Contracts for Difference (Sustainable Industry Rewards) Regulations 2024

Considered in Grand Committee

Moved by

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

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.

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?

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”.

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

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.

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.

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.