Draft Contracts for Difference (Miscellaneous Amendments) (No. 2) Regulations 2025

The Committee consisted of the following Members:

Chair: Wera Hobhouse

† Burton-Sampson, David (Southend West and Leigh) (Lab)

† Davies, Jonathan (Mid Derbyshire) (Lab)

Farron, Tim (Westmorland and Lonsdale) (LD)

† Fookes, Catherine (Monmouthshire) (Lab)

† Haigh, Louise (Sheffield Heeley) (Lab)

† Lewin, Andrew (Welwyn Hatfield) (Lab)

† Paul, Rebecca (Reigate) (Con)

† Shanks, Michael (Parliamentary Under-Secretary of State for Energy Security and Net Zero)

Shelbrooke, Sir Alec (Wetherby and Easingwold) (Con)

† Smith, David (North Northumberland) (Lab)

† Sullivan, Kirsteen (Bathgate and Linlithgow) (Lab/Co-op)

† Sullivan, Dr Lauren (Gravesham) (Lab)

† Thomas, Bradley (Bromsgrove) (Con)

† Timothy, Nick (West Suffolk) (Con)

† Turley, Anna (Lord Commissioner of His Majesty’s Treasury)

† White, Katie (Leeds North West) (Lab)

† Young, Claire (Thornbury and Yate) (LD)

Beth Goodwin, Ray Jerram, Committee Clerks

† attended the Committee

Second Delegated Legislation Committee

[Wera Hobhouse in the Chair]

Draft Contracts for Difference (Miscellaneous Amendments) (No. 2) Regulations 2025

18:00:00

I beg to move, That the Committee has considered the draft Contracts for Difference (Miscellaneous Amendments (No. 2) Regulations 2025. It is a pleasure once again to serve under your chairmanship, Mrs Hobhouse. The draft regulations were initially laid before the House on 11 March, but they were re-laid on 2 April to correct very minor drafting errors. On 10 February, I made a statement to the House confirming that, following a public consultation, the Government intend to introduce short-term support for large-scale biomass generators to ensure the UK’s continued security of supply. As set out in our response to that consultation, legislative changes are needed to enable the Government to provide support to existing biomass generators through a new low-carbon dispatchable contract for difference. I stress that, while the draft regulations will allow for new support to be provided, the final decision will be taken following the conclusion of internal assessments and commercial negotiations, which are ongoing. Before I cover the provisions of the draft regulations in more detail, I will briefly set out the Government’s position on large-scale biomass generation, which provides around 5% of the UK’s annual electricity generation. Current support for these generators under CfDs and the renewables obligation ends in 2027. It is critical to the Government that we maintain security of supply, even if that means making hard decisions. I will briefly set out the range of factors that we considered before deciding whether to provide further support for these generators. First, we took analysis from the National Energy System Operator and concluded that, without further support for large-scale biomass, the country could face security of supply risks between 2027 and 2031. Relying on alternative options, such as newly built gas plants, to come online in that timeframe would carry significant risks. The Government will not take chances on our energy security. Secondly, we undertook comprehensive analysis of the costs of biomass against the alternatives. Our central projections show that, on the right terms and if playing a much more limited role in the system than today, biomass generation can be the lowest-cost option for bill payers during that period. Lastly, we will introduce strengthened sustainability requirements from the outset of any new agreement. Importantly, the draft regulations will also allow the sustainability measures to be enhanced throughout the duration of the contract, in line with the latest scientific evidence or global best practice. Those factors represent a substantial shift from past arrangements on sustainability and value for money. However, we recognise the strength of concerns about the use of unabated biomass. It is not a long-term solution. We are determined that, the next time these decisions are made, the Government will not be left in the circumstances that we were this time. We will therefore do the work that was not done by the previous Government to build strong and credible low-carbon alternatives, so that we have proper options in four years’ time. During my oral statement earlier this year, I also confirmed that the Government had agreed heads of terms for a new CfD with Drax. The draft regulations will enable that CfD, if a final decision is taken to provide it, but they will also enable similar agreements with any other biomass generators. I remind the Committee that the draft regulations are about ensuring only that we have the option available to respond to security of supply needs and to deliver low-carbon electricity to the grid at the lowest cost to the consumer. I know, however, that many Committee members are interested in the details of a potential agreement with Drax, the largest biomass generator in the UK. The proposed agreement with Drax would limit generation to times when the system and, in turn, consumers most require it. When renewable power is abundant, Drax will not generate, and consumers will benefit from cheaper wind and solar instead. That means that Drax will only be supported to operate less than half as often as it currently does. As a result, the deal would halve the amount paid in subsidies, compared with existing arrangements—that is equivalent to a saving of nearly £6 per household in annual bills—and, when compared with the alternative of procuring gas in the capacity market, it would save consumers £170 million in subsidies each year. The agreement also introduces tough new measures on sustainability, and we will appoint an independent adviser to support the development of policy and practice in biomass sustainability and ensure that they keep pace with the emerging science and international landscape. The draft regulations will amend the Contracts for Difference (Definition of Eligible Generator) Regulations 2014 such that a person is eligible for a CfD in respect of a “biomass station” where it is intended that the existing biomass station will continue to provide electricity. Simply put, this will enable a new low-carbon dispatchable CfD to be signed with existing biomass generators, which is not currently possible. As is the case today, the Low Carbon Contracts Company will be the counterparty to any new CfD. The second part of the draft regulations relates to sustainability. The Government support the use only of sustainable biomass, and we continue to review sustainability requirements so that we can remain aligned with the latest evidence. The draft regulations will amend the Electricity Market Reform (General) Regulations 2014 to allow the Secretary of State to direct the LCCC to implement amendments relating to sustainability obligations within the new CfD. That will mean that the Government can make changes to sustainability requirements within the new contract, to ensure that they keep pace with the latest evidence. Before I conclude, I want to thank the Public Accounts Committee for its review and report on wider biomass policy. My Department is carefully considering the contents of that report and will respond in due course. The Government will do whatever it takes to deliver energy security and to protect bill payers now and into the future. The draft regulations support that commitment. They make the necessary amendments to enable support to be provided to biomass generators when existing schemes end in 2027. That will enable us to maintain the UK’s security of supply, deliver value for money for consumers and enhance sustainability requirements. I commend the regulations to the Committee.

18:07:00

I am delighted to serve under your chairmanship, Mrs Hobhouse, and pleased to respond on behalf of His Majesty’s Opposition. Today we consider the Government’s plan to go on subsidising Drax. Drax is of course not mentioned in the draft regulations, and Ministers had hoped to sneak through this contract for difference without much scrutiny, but we have a responsibility to examine what is actually a very significant change to our country’s energy system. The draft regulations will push ahead with the Government’s four-year extension of the subsidy scheme for Drax, from 2027 to 2031. Such a major move is being made without proper debate or awareness of all the facts. Ministers and Drax itself have kept vital information hidden from scrutiny, covering up the true costs and business practices of the company. Concern has been expressed about Drax in both Houses of Parliament in recent months. The Public Accounts Committee says that Ofgem allows Drax to “mark its own homework” when it comes to subsidy claims. The House of Lords Secondary Legislation Scrutiny Committee has criticised the Government for not sharing key documents about the true nature and cost of their dealings with Drax. Just a couple of months ago, the company was taken to court by a whistleblower who claimed that Drax had made attempts to “deliberately conceal” the unsustainable sources of its wood and “had likely broken its legal obligations owed to its government funders”. Thanks to the investigations by BBC “Panorama” and others, we know Drax’s behaviour has not been honest. Drax executives have been caught misleading the media, covering up reports and manipulating evidence. Ofgem fined Drax £25 million for inaccurately reporting data about its sources of wood. We have seen evidence that Drax sourced wood from primary forests in British Columbia and elsewhere. There is more than enough cause for many to doubt the ethical integrity of Drax and whether it should receive more public money. Before presenting the draft regulations to the House, Ministers should have done their due diligence and published this evidence, so I ask the Minister these questions. When will we see the legal documents associated with the recent court case? When will we see the 2022 KPMG report on Drax’s accounts, which the Prime Minister said on the Floor of the House he would look at? When will we see the Ofgem audit? When will we see the NESO modelling justifying the extension of the subsidy scheme?

Order. Mentioning Drax as a company is not within the scope of the legislation in front of us.

Forgive me, Mrs Hobhouse, although the main recipient of the subsidy that we are talking about is Drax itself.

I am being advised by the Clerk.

We are debating the legislation, not a company.

The Government Whip could stand and refer to the names of the companies in receipt of the subsidies, if she so wishes.

We are discussing the legislation; that is the point of principle, and that is why the Clerk has intervened.

And, as I say, the main recipient of the public subsidy will be Drax. When will we see the NESO modelling justifying the extension of this subsidy scheme? When will the Government publish details of their new sustainability criteria and means of enforcement to ensure that biomass is properly sourced? The Minister should also answer why the Department only sought the advice of the Subsidy Advice Unit on its plans last Friday, knowing that we would be voting on the draft regulations today. The SAU is now running a two-week consultation and will not publish its report until 10 July. There should not be a vote on extending the subsidy until Parliament and the public have been able to examine thoroughly the SAU’s findings. These are big questions that should have been answered before the draft regulations were debated. Beyond those concerns, we must also ask ourselves whether subsidising companies like Drax is good energy policy. The evidence shows that it is clearly not. The company that I have been discussing is an expensive white elephant for which we have been paying ever since the Energy Secretary first held his post back in 2009. Since the ramp-up that he authorised, the company has cut down 300 million trees, six times more than in the entire New Forest. The company has received £6.5 billion of public subsidy. In the nonsensical world of net zero, it has been classed as clean energy, but it is far from being a source of clean energy. It is a plant for burning wood imported from forests across the world. As new forests are planted to offset the emissions from chopping down the trees, turning them into pellets and burning them, we are supposed to believe that it is clean. The truth is that the plant we are discussing produces four times the carbon dioxide emitted from our last coal plant, which itself produced twice as many emissions as gas. The imported wood has come from rare, at-risk and irreplaceable forests and arrives here on diesel-powered ships.

Order. Again, I remind the shadow Minister that we are discussing the legislation, not a particular company and where it sources its materials. I recognise that this discussion is happening across Parliament, but I remind him to limit his remarks to the legislation.

I certainly will, but we are talking about legislation permitting the subsidy of biomass. It is not cheap to do so; we pay £500 million for the privilege, and the draft regulations will make it even more costly for taxpayers. Every megawatt-hour produced will now cost £160—more than double the cost of gas power—up from £138 before. Burning these trees is raising the cost of wood globally while reducing biodiversity in key areas and eroding natural carbon capture. It gets worse. The sixth carbon budget demands the removal of 23 million tonnes of emissions to avoid even more painful behaviour changes from the general public. This company is being used as an expensive “get out of jail” card, with more public money potentially coming down the line for carbon capture. It was for those reasons that my right hon. Friend the Member for East Surrey (Claire Coutinho) withdrew Government support for schemes such as this last year, which led the chief executive officer of the company that we have been discussing to call her “reckless and irresponsible”. Cutting down and burning trees in the name of saving the planet is not just reckless and irresponsible, but complete madness. If Members here today believe that this is environmentalism and a solution to climate change, I have a bridge to sell them. The Climate Change Act 2008 has created a complex web of targets, quotas and regulations, as well as policies set by a monomaniacal and unaccountable quango tying the hands of elected Governments and twisting policy out of shape. It is producing an energy system that is less secure and more expensive, while doing nothing to prevent rising carbon emissions worldwide. That is why we will vote against the draft regulations. I urge colleagues from all parties to join us and show that they are truly committed to a secure and rational energy system, and not throw more money at the Energy Secretary and his very costly mistakes.

18:15:00

It is an honour to serve under your chairship, Mrs Hobhouse. In 2009, the then Climate Secretary, the right hon. Member for Doncaster North (Ed Miliband), announced his plan to ramp up the use of wood-burning power stations while also ensuring sustainability. Fast forward to today and the right hon. Member—now the Secretary of State for Energy Security and Net Zero—is attempting to paper over his legacy by forcing through an extension of subsidies until 2031. That is being done despite broad cross-party opposition to the move, as the previous Government took the decision to refuse the extension. There are alternatives. Since that so-called ramping up 15 years ago, six times more trees than in the entire New Forest have been cut down. Disapproval is so strong that it undermines trust in the Government’s entire package of net zero policies. Key investments in our energy infrastructure will be squeezed if we persist in chopping down North American forests and shipping them across the Atlantic in diesel freighters. There are far better and smarter ways to power our homes. We have already heard about the comments from the Public Accounts Committee, and this month the Lords Secondary Legislation Scrutiny Committee agreed that this is not value for money. It also expressed deep concerns about the true purpose of the draft regulations and stated that Parliament needs to see key documents about them, including legal evidence, the National Energy System Operator report and the Ofgem audit. Rather than reflect on those grave issues, the Government chose to announce on the first day of recess that they would convene a Delegated Legislation Committee on the first day back. That is despite the fact that the draft regulations would enable Ministers to extend the subsidies to burn trees for four years from 2027, when the current subsidies run out, to 2031. Liberal Democrats strongly believe that biomass is not a form of renewable energy and should not be subject to any exemptions or Government support. It is an incredibly inefficient method of producing electricity, and there are far better methods we should be investing in. We note the concerning comments in the Climate Change Committee’s seventh carbon budget recommendations, which confirmed that there is “no role for large-scale unabated biomass generation at high load-factors in the pathway beyond the expiry of existing contracts in 2027.” Yet the Government are choosing to go ahead with just that. Liberal Democrats want to see the contracts for difference scheme used to benefit renewable energy production and reduce the UK’s dependence on fossil fuels in the hands of authoritarian regimes. Investing in renewable energy will cut bills, lower emissions and improve our energy security. We have been calling on the Government to keep the cap on the dedicated biomass plants and end support for all new biomass plants. We want to ensure that 90% of the UK’s electricity is generated from renewables by 2030, with biomass not a part of that because the wood often does not come from renewable sources and in many cases the emissions are worse than coal. We therefore oppose the draft regulations and urge the Government to think again.

18:18:00

We are somewhat through the looking glass with the response from the shadow Minister, the hon. Member for West Suffolk, who seemed to forget in his long list of things that were wrong with the contracts previously that it was his Government that agreed them. This Government have sought to improve every single aspect of the contract: halving the subsidy, improving sustainability, only running on the system when it is required, and delivering security of supply. He talks about being reckless and irresponsible. What would have been reckless and irresponsible is to come here and say that we do not care about the security of supply and the importance of finding the dispatchable power that we need. That is the decision that we are here to allow the Government to take forward—

If the Minister is interested in the security of supply, why will the Government not allow new licences for oil and gas in the North sea?

We are considerably off the topic of the draft regulations, but since the shadow Minister makes the point, I will answer the question. We have not said that there will be no new oil and gas. We have said that there will be no new licences to explore new fields, taking into account all the available evidence, which is that the North sea is a declining basin. If we manage it properly, we can have a future energy process in the North sea that delivers on carbon capture, hydrogen, offshore wind and oil and gas for many years to come. There is much more on our oil and gas policy that we can discuss, perhaps in a different debate. On these particular draft regulations, the shadow Minister asked a number of questions, which I am happy to follow up on. On the KPMG reports, perhaps he did not see, but I wrote on 25 February—as soon as I could following my statement in the House, because I take these things very seriously—and the chief executive of Ofgem responded on 12 March. Both letters are in the Library and the shadow Minister can read them. The KPMG reports do not belong to the Government or to Ofgem; they belong to Drax, and it is for Drax to decide whether to release legally privileged documents. Clearly, analysis that NESO provides to the Government is sensitive, for very good reasons—a considerable amount of what NESO does in running the energy system must be kept secret, for commercial reasons and so that the Government and NESO can freely exchange information—but it published a summary of its advice on its website, which, again, the shadow Minister can look up. On the points made by the hon. Member for Thornbury and Yate, first of all, we are back from recess, which means we are back to work. The Government do not have time to waste, hence, I am afraid, we scheduled consideration of the draft regulations for the first day back; we have things to get through. She made the point that there are alternatives to biomass. A number of others have made that point, too, but they have yet to name the alternatives and what can be built within two years to provide the necessary supply. We do not think that there is a long-term future for unabated biomass—we agree on that—but the crucial point is that we have a short-term security of supply issue that we have to resolve. We need dispatchable power when we need it, and the alternatives—gas, as the shadow Minister says—are considerably more expensive. The Conservative party might want to consign us to much more of the fossil-fuel casino and higher bills for all our constituents. This is a short-term decision for us to move away from that. We have significantly increased the sustainability requirements and we will appoint an independent sustainability adviser to provide expert advice and challenge to both Government and providers on sustainability policy and delivery. We want to take sustainability much more seriously than the previous Government did, but this is an essential short-term measure to ensure the security of supply across the country. The draft regulations—copies are available in the room if Members have not had a chance to read them—will enable the Government to continue to deliver security of supply at the lowest possible cost for consumers while protecting and enhancing vital sustainability measures, and I commend them to the Committee. Question put.

1|0|11|4|The Committee divided:|Question accordingly agreed to.||0|0

18:24:00