Lords consideration of the Contracts for Difference (Sustainable Industry Rewards) Regulations 2024 - May 13

Moved by

Lord Callanan

That the Grand Committee do consider the Contracts for Difference (Sustainable Industry Rewards) Regulations 2024.

Relevant document: 21st Report from the Secondary Legislation Scrutiny Committee

The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)

My Lords, I beg to move that these draft regulations, which were laid before the House on 21 March 2024, be approved.

The Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee have provided a very helpful review of these regulations and, I am pleased to say, have not drawn any special attention of this House or the other place to them. These regulations amend the regulations underpinning the contract for difference scheme. The CfD scheme is the Government's main mechanism for supporting new low-carbon electricity-generating projects in Great Britain. It has been hugely successful in driving down deployment costs and driving up the share of renewable energy in the UK.

These amendments are about providing extra funding support through the CfD so that we can better support offshore and floating offshore wind supply chains. Offshore wind in particular is a critical industrial sector. It has been hard-hit by inflationary pressures and supply chain disruption resulting from the Russian invasion of Ukraine. Consequently, necessary investments in manufacturing and infrastructure have been delayed or, in some cases, abandoned altogether.

As the CfD currently focuses on prices of deployment and no other factors, offshore wind developers are incentivised to use the cheapest supply chain options available, regardless of where in the world or how dirty their means of production. We are therefore introducing sustainable industry rewards—SIRs—to rebalance CfDs, to address some of these supply chain challenges which are already causing bottlenecks in the supply chain, further increasing costs and slowing down deployment. This policy intervention has understandably been much welcomed by supply chain companies. It is intended to take effect for the seventh CfD allocation round, which should take place in 2025.

How does this policy work? These regulations require all offshore wind and floating offshore wind CfD applicants, as a condition of entry to the CfD, to obtain an SIR statement from the Secretary of State. Those applicants who obtain an SIR statement will receive additional revenue support through the CfD—a top-up, as it were—for investing in the economic, social and environmental sustainability of their supply chains. SIR statements are obtained if applicants make successful SIR proposals that fulfil one of two sustainability criteria. One is investment in shorter supply chains in UK deprived areas. This means investing in manufacturing in the most disadvantaged parts of the United Kingdom. The other is investment in more sustainable means of production. This means investment in manufacturers who have signed up to the Science Based Targets initiative for the reduction of carbon emissions.

The mechanism to allocate SIR funding will be a competitive auction just before the main CfD auction. An applicant that obtains SIR funding will be contractually obliged to deliver their commitments; undelivered commitments will be subject to a system of performance adjustments. SIRs will make more expensive but more desirable investments from offshore wind developers cost-neutral, and therefore will not impact the main CfD auction, held shortly after the allocation of SIR funding.

Noble Lords should note that the regulations provide the powers to run the SIR allocation. The explicit, detailed rules of that allocation are set in the draft SIR allocation framework that was released in parallel to these regulations. The regulations replace the current supply chain plan process for offshore wind and floating offshore wind. The Government are very conscious that this extra support for offshore wind will have an impact on consumers' electricity bills as, like the rest of the CfD scheme, SIRs will be funded through the existing electricity supplier obligation levy, which electricity suppliers pay.

The actual budget for SIRs is still being discussed with the Treasury. However, we estimate it could be in the region of £150 million to £300 million per year, for no more than three years, subject to the number of applicants. The impact on consumer bills will be very small, in the region of £2 per year per consumer. I hope that noble Lords will agree that £2 a year per consumer is a small price to pay for the benefits that sustainable industry rewards could bring to UK communities, through creating new and cleaner manufacturing facilities in deprived areas, alongside highly skilled jobs or carving out opportunities for businesses to become part of the offshore wind supply chain.

To ensure that the policy does not become a permanent burden on consumer bills, our proposal is that the intervention is time limited for three years; it is there to address specific market failures. The SIRs work as a prerequisite to the CfD for offshore wind, although applicants will have access to the main CfD round as long as they meet a required minimum standard of investment in their supply chain. The SIRs also complement other government support for renewable supply chains, such as the £1 billon Green Industries Growth Accelerator, which runs to a similar timeframe. I beg to move that these regulations are approved by the Committee.
Baroness Bennett of Manor Castle (GP)

My Lords, I have some technical questions, although I begin by broadly welcoming the Government's direction of travel on this. It really is urgent that we proceed with offshore and floating offshore wind schemes.

I have two questions, one of which refers to the Procurement Act, which I spent more hours than I care to remember debating in this very Chamber when it was a Bill. How does this provision fit with the social value provisions in the Procurement Act? These measures would seem to be carved-out and very narrow provisions within that, so I am wondering how those two legal elements interact. My other question is, this provision provides a mechanism for offshore and floating offshore wind; how will this impact potentially on bids for solar, hydro and other schemes? Will it create a disadvantage for smaller-scale schemes, particularly community schemes?

Earl Russell (LD)

My Lords, I note that this SI has not been the subject of any report by the Secondary Legislation Scrutiny Committee. On these Benches, we broadly welcome the SI and its intention to grow the green economy. The UK is one of the best-placed countries in the world for developing and deploying offshore wind to help to provide energy security and meet our net-zero commitments. In 2023, a record 49 terawatt hours, 17% of the UK's total electricity generation, was produced by offshore wind energy. The UK is aiming to triple its offshore wind capacity in the next six years and desperately needs a successful wind auction this year after the failure to attract any bids from offshore wind developers for the last round of contractual auctions.

The green economy in the UK grew by 6% last year and is crucial to delivering economic growth, the just transition and our climate goals. There are worries about the level of support for future investment in the UK offshore wind sector, and this SI is broadly welcomed on these Benches for recognising this and aiming to improve the situation.

This SI applies contracts for difference sustainable industry rewards—SIRs—which, it is said

“will help to address recent supply chain challenges that could otherwise hinder the deployment of offshore wind (OFW) and floating offshore wind (FOW). They will do so by providing additional revenue support to OFW and FOW developers, through a series of lump-sum payments in addition to their regular CfD payments, should they invest in the economic, social, and environmental sustainability of their supply chains”.

4.45pm

The SIRs scheme is a direct recognition from the Government that grant funding alone is not sufficient to increase investment capacity at the speed and scale that is desired to meet our climate commitments. The SIRs here work within a contract for difference scheme and reward companies which invest in shorter supply chains in the UK's deprived areas and/or

“more sustainable means of production”

here in the UK or anywhere else in the world. What is the budget for the SIR and, again, how will value for money in each round be assessed and reported back to Parliament?

The SI allows for performance-related adjustments if the applicant is not at fault and for an SIR statement to be amended in relation to evidence-based material changes. Again, similar to the previous SIs, can the Minister confirm that there is a dispute resolution mechanism prior to any legal proceedings, in case of difficulties here?

As I said, we welcome that this SI is seeking investment in deprived areas of the UK. However, how are “deprived areas” defined and how does this relate to other potentially competing demands, particularly the need for shorter supply chains? Can the Minister also say a word on what

“more sustainable means of production”

looks like for the Government? It is well known that these offshore wind turbines' blades cannot be recycled, as they are made of carbon fibre, so is there an attempt here—or do the Government see it as possible—at some point in the future to have greater use of recycled materials within the industry? Is that one of the intentions here?

As the Minister, the SI will apply only to allocations rounds 7, 8 and 9, when a full review is expected, and new legislation will have to be laid if this policy is to be continued. Are the Government confident that this policy is sufficient to secure the inward investment that we need, at scale and at speed, to meet our future commitments? He spoke of specific market failures: I assume that those relate to the war in Ukraine, Covid and supply issues. I guess there is just a question of whether these measures, in that three-year timeframe, will really be sufficient to take this industry forward to meet the expected demand, when other countries are also expanding their offshore wind at the exact same time, and we are dependent on multinational companies to deliver these big infrastructure projects for us.

Finally, what is the earliest proposed date that the policy could be extended by new legislation, if that was a desired outcome for this Government or the next one? Will the need for new legislation be hampered by any lack of statutory review included in these regulations? For example, if there were a change of Government, would the fact that there is no statutory review impact on any incoming Government's ability to bring forward new legislation? While I welcome this SI and its intentions, I am not certain that the powers that it delivers will alone be enough to deliver the desired policy outcomes that the Government seek to achieve.

Lord Lennie (Lab)

My Lords, before I begin my comments on sustainable industry rewards, I want to place on record my congratulations to Gateshead Football Club, which on Saturday beat Solihull Moors at Wembley, after extra time and penalties, in the FA Trophy. I am sure that the Minister would want to join me in sending congratulations to Rob Elliot and the whole of his team up on Tyneside, where we both live.

This instrument amends the current contracts for difference regulations and is specifically about providing extra funding in order to support supply chains in the offshore and floating offshore wind sectors. As things stand, contracts for difference focus only on the price of deployment, as the Minister said; developers are therefore incentivised to use the cheapest supply chain, which may not always be the cleanest. This instrument introduces SIRs—sustainable industry rewards—to try to rebalance the CfD scheme in addressing the supply chain challenges.

All offshore floating wind applicants for a CfD will have to obtain an SIR statement from the Secretary of State as a precondition of having an application considered. Once the SIR statement is obtained, applicants will get additional support through what the Minister called a “top-up” in the CfD for investing in the economic, social and environmental sustainability of their supply chains.

I turn to the two criteria that the Minister outlined: investment in shorter supply chains in the most disadvantaged places in the UK; and investment in more sustainable means of production, where manufacturers committed to a science-based targets initiative for the reduction of carbon emissions. The impact on consumers, as suggested by the Minister, will be small—approximately £2 per annum per bill—and the proposed time is limited to three years or three rounds of allocation.

Labour is very supportive of these changes, as I am sure the Minister is aware. We believe that they will make a material difference to the quality of the scheme supported by the Government and to the impact on the whole industry with regard to UK-sourced materials, the maintenance of jobs, the sustainability of the supply chain and end products. There are, however, a few questions that I would like to put to the Minister.

The Minister again suggested, as was suggested in the previous debate, that the budget will be up to £300 million. When will this be finalised? When will we know what the budget for the SIRs will be? Secondly, why is the scheme limited to just three rounds or three years? Would it not be a good idea to make it a permanent or indefinite scheme, with an option to consider axing it at the end of the three rounds, if appropriate, rather than requiring new legislation to come before the House for it to continue? Is it possible for a company to bid in the final round allocation for the CfD if it meets the eligibility criteria for an SIR but does not win funding because of the scheme's budgetary restrictions? If the budget has been spent, what happens to that application?

Finally, I repeat Dr Alan Whitehead's question in the other place when these regulations were discussed; I do not know whether he has had an answer yet but, if the Minister could provide an answer today, that would be good. Is it the case that the most disadvantaged in the allocation round may well be those who bid for an SIR but lost, and have then adjusted their bid accordingly? Could it be that the smartest strategy for companies is to try to lose an SIR while having indicated that, in principle, they can meet its terms? They can then bid more competitively than if they had an SIR in the first place. I look forward to the Minister's response.
Lord Callanan (Con)

I thank all three noble Lords for their contributions.

Let me say at the start that CfDs are a key pillar of our energy security. They have been fantastically successful in what they have delivered in terms of our renewable energy mix, but they need to adapt to changing market conditions. We are determined to make offshore wind deployment an even greater success story and are willing to look at various innovative steps to help make that happen. These SIRs represent one of those innovative steps. We have developed them with industry input and believe that they will provide much-needed support to a sector that has faced a tough economic environment and many supply chain disruptions. This support should trigger significant investments in expanding the supply chain's capacity and capability in many deprived coastal areas around the UK—the noble Lord, Lord Lennie, and I should declare an interest in this matter—and in new, cleaner manufacturing processes. I mean that in terms of the fact that we are from the north-east of England and not in terms of any financial interests, by the way.

These investments will help deliver our levelling-up agenda and positively impact the communities hosting large infrastructure projects by providing new, well-paid, high-tech manufacturing jobs, as well as maintaining many existing successful jobs. Already, new offshore wind manufacturers, both British and from overseas, are looking to relocate to the UK thanks to this package of supportive measures.

It is true, as I said at the start, that these measures will have an impact on consumer bills. We are talking to the Treasury to get the balance right between the cost to consumers and what we can achieve through targeted revenue support in order to get investments in the supply chain back on track. However, I emphasise once again that we are looking at a very small impact on bills—around £2 per year per consumer—in all the scenarios we are considering, for a time-limited period of only three years, and that the competitive auction process will ensure that consumers see the greatest return on their investment. We believe that this is a small price to pay for the benefits that SIRs could bring to UK communities and beyond, as I articulated earlier.

These measures will also put us on a more equal footing with our direct competitors in the US and the EU, who are also investing heavily in their offshore wind supply chains. Considering how much deployment and potential we have here in the UK, it is only right that we, too, try to attract and support as much of that supply chain as possible. It is key, though, and important to emphasise, that we need to provide this support in a targeted and proportional way.

As Members have already indicated, allocation round 6 of the CfD is now live. The budget for AR6 was announced as part of the Chancellor's Spring Budget and, at more than £1 billion, is four times larger than the budget for the previous allocation round. Although this current round does not include SIRs, I wanted to flag that as it is none the less a crucial step in our renewable energy deployment plans and it demonstrates the Government's commitment to ensuring that the UK remains one of the world leaders in renewables. Of course, the Secretary of State will decide in due course whether to increase that budget later this year.

Let me deal with some of the points that were raised during the debate. The noble Baroness, Lady Bennett, asked how this SI fits with the social value provision in the Procurement Act and how CfD/SIRs impact on solar, hydrogen and other schemes. It is important to emphasise that the CfD is not a public procurement mechanism and therefore does not fall under the Procurement Act; it is a revenue support scheme, although many of the aims and mechanisms are of course similar. Solar, onshore wind and other technologies face different challenges to offshore wind; SIRs are therefore not appropriate interventions for them. For example, solar supply chains are currently massively dominated by China and the UK market alone will not help to shift that dominance, sadly.

The noble Earl, Lord Russell, asked how the value for money of SIRs will be assessed, what a sustainable means of production will look like and whether this policy is sufficient to meet future commitments. The budget, as I said, is still being negotiated with the Treasury. It is likely to be in the region of £150 million to £300 million; that will be determined shortly. The budget should be set out in June and value for money will be determined by a competitive allocation of that funding. I am happy to reassure the noble Earl that there will be a dispute resolution mechanism as part of the application process and that a sustainable means of production means either shorter supply chains made closer to the home in the UK, with a lower carbon footprint, or the use of firms signed up to the Science Based Targets initiative for the reduction of carbon emissions.

As to whether we are doing enough and what will happen afterwards, we will see in due course, but the global market for renewables has changed dramatically since Covid and the Russian invasion of Ukraine. CfD/SIRs is just one initiative we are using to address those new challenges. Of course, it complements the other initiatives that the Chancellor announced last year: the Green Industries Growth Accelerator, or GIGA, funding, which stands at over £1 billion and whose allocations will be announced shortly; and the Floating Offshore Wind Manufacturing Investment Scheme, or FLOWMIS, which is another policy that we are using to help support this industry. In answer to the question of whether this policy will be extended, it will depend on the market circumstances at the time, faced by whoever is in the Government at the time.

The noble Lord, Lord Lennie, asked when the SIR budget will be finalised and why we have limited the scheme to three allocation rounds. I think that I have just answered that question: it will be finalised in June. We will then take a view on how successful the current allocation round was and whether we will wish to extend it in future. If a developer is unsuccessful at the SIR auction, they would still be able to enter the main CfD auction as long as they have met the minimum standard of investment required in their supply chain.

Regarding the question posed by the noble Lord's honourable friend in the other place, Alan Whitehead, the whole scheme is designed so that an SIR bid has no impact on the main CfD bid. We are covering the costs of the extra expenditure in a cleaner supply chain, which will allow an applicant to go into the main CfD auction on a cost-neutral basis, needing neither to increase nor to decrease their CfD bids. As I said, this scheme has initially been limited to three rounds over three years so that we can then reassess the market conditions and take a view on how successful the initial intervention has been.

I thank the Committee for the support that was expressed. I hope I have dealt with all the questions that were asked. I commend these draft regulations to the Committee.

Motion agreed.