My Lords, the issue of competition and, in particular, the route to market for independent renewable generators has been referred to throughout the Bill’s passage in this House and in the other place, and the debate has been equally eloquent and balanced today. There is good reason for that. I agree with noble Lords: independent renewable generators have a significant pipeline of projects across the UK and bring essential competition, innovation and diversity to the energy market.
The Government recognise that in recent years it has become harder for independent renewable generators to secure power purchase agreements on bankable terms. We judge that several of the factors currently constraining the market will be resolved by the introduction of CFDs, but some issues may continue to limit competition for long-term PPAs after CFDs have been introduced.
My officials have worked very closely with industry to prepare the market for the CFDs. We have already established industry working groups to develop PPA structures that will be fit for purpose for the new market arrangements and a code of practice for those participating in the PPA market. Those will help new entrants and smaller generators to navigate the process of negotiating and securing PPAs. However, the Government have decided that it is necessary to provide further confidence for developers and investors by tabling amendments to the existing powers in the Bill.
I am very pleased to hear a welcome from noble Lords from across the Committee for the amendments. They will enable the establishment of a power purchase agreement scheme which could provide generators with access to an off-taker of last resort. This mechanism would be similar to that outlined in my noble friend’s Amendment 55AB. In the light of the Government’s amendments, I hope to reassure my noble friend and other noble Lords that these issues are being addressed.
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Amendment 55AB is designed to address the issue of access to market by giving all CFD holders the right to a backstop power purchase agreement with an
electricity supplier on terms specified in regulations. The Government fully agree with the intention behind this amendment. However, the amendment differs from the government amendments in a number of key areas. First, it would place the Secretary of State under a duty to introduce the mechanism. We do not think that this is appropriate, since a full understanding of potential unintended consequences is needed before taking any decision to introduce any such mechanism, and the need for this may change over time. Secondly, the amendment explicitly states that every generator eligible for a CFD contract should also be eligible for a backstop PPA. This would include large nuclear, renewable and CCS generators, for whom this may not be appropriate.
Finally, the amendment requires the Secretary of State to have regard to,
“the desirability of ensuring that every … generator who is a party to a CFD is able to borrow money commercially for its business purposes at reasonable cost and over a reasonable period”.
This is something that the Government should not do, as there are many factors other than a backstop PPA mechanism that have a more significant effect on whether generators have access to debt at reasonable rates and terms.
Amendment 55AC would oblige the Secretary of State to establish a green power auction market in the case that the backstop off-taker scheme proves ineffective. While we appreciate the GPAM proposals as a valuable contribution to the debate, we have considered very carefully the analysis of the impacts and decided that this would not, perhaps, be the best way forward. GPAM would effectively turn the CFD into a fixed feed-in tariff, which would isolate generators from normal market incentives. Noble Lords may recall that the CFD was chosen over a fixed feed-in tariff to retain market incentives. In other developed countries, such as Germany, with high levels of renewable generation, fixed feed-in tariffs have led to excessive costs to consumers, and such countries are increasingly moving to other mechanisms that retain market incentives. Furthermore, GPAM would be a fundamental distortion of the purpose of CFDs and is not guaranteed to be bankable. Indeed, lenders have indicated that GPAM would itself require an off-taker of last resort mechanism to protect against the possibility of a generator’s power not selling in the auction, or the auction not taking place.
As my right honourable friend in the other place, Greg Barker, stated,
“we have to be careful, despite having all the right motives, not to create an expensive, long-term solution to what might turn out to be a short-term problem”.—[Official Report, Commons, 4/6/2013; col. 1452.]
I welcome the intention behind the Amendment 55AE proposed by the noble Viscount, Lord Hanworth. It requires the Secretary of State to ensure that independent electricity generators, employing renewable technologies, have a route to market. I have already set out the range of work under way to support independent generators and hope that this, in addition to the Government’s own amendments, satisfies the noble Viscount’s concerns and that he will not press his amendment.
Amendments 55AFA and 55AFB amend the Government’s amendments. I hope that this is a sign that the noble Viscount sees merit in our proposals. Amendment 55AFA would ensure that electricity generators are eligible for PPAs under the scheme for the duration of their CFDs. While I am sympathetic towards its intention, we have to be careful not to constrain our options at such an early stage. For example, it may be that access to PPAs under the scheme is not appropriate during the first few years of a generator’s CFD, when the risks and level of uncertainty is lower. We plan on consulting on the design of the off-taker of last resort later in the year. I reassure the noble Viscount that the duration of support will be considered as part of this process. Amendment 55AFB would enable the terms of the PPAs under the scheme to be made by reference to current market prices. This would undermine the effectiveness of the scheme which depends on generators knowing the backstop price at the onset of the CFD.
I am grateful to my noble friend Lord Roper for tabling Amendment 55AGA, which would amend the Government’s amendment to make power purchase agreement scheme regulations subject to the affirmative procedure. The Government are committed to ensuring appropriate parliamentary scrutiny of any secondary legislation made under this chapter, so will give this amendment careful consideration. On that basis, I hope that my noble friend will withdraw his amendment in due course.
I turn to government Amendments 55AF, 55AG, 55AH, 55AJ and 55AM, which I hope noble Lords will welcome. These amendments clarify and supplement the existing powers in this chapter by enabling the establishment of a power purchase agreement scheme. Under such a scheme, licensed electricity suppliers would be required to offer to enter into PPAs with eligible generators on specified terms and through a specified process. The amendments would also enable the costs or benefits of the scheme to be apportioned among suppliers, and functions to be conferred on the Secretary of State or Ofgem.
These powers would enable the Secretary of State to create an off-taker of last resort mechanism. This would guarantee generators access to backstop PPAs on specified terms, thereby giving them confidence over the minimum price they will receive for their power. To ensure that the mechanism is truly a last resort, the terms offered must be significantly lower than those expected in a well-functioning market.
The socialisation of the costs or benefits of the scheme across suppliers would ensure that any effect on the PPA market is minimised. To ensure that the mechanism operates fairly and efficiently, Ofgem would be responsible for administering the scheme, including overseeing allocation of generators to suppliers. These protections will ensure that the mechanism does not interfere with the normal PPA market and would be called upon only in the event of a clear market failure.
We consider that such a mechanism, by contrast to the GPAM, offers a simpler solution that will provide better value for money. It does not require significant intervention in the market, as the GPAM would, and it will reduce costs to consumers because it retains
normal market incentives on generators. This mechanism should make lenders more comfortable financing projects that use a greater variety of routes to market, including a more diverse range of PPA counterparties and shorter-term PPAs. This will lead to greater competition in the PPA market, potentially reducing the costs that independent generators face in accessing the market and reducing costs to consumers.
Initial reaction from stakeholders has been broadly positive. However, I accept that there is much more work to be done to turn these initial proposals into a fully functioning mechanism. The Government will work with stakeholders to develop detailed proposals over the next few months, and plan to consult on options later this year. Before I conclude, I would like to—