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Energy Bill

Volume 704: debated on Wednesday 22 October 2008

Report received.

Clause 20 [Terms and conditions]:

1: Clause 20, page 11, line 13, after “authority” insert “, after consulting the licence holder,”

The noble Lord said: My Lords, the amendment is in the name of my noble friend Lord Hunt of Kings Heath. It concerns the terms and conditions of carbon dioxide storage licences. I hope that noble Lords will find it helpful if I briefly outline Clause 20 and explain why and how we propose to amend it.

This clause allows licences to be granted on such terms and conditions as the licensing authority sees fit. One such potential licence condition is specified in subsection (3)(d), which states that the licence may include a provision,

“enabling the licensing authority to modify the licence in specified circumstances (with or without the consent of the licence holder)”.

In Committee, the noble Baroness, Lady Wilcox, proposed an amendment to this provision which would require the licensing authority to consult the licence holder prior to making any such modifications to a licence. She pointed out that such an express duty would provide certainty to commercial operators, and we agree with that broad objective. Therefore, while it has always been our intention to consult the licence holder in such circumstances, I agree with the noble Baroness that it is desirable for a duty to consult to be stated expressly in the Bill, which is why the amendment is proposed. I am therefore grateful to the noble Baroness for tabling her helpful amendment in Committee and ask the House to support this amendment. I beg to move.

My Lords, I thank the Minister for tabling the amendment in response to our debate on consultation in Committee. As he said then, putting in the Bill the explicit intention to consult properly before modifying the licence would add regulatory certainty and wider confidence in the regime. I am very pleased to accept the amendment as a result.

On Question, amendment agreed to.

2: Before Clause 32, insert the following new Clause—

“Capture of carbon dioxide competition

In any competitive process relating to the capture of carbon dioxide initiated by the Secretary of State, equal status should be given to all technologies relating to the capture of carbon dioxide.”

The noble Lord said: My Lords, the amendment relates to an important part of government strategy, which is the continued use of coal as an energy source in a low-carbon economy. The only way that we can do this is to take out carbon dioxide from the generation of electricity through coal. This is very important technology. It is interesting that, although we sometimes say that we lead in this area, Germany last month launched the first power station in Europe with carbon capture and storage technology, and the United States and Norway are on a similar path. Yet in the UK, competitions have been based solely around post-combustion technology. The Americans have gone down a different route. There is always an inherent danger in Governments trying to choose or restrict the technologies with which industry experiments to try to bring forward this important technology. The amendment would make sure that the criteria are broadened and that, in future competitions, both pre-combustion and post-combustion technologies are allowed to be tendered for. The European Parliament has recently debated in the context of the energy packages there being some dozen experimental sites for carbon capture and storage within the European Union, to be functioning by 2014. I hope that we will have a number more of those in the United Kingdom, but it would be very dangerous if we restricted it to a particular type as has happened so far.

Carbon capture and storage is absolutely key to medium and long-term energy needs within the United Kingdom, and towards our climate change objectives. It is, therefore, undesirable to restrict the technologies that the private sector is able to move forward, to experiment with, or to prove at this stage. I beg to move.

My Lords, we have a great deal of sympathy with this amendment. I am in complete agreement with the noble Lord, Lord Teverson, about the inadequacy of government policy in this area. In Committee, the Minister said that:

“The Government’s commitment to all carbon capture technologies is clear”.—[Official Report, 12/6/08; col. GC 298.]

Yet he signally failed to demonstrate the effectiveness of that commitment. The Government’s competition was notable for its exclusion of promising technology, the delay that one has come to expect from the Government—not just in this area—and the eventual disappointment of many companies, which optimistically believed that the level of promised government support would be meaningful.

I would have more sympathy for the Government’s concern for the cost in supporting technological development in this area if they were not so keen to promise the world in statements to the press and to stakeholders. They claim to understand the importance of carbon capture and storage technology, but then talk of various bodies having CCS “as a possible theme”. As the private sector continually has to pay for the Government’s half-baked commitments that lead nowhere, it is becoming apparent that government policy towards CCS technology is not saving money, merely wasting it.

I feel that I am repeating myself. The Conservative Party policy is clear on this. We have learned how counterproductive it is when Governments try to pick the winner, and we would support both pre- and post-production technology.

My Lords, if there is to be a competition and the noble Baroness is saying that there should be a wider range of competitors, then if we are to take advantage of both technologies, or maybe even a third, should there not be three winners—one from each section? If they are going to have that, would she favour increases in expenditure or a reduction in the prize so that it could be divided into three?

My Lords, I always expect interesting questions from the noble Lord. As your Lordships know, my party will do anything rather than spend money unnecessarily.

My Lords, my noble friend’s question was very interesting because it related to the resources that should be deployed on this issue. As we had extensive debate in Committee, I understand the positions of the noble Baroness and the noble Lord, Lord Teverson, and I appreciate that in an ideal world the Government could conjure up resources from any quarter and invest in developing strategies and competitions for every conceivable solution to the enormous challenges that we face on the question of carbon capture and storage. However, government is about choice and the effective and accurate deployment of scarce resources.

I understand when the noble Lord, Lord Teverson, says that others are busy in this field. Of course they are: when this issue is crucial to how we tackle climate change and meet our carbon targets worldwide, does anybody think that the United States is likely to stand idly by, when it is all too well aware of the potential marketability and advantages of producing an effective carbon capture and storage system? Norway is, of course, also interested since it has extensive gas and oil areas, parts of which can now be used for carbon storage as they are exploited, provided the technology can be established. Those countries will play their part and, of course, Germany and other countries in the European Union are looking at this issue. What I want to emphasise is, contrary to the two contributions from the opposition Front Benches today, how much progress the Government are making in this area. We are significantly in the lead. The Bill is an enabling framework that will allow the safe storage of carbon dioxide offshore. It does not address the capture or transportation elements of the carbon capture and storage change and, as such, does not provide for government competitions for carbon dioxide storage demonstrations, or regulate the type of technologies that may be deployed via such competitions. In other words, the provisions are technology neutral.

The Government already support a range of technologies through a variety of different initiatives, including the Environmental Transformation Fund, which was set up in April to encourage and fund industry-led demonstration of carbon abatement technology projects, including CCS. To date, more than £2.2 million has been granted via the fund, £8.8 million for various research projects supported by the research councils and the Technology Strategy Board. We have championed the inclusion of CCS into the EU-ETS directive and pushed for a European-wide financing mechanism for CCS, because it is clear that we will solve these problems not on a national basis alone but on a much wider basis, in which the European Union plays its part. We are also hosting the Carbon Sequestration Leadership Forum ministerial conference in London in autumn 2009. The meeting will provide a forum for the examination of key carbon capture and storage issues among the political and industry leaders.

All the initiatives that I have outlined give equal status to all carbon capture technologies, which is consistent with the Bill and the amendment. I hope therefore that the noble Lord will feel reassured that the Government see CCS as a priority. We are showing global leadership in facilitating its demonstration and deployment, irrespective of the type of carbon capture technology. The only area in which the Government have had to make a deliberate choice regarding a capture technology is in relation to our competition for a commercial-scale demonstration project with power generation. There are sound reasons why we have made this choice. The potential contribution of CCS technologies in mitigating global climate change cannot be underestimated. I know that the amendment was inspired by exactly that consideration.

The Stern report envisages that CCS would need to contribute up to 28 per cent of global carbon dioxide reductions needed by 2050. That is a massive contribution to the overall challenge that faces the whole world. This clearly indicates the importance of remaining focused on CCS as a global solution. For it to be deployed on such an extensive scale, the technology first needs to be demonstrated on a commercial scale. That is why we announced that we will support one of the world’s first projects demonstrating the full chain of CCS technology on a commercial-scale power station.

The key objective of our project is to demonstrate a technology that is relevant and transferable to global markets. It is of fundamental importance that actions we take in the United Kingdom can also assist other countries in taking steps towards tackling their own emissions. Climate change is a global problem that requires multilateral and multinational solutions. The House will appreciate that coal consumption in power stations in Europe is dwarfed by the amount of coal used elsewhere in the world, particularly India, and of course with the enormous growth of China. One extraordinary fact is that China builds one coal-fired 1-gigawatt power station every four days. That translates to the equivalent of two new Drax 4-gigawatt power stations every month. That is the scale on which China is expanding its power production. That is why we have to look at this issue in terms of the contribution which the United Kingdom can make. I hope that I have already reassured the House that we are very much in the lead on this issue. There are also immense implications and, indeed, opportunities if we get the technology right.

There are also clear advantages of focusing on post-combustion coal technologies. Depending on the type of power station built and the rate of construction, it is estimated that the new-build coal-fired power stations in China alone could emit around 260 million tonnes of carbon dioxide each year. That is almost double the carbon dioxide emissions from the whole of the United Kingdom economy, not just power, but transport and heat as well as electricity. The fact that post-combustion technology can be retrofitted to existing power plants ensures that carbon dioxide emissions that are otherwise locked in through existing and planned new-build power stations can be tackled by installing post-combustion carbon capture technology in the future.

Noble Lords should contrast that with the issue that we are being invited to consider in the amendment. The deployment of pre-combustion technologies is not yet widespread, and it may take years for this to become the case. Because pre-combustion technologies cannot be easily retrofitted, they will have, however successful they are, less relevance over the medium term, when the focus must be on controlling emissions from key developing countries such as India and China.

I hope therefore that I have explained why early demonstration of post-combustion capture, which can be readily retrofitted, is fundamental to combating carbon dioxide emissions on a global scale. I am confident that we have made the right decision in focusing the competition on post-combustion and stand wholeheartedly behind this decision.

The noble Lord has deployed his case with his usual skill. I know that we are criticised for supporting one commercial-scale demonstration project, yet supporting one project alone represents a significant public commitment that only two other countries in the world are matching. To suggest that the Government should be supporting two or three demonstrations is simply not realistic. We are doing more than any country in the world in this area. That is something in which the House should take pride, rather than being overly critical.

In summary, while—

My Lords, before the noble Lord sits down—bearing in mind that we are on Report—the noble Lord, Lord Teverson, asked about the German plant. It is small, but they claim to have a working CCS plant. Can the Minister tell us anything of what the Government know about that?

My Lords, we of course follow such developments with the keenest interest. The noble Lord will recognise that we are concerned; as I mentioned, we are taking the lead at a conference next year. We are interested in the European response to these issues; there is no doubt that Europe can play a significant part. However, the noble Lord will appreciate that my case is that we could not afford, nor could we be expected to afford, the possible backing of a range of technologies at the enormous cost involved without any guarantee that they would prove successful. We have set up a competition for one which is promising and in which there is a great deal of activity. It potentially produces, as I have demonstrated, benefits that are more widely spread than the pre-combustion technology that the noble Lord, Lord Teverson, brought to the House’s attention.

I am in no way in conflict with the noble Lord’s intentions. I know how well he appreciates carbon capture and storage as a solution in this area. We are as one on that. The issue is whether the Government have the decisions right in backing one technology in circumstances where resources are inevitably limited. I hope that the House will recognise that the Government have strong reasons for pursuing its strategy, and that we are hopeful that it will produce benefits not only for the carbon emissions level and economy of the UK, but for the whole world.

My Lords, before the noble Lord sits down, I declare an interest as president of the Carbon Capture and Storage Association. I am sympathetic with the amendment. However, given the financial circumstances in which the Government find themselves, I am clear that they really made the only decision that they could if they could support only one technology. No one believes that carbon capture and storage is in itself a complete answer to the world’s problems. Equally, it is clear to anyone who looks at the numbers, as the Minister pointed out, that there cannot be a complete solution without some carbon capture and storage.

I am personally of the view that we will ultimately end up with the present technology. There is a great deal to be done. On the other hand, it would be encouraging if the Minister could give an assurance that, at the research level, the essence of the amendment would be respected. That is the important element.

My Lords, I am grateful for the noble Lord’s intervention, which has extended and advanced my argument in response to the amendment. The House will recognise his great authority in this area. I reassure him that, in my description of the Government’s support for various strategies, continuing research is important and we are indicating the resources that we are prepared to extend on that.

More generally, I know that no one in the House does not share the Government’s—in fact, our whole society’s—objectives on the successful combating of climate change and the issues that the world faces. While I ask the noble Lord, Lord Teverson, to withdraw his amendment, he has occasioned the opportunity for the Government to deploy our full case. I hope that I have been able to reassure him that he is quite safe in withdrawing the amendment.

My Lords, the Minister eloquently described the size of the problem. That is why the amendment is drafted in the way that it is. As regards the point made by the noble Lord, Lord Oxburgh, there is a lot of uncertainty about these technologies, which is why the schemes we are discussing are demonstration projects. We know that the technologies probably work, but we do not know what efficiencies will be lost in electricity generation through their application. That will have a major effect on the efficiency of power generation from coal in the future. We also know that the nuclear technology the Government are pursuing is characterised by base-load non-variability. That is why coal, or a predictable variable source of energy generation, will be even more important in the future. I say to the noble Lord, Lord O’Neill, that the developed world cannot afford not to pursue urgently a number of these technologies. There is a solution, of which the noble Lord is no doubt aware, and which perhaps ties in with the Minister’s reply in that at a European level the—

My Lords, does the noble Lord recognise that the cost involved in carbon capture and storage is not just that of the technology at the power station but of pipeline technology, transport technology and the whole technology of deep-sea or underground storage? It would be misleading to suggest to the wider public that the technology costs are overwhelming as regards this particular matter, important though it is. The other expenditures, for example on research, are very much larger than that on technology not at the coal face but at the power station.

My Lords, I absolutely agree. That is why it is so important that these demonstration projects determine what that cost is and how viable coal is as a future technology and what contribution it can make to the energy mix within a low-carbon economy. That is the entire point. I was going on to say that it is suggested that the 12 demonstration projects debated as part of the energy package within the European Parliament should be financed by the European trading system, which is perhaps the way to do this. However, it will be some time yet before any real revenue will come from those sources.

My Lords, on the question of time, does the noble Lord also agree that the most optimistic estimate of commercially viable equipment being available on the market, which has been made by Doosan Babcock, one of the leading British players in this, is that at the very earliest it will be 2020 before any kit of any size can be bolted on to a power station anywhere in the world? The German scheme of which he spoke I think produces something of the order of 30 megawatts. That is a very small output; it has a long way to go.

My Lords, I again completely agree with the noble Lord. The German installation is not seen as a commercial venture, but provides evidence on the type of issues that we have been talking about. But because the timescales are long, it is important to understand as soon as possible how viable and how economic this technology is. However, having heard what the Minister says, I accept that in general the Government are technologically neutral. But I hope that in any future competition a broader view is taken in this area. The European Union as a whole has to ensure that a broad range of demonstration projects are brought forward quickly that really show how much we can depend on coal in a low-carbon economy. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

3: Clause 37, page 27, leave out lines 29 to 33 and insert “any grant which is payable out of public funds and awarded under or by virtue of an Act of Parliament, except a grant awarded to support or promote research and development.”

The noble Lord said: My Lords, I have interests in relation to renewable energy declared in the Register of Interests, although I have no financial interest in the Beatrice offshore wind project which I shall refer to not in relation to the companies involved but as a customer of Scottish and Southern Energy, although Talisman has an association with the MREDS project whose steering committee I chair unremunerated for Heriot-Watt University.

I hope that there would be a shared, common objective between myself and the Government—it might be too much to presume that this involves all Members present—to wish to see major expansion of our country’s offshore renewable capacity. The announcement yesterday of a 194-megawatt offshore wind project off Lincolnshire has been claimed as putting the United Kingdom at the top of the league as far as offshore wind generation is concerned. I am sure that even the Minister would agree that there is still some considerable way to go to meet the target set by the previous Secretary of State, John Hutton, last December.

I have mentioned the Beatrice development, the significance of which is that it is in deep water. Most Members would agree that to achieve the very ambitious targets that have been set, there is considerable importance attached to research and development. That project received research funding from the European Union’s sixth framework research and technological development programme. It received support for its research work from the then Department of Trade and Industry’s new and renewable energy programme and from the previous Administration in the Scottish Executive. It has already delivered a number of significant engineering achievements: the installation of the first turbine in international waters 25 kilometres from shore in water depths of more than 45 metres; the offshore installation of the next generation of a 5 megawatt turbine; the use of jacket substructures in the offshore wind industry; the onshore assembly of the complete turbine—tower turbine and blades—and the transportation of that to shore installation as a complete unit and the offshore installation using a floating vessel and a soft landing system. Each one in itself is a significant engineering achievement and cumulatively they mark out the significance of the project.

The concern that my amendment seeks to address is that, under the Bill, that project would not be eligible for both an upbanded ROC and for the research grants that it has already received, and it gets the option of returning the research grants if it wishes to receive an upbanded ROC. I am grateful to the noble Baroness, Lady Carnegy of Lour, for indicating her support for the amendment, the purpose of which is that grants paid as part of support or promotion of research and development would not fall within the general definition of grants that might have to be handed back.

I have been in extensive correspondence with the Minister’s predecessor, and I thank members of the Bill team who agreed to meet me to discuss these matters. I was certainly encouraged, as were people who made representations to me on this issue, by the letter that I received from the former Minister, Malcolm Wicks, dated 12 September, in which he said:

“We would like to reassure you that it is not our intention to discourage investment and hamper technology development. As you point out, our consultation document made clear that we do not believe that in future a banded Renewables Obligation alone will be sufficient to bring forward technologies which are further from commercial development. It is our intention that such future research and development projects will receive banded ROCs and a grant”.

That is very welcome, and anything that the Minister can say from the Dispatch Box—and on the record—would be very welcome indeed.

Although there appears to have been some reassurance on the position with regard to future projects, I shall address the question of historic projects. I understand the point that the grants were given and accepted, that the companies concerned made a commercial decision at the time and that in some respects we should not be revisiting it. There are a number of points to make in response to those arguments. First, it was understood during the consultation process leading up to the energy White Paper that there is a distinction between grants related to research and development and post-demonstration projects that were in receipt of a capital grant—for example, some of the round one wind projects such as Scroby Sands.

However, the clause as drafted covers all grants—at least potentially, because it would be applied by order. Secondly, by taking head-on the expectation that only a single ROC, not an upbanded ROC, would apply, the clause does not take account of the fact that since the grants were given and accepted, there has been a significant increase in the costs associated with the DOWNVInD project in particular. At that time, estimated costs were £28.6 million, but have reached an estimated £45.3 million. A number of important technical challenges have had to be addressed which have led to that increase. As a consequence of some of the changes that had to be made in terms of technology, the European Commission, in turn, required further tendering. Because of the time lapses, including the costs of shipping and the tugs that were required, costs grew considerably. Many of those increases were beyond the responsibility and ability of the developers to control them and were imposed upon them. Nevertheless, the costs were very real and were not foreseen when the initial R&D grants were given.

I wish also to make a comparison regarding the position previously taken by the Department for Business, Enterprise and Regulatory Reform on the availability of assistance for new stations for using biomass or mixed waste. It is my understanding that existing stations were to be exempt from grandfathering, and were rewarded upbanded ROCs, in line with new-build stations—a position that I would support. It would appear that a position has been taken with regard to new biomass or mixed waste stations, but that has not been carried through into the limited number of examples of marine offshore development. Certainly the number of ROCs concerned have been calculated to be only a very small fraction compared with those agreed for biomass or mixed waste stations.

Furthermore, under the terms of the grant assistance, the Government get their money back if the developments bear fruit. Some of the revenue has to be returned to the Government in proportion to the value of the grant for the overall project; and when the period of the grant expires, future revenue streams are looked at, a capitalisation is made and money is handed back to the Government up to the full value of the original grant. If a higher banded ROC is available, the Government might well get their money back sooner rather than later. We would all want that to happen. The Government not only get their money back but, thereafter, if we do not do anything about this, the company may get only the value of a single ROC and will possibly have to compete commercially against others that are getting a higher-value ROC. So there are good reasons why marine offshore developments should benefit from the R&D grant assistance and the upbanded ROCs.

This issue has been raised in some of the correspondence about state aids. Sometimes it is frustrating that state aids are used at every turn to try to block developments or initiatives that seem very much to go with the grain of other projects and policies that the European Union is trying to promote. The EU is very positively trying to promote the development of renewable energy and recognises the importance in connection with that. The project to which I have referred was in receipt of framework 6 assistance. Therefore, given the recognition of the importance of the development, I hope that that would not be an insuperable problem.

The projects do not necessarily offer a return to the developers but, rather, have represented some of the costs already incurred. Offering multiple ROCs would not be an offer of excess support, but would allow the developers additional and much-valued support to continue with an important technological development—one which we would all wish to come to fruition and make its contribution to the amount of renewable energy that we can generate offshore. On that basis, I beg to move.

My Lords, I have no financial interest to declare on this matter, but I have added my name to the amendment because I feel strongly about the issue discussed by the noble Lord. I tabled an amendment in Committee to make the same point, my own Member of Parliament, the MP for Angus, having raised the matter in another place and having received a not very satisfactory answer from the Minister. In the event, I could not be present when my amendment was called, so the Minister here has agreed that I can pursue the matter on Report.

What the noble Lord has said is of the greatest importance to certain firms, particularly those involved in the research and development of deep-sea wind and wave generation projects off the north-east coast of Scotland, in the Pentland Firth and elsewhere around our shores. Should the Bill stand as drafted, a number of vital, innovative projects may never happen at all.

What the Government are trying to do in the Bill may be logical for many renewable energy projects: the availability of various grants from various sources has been added to by the new system of banded ROCs in the Bill. It could be argued that, in some cases, a firm should not benefit from both and that they should not be paid twice over. As the noble Lord, Lord Wallace, has just said, it is possible to invoke European rules on that.

However, there are notable exceptions to that argument. Research and development when the sea is deep and the weather wild are exceptionally and unpredictably expensive. Such programmes are often attractive to firms only if they have some initial capital grant help to construct and deploy equipment and subsequent income support for the operation itself and for learning from it. Both grants and banded ROCs may well be needed in some cases. It must also be noted that research grants are not necessarily retained in their entirety, as the noble Lord, Lord Wallace, explained. Whoever awards a grant can claw back a considerable proportion of the money generated during the grant period and subsequently. Europe’s rule does not apply or, at most, only sometimes applies in these cases.

The Government constantly talk of investing when they really mean spending. The Minister who is to respond to this debate is among those who do that most of all, I think. The money put into research and development is surely proper investment in the strict sense of the word. The problems of achieving sufficient land-based wind and river generation in these crowded, environment-aware islands are daily more apparent. Offshore shallow-water generation has its limits too. We must now encourage the move further out to sea. There is plenty of deep water out there where waves, currents and winds abound, but research and development are central to that and are mightily expensive. To limit incentives as the Bill does is short-sighted, to say the least. I hope that the letter from the Minister that the noble Lord quoted indicates that the Government will accept the amendment, or something like it, because it sounded as though both ROCs and grants will be permissible in these circumstances. I support the amendment.

My Lords, in supporting this amendment, I do not intend to detain the House for long. I wonder how many other noble Lords noticed the irony that the Minister who was chiefly responsible for promoting wind energy over the past year has now become the Minister most responsible for opposing it, as he is in charge of the Ministry of Defence. It will be interesting to see his first Question Time, if the issue is raised. I am sure that he will not mind me drawing attention to the fact that often in government you have to argue black on one occasion and white on the next.

If we are to accept that wind energy is to play a part in the future generation of power in this country, not even going for the rosy prospects that some people argue are possible, it is clear that it will not be done by the low-hanging fruit of sites conveniently close to shore. We will have to move more deeply offshore, which means moving to areas where predicting costs is a chancy business. That is why this amendment is so important. The Government must recognise that while the principle of banded ROCs is sound, and one that we would all support, there are occasions when it may be necessary to look more favourably at development projects, such as the Beatrice project, that involve not only a great deal of expense but uncertainty about how much expense. I hope that my noble friend will look favourably on the amendment.

My Lords, the whole House is indebted to the noble Lord, Lord Wallace, for raising this important question. He will have noted that, as he spoke, the House filled up, which is a measure of the interest in this subject. We were pleased at the prospect of overtaking Denmark in offshore renewables. He is right to point out that we cannot be complacent and that we have a long way to go, but it is a mark of progress. He is also right to raise the importance of research and development. I assure noble Lords that there is no question but that, in relation to the new ROC system and the banding, R&D grants will be available. We are debating the transitional arrangements and how they impact on organisations that have already received an R&D grant under the existing scheme. I am also indebted to the noble Lord because, as I will explain, as a result of his amendment and the work that we have now done in discussion with him, we found a defect in the drafting of Bill. I shall table an amendment at Third Reading to deal with that.

Noble Lords will know that the transitional provision ensures that current renewables projects in receipt of a grant have the option to surrender that grant and take advantage of the new banding proposals or can choose to retain the grant and continue to receive one renewables obligation certificate per megawatt hour. We think that the arrangement gets the system right by allowing a transition, by respecting the original investment decisions of the companies involved, by ensuring value for money and by complying with the state aid rules. I shall come to the point made by the noble Lord about whether we are hiding behind the state aid rules.

Two issues come from that: first, whether we should require projects that have already received grants to repay the grant if they wish to benefit from additional support under banding; and, secondly, whether projects in receipt of grants awarded at some future date should be allowed to benefit from higher levels of support under a banded RO.

With regard to the first point, where a project is awarded a grant, the amount awarded is determined on a calculation of how much money is needed, taking account of the expected future income at the time of award. In cases where a grant has been awarded prior to our announcement of banding, that would have been on the basis of the project receiving one ROC per megawatt hour. A higher level of support under the new banded RO, in addition to the full grant, would not be good value for money either for the taxpayer, who ultimately funds the grant, or for the consumer, who ultimately bears the costs of the RO.

When we announced the banding proposals, there was a risk that we might create a perverse incentive for projects that were due to become operational during the transitional period to delay their operation until the new banding regime came into force. To avoid this, we decided to provide companies with the option either to surrender their grant and receive the higher level of support or to retain the full grant and remain on one ROC per megawatt hour.

The noble Lord’s amendment specifically addresses research and development grants and seeks to exempt generators benefiting from such grants from having to repay the grants in order to be banded up. I accept that research and development grants are often awarded to projects in the early stages of technology development to test the workability of the technology. However, the decision to accept a grant and proceed with a project is still fundamentally a commercial decision by which the company should be expected to stand. The sums of taxpayers’ money involved may be significant and we must ensure value for money.

An amendment such as this would remove the opportunity for companies to choose whether to surrender their grants and benefit from banding. To preserve value for money to the public, we would be forced to limit those projects to one ROC per megawatt hour for the lifetime of the RO and no longer offer the owners a choice of giving up the grant for a higher level of banded support. The noble Lord referred to a particular project. One never knows whether it is right to debate the details of one project, but I accept that he used it to illustrate a more general point, which I understand, that the costs in practice were larger than expected when the application for a grant was made. The issue is about balance and who accepts the risk. The Government’s view is that the company must accept the risk.

I understand that the treatment of biomass stations takes account of the competition for biomass fuels and of the ongoing costs for the station, which is not the case for wind projects, where wind is free. That is why they have been treated differently. The example used in the consultation document is wave and tidal energy, which is being supported under the renewable development fund, an R&D programme. We do not propose a different treatment for those projects.

I assure the noble Lord and the noble Baroness, Lady Carnegy of Lour, who also made an important contribution to this debate, that we are not hiding behind state aid rules to justify our position, although we must take account of them. We are currently discussing with the European Commission the proposed changes to the RO to obtain clearance for our banding proposals under state aid rules. The Commission has indicated that processes to prevent projects from being oversubsidised, whether they receive research and development grants or capital grants, will be an important consideration. That is why we oppose his amendment.

The noble Lord wants me to clarify the position on future projects, and I will do so again. We have looked again at whether the powers in the Bill and the forthcoming renewables obligation order, which sets out the detail of this policy, allow us to deliver our stated policy. Our intention has always been to allow projects that become operational after our banding proposals are introduced to benefit from increased support under the RO where appropriate, without ruling out in a blanket manner the possibility of also receiving a grant. We are grateful to the noble Lord because, on reflection, we find that new Section 32E would not allow projects awarded a grant after 1 April 2009 to receive more than one ROC per megawatt hour. I want to assure noble Lords that that is not our intention and that I will bring forward an amendment at Third Reading to deal with it.

At Third Reading, I will also be dealing with an issue in relation to the transfer of the relevant powers to Scottish Ministers. The operation of the renewables obligation in Scotland is already devolved. In the past, transferring RO powers to Scotland has typically been achieved by way of an Order in Council made under Section 63 of the Scotland Act. That was our original intention. An order would have needed to be laid and debated in both the UK and Scottish Parliaments and then be considered and made by the Privy Council before the RO order in Scotland could be introduced. However, we want to implement these changes, including banding, by April 2009 and the timetable to achieve this will be made even more difficult by the need to debate any RO-related amendments. Our solution is to expedite the process by transferring the functions to Scottish Ministers on the face of the Bill rather than waiting until it is finalised and then going through the process of putting the Section 63 order in place. I will bring forward an amendment on this at Third Reading, which I hope will find favour with noble Lords.

Again, I thank the noble Lord and the noble Baroness. They have raised a relevant matter because in the future, as in the past, R&D grants will be very important. However, we have a particular issue in relation to the transitional provisions.

My Lords, I am grateful to the Minister. I shall not detain the House because I rather suspect that it has filled up for reasons other than the discussion of R&D grants. I also thank the noble Baroness, Lady Carnegy of Lour, for her support and, indeed, the noble Lord, Lord Moonie, who as a former Defence Minister now probably finds himself arguing the opposite case on the side of the angels, which he seemed to be more comfortable with.

I welcome the Minister’s full response, particularly his final comments about bringing forward amendments to clarify the situation on future projects and to ensure that the position north of the border is regularised. Obviously I am disappointed that he is not willing at this stage to accept the arguments put forward with regard to historic projects. I cannot believe that all that many have been caught out in this way. I want also to consider what he said about biomass and mixed waste plants, because there is a precedent where the position was allowed to continue for existing plants. I am grateful for his constructive reply and for his specific proposal to bring forward amendments. In the circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.