Baroness Worthington:

Moved by Baroness Worthington

59: Clause 72, page 63, line 36, leave out from second “counterparty” to end of line 38 and insert “and the eligible low carbon hydrogen producer specified in the notification must, in accordance with provision made by revenue support regulations, contract on—” Member's explanatory statementThis amendment makes the signing of a revenue support contract or contract for difference (CFD) mandatory for a firm which has successfully bid for it.

I shall move Amendment 59 and speak to Amendments 60 and 61, in my name and that of the noble Lord, Lord Howell of Guildford, who sends his apologies. He had a diary clash, but assures me that he is fully supportive of this discussion. In fact, he informed he that he was around when the very first CfDs were used as private contracts, a long time ago, and is very keen that they remain a trusted and respected form of investment, hence he was keen to lend his name.

These are obviously probing amendments, designed to start a discussion about the need to preserve integrity in the CfD mechanism. The UK deserves huge credit for having introduced this mechanism, which is seen as investable and a dependable way of getting large investment into decarbonised infrastructure—something we all need.

It is regrettable that there is now a set of circumstances whereby contracts, once awarded, are not being taken up. The reason they are not being taken up is that market prices are currently so high that if you took on your contract for difference, you would be required to pay back into the fund anything above your strike price. Some of these contracts have been awarded at around £55, £59 or £60 per megawatt hour—market prices are way above that—so people are choosing not to take up the contract and to delay.

Now, I am aware of three wind farms that have currently delayed this for these reasons. It makes perfect sense for them: they are representing shareholder value and possibly could not do otherwise, because of the existence of a loophole, which is that there is no requirement to take up the contract once it is awarded. What we want to try to do is close that loophole and, if possible, do something about it in the current time. Amendments 59, 60 and 61 all seek to do that.

It is important to note that these three wind farms—I do not want to overblow this; it is not everybody—are all in foreign ownership. Ørsted, RWE and EDP Renewables in Spain own these sites. It is public money that they are essentially not giving back, having got this contract. It feels very wrong, at the time of a cost of living crisis, when we need every penny, for hundreds of millions of pounds to be lost to these companies and their shareholders as a result of this loophole in how the contracts are drafted and can then be delayed.

I am sure that the Government are working hard to try to address this too. It strikes me that we have an Energy Bill and can therefore get this right for future contracts, but if we can also do something about current contracts, that would be enormously beneficial. I thank Carbon Brief for helping me understand how many wind farms are involved in this: they are Hornsea Two, Triton Knoll and Moray East, I am told by an article in the Times, just to get that on the record in Hansard. If the Government know differently, and if they can tell us exactly the extent of the problem, that would be super helpful, because we have not been able to find it from official sources. This is, as I say, from research by Carbon Brief. If the noble Lord, Lord Howell, were here, I am sure he would say how keen he is for this to be resolved. I look forward to the Minister’s response.

The history of contracts for difference is longer than I thought; I thank the noble Baroness for mentioning that. They became a big thing in the last Energy Act during the coalition Government and have been amazingly successful. I have to admit that I did not realise that this issue was quite so significant, but it is interesting that, given the financial investment required for offshore wind farms and the time they often take to implement and build, this is a case where the risk goes up for the financial investor, as opposed to a low-risk contract for difference. I am therefore also interested to understand from the Minister whether these businesses are just delaying until they see the lay of the land and whether they still have those options, because there is that risk-reward ratio.

I very much support the intention of this amendment, but the energy industry has also talked about contracts for difference being a way forward even in the fossil fuel industry, and a way that we could decouple power prices from gas prices. It may be that the Government are not doing anything in that area, but I am interested to understand whether that is something the department is investigating as a way forward on that decoupling.

Contracts for difference are a fantastic invention. As the Minister said, at the moment they are bringing good money back into the public sector—technically into the counterparty company, but effectively into the public finances. I very much support the motivation of this amendment.

My Lords, we are also very supportive of contracts for difference and of this attempt to ensure that contracts entered into are adhered to. I was not quite sure whether the noble Baroness, Lady Worthington, had the total number of these failures to enter the contracts, other than the three she cited, which is probably enough. Maybe the Minister could help with that if she does not have that information.

The only thing that concerns me is that, although I cannot think of what it could be, there might be some reasonable exemption for not signing up. However, apart from that, it seems to me entirely sensible to tighten this obligation.

I thank the noble Baroness, Lady Worthington, and the noble Lord, Lord Howell, for their amendments. I say at the outset that the CfD model will remain an important tool in the armoury of financing options to encourage investment in green energy, although I understand that the point of these amendments is to preserve its integrity.

Amendment 61 seeks to make the signing of a contract for difference—known as a CfD—mandatory for a renewable electricity project that has successfully bid for one in a competitive CfD allocation round. I point out, however, that the Energy Act 2013 already contains, in Section 14(2)(d), powers very similar in effect to the amendment. Section 14(1) of the 2013 Act provides for a CfD counterparty, acting in accordance with provisions made by regulations, to offer to contract with an eligible CfD generator. Section 14(2) of the Act allows for regulations to be made that make further provision about an offer to contract, including, at Section 14(2)(d), provision about what is to happen if the eligible generator does not enter into a CfD as a result of a contract offer. Successful applicants for a renewable electricity CfD are expected to enter into a contract with the Low Carbon Contracts Company if offered one following a CfD auction. Those who do not are excluded under Regulation 14 of the Contracts for Difference (Allocation) Regulations 2014, as amended, from submitting an application at the same site for a specified number of future CfD allocation rounds—an “excluded site”. The 2014 regulations were made under the powers in Section 14 of the Energy Act 2013.

The purpose of this exclusion mechanism—commonly referred to as the non-delivery disincentive, or NDD—is to deter speculative bids and incentivise successful CfD applicants to sign contracts and deliver operational renewable power stations within a set timeframe. The NDD has been very effective in discouraging non-compliance across the four CfD allocation rounds held to date between 2015 and 2022. I am informed that only three small projects, totalling 41 megawatts, have refused to sign a CfD contract, out of the 26.6 gigawatts of capacity that has so far been awarded. I am afraid I do not have a specific answer on the three wind farms that the noble Baroness mentioned. If I can get further details, again, I shall put that in writing for the Committee.

The 2014 regulations were amended as recently as this July to extend the exclusion period so that an application cannot be made in respect of an excluded site in the subsequent two applicable allocation rounds, strengthening the previous policy of excluding a site from only one subsequent allocation round. I draw the attention of the Committee to the Contracts for Difference (Allocation) and Electricity Market Reform (General) (Amendment) Regulations 2022.

We have already announced that we will move to annual CfD auctions, bringing forward the next round to March 2023. The Government therefore believe that the current legal provisions that exclude non-compliant applicants are proportionate and effective, and do not require further strengthening.

I hope I am not pre-empting the noble Baroness, but are the Government then going to use those powers?

In law, the Government have the power to use them. I am afraid I am not able to comment on what action we might take on the three specific cases which the noble Baroness, Lady Worthington, mentioned, but as I said, I will take that back to the department and write to noble Lords to set out whatever action is being proposed.

Does the Minister know of any further cases, other than the three that have been cited? What total caseload are we talking about?

My briefing suggests that only three small projects totalling 41 megawatts have refused to sign a CfD contract, but that does not sound like a big enough totality to incorporate three large wind farms. I am afraid I do not have any further details on that at this moment.

Amendments 59 and 60 similarly seek to make the signing of a revenue support contract mandatory for a firm which has successfully bid for it through an allocation process put in place under Clauses 68 to 74. Clause 72 provides for a hydrogen production counterparty and carbon capture counterparty, acting in accordance with provision made by regulations, to offer to contract with an eligible low-carbon hydrogen producer or eligible carbon capture entity respectively in specified circumstances. Clause 72(3) provides the Secretary of State with a power to make further provision in regulations about an offer to contract made under this clause. Subsection 3(d) sets out that this may include provision about

“what is to happen if the eligible low carbon hydrogen producer or eligible carbon capture entity does not enter into such a contract as a result of the offer.”

As I have explained, a similar power in the Energy Act 2013 has been exercised to introduce the non-delivery disincentive for the CfD regime, which has been very effective in discouraging non-compliance across the four CfD allocation rounds.

We are considering how to evolve our approach towards more competitive allocation processes under Clauses 68 to 74 for the industrial carbon capture business models. Work is under way to develop the possible design of a more competitive allocation process for the hydrogen business model, including the offer to contract process. I therefore ask the noble Baroness and the noble Lord not to press Amendments 59 and 60, but again thank them for helping to test the robustness of the Government’s decarbonisation ambitions.

I hope I have been able to reassure noble Lords and that, with the offer to write with further details on the wind farms, they feel able to withdraw their amendment.

I thank the Minister for her reply. I have not been clear enough; it is entirely my fault. These are not non-delivery instances. These are instances in which a wind farm is completed, has a CfD and then delays the actual mechanic of the strike price by a certain number of months or years. In doing so, they are ensuring that they can sell at merchant value now and then take up the strike price when the prices fall. Essentially, they have de-risked completely, so that we are carrying all the downside risk and they are taking all the upside risk. That is not how a CfD works. Three of them are doing this, so my fear is that this has almost become quite a clever standard practice. If it persists, this is hundreds of millions of pounds that could be coming back. It completely undermines the integrity of the whole process. So it is not the non-delivery or refusal to sign—I understand that all those provisions are there—it is the delaying out. There is nothing government or the LCCC can use to compel them to take it up at the point of signing. It is on that that I would love to receive a note.

We are obviously going to come back to this. It is all in the interests of getting value for money, keeping up the reputation of this sector and making it as full of integrity as we can. I will withdraw the amendment, but I look forward to continuing the conversation.

This is something that I suspect we all hold the same view on. Could the Minister write to us to clarify the situation before Report? That would be very useful. It seems to me that we are all on the same side on this.

I am happy to agree to that.

Amendment 59 withdrawn.

Amendments 60 and 61 not moved.

Clause 72 agreed.

Clauses 73 to 75 agreed.

Clause 76: Application of sums held by a revenue support counterparty

Amendment 62 not moved.

Clauses 76 and 77 agreed.