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

Michael Shanks Excerpts

Monday 2nd June 2025 General Committees

[The Parliamentary Under-Secretary of State for Energy Security and Net Zero (Michael Shanks)]

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.

--- Later in debate ---

[Michael Shanks]

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—

[Nick Timothy]

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?

[Michael Shanks]

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.