfDs, is GB-wide. That is, electricity market reform, including contracts for difference, is Great Britain-wide––I am sorry, I am trying not to use acronyms––and does not operate in a regionally specific way. That is linked to the fact that we have a GB-wide, integrated energy system on which the CfD scheme relies. The costs of the CfDs are spread across all consumers in Great Britain, which results in a fair distribution of the burden. That means that when exercising EMR functions under part 2 of the Energy Act 2013, it is appropriate that the Secretary of State has regard to the matters in section 5(2) of the Act on a Great Britain-wide basis. Having a GB-wide system ensures that support is directed as efficiently and cost-effectively as possible, which helps keep down the cost ultimately borne by bill payers.

Under current energy policies, Scotland has more than proportionally benefited from financial support from all GB bill payers. Around 9% of the UK population is in Scotland but around 30% of UK renewable electricity generation capacity is in Scotland. Of the 25 successfully signed contracts for difference, 12 have been awarded to projects in Scotland. That includes the 448 MW offshore wind farm in the outer firth of Forth and 11 onshore wind farms with a combined capacity of more than half a gigawatt. Transferring the power to Scottish Ministers to award contracts would go well beyond the Smith commission agreement. It was not the intention and nor is it appropriate.

I do not think it is necessary to devolve the publication of the annual report to Scotland. Every year, we publish an update that reflects the scheme’s GB-wide nature and sets out the progress the Government have made over the past year in implementing electricity market reform and how the Secretary of State has carried out functions under part 2 of the Energy Act 2013. Furthermore, the Secretary of State is already required to send the published report to Scottish Ministers, so I urge the hon. Gentleman to withdraw his amendment.

Question put, That the clause be read a Second time.

The Committee divided:

Ayes 8, Noes 11.

Division number 11 Christmas Tree Industry — Contract for Difference

Aye: 8 MPs

No: 11 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly negatived.

New Clause 6