My Lords, we are today considering an instrument which amends the Contracts for Difference (Allocation) Regulations 2014, which came into force last summer, implementing electricity market reform. The powers to make this secondary legislation are found in the Energy Act 2013.
This reform, as noble Lords will be aware, is designed to encourage the necessary investment in secure low-carbon electricity generation through contracts for difference, or CFDs, which provide long-term price stabilisation to low-carbon plant, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. In brief, a contract for difference is a private law contract between a low-carbon electricity generator and a Government-owned company that provides the generator with greater certainty and stability of revenues, resulting in lower borrowing costs. This saving is passed on to consumers in the form of lower support costs to low-carbon generators.
As the Committee may be aware, the result of the first CFD allocation round was announced on 26 February. Twenty-seven contracts were offered to projects aiming to deliver 2 gigawatts of low-carbon energy capacity across England, Scotland and Wales. Together, these projects have the ability to power 1.4 million homes. The competitive CFD auction has successfully driven down the costs to consumers, resulting in the capacity costing up to £110 million per year less than it would have in the absence of competition.
Before we commence the debate, I will briefly describe the amending instrument. The draft Contracts for Difference (Allocation) (Amendment) Regulations 2015 amend the instrument that came into force last summer which governs the way in which applicants to the CFD are treated for the purposes of contract allocation. These amendment regulations, which the industry has been consulted on, implement a non-delivery disincentive to the CFD scheme. The amending provisions are aimed at preventing gaming and speculative bidding behaviour in CFD allocation, ensuring that only projects that intend to deliver and are capable of it participate in CFD allocation rounds.
The amending instrument sets out a consequence in relation to the site of the main generating structures of a generating station where either an applicant has been offered a CFD and fails to sign or a CFD was entered into but was terminated on a date less than 13 months from the date when the CFD notification in respect of that CFD was given. Applications in respect of such a site will be temporarily excluded for a period of 13 months from the date on which the relevant CFD notification was given. Unless an exemption applies, an applicant will not be able to make a CFD application in respect of the same site during that temporary exclusion period. This will help to ensure that only legitimate projects which are able to deliver low-carbon energy capacity participate in a CFD allocation round.
The amending regulations also set out a process for granting exemptions. This process is to be administered by the Secretary of State in accordance with the time periods set out in the regulations. The amending regulations also set out the grounds on which an exemption to the temporary site exclusion may be available. These are as follows—first, when an applicant can demonstrate that an application is in respect of a site that is not materially the same as the site to which a temporary site exclusion applies. Materiality limits are specified in the amending legislation. Secondly, it is when an applicant can demonstrate that it held a relevant property interest in the site prior to 14 October 2014, the date when stakeholders should have been aware of the detail of the NDD policy. This ground also requires that the applicant is not, and is not corporately associated with, the person who caused the temporary exclusion to apply by not signing or having their CFD terminated. Thirdly, it is when an applicant can demonstrate that it agreed a relevant property interest with a landowner prior to 14 October 2014. This ground also requires that the applicant is not, and is not corporately associated with, the person who caused the temporary exclusion to apply by not signing or having their CFD terminated. Fourthly, in relation to a non-signature case only, an exemption
may apply when an applicant can demonstrate that relevant court proceedings, as defined in the instrument, are ongoing at the time of signature and the applicant’s ability to comply with the terms of the CFD would have been materially adversely affected. Relevant court proceedings include a judicial or statutory review of a planning consent applicable to the relevant project. The final ground on which an exemption may apply, which applies only to a non-delivery case, is when an generator’s CFD contract is terminated as a consequence of a qualifying change in law or relevant construction event, as defined in the CFD itself.
When the Secretary of State is satisfied that an exemption applies, an exemption certificate may be issued by them to a prospective applicant, allowing a CFD application in relation to that site to be made by that prospective applicant in the next allocation round. Once these amending regulations are in force, the Low Carbon Contracts Company will maintain and update a publicly available list of any excluded sites setting out the site, the name of the person who caused the temporary exclusion to apply by not signing or having their CFD terminated, and the period for which a temporary exclusion applies to each site. Implementation of the non-delivery disincentive into legislation will inspire further confidence in the robust CFD allocation process, which has already demonstrated an ability to drive down prices and deliver value for money for consumers. I commend the regulations to the Committee.