Oral evidence: Early contracts for renewable electricity, HC 454-i
Oral evidence, 2 July 2014.
Witnesses
Stephen Lovegrove, Permanent Secretary, Hugh McNeal, Director, Office for Renewable Energy Deployment, Hugo Robson, Commercial Director, SRO for FID Enabling for Renewables and Simon Virley, Director General, Markets and Infrastructure, Department of Energy and Climate Change, gave evidence.
Chair
Welcome. Can I formally welcome Richard Brown to his first meeting here as with us as the Treasury Officer of Accounts? We might be throwing one or two questions your way today, so I hope that is all right with you. Can I also welcome Andrea Leadsom, our new Minister, who I hope reads some of our Reports? Andrea, I will give you an opportunity to say something at the beginning.
Andrea Leadsom
There are three brief points I want to make, if I may. First, I wanted to congratulate the Committee because it builds on a very long tradition of ensuring value for money. As a Treasury Minister, I fully support your role and I certainly agree that we should work together to deliver better value for money in all areas of Government expenditure. And many congratulations because, as I understand it, 90% of the recommendations made by the Committee are followed through by Government Departments. I am sure that you are also aware of that statistic.
Chair
I think, if you hear the hearing today, there will be some frustration that not enough learning takes place, but we welcome that.
Andrea Leadsom
Good, thank you. My second point is that I am sure the Committee knows that Departments already respond on whether they will accept or reject Committee recommendations through a Treasury minute and annually through a Treasury minute update. For your information, the Treasury enforces this quite strictly, as we certainly take the Committee’s recommendations very seriously and accept them in the majority of cases. Of course, the National Audit Office also carries out follow-up studies, in part to check progress with implementing Committee recommendations, and these reports are placed before the Committee. I think all of that accountability is incredibly important. My third and final point is that I entirely agree that the Treasury should increase the transparency of public spending information. That way we can improve accountability to the House and to the general public, while generating value for money and delivering on our programme for efficiency. I certainly welcome the NAO’s recognition of the Treasury’s continuing commitment to improving whole of government accounts, in terms of timeliness and content. The Treasury has taken steps to make the disclosures in whole of government accounts more detailed and transparent, hopefully to the benefit of the general public.
Chair
Thank you for that and we look forward to continued co-operation. I think we have got the permanent secretary in front of us on Monday next week to talk about some of these issues; how we can use the centre and particularly the Treasury to enhance the impact of some of the recommendations that we make here and have that shared learning, so thank you very much.
Mr Bacon
Chair, may I point out, while so many congratulations are flying around, that congratulations are due to you as the new “tax personality of the year”? That is an oxymoron, by the way.
Chair
The same people called me “tax prat of the year” last year, but thank you very much indeed, Richard. Right, on to the hearing: who is in charge of this one, who is the accountable person out of you four—the actual person who is taking all the decisions?
Stephen Lovegrove
I am the accounting officer.
Chair
Who is the actual person who is taking all the decisions?
Stephen Lovegrove
The decisions are obviously made through a variety of the Government’s mechanisms in the Department, but Hugo Robson is the senior responsible officer for FID Enabling for Renewables.
Chair
You are the person and you have been working on this programme for—
Hugo Robson
Since 2011.
Chair
Since 2011. So you are the senior responsible officer?
Hugo Robson
Since July 2011, correct.
Chair
Can I start by saying that you set this programme up to deal with investor uncertainty—that was the rationale for it? Can I ask you what alternatives you looked at to prevent a loss of investor confidence? What were the other alternatives, apart from this, that you examined before you settled on this one?
Hugo Robson
In July 2011, when the White Paper was published in relation to electricity market reform, we recognised at that point that there was a potential for a hiatus of investment leading through to the set up of the enduring regime in 2014. At that point, there was at least a three-year gap before—
Chair
Can you answer the question. What alternatives? I understand the rationale for doing it. What were the alternatives that you examined?
Hugo Robson
We looked at a number of alternatives—
Chair
What?
Hugo Robson
Which included, for example, giving letters of comfort to generators, in terms of giving them comfort that we were moving towards a—
Chair
Money?
Hugo Robson
In terms of an enduring regime and the CfD—that was at one level.
Chair
Sorry, I don’t understand those—
Hugo Robson
What electricity market reform is about, in terms of putting a contract for difference in place—what generators and developers did not know back in 2011 was precisely what form that CfD would take. The contract had obviously not been drafted at that point. It was a concept at that point in this process.
Chair
I understand that. I’ll ask you the question again. I understand there was uncertainty in the market because we were moving to a new system. The purpose of this particular scheme, of which I have to admit I think many of us are very sceptical, was to deal with a hiatus. I am trying to get out of you what alternatives you looked at apart from this scheme to try to deal with what you thought was investor uncertainty.
Hugo Robson
Clearly, one possibility was a do nothing scenario, which is to wait for the enduring regime. That was not considered satisfactory because we were very concerned it would create a hiatus of investment. At the other end of the scale was talking to developers and working with them, which we were doing anyway in relation to putting together electricity market reform and developing the contracts for difference. It was very much a case of working with developers in terms of what they were going to need. At one point, we considered that we would potentially not have to offer a full contract. But it quickly became clear that, for people to have the confidence to move forward, we would need to offer an investment contract, which is effectively the same thing as a CfD. The contracts we have signed—the 8 investment contracts—are essentially the same instrument as a CfD, but just an earlier form.
Chair
My understanding, from that answer, is that you looked at doing nothing and decided you couldn’t. I don’t quite understand that, but we will come back to it. You then negotiated, in effect, with the suppliers to find a scheme they thought was satisfactory. Am I putting words in your mouth?
Hugo Robson
It was not a case of negotiating a scheme, in terms of moving forward with and developing the contracts for difference. Initially, when there was the uncertainty in 2011, a large number of developers actually thought the alternative route, in terms of avoiding a hiatus of investment, was to extend the existence of the RO through to 2020.
Chair
That brings me neatly on to my next question. It would be really helpful if you didn’t use—
Mr Bacon
TLAs: three letter acronyms.
Chair
Thank you. The renewables obligation is open until April 2017—six years. Why was that not enough? Why, in your assessment, did it need any interim scheme?
Simon Virley
Could I pick that up?
Chair
Why you?
Simon Virley
Because I was chairing the work on electricity market reform at the time so can perhaps elaborate on what Hugo said. We were, of course, thinking in 2010 about how to improve value for money for consumers and had come to the view that we could do that by moving to a new regime and away from the renewables obligation, which was the previous regime.
Chair
I think we understand that. Just answer the questions, because we have loads of questions for you.
Simon Virley
One option was to just stick with the renewables obligation, which we discarded. It then became a question of how we transitioned to a more cost-effective regime. We discussed whether we could move straight to competition and didn’t think we could move straight to competitively allocated—
Chair
I repeat my question. They can use the renewables obligation until April 2017. Why was six years not enough for them to move to the new regime without a hiatus and without having to introduce an interim system—in other words, move to full competition, which you are now not having?
Simon Virley
We are going to be moving towards competition.
Chair
Very little, because you’ve spent most of the money. Anyway, we’ll come on to that.
Simon Virley
The answer to your question is that we wanted to move people as quickly as possible out of the renewables obligation.
Chair
Why was six years not enough? They knew in 2011 that you wanted to move to contracts for difference. They have—you are frowning, so I might have misunderstood this—until April 2017 to commission new schemes under the renewables obligation. That is six years. Why was that not enough to prepare for the transition?
Simon Virley
Because I think it was beneficial to consumers to get as many of those projects into the new regime as quickly as possible, and that is what the transitional arrangements helped to do.
Chris Heaton-Harris
Was it anything to do with state aid as well, because under European law you have 11 years where you can have this sort of subsidy before you run into state aid issues, and the renewables obligation, I think, overran by a tiny bit of time? Were you not worried about the state aid issues?
Simon Virley
No, it was a decision made on the basis of how we could best meet our legally binding obligations in a way that was the most cost-effective for consumers. I think we have provided figures showing that for the eight projects we are now taking forward, we are saving something like £2 billion-worth of support costs. That is about a 17% reduction in costs to consumers over the lifetime of those projects.
Chris Heaton-Harris
How do you know that, because the Report says you do not actually know what the costs of any of these projects are? You have no sight over any of the transactions that go on to build a project up; you have got no idea of what the costs to the developer are. So how can you say that?
Simon Virley
Those are on the best estimates of what we think the support costs are going to be.
Chris Heaton-Harris
So it is a best estimate of what you are saving the consumer?
Simon Virley
Yes.
Chair
We will come back to that. Littered through the Report are references to the contractors and the consumers. I think the one that offended me the most was when you say you were looking after the interests of consumers on page 38, paragraph 3.20. As part of your developing the new scheme and bringing in an inflation index, you say there that, “The Department allowed inflation indexation because consumers are thought to be better placed to absorb the impact of high inflation than generators.” I just want to think how on earth you can justify those extra costs to my constituents. I think you should come and face them, and tell them that you think that looking after the generators was more important than looking after their interests. Right the way through this Report, the idea that the consumer interest was uppermost in your mind just does not shine through.
Hugo Robson
If I could make a point on that, in terms of the inflation indexation, it is this: had we not had any indexation, the prices here would have been significantly higher. One of the benefits of being able to have indexation is that you can keep the up-front costs, in terms of the contract for difference. So the prices of £150 and £140 a megawatt are for the offshore wind, and they would not have been at prices that we could have had if we had had no indexation at all. Therefore, the consumer—
Chair
How do you know? We are back to Chris’s point—how do you know that?
Hugo Robson
Because it is a basis on which you look at the potential returns on the projects, and the potential returns on the projects are either looked at on an inflation basis or a real basis. So, ultimately the developer will be looking to get—
Chair
But you don’t know the costs, because you have not asked.
Hugo Robson
We do know the costs of typical projects, so we—
Chair
You don’t. How do you know? You haven’t asked. You didn’t ask for that information. You didn’t even protect consumers by having the courtesy of actually investigating the real costs.
Simon Virley
Well, there was an extensive process in 2011 and 2012 to try to understand the so-called levelised costs, the long-run costs of these technologies, and that work was all done with the support of external experts and published at the end of 2012.
Chris Heaton-Harris
Were any of the external experts from outside the industry itself?
Simon Virley
Yes.
Chris Heaton-Harris
I do not expect you to have that information here, but if you could give us a note on who they might have been, that would be great.
Simon Virley
Certainly.
Mr Bacon
Why did the Department think that, in the words of the Report, “consumers are thought to be better placed to absorb the impact of high inflation than generators”?
Hugo Robson
It is not high inflation—
Mr Bacon
I am just reading from the Report, which is an agreed Report. It says, and the Chair has already quoted this, “consumers are thought to be better placed to absorb the impact of high inflation than generators”. Why did you come to the conclusion that “consumers are thought to be better placed to absorb the impact of high inflation than generators”?
Hugo Robson
I would have preferred to have deleted the pejorative word, “high”, and called it, “better placed to deal with—”
Mr Bacon
I did not ask you which words you would like to have deleted. Mr Robson, we do not have a huge amount of time and we have a lot to cover, so instead of redrafting the Report for us, because it is an agreed Report, could you just answer the question? Why did you think that “consumers are…better placed to absorb the impact”—that is, the impact of costs going up—“than generators”?
Hugo Robson
With the costs, in any case we were looking at an existing renewables obligation scheme, which is index-linked to RPI. The move into the contract for difference was also looking at preserving that indexation for generators. We introduced it to consumer price indexation as opposed to retail price indexation. We think that is a good indicator of what general inflation within the country is.
Mr Bacon
You are talking about indexes—or I should say indices—but you are not answering my question. I don’t want to put words into your mouth, but I may have to. The answer should be, “We thought consumers were better placed than generators to absorb the impact of high inflation because—” and then you finish the sentence. Why did you think consumers were better placed than generators to absorb the impact of costs going up?
Hugo Robson
I would say again I’m afraid that I believe that consumers are well placed.
Mr Bacon
I am not asking you whether they are well or badly placed. The sentence compares and contrasts—on the one hand consumers, on the other hand generators. It says that consumers are better placed than generators.
Stephen Lovegrove
Mr Bacon, may I have a stab?
Mr Bacon
You may have a crack at it.
Stephen Lovegrove
Obviously, in any industry, ultimately higher costs are going to be passed through to the end consumer where they can be—
Mr Bacon
Not necessarily. You might have permanently lower profits. There are lots of possible answers to that. You used the word “obviously” and it is not obvious. You might have permanently low profits.
Stephen Lovegrove
In the vast majority of industries where there are higher costs, those get picked up ultimately by the end consumer. That is the case certainly in energy, famously so. We know that higher energy costs have been passed through to the consumer. There has been a great deal of debate about that. This kind of project is quite fragile. The judgment of the Department was that allowing the normal mechanism of passing that kind of cost pressure through to consumers would be safer for the projects to go ahead at all, than to ask the developers to carry it. If we had asked the developers to carry it, consumers would have had another type of deleterious effect, which is that the consumers would have had to price in the risk in a way that meant that the strike price would have had to have gone up. On the one hand, you can argue that the consumers are exposed to price indexation; on the other hand, you can say that they are protected from the higher strike prices that the developers inevitably would have charged for these businesses.
Chair
That would all work if I and other Committee members had confidence that you were negotiating on our behalf the best strike price. To take the issue of indexation, most of these developers were borrowing. We have seen it on PFI contracts. That is the frustration of this Committee; we have seen it on endless contracts. We actually saw it on the electricity transmission contracts, which we had as an early issue coming out of DECC before you were in post. In this particular one, they borrow at fixed interest rates, as far as I can tell, so there is not an automatic inflation built into their borrowing for developing this capability in the electricity market. Yet they get this added bonus from their investment of inflation guaranteed, while my constituents have to pick up the tab in a regressive form of taxation that impacts on them perhaps more than others. I see no justification in a situation where you do not have sight of the costs and benefits. You don’t have it; it says so in the Report. You know they are borrowing at fixed interest rates. They automatically get a rise on inflation because you want to protect their interests more than those of consumers in our constituencies. I don’t get it, and we do not have that confidence in you, I’m afraid.
Stephen Lovegrove
The whole move to the contract for difference type of support mechanism for these renewable technologies is in a sense designed to protect consumers. They are demonstrably, as the Report says, better value because the cost of financing them is considerably lower.
Mr Bacon
Because they are so low risk. They are already amazingly low risk. The whole purpose of this is to create an environment of certainty for the investors, isn’t it?
Stephen Lovegrove
It is to create an environment in which investors can get a return. It is not to over-compensate investors; it is to create an environment in which developers can develop projects that we need to meet our legally binding climate change obligations.
Austin Mitchell
There is no money left over. You’ve doled out 50%, so that’s not creating a sustainable environment for other people.
Stephen Lovegrove
There is money left over.
Chris Heaton-Harris
There is an odd thing on this, looking at the consumer. Throughout this process, was an estimate done of how many extra people might be pushed into fuel poverty because of these decisions?
Simon Virley
Not specifically in terms of this programme’s impact on fuel poverty, but the overall impact of DECC’s policies on fuel poverty has been assessed.
Chris Heaton-Harris
But that is the assessment that says that there is a benefit to people, but only if they buy a new washing machine or fridge freezer—white goods that the poorest in society cannot necessarily afford. I am interested in this project, because if you are looking at what is going to be best for the consumer, surely you think that you are going to be guaranteeing a lump of money here and the consumer—the person in paragraph 3.20—is going to be paying. How much would that be for the consumer? How is it going to reflect on people’s bills?
Hugo Robson
All I can say is that we looked at what prices we would need to be offering in the event that we did not have any indexation. They were considerably higher than the prices here. With indexation, the prices are lower at this point. Yes, we did look at the effect on what the price would be.
Chris Heaton-Harris
So you had specific meetings about fuel poverty and the cost to consumers?
Hugo Robson
Sorry, I am just saying that naturally the effect of higher prices—
Chris Heaton-Harris
I know what you are saying, because the answer is obviously no, you didn’t look at the effect on consumers and how many people would be pushed into fuel poverty.
Simon Virley
The answer I gave earlier is that for the eight projects we signed up, we think we have saved about £2 billion-worth of support costs.
Chair
You think?
Simon Virley
That is about a 17% reduction.
Chris Heaton-Harris
You know you can’t quantify that.
Simon Virley
Well, that is our best estimate.
Mr Bacon
Without understanding the costs of the project?
Simon Virley
You have to make a best estimate of what you think the costs will be.
Mr Bacon
When you say you have to, what you could have done is mandate that you understand the costs of the project, otherwise you don’t get any subsidy, strike price or support.
Chris Heaton-Harris
Paragraph 3.18 says that in 2013 “NERA analysis for the Department showed that investors in similar renewable electricity projects elsewhere in Europe had accepted lower returns.” So elsewhere in Europe, there are people looking at these projects in slightly different ways and negotiating in a slightly different fashion. Is that a fair thing to say?
Hugh McNeal
That is not true for the prices for offshore wind. Sorry, I know the Report is agreed.
Chair
Well then, why did you agree that paragraph of the Report?
Hugh McNeal
I will try to think of a way of saying that. The point about prices for offshore wind in Europe and elsewhere in the world is that in Japan they pay approximately double what we are paying—this is independent analysis from Bloomberg New Energy Finance, not from the Department—in France they are paying about a third more and other European countries are paying similar rates to what we are paying now, but we are at the bottom end when we move to the £140 strike price. Our projects are in deeper water than those in some of the other European countries.
Chair
You are taking about offshore, but I have the article in the FT about nuclear, about which you have had a 68-page initial assessment. The article says: “The commission questions whether the deal addresses a genuine market failure and suggests the terms will overpay EDF, shield it from almost all operational risk and crowd out alternative sources of energy supply.”
Simon Virley
The deal on nuclear—I assume it is referring to the Hinkley Point project—is currently being considered by the European Commission through the state aid process. It put out the questions it wants us to answer, and we have answered those points.
Chair
A 68-page initial assessment?
Simon Virley
We have responded with evidence to the effect. So the strike price for nuclear from the Hinkley contract, as you will be aware, is £89.50 per MWh. That compares favourably with some of the renewable technologies that are currently more expensive; but we hope to get down in terms of costs as the scale of those industries builds up.
Chair
And what they say is potentially wasting up to £17.6 billion of taxpayers’ support on the plant.
Simon Virley
We don’t agree with that view. We have provided robust evidence to challenge it.
Chair
I shall be amazed. I bet it is right.
Sir Amyas Morse
May I just make a couple of points referring back to the conversation we were just having? The saving that you rightly quote is by comparing the old RO-X regime with a transitional regime. It does not compare what you might have achieved if you had not let as many of these transitional regime contracts and subjected more to competition, of course. That is true. I think it is worth just making that point. On the question of inflation, it is quite true in my view, and worth saying to the Committee, that if you are constructing assets over a period of time then inflation will operate on the input costs of those assets. That is quite true. I can understand that you wanted to protect these companies from having inflation because it would have driven a higher price. The other bit about consumers being more able to is the more unfortunate leg of the equation, but I understand that inflation is bound to operate on the underlying costs. It is just worth reminding the Committee of that.
Stephen Lovegrove
May I respond to the first part of that observation? It is, of course, true that when the market is more mature, competition is likely to drive better prices for consumers. There is no doubt about that. We don’t believe—we didn’t believe then and don’t believe now—that it was a tenable position to adopt that we could go straight to competition.
Chair
Why?
Stephen Lovegrove
Because the technologies, the developers were all too immature to be in a position where we felt that we could go straight to a competitive allocation.
Chris Heaton-Harris
How long has offshore wind been producing energy for the United Kingdom?
Stephen Lovegrove
I don’t know about that. These are vastly bigger projects. They are very different from your standard PFI contract and very different from—
Chair
Which? is hardly a lefty organisation. They think, on the offshore wind, you should be competing now.
Sir Amyas Morse
Can I just be clear? I was not suggesting that there shouldn’t be a transitional regime. I am sorry if I gave you that impression mistakenly. I was saying that if less funding had been devoted to the transitional regime then more would have fallen into the competitive regime that you are now intending to apply.
Stephen Lovegrove
That is self-evidently true.
Sir Amyas Morse
Good.
Stephen Lovegrove
However, we do not believe that we would have been able to move so quickly to a competitive regime if we had not had this scale of transitional regime.
Chair
Chris, do you want to come back on the offshore stuff?
Chris Heaton-Harris
I think it is paragraph 3.7 which says: “it is not clear that the full scale of these commitments was needed so soon”.
Hugh McNeal
The answer, just in terms of the detail of where we might be this autumn, to answer the question about competition, is that to take an offshore wind project and to meet the criteria to be eligible for a contract, whether it is competed for or not competed for, costs tens of millions of pounds.
Chris Heaton-Harris
Do you know that for a fact?
Hugh McNeal
Yes. It is to do with all of the surveys that must be done. It is to do with the surveys around birds, mammals and we can do you a note on that. The question is where are we now in terms of where we might have been without FIDeR? Without going into commercial confidences, there are perhaps up to seven offshore wind farms that might be looking for a CfD this autumn. Of those seven, five have been part of this process. Of the two that have not, last autumn when the decisions on budgets and other things were taken one was absolutely clear that it wanted to come forward under the RO and the other one has only just got planning consent. So from where we sit, the fact that we have had this process has enabled us, faster than anywhere else in the world, to move to a position where we are going to be competing for offshore wind. If you look at international comparisons, our prices, as administratively set, are already lower.
Chris Heaton-Harris
Actually, you are just picking a winner and throwing loads of money at it. It is not a surprise that you are in that position, because you are just chucking taxpayers’ cash at these things.
Hugh McNeal
We can have a back and forth about the pros and cons of offshore wind. The case for has three points—
Chris Heaton-Harris
How do these offshore wind turbines do when the wind is not blowing? Have you calculated how much carbon is not saved because of the gas turbines turning in the background? We can have this to and fro, but I just don’t believe that you have looked seriously at the alternatives. You could have gone for competition, but you chose not to because that was easier.
Hugh McNeal
The argument I have just presented to you is that we do not believe—obviously you can disagree—that there would have been the volume to have competition. Nor do we believe, if you look at what other countries were paying and how much people would have had to spend to get the projects ready to enter into the competitive process, that anyone would necessarily have entered into the auction. Of course—
Chair
Do you disagree with Which? when it says, “We see no compelling reason why offshore wind developers should not at least compete with other offshore wind developers for subsidy to help drive down support costs”? Why is that wrong? It goes through figures of how much is currently provided by the total installed offshore wind capacity—
Hugh McNeal
It is 3.7 GW right now and 1.4 is GW in construction.
Chair
It is 3.5 GW at present, rising to 7.5 GW by 2020 and then 15.9 GW by 2025. Its view is that the market is sufficiently well developed to allow immediate competition. You took a different view. We want to understand why and whether that was justified, because there was an additional burden on consumers in Barking and Dagenham and elsewhere.
Hugh McNeal
As I have said, we may well see competitive pressure in the way that I have just described this autumn. If that is the case, we will be leading the world. The argument against it is the incumbency in offshore wind. We have about 3.7 GW currently built. The renewables industry always complains when we release prices, and you would expect them to, but when we released the administrative strike prices last year, they actually followed through. SSE said, “We’re not going to take any more FIDs for offshore wind.” Centrica sold Race Bank and RWE said, “We’re not going to do any more.” The people who are now entering our market are expanding existing businesses who work in oil and gas, such as Repsol.
Chris Heaton-Harris
But what did the industry do when you reduced the feed-in tariff for solar? I seem to remember it saying that there would be no future investment in solar in the UK and I was written to by solar companies in my constituency who said that that was their market completely blown to pieces. What happened after that?
Hugh McNeal
I completely accept that point. Of course, the industry is always upset with us when we set prices, but we are used to that. The difference here was that the companies who we had previously relied on to drive the market left it—they put their money where their mouth was and said, “We don’t want to invest here any more.”
Chris Heaton-Harris
They left it for how long?
Hugh McNeal
We will see.
Chair
Who are the five people who you have got on this? There are obviously people around doing it.
Stephen Lovegrove
Not the UK ones.
Chair
But there are five people.
Stephen Lovegrove
Yes, but an important point is that there is no market in the world at the moment where there is competitive pricing for offshore wind. The UK is going to be the first. That probably tells you that we are moving as quickly as we possibly can—much faster than any other territory in the world—to competitive pricing, which is what we want to do.
Simon Virley
If I could add to that, in terms of where we were in 2011, it is unrealistic to think that we could have said to the industry, “We will run some auctions in 2014, in three years’ time. Keep developing your projects.” We didn’t have the Energy Act, the contracts or the strike prices. To spend the tens of millions that Hugh was referring to would have been unrealistic for most developers if we had said back 2011, “Come back in three years time and we will run an auction.”
John Pugh
Going on to the developers, I have an app on my phone at the moment that says it is a surprisingly good day for wind generation, with 9% of all our electricity currently going to the national grid coming from wind sources. It can go down to 0.5%, which shows that, in order to get investment in, you need an element of predictability. You are obviously trying to build a strong element of predictability into the system through the deals that you have done. Am I right about that? Stephen Lovegrove indicated assent.
John Pugh
Our concern, and the genuine concern of any elected representative, is that you are providing too good an assurance of profit and return for the developers themselves. Clearly, a market does not do that and you are trying to balance two things out. Lack of predictability has led to lack of investment, which has led to slow development and so on. Given that there is a possibility of excess profits being made through getting the strike price or the initial decision contract wrong, did you not consider at some point in modelling this having some sort of clawback or profit-sharing arrangement that would have mitigated the potentially huge profits that some of these developers could make?
Stephen Lovegrove
We looked into the particular subject of clawback very closely, took a great deal of advice on it and consulted pretty widely. We took the view that, for the projects that were coming forward underneath FIDeR, a clawback arrangement was not going to be possible.
John Pugh
Why not?
Stephen Lovegrove
I will tell you. It was a new and unfamiliar instrument for financiers. There is a long contract, which is 800 pages now, but it wasn’t actually developed at that point. These are projects that have a great deal more risk associated with them, certainly construction risk, than your average PFI.
John Pugh
But the clawback of excess profits doesn’t add anything to the risk to the developer, does it?
Stephen Lovegrove
We repeatedly heard—and spoke to independent financial advisers on this particular subject as well—that putting in clawbacks would have been a complete show stopper. It would have been a red light. The projects would not have come forward.
John Pugh
But they would say that, wouldn’t they?
Stephen Lovegrove
That is why we went to independent financial advisers.
Chair
Did you consult consumers or any consumer organisation?
Stephen Lovegrove
I don’t know. Did we consult any consumer organisations?
Simon Virley
Consumer groups were involved throughout the process in terms of electricity market reform.
Chair
You consulted consumers and they said, “Don’t put in a clawback”?
Simon Virley
No, there were representations to say we should have clawback and that was obviously weighed up in the consideration.
Stephen Lovegrove
The other thing I should say is that putting a clawback in would have been another upward pressure on the strike price.
Chair
The whole way you argue suggests to me that you are completely captured by the industry. If I were the industry, of course I’d threaten, “Don’t give me inflation or I’ll shovel the money up. Don’t give me clawback or I’ll shovel the price up.” Of course they are bound to do that. You are there to protect our interests as consumers in a much tougher way than we think you have done.
Austin Mitchell
I get confused by all this comparative pricing. You are saying, here we are, leading the world, a first for Britain kind of thing, but what are the comparative strike prices for these projects: the one-off EDF deal that the Government has also come to, the land generation of wind power, which is not under these deals, and coal-fired power? Which is the most expensive and why?
Simon Virley
Certainly at the moment offshore wind is the most expensive of the ones that you listed. The strike price for offshore wind is currently about £150 per megawatt-hour. It will be coming down as we publish over the next few years and we expect to come down further when we move to auctions, to competitive processes. That compares with the strike price for nuclear I mentioned earlier that we have agreed with EDF of £89.50 per megawatt-hour—onshore wind is about £95 per megawatt-hour. Those are the current prices we have for the low-carbon technologies that are currently providing a considerable amount of Britain’s electricity.
Austin Mitchell
Okay, but what I don’t understand is: why the rush? You say, “We’re going to lead the world,” and that kind of thing, but you’ve rushed into these contracts. You’ve given away 58% of the dosh that is going to be needed for future contracts, so there’s going to be more risk attached to them, and you’ve done so without price competition, and you’ve done so with a guaranteed price for the producer and when some of the projects haven’t got planning permission. What is the rush, particularly before we have the capacity in this country to build the big wind generation units that will be needed offshore? That’s another dimension—another technology really, they’re so big—so why the rush? Why not wait?
Stephen Lovegrove
Two reasons—although colleagues will wish to chip in, I’m sure. We absolutely do not believe that we would be able to get to a world-leading position on price competition without the FIDeR process. We believe that we need to have FIDeR in order to be able to develop the industry so that we can get to competitive pricing and allow the competitive dynamic to drive down prices for consumers. That’s the first thing; the second thing—
Chris Heaton-Harris
Sorry, could you just confirm that FIDeR is the final investment decision?
Stephen Lovegrove
I apologise: this is another TLA. FIDeR is Final Investment Decision Enabling for Renewables. We absolutely believe that we needed to have this scheme in order to get to a competitive place. The second point, I would say, is that as well as the industrial factors, we clearly have very ambitious decarbonisation, greenhouse gas and renewables targets in the UK. They are legislated for and they are legally binding. We have to get to 15% of our energy consumption being provided by renewables by 2020. If we do not move aggressively, particularly in the electricity generation sphere, we will break those legally binding objectives. In particular—you talked about the different range of technologies that we’ve got and the fact that they have different strike prices and so on—our main target is the one from the 2007 Climate Change Act, under which we have to cut our greenhouse gases by 80% by 2050. For us to be able to do that, we basically have to be able to completely decarbonise the electricity sector and we have to have a diverse set of generating assets and technologies which are low-carbon; so this is a long-term game and there is no room for complacency. We need to move quickly.
Austin Mitchell
But even the Chancellor has said he doesn’t want consumers to be burdened with the high costs of reaching green targets before it’s necessary. The rush to reach the targets is very nice, but the costs will come down. In particular, we shall generate more jobs when we have the capacity to make these big wind turbines in this country. The Siemens plant isn’t yet established in Hull. There are alternative plants we’re hoping to get—the Able UK operation on the other side of the Humber is nowhere near planning permission—and there’s every advantage to delay until we can build the big generators in this country.
Stephen Lovegrove
We feel confident and pleased about the Siemens plant, and I certainly hope that there will not be a delay in Siemens coming forward. It is an incredibly important part of the supply chain in the UK for offshore wind. With respect to the Chancellor’s position about wanting to do the whole of the decarbonisation agenda on the least-cost pathway, that is one that we absolutely share; but decarbonising the UK’s economy is not a cost-free exercise. It is going to cost something and—
Chair
We want to minimise the cost.
Stephen Lovegrove
I agree, and so do we, Chair.
Jackie Doyle-Price
Key to minimising the cost is my favourite renewable, which is coal converted to biomass stations, and I am quite interested in what the Report tells us about that. Figure 1 brings home quite nicely just how much value for money there is in pursuing that, which is why it is quite disappointing that we’ve only got Drax and Lynemouth funded. Paragraph 1.11 also says that Drax is getting a loan from the Government green investment bank and a guarantee for £75 million. Bearing in mind that figure 3 also tells us that there are six initial expressions of interest in biomass conversion, we would end up with only those two, and Drax has all that extra support. Can you explain why that is?
Hugo Robson
We were keen that there should be a mix of technologies coming through the process. In terms of what was able to come forward, we set an affordability envelope. That was carefully run through, and in order to get that mix of technologies, we essentially ensured that the top project in each category of the four technologies would be assured to get a contract for difference. So we had this quartile test, so the top 25% of the projects, as ranked, would be assured a project. After that, we then needed to run a process that looked at the projects that ranked best out of the others, and that in effect filled up the budget that we had set. In terms of the process, the fact that in effect we ended up with three biomass and five offshore wind determines that this was a good mix of projects, but it was not, in any way, we had to, as we have just been discussing, look at the affordability of these, particularly given that the biomass conversion projects tend to use up the levy control framework money that is available earlier on in the process, and we had agreed the basis of the levy control framework with the Treasury, and that, in effect, made bringing all of the biomass conversion projects on early unaffordable. The other point that I would make is that biomass is obviously a transition technology. Therefore, in terms of looking at the mix, we wanted to bring forward a good mix, not just reliant on a—
Chair
Why did they get the extra money? Q76 Jackie Doyle-Price This is the whole point. You have answered the question, but without picking up the real point, which is what is so special about Drax? I have been lobbying the Department in favour of other biomass schemes, yet not only does it get one of these contracts, but everything else as well.
Hugo Robson
Apologies for not getting directly to the question, but in terms of the availability for other projects, in terms of supporting the green investment bank, or an IUK guarantee—the guarantee for IUK was given to Drax at the corporate level, as opposed to for the specific project—those schemes are available to all other investors.
Chair
But they are extra subsidy, aren’t they?
Stephen Lovegrove
IUK is totally separate from this process.
Chair
Again, if I can say to the Treasury, for goodness’ sake, this is taxpayers’ money. You want to look across Departments and if there is extra subsidy going into this, is it justified? You clearly did not look at that.
Hugo Robson
It is not for us necessarily to speak to the guarantee scheme—
Chair
It doesn’t matter. The project gets money from Government. It doesn’t matter if it is not DECC.
Hugo Robson
The IUK guarantee scheme is at commercial rates. It is not a subsidy.
Jackie Doyle-Price
It looks like favouritism to me, and I am sure I am not the only person who thinks that. Figure 3 tells us that we had a biomass conversion that was disqualified. Can you explain why that was?
Hugo Robson
They did not meet the eligibility criteria.
Jackie Doyle-Price
Right, which again is why I say it looks incredibly like favouritism.
Hugo Robson
Sorry, I think we are talking about the Drax unit. There was a single Drax unit.
Jackie Doyle-Price
That was part of Drax.
Stephen Lovegrove
That decision is being reviewed at the moment.
Hugh McNeal
We are in court today on that decision.
Jackie Doyle-Price
Right. So that will be in court today. We are talking about a technology that delivers energy in considerable volume. Mr Pugh has just told us that we have 9% generated by wind today, but it can be a lot lower. Obviously, biomass is a much more reliable technology. Part of building the market that you have described—a competitive market—is that you need to let more people in. Effectively, what we have is a pretty limited impact on the supply chain. Surely we should be doing a lot more to encourage this technology.
Simon Virley
Biomass is a transitional technology, as Hugo mentioned. We are capping support for biomass at 2027, because we do not foresee that biomass will play a part in the decarbonised economy beyond that period. In terms of supply chain benefits, the key development has obviously been to try build up the offshore wind supply chain. We have seen the results of that through the investment that Siemens has made. On biomass, there are significant costs. If we had taken more biomass projects through in the short term, we would have added to the cost to consumers and broken the levy control framework.
Jackie Doyle-Price
You were talking about up until 2027, but we are talking about the fact that we do not have enough investment coming on quick enough for things such as nuclear, so we are still needing that good, reliable supply. We have a coal plant that is easy to convert. It’s a no-brainer, surely. We are going to achieve better value for money by doing that. What’s this Beatrice wind farm? It is more than double the price in terms of power. Surely it is going to be beneficial to consumers if, for this decade, we focus on maximising the impact of biomass conversions.
Hugh McNeal
I agree with, certainly, some of that. You don’t get the same carbon savings in a biomass plant, so in terms of our longer term targets, biomass is not as beneficial to us as offshore wind would be. We are seeing some supply chain investments. It is great that Drax has arranged for the design of—now to be built—new train wagons from UK-based companies. It is great that investment is going in—imminently, we hope; I think I am allowed to say that, even though they are in court today. But ultimately, when you look at our sustainability standards—obviously that is very important, and our standards are going to be legally binding, and they are going to be as stringent as they are anywhere in Europe—we only make a saving in greenhouse gas terms of 68% against coal. It is not the same in terms of the carbon savings that you get from offshore wind. The trade-off is, as you say, that you get more dispatchable power. It is quite difficult to handle biomass. We have seen that, haven’t we, with the fires? People are still learning about how to use it. It is not the same as coal. We have put quite a lot of effort into supporting biomass in recent years.
Stephen Lovegrove
Looking a long way ahead, the electricity generating scene in the UK is likely to be dominated by nuclear, which is base load, and you can’t turn it up and down very much; and very intermittent renewables, which are absolutely understood. We spent a lot of time with National Grid talking about that. In order to make it sufficiently flexible as a system, we will have to have fossil fuels and plants that look like gas, coal or biomass plants. After 2027, we will not be providing support for biomass. Our longer-term approach to that part of the mix is carbon capture and storage, so that we can have gas plants and possibly even coal plants if it is sufficiently effective, which can run, but we can capture the carbon. That is the longer-term technology. Of all these technologies, probably CCS is the longest term and, at the moment, probably the most expensive.
Jackie Doyle-Price
As I said, I look forward to the day when coal is brought back into favour.
Chair
I have every confidence that they can predict what will happen in 2027.
Chris Heaton-Harris
I got hold of a company update from Bank of America Merrill Lynch on the Drax group. It is entitled, “Summer of Certainty”. Just a couple of the points directly relate to today’s hearing. One of the subtitles is, “CFD is preferable but ROC is still attractive.” I cannot work out why that should be if the CfD gives better value for money for us than the ROC. In making your choice and, in this case, by giving Drax—I have no problem with Drax. It is a good company and very efficient in what it does, but there is a valuation scenario of what their share price would look like with the various subsidies. Two units of ROC, one CfD base case: £8. Three units of ROC, one CfD: £8.70. Three units of ROC, worst case: £7.25. Four units of ROC: £7.95. One ROC, two CfD: £8.70. One ROC, three CfD: £10. The current price is about £6.25. These are all court case pending and state aid ruling pending. That is quite a jump in the value of this company you have picked off the shelf to do this. Give us some assurance that you are aware of this.
Stephen Lovegrove
We are certainly aware of the fact that decisions made as a result of processes we have in the Department can affect the value of companies on the other side of the trade. There is absolutely no question about that. As you may know, I was an investment banker for a long time and am very aware of the impact on the cash flows and therefore the valuation of these kinds of decision. I can give you absolute assurance that the process we have gone through has been as rigorous and even-handed as we could possibly make it.
Chair
But we would say that the outcome, which suggests that the process as you devised it was maybe wrong, suggests there is a greater benefit to this particular company—I agree with Chris that it is probably very efficient —than to the consumer. There must be; that is what all those figures suggest. You, as an investment banker, must see that.
Stephen Lovegrove
I refer you to the point Simon made earlier. If you take the models we have for these particular projects at the moment—accepting that we have not done the absolute nth degree of diligence in those models because that is not the way we set this up; we set it up so that there is a generic contract. If you take those models and run them underneath the funding costs to the consumer under the CfD, and then run them underneath basically running on the ROC, the cost to the consumer of the process we have adopted is 17% lower and is a saving of £2 billion. Clearly, you can flex that up and down if you decide that the model is a different one. But the point is that they are off the same base so it will always be a saving of 17%. That is an important point.
Chair
It isn’t always. You have no certainty about that.
Simon Virley
If I could answer the question about how this is of benefit to consumers if it is also of benefit to investors—the key point here, and the whole basis of electricity market reform, is to try to lower the costs of this financing, which is the certainty the contract provides in terms of a stable strike price. That lowers the cost of the financing for these very capital-intensive projects. It is good for investors and ultimately good for consumers, because we can lower the prices. That is the basis of the model.
Hugh McNeal
The final thing to add—we touched on it earlier—is about the supply chain and industrial benefits. One frustration in a role like this is the inability to leverage the support we have to secure supply chain benefits for the country. Under the new regime and these transitional contracts, we are able to do that. If we get on to that, I can give you some examples.
Sir Amyas Morse
If these companies are able to more readily obtain cheaper finance and, at some point in the future, refinance themselves and realise they spot gain—as, after all, we saw happening a great deal under PFI—that is just their gain, is it? Have you considered that?
Simon Virley
I think Stephen answered that point earlier. If we had introduced clawback provisions at the start of a new instrument, that would have made this proposition completely uninvestable for any developers.
Sir Amyas Morse
It is very odd that you take that as given, based on the high prevalence of clawback in PFI. It doesn’t seem to prevent people from doing PFI contracts.
Stephen Lovegrove
The construction risks associated with, for instance, a deep offshore wind farm are vastly greater.
Sir Amyas Morse
I got that. But not the potential for making a spot gain on re-financing. Frankly, you should think about it a bit more. I am concerned that if this does happen in future there will be embarrassment; if the construction is carried out so the construction risk is gone—same as in PFI—and then subsequently, because I know it would not happen before then, there is a refinancing operation and a significant spot gain is achieved. Let’s say you have a performing asset that is sold off to a new type of investor, which we have seen in PFI, because this is all the experience we have had up to our eyeballs in the public sector, there is a question mark about how that is going to play. If it goes that way, what is the argument going to be for why that was such a good thing?
Stephen Lovegrove
We can take that away and think about it. We should think about it. Of course, there is a recent example with the way in which Ofgem is dealing with the OFTO regimes at the moment. As you say, that is refinancing after the asset class has been established and built and we are not in that place at the moment.
Mr Bacon
Yes, and just so that I am not mistaking what you are saying, you used the word “uninvestable”; that if we had included a refinancing clause it would have been uninvestable. Is that your position?
Stephen Lovegrove
Yes it is our position.
Mr Bacon
So if, and only if, the thing comes through successfully, washes its face, is up and running and built, and therefore represents a much lower risk and capable of being refinanced with a significant degree of profit; if in those circumstances you were to include, as you did not do for many of the early PFI contracts, a refinancing clause, you are honestly saying that unless you had abjured from having such a clause it would have been uninvestable.
Stephen Lovegrove
It would have been uninvestable at anything like the kind of strike prices that we have set at the moment, which have already come in for quite a lot of criticism for being too high.
Chair
Does Treasury concur with that view, with all your experience of PFI?
Richard Brown
I think that there is a lot of difference between the initial types of contract that one might enter into and similar contracts when you have got further down the road. The amount of risk that people are taking initially is not the same as that people are taking when they are several years into a programme of development.
Chair
But does Treasury concur with the view expressed by DECC that there should not be a clause in here that enables the consumer to recoup any benefit should there be excess profits? Do you concur with that view?
Richard Brown
The judgment would be that you have to take account of the professional call that DECC made about whether it would be possible to get the projects away if you had included a provision for clawback in these contracts.
Chair
You concur with their view?
Richard Brown
Yes.
Mr Bacon
Despite the fact that there have been dozens and dozens of PFI contracts. On this Committee we have examined at least 63, because I have counted them, and there are probably more than that now.
Richard Brown
There is a difference in the risks involved between the first contracts that you let and the contracts that you let further into a programme.
Sir Amyas Morse
That is perfectly fair comment; I understand that. But you would imagine that would have a bearing on the number of contracts that you let in that initial group and the amount of value associated with them, wouldn’t you? If you saw this primarily as a test bed rather than a very large exercise, you would imagine you would approach it differently.
Richard Brown
If that were the only thing that you were concerned about, that might be the case. In the discussion that we have had so far we have also referred to the existence of what are extraordinarily stretching targets for renewables, which we have simply got to achieve.
Chair
This is £16.5 billion of money.
Mr Burrowes
Can I look at the approval of the business case at paragraph 2.11? There has been a balancing exercise of the potential benefits that have not been monetised outweighing the potential risks to value for money. The benefits have been outlined, but can someone outline the risks to value for money at that stage?
Simon Virley
Shall I kick off, then people might want to add in? You are right to say, as paragraph 2.10 does, that it was not possible to monetise all the costs and benefits. We therefore added in qualitative judgments that are listed against the objectives in paragraph 2.11. We would argue that the three key points there, showing that the contracts—
Mr Burrowes
I am not looking at the benefits; I am looking at the risks to value for money.
Simon Virley
I am answering by saying that I think they show that we assessed those risks, in terms of whether the process was going to demonstrate that the new contract system could work, that it could deliver supply chain benefit and that it was going to keep us on track to hit the renewables target. Our answer today, as it was then, is demonstrably yes.
Mr Burrowes
So the risks are effectively a negative of those three points. Those were the only risks to value for money of not proceeding in that manner, in terms of the business case.
Simon Virley
We looked at the risks of not proceeding against the inverse, and whether we could have moved straight to competition, as we discussed before. We looked at whether there was any slack in the renewables target, for example, or whether we could have secured the supply chain benefit in another way. We did not think that was possible.
Mr Burrowes
So the risks to value for money are the tramlines of those three points, effectively.
Hugo Robson
That is right. Clearly, in any project, you have a risk register.
Mr Burrowes
Did you quantify in any other way the risks to value for money?
Hugo Robson
Not other than through the process that we did. As we said, for the main purpose, it came out broadly neutral. We then looked at non-monetised benefits, which, by definition, are non-monetised.
Mr Burrowes
Right. Can you explain “broadly neutral”? How did you work that out?
Hugo Robson
In terms of the benefits of the scheme versus the costs of the scheme.
Mr Burrowes
The balancing exercise came out neutral. Obviously, there was a balance. Can you give more detail about how the balance was on the side of the non-monetised benefits?
Hugo Robson
Basically, it was broadly neutral. In order to be satisfied that this was right so we could move forward, the focus was on the non-monetised benefits. As we said earlier, the principal value for money on the project was the move from the existing renewables obligations scheme into the contracts for difference. That was the primary value for money of the overall project, and that had already been taken into account when we looked at the effect of the timing of the various different projects and when they come through, which really has the main effect on value for money.
Mr Burrowes
Okay. We have got those three bullet points. If the legal obligations were taken out and it was left to a market decision, would that have an impact on the weighing exercise—whether, on balance, the benefits outweighed the risks?
Stephen Lovegrove
Perhaps I can sum it up in a different way. The financial analysis and the cost-benefit analysis at the back end of 2013 was neutral, and these factors were strongly positive. Unfortunately, it is not possible for us just to ignore the legal obligations we are under, but I take your point. Nevertheless, it is still the case that because of the fundamentally better structure of the CfD it would be better to proceed with the contracts as CfDs than to continue with ROCs.
Mr Burrowes
I appreciate that you can’t ignore the legal obligations, but from a market position, in terms of investment, it would still have been the appropriate course of action.
Hugh McNeal
Looked at from now?
Mr Burrowes
Yes, and from then.
Hugh McNeal
Just to give a bit of flavour, I was working on the Siemens deals—there were two investments—and we tried very hard to land that deal last summer. Lots of people across all political parties worked very hard on that, and there are two new factories. We tried to land that deal last summer before the decisions on this scheme were made, and we were not able to do so. After Dudgeon made its decision to go ahead with purchasing 67 turbines in January from Siemens, we were able to leverage that and other things. It does not matter who had been successful through this process to get some leverage and to finally land that £310 million deal in March. The knock-on effects are not just in the Humber region. Siemens have added another 150 staff in Newcastle. They have 900 people there now and 85 apprentices. That is going to be servicing the Dudgeon contract. At least on that one point, we can now say that some of those benefits are starting to be realised.
Jill Goldsmith
I want to come back to the cost-benefit analysis. The cost-benefit analysis in paragraph 2.10 talked about being broadly neutral. We observed that was on the basis that all went ahead or all were delayed or cancelled. There was not an analysis of a different scale of the scheme at that time.
Mr Burrowes
Are there milestones that may lead to a review of that business case?
Hugo Robson
The business case was during 2013.
Chair
It’s a yes or no.
Mr Burrowes
Are there milestones or triggers that will lead to a review of the business case?
Hugo Robson
There were triggers in terms of—
Stephen Lovegrove
The business case leads to a go or no-go decision, basically, and it is a go decision.
Mr Burrowes
Okay, but it is based on a cost-benefit analysis that it will all go ahead as planned. If there are changes or problems along the line, will that lead to a review of the business case?
Stephen Lovegrove
That particular business case—no, it won’t because—
Mr Burrowes
So it is fixed, whatever happens?
Stephen Lovegrove
The business case was designed to inform a go or no-go decision for Ministers to take.
Mr Burrowes
So it is go, go, go, whatever?
Stephen Lovegrove
These eight contracts are go, yes.
Hugo Robson
We move on to an evaluation. We will monitor the eight projects.
Chair
But you have spent 58% of the money.
Hugo Robson
Those are the additional stages post the business case, where we need to monitor the projects.
Mr Burrowes
At the time of the business case approval, there were no clear monetised benefits. When will there be clear, monetised benefits?
Stephen Lovegrove
I have to take you back. The monetised benefits arise from the fact that the CfD is a greatly better instrument than the ROC.
Chair
That is the assertion. It is not proven yet. That is an assertion.
Stephen Lovegrove
It is in the document from the NAO. There is a list of the hurdle rates. It shows that the hurdle rates are lower.
Jill Goldsmith
Potentially at a higher cost you might have got a competitive—
Chair
If, if, but, but.
Stephen Lovegrove
Yes, but we would not have got to a competitive allocation without—
Mr Burrowes
Aside from the rationale, have you planned this in terms of the business case and the plan? Will there be a date when there will be clear, monetised benefits?
Stephen Lovegrove
I am wondering which counterfactual we would have to try to assess that against.
Mr Burrowes
Let’s put it a different way—is it part of the planning that there will come a stage when you are clearly able to benefit—to monetise the benefits and the value to the taxpayer?
Stephen Lovegrove
We need to be clear about what the business case was trying to answer. We have no problem coming back to you and demonstrating to our best ability that the CfD has, indeed, proved to be a better instrument that the—
Mr Burrowes
When could that realistically be?
Stephen Lovegrove
When do you think we might be able to come back to the Committee and give some further information about that?
Hugo Robson
I would have thought probably in about six months, in terms of the next stages of reviewing the projects. We can come back with an evaluation plan immediately and give you some more information, but in terms of being able to start monetising those, it will take a considerable amount of time before one is able to look back.
Mr Burrowes
Let’s say in six months you can come back with clarity on the monetised benefits. Would that lead to any change of direction of the go, go, go—if we have go the eight contracts—or will it affect the wider plan in relation to allocation processes?
Stephen Lovegrove
There are effectively eight projects that are underneath the FID-enabling for renewables banner—that is, the contracts in here. All things being equal, we will not be revisiting the decision to award investment contracts to those projects.
Mr Burrowes
That is definitely fixed, whatever happens?
Stephen Lovegrove
Not all of the contracts have been signed. Contracts are never signed until they are actually signed. It is our intention to sign these contracts.
Chair
Have they all got planning permission?
Hugo Robson
They are all signed and they still have conditions outstanding.
Chair
Have they all got planning permission?
Hugo Robson
They don’t all have planning permission.
Chair
So if they don’t get planning permission you have signed a contract, what then? No doubt we will cough up money—
Stephen Lovegrove
You’ve been saying that we only have 42% left. That money would not become part of the 58%; it would become part of the 42%, as it were.
Hugo Robson
We only pay the money when they are producing electricity. So if they fail to get planning permission at that point the contract falls away.
Mr Bacon
The contract has no clause whereby you would compensate them in circumstances where they failed to get planning permission.
Hugo Robson
If they get planning permission—
Mr Bacon
No, if they fail to get planning permission does the contract not have any clauses where you would compensate them because of the failure to get planning permission?
Hugo Robson
No, it doesn’t. We would pay no compensation in those circumstances.
Mr Bacon
We were looking at some waste incinerators last week where failure to get planning permission triggered substantial compensation of tens of millions of pounds. We were not quite sure why, but it did. We were assured that it did. You are saying there is no such compensation.
Hugo Robson
There is no compensation—
Mr Bacon
I want to be clear about this. You are saying that it is possible to do a project, a project of such hideous complexity that PFI looks simple by comparison, pace Mr Lovegrove, and yet not have any compensation if there is a failure to get planning permission. That is correct?
Hugh McNeal
Yes.
Mr Bacon
Thank you.
Mr Burrowes
As we move to next year in the allocation process, is there a commitment to have a comprehensive review to ensure that maximum value for money for the consumer is delivered? Secondly, is there a wider roadmap that will ensure that there is increasing competition in the CfD allocation process which includes contracts for nuclear generation?
Simon Virley
Do you want to do the first bit on evaluation and then I’ll pick up the question on competition?
Hugo Robson
In terms of the evaluation of this scheme, as we have said, it has now effectively been completed subject to state aid approval and is moving through post-state aid approval. We will monitor not only the eight projects that have been successful but will also work closely with the counter-party body which is there to manage the contracts. We will be looking to get as much information from those—
Mr Burrowes
I am sure you will be monitoring but will there be a comprehensive review? [Interruption.]
Chair
You have to say yes or no as we have a Division.
Hugo Robson
There is no specific date for a review. Sitting suspended. On resuming—
Mr Burrowes
So we had no to a comprehensive review. The second part was whether there would be a clear road map towards increasing competition in the CfD allocation process, which will include contracts for nuclear generation.
Simon Virley
The plan is to move to competition for all technologies as quickly as possible. We are looking at the numbers now for whether we can move to competition for the first allocation round this autumn, and that is a possibility. We are still working through the numbers and Ministers have to make some final decisions, and it is dependent on the number of applications that come forward, but the long-term trajectory here is to move to competition for all technologies. It is just a case of how quickly we can get there.
Mrs McGuire
I want to come back on Richard’s point about compensation, so that we are clear what the word “compensation” does and does not cover. Will there be any recompense, which can be quite different from compensation, for development costs, fees and anything that is associated with the bid for planning consent, so that we can be utterly clear and do not have to come back in a year’s time and say, “Well, actually that is not covered by compensation”?
Hugh McNeal
They don’t get coverage now, and they won’t get it in the future. People know that they take forward projects under the RO at their own risk, although they know that they will get a contract at the end—
Mrs McGuire
So they are taking all the financial risk.
Hugh McNeal
Yes.