Peter Aldous highlights the success of contracts for difference (CfDs) in supporting the UK's offshore wind industry, but following the failure of auction round 5 he calls on the Government to learn from the mistakes made so that the scheme can be adapted to changing market conditions and rounds 6 and 7 are successful so the industry continues to thrive.
Peter Aldous (Waveney) (Con)
It is a pleasure to serve with you in the Chair, Dame Angela. I congratulate the hon. Member for Strangford (Jim Shannon) on securing the debate. His case was very much location-specific, and I thought he made it well. I will not dwell on it any longer, and I will wait with interest to hear the response from my right hon. Friend the Minister. The debate is timely, because it comes in the wake of a disappointing and unsuccessful auction round 5, and ahead of the publication next month of the draft allocation framework for auction round 6.
Contracts for difference have been around for a very long time. They were originally developed in the UK in 1974 as a way to leverage gold. The context in which we are considering them today is their use as a means of supporting new low-carbon electricity generation, as introduced by the Energy Act 2013. Over the past decade, they have been remarkably successful. They have enabled the UK to become a global leader in the offshore wind sector, which will be the focus of my attention over the course of the next few minutes.
CfDs have been the foundation stone for securing significant inward investment into coastal communities all around the UK, including Lowestoft in my constituency, and the first four allocation rounds were remarkably successful. Unfortunately, this undefeated run came to an end with round 5, when no offshore wind bids were submitted, as the core parameters did not take into account the changed geopolitical situation in the light of covid and the war in Ukraine, and the uncertain and inflationary global economic outlook that has ensued.
It is vital that lessons are learned and that we get back on track ahead of allocation round 6. The work to do this should be set in the context of the UK providing a response to the US’s Inflation Reduction Act, and I suggest that that should come in the Chancellor’s autumn statement next month. I shall say a few words about that later, as the energy industry is globally footloose. Although the UK has been very attractive to investors—in many respects, it has been the come-to place—we cannot rest on our laurels, and we are now in danger of being overtaken. As Keith Anderson, the chief executive of Scottish Power, has said of the US:
“We can’t possibly hope to outspend them. What we can do is outsmart and outpace them.”
After the failure of auction round 5, it is vital that auction rounds 6 and 7 are successes. One failure is a blip, but two risk setting a trend that will send a negative signal to developers and investors, and the situation could then become very difficult to retrieve. This is particularly important for the continued development of the offshore wind industry off the East Anglian coast, with ScottishPower Renewables and Vattenfall’s forthcoming projects in mind. The parameters that the Government should take into account are as follows. First, there is a need to provide more clarity, consistency and certainty with regard to the longer-term pipeline of projects. That will give developers, supply chain businesses and infrastructure providers the confidence to invest, often way ahead of demand. A clear pipeline will help to deliver long-term apprenticeship initiatives, optimise the cost profile of development and better facilitate strategic investment in the national grid.
We also need to improve the way we incentivise developers to commit to invest in UK infrastructure and supply chains. This can be achieved through non-price factors in the CfDs, provisions in seabed auctions and improved collaboration in supply chain plan delivery. Dusting off and reviewing the offshore wind sector deal, which was originally signed in Lowestoft in 2019, would be very welcome.
The feedback I am receiving, which is welcome, is that ahead of the draft allocation framework for allocation round 6 being published next month, there is positive and ongoing engagement between the Department, trade associations and developers. I would suggest that the key points that need to be addressed are as follows. First, the administrative strike price must be set at a level that takes account of market pressures, so that this time, developers do actually bid. Secondly, so as to give certainty to the market, there should be a ringfenced pot for offshore wind. That is vital, taking into account the targets that Government have set for offshore wind delivery. Thirdly, taking into account the missed opportunity with allocation round 5, the pot budget and parameters should be set so as to reflect the pipeline that is now available in order to secure maximum capacity through allocation round 6.
Work along those lines is necessary so as to correct the mistakes that were made in allocation round 5. However, at the same time, we cannot ignore the new world order. As I have mentioned, we cannot and should not get into a subsidy race to the bottom with the likes of the US, but what we can do is work faster and smarter, building on the foundations that have been laid over the past decade.
In the upcoming autumn statement, our energy policy framework should be adjusted to include the following initiatives: first, expanding reforms to capital allowances and introducing new tax incentives and grants; secondly, supporting the UK supply chain through multi-year co-funding for the industrial growth plan; and finally, as we discussed yesterday in the Westminster Hall debate led by my right hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb), we need policies that unlock private investment in port infrastructure.
We invariably herald offshore wind as a great British success story, and indeed, the way that the industry has developed over the last decade has been remarkable. Contracts for difference have been the cornerstone on which this success has been built. They have the advantage that they are flexible and can be adapted. Unfortunately, that did not happen for allocation round 5. It is important that this mistake is not repeated in round 6, and I hope that the Minister will provide the assurances that the industry is seeking. It is vital that he does, as offshore wind is bringing significant benefits to coastal communities such as Lowestoft, and it is imperative that it continues to do so.
Peter Aldous
I was listening with interest to what my right hon. Friend was saying. To a degree, I hear what he says, but does he not agree that with offshore wind not being successful in AR5, the costs go up in future allocation rounds? It was ready to go, and there were economies of scale that it was ready to take full advantage of, but it was not able to go. The feedback that I am getting from industry is that these things cannot take place in a vacuum, ignoring what is going on throughout the world. Does my right hon. Friend not agree with me that it would have been much better if offshore wind had been successful in AR5?
The Minister for Energy Security and Net Zero (Graham Stuart)
Having been chided, my hon. Friend is of course—quite rightly, and characteristically—straining to justify his position, and I have a lot of sympathy with it. I have said that we would ideally have got the window in a way that better matched that reality. But there are reasons for having the annual auction. We always come up with a window that industry says is not enough. We have managed to bring down the costs by 70%. It is hard to overestimate the importance of this. This country, the CfD mechanism and, I have to say, this Government have transformed the economics of offshore wind—not just to the betterment of UK consumers, but to the benefit of the whole world. It is only because of what has happened here with this approach, which every year is in a state of tension with industry, that we have been able to show and reveal these prices. We are now able to export our expertise to the north-east of the United States, to the Gulf, to Taiwan—all over the world—as a result of this process.