rose to move, That the Grand Committee do report to the House that it has considered the Renewables Obligation Order 2006 (Amendment) Order 2007.
The noble Lord said: The Government are bringing forward this amendment order to make some changes to the renewables obligation. There is strong and indisputable evidence that climate change is happening and that manmade emissions are its main cause. We have set ourselves some tough targets with a goal of putting ourselves on a path to cutting the UK’s carbon dioxide emissions by 60 per cent by around 2050, with real progress by 2020. Our domestic targets are, of course, now further reinforced by the EU agreement last week to source 20 per cent of EU energy from renewables by 2020. The Government regard the development of a range of renewable energy sources as playing a vital element in contributing to this target and so addressing climate change; the renewables obligation is our key mechanism for achieving that.
The renewables obligation places a requirement on electricity suppliers to source an increasing proportion of their sales from renewable sources. Since the introduction of the renewables obligation in 2002 we have more than doubled renewable generation and, year on year, we are seeing increasing amounts of new capacity coming through. In 2004, there were 240 megawatts of new wind build. That increased to 446 megawatts in 2005 and to over 630 megawatts in 2006.
Neither is it all about wind. Last year work started on the 100 megawatt Glendoe large hydro scheme, the first large-scale conventional hydro plant to be built in 50 years. We are also seeing a newer type of technology being utilised, such as the building of new dedicated biomass power stations in Lockerbie and Teesside. These will provide around 70 megawatts and more than 300 jobs between them. It is schemes such as these which when built will contribute to our renewable targets and tackling climate change.
The renewables obligation is working well but in order to bring on more generation from emerging renewable technologies, such as offshore wind and wave and tidal, we announced as part of last year’s energy review a number of long-term changes; in particular, banding the RO to provide differentiated support to different technologies and extending the level of the RO to 20 per cent. Those are long-term changes, however, and the earliest they can be introduced is April 2009, subject to parliamentary approval. Meanwhile, we want to ensure that the RO continues to work effectively. The order before the Grand Committee does not attempt to change the RO in any fundamental way but introduces some limited changes that will improve its effectiveness. These changes are mainly about the processes and administration of the RO. They stem from consultations carried out as part of the 2005 RO review as well as last year’s energy review. There are also changes that we hope will ensure the continued development of the energy crop market in the UK and a small change to biomass fuel measurement. Let me spend a little time outlining each of the changes. I will take them in the order that they appear in the amending order.
The first change is to provide a new definition for energy crops. This new definition will mean that if an energy crop is planted after 31 December 1989 and is either Miscanthus (elephant grass), Salix (willow) or Populus (poplar), there will be no need for the generator to produce evidence demonstrating this when it submits its claim for renewable obligation certificates—ROCs—to Ofgem. The change will reduce the administrative processes that generators using these named energy crops currently have to undertake. These crops invariably are used for energy purposes and as such have very limited alternative markets.
The second amendment is to the treatment of biomass fuels. Under the current legislation, if a power station burns two fuels, one where 94 per cent of the energy content derives from biomass and the other where 88 per cent of the energy content derives from biomass, the power station is unlikely to be eligible for ROCs. The proposed change to the RO would resolve this difficulty because if a power station burns more than one fuel stream, then as long as 90 per cent of the total energy content of those fuels is derived from biomass the generator will be able to claim ROCs.
The third amendment is a further change for generators burning energy crops. As I mentioned earlier, in the long term the Government are looking to band the RO, and that was announced in the energy review last year. The change to the RO that we are proposing today is to ensure that the UK’s energy crop market continues to develop between the energy review announcement last year and the possible introduction of banding.
Co-firing is the most economic technology eligible under the RO. To limit the amount of subsidy it receives the current legislation sets out caps on the amount of ROCs from co-firing with which a supplier can meet its obligation and, from 2009 onwards, requires a minimum percentage to be sourced from energy crops.
If our proposals for a banded RO were introduced in 2009, the caps on co-firing would be lifted and support levels for non-energy crops reduced. However, until then, this interim change would allow a change to the co-firing rules to enable co-firing of energy crops outside the existing co-firing caps. This means that ROCs awarded for the co-firing of energy crops would not contribute to a supplier’s 10 per cent co-firing limit, creating an additional market for energy crops and so removing the need for the minimum energy crop percentages that would have been required from 2009 onwards.
The next change is an administrative simplification for all generators participating in the RO. Currently, to claim a ROC a generator has to demonstrate that the electricity has been generated and supplied in the UK. That means that where a generator—and this particularly applies to microgenerators—is consuming its own electricity, it has first to sell it to a supplier before buying it back for its own consumption. To do that, generators have to enter into a contractual arrangement called a sale and buyback agreement. That is an administrative burden that we would like to remove. The amendment to the RO means that generators who are consuming their own electricity will now be able to claim ROCs for that without the administrative necessity for a sale and buyback agreement.
The next three changes apply just to small generators; that is, generators which are 50 kilowatts and under. Last year’s energy review made it clear that the Government are committed to the long-term future of microgeneration and the Government’s microgeneration strategy sets out our policies to promote greater uptake of these technologies. Although the RO is designed for large-scale deployment of renewables, small generators are also able to participate. These changes are designed to reduce administrative barriers to accessing the benefits of the RO that small generators may experience. The first of these is to allow agents to act on behalf of small generators, not just in the RO accreditation process but also in the claiming and issuing of ROCs. This will remove a level of administration which we know can be a burden.
The second change is to require that where agents are acting on behalf of one or two small generators, they amalgamate the output of those generators. This will mean that small generators can benefit from the RO by joining forces with others in the same boat where previously they may not have generated enough to make claiming ROCs worth while. Not only will that reduce administrative burdens but there is also an opportunity for a market for agents to emerge. These agents will have the expertise to gain the most benefit from the RO. While these changes will allow small generators to use an agent, there will be no compulsion to do so. That means that small generators can continue to operate on an individual basis if they so wish.
The final change is a further administrative simplification. Small generators have the option to make monthly or annual claims for ROCs. However, if they wish to make annual claims, under current rules, newly accredited generators must provide a minimum notification period to Ofgem. Depending on the timing of this, it can mean that not all their output can be counted towards their ROC claim. We therefore propose to amend the legislation so that there is no minimum notification period for newly accredited small generators which wish to make annual ROC claims. Instead they will simply need to notify Ofgem at a point of their choosing as long as it is prior to their first annual ROC claim.
I recognise that some of these amendments are technical and fairly detailed. I would like to reassure noble Lords that these changes have been the subject of a statutory consultation which received broad support from the renewables industry. I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the Renewables Obligation Order 2006 (Amendment) Order 2007.—(Lord Evans of Temple Guiting.)
I thank the Minister for explaining the order at considerable length—I am sure that we have all benefited. Renewable sources of energy clearly have an essential role to play in reducing the carbon emissions that cause global climate change. We on these Benches are committed to supporting the development of a viable renewable energy sector in the United Kingdom and, indeed, to encouraging the development of renewable generation sources worldwide.
The renewables obligation—the Government’s present approach to supporting renewable sources of energy—has increased the amount of United Kingdom electricity coming from renewable sources, which is to be welcomed. However, the policy has not been without its problems. Perhaps the Minister could explain why the renewables obligation presently costs up to seven times more than other government policies per unit of carbon abated and why the Government have hitherto ignored micro-renewable energy sources.
Furthermore, it is widely acknowledged that the Government have created perverse incentives whereby generators deliberately limit the amount of renewable electricity they produce. What action are the Government proposing to take to amend the incentive arrangements so that those practices cease?
Clearly, there remains an urgent need for improvement. We are looking at ways of reforming the renewables obligation so as not only to put these problems right but also to develop renewable energy sources faster.
I have only a couple of further questions for the Minister at this stage and would be most grateful for answers. It appears from note 4.1 to the Explanatory Memorandum that a licensed electricity supplier, producing electricity from a renewable source, will be able to discharge its obligation by producing renewable obligation certificates relating to renewable electricity, which is not supplied to customers. From what the Minister said, I think I understand that this is so that a producer who produces renewable energy for its own use is not adversely prejudiced by the system. That seems right and fair. After all, it would mean that the producer is not using electricity which otherwise might have come from a non-renewable source. Will the Minister confirm that I have got that right and help me with this question as well? How will the order prevent a situation in which a licensed electricity supplier, whose main business is the production of power from a fossil fuel source, might install, say, a wind-powered turbine, in a place where there is adequate wind to produce energy only at times of day when there is no market for it? Although it is a completely spurious project, the company is nevertheless able to claim its full allowance of ROCs.
Paragraph 7.2(f) of the Explanatory Memorandum, which I think expands upon Article 3(3) of the order—the Minister spent some time on this—provides that a fuel which is not biomass is to be treated as biomass when it is used with at least one other fuel and 90 per cent or more of the energy content of those fuels is derived from biomass. Am I right in deducing that the purpose of this is to allow the use, alongside biomass, of other energy sources such as straw, which, although they are not defined as biomass—for example, because they are not grown specifically for electricity generation purposes—are nevertheless renewable? Whether or not that is the case, how does the order prevent such materials as—to take an extreme case—diesel, which might have become slightly polluted so that it cannot be used for its intended purpose, being used legally under this loophole?
I reiterate that we are committed to and supportive of the development of a viable renewable energy sector. I look forward to the Minister’s answers to these and other questions.
We on these Benches also welcome the order. All these points have been raised at earlier stages, especially when we debated this last time. It is good to see that the Government have taken on board most of those points and answered many of them, especially on co-firing. It was not seen as a priority as I believe the Government thought that coal would not be a primary source of energy in the future. But as we have seen, especially with the rise in the spot price of gas, co-firing has become a real issue. Therefore, the introduction of co-firing using biomass is a very important way of reducing carbon emissions.
I have one question on this. The issue with co-firing is that if biomass and energy crops are used, they would flood the market. What progress has been made on the banding discussed with the industry—namely with the big power stations such as Drax, the country’s major polluter, although it is trying to utilise the largest co-firing element—and will that banding affect the type of biomass? I ask that because waste biomass is around three times more expensive than coal. Indeed, energy crops can be five times as expensive.
The other points on microgeneration are particularly helpful, especially those concerning buyback. When I looked into building a small turbine on a grid connector system, I found it incredible that although I would be able to sell energy to the grid at 2p per kilowatt hour, I would have to buy energy back at 5p per kilowatt hour. I understand that the distributors have some costs to meet, but it is rather unfortunate that we have such a major impediment in the system. We support the order.
I am grateful to the noble Lords, Lord De Mauley and Lord Redesdale, for their questions. This is, as I said, a rather technical order and I may not be able to answer all the points raised, but a letter will deal with any points that I fail to respond to.
The noble Lord, Lord De Mauley, asked why the RO costs seven times more. The changes to the RO announced in the energy review are intended to clarify the Government’s long-term ambition for renewables and so create greater certainty for ROC prices by extending the level of the RO to 20 per cent. Additional targeted support is also being provided for emerging technologies and we will promote achievements towards our long-term targets by providing different levels of support for different technologies, as well as by managing costs to the consumer. That response probably does not answer the question of why the RO costs seven times more, but the detailed explanation will be set out in a letter.
The noble Lord went on to ask about the removal of the requirement for sale in buyback agreements. This removal is for administrative simplification. Obtaining sale and buyback agreements can be difficult, particularly for small generators. ROCs will now be issued for own consumption without the need for a sale and buyback agreement. We are aware of the concern that this may impact on ROC prices, but we believe that it will be very limited. Less than 1 per cent of total electricity sales are accounted for in sales and buyback agreements.
The noble Lord also mentioned microgeneration, as did the noble Lord, Lord Redesdale. The Government are fully committed to promoting microgeneration. In our view, which I know is shared by many noble Lords, microgeneration has a significant role to play in meeting our energy policy objective of sustainable and secure energy supplies for all. In the energy review published last July the Government announced a comprehensive review of the incentives and barriers that impact on distributed electricity generation. In March 2006, we published our first ever government strategy on the promotion of microgeneration. We launched the new carbon buildings programmes in April 2006, offering £30 million in capital grants over three years to successful applicants, with a further £50 million made available in the 2006 Budget. That demonstrates the Government’s commitment to the importance of microgeneration.
The noble Lord, Lord De Mauley, also made the point about the development of non-viable wind farms. The RO provides support for megawatts of electricity produced. It is up to the market to decide whether a wind farm is economically viable.
The noble Lord, Lord Redesdale, asked about consulting on co-firing. The Government are consulting widely with industry on banding, RO, including different types of support for different forms of biomass used in co-firing, and particularly on more support for energy crops. As I said, this is a technical order. A number of questions have not been answered but, at the beginning of next week, we will get a letter to all noble Lords who have taken part in the debate.
On Question, Motion agreed to.