Considered in Grand Committee
I beg to move the Renewables Obligation Order 2009, which is part of our attempt to drive further the significant advances we have already made towards delivering our renewables energy targets. Renewable energy is of vital importance to our strategy for tackling the two major challenges we face; that is, combating climate change and ensuring a supply of secure energy for the United Kingdom. That is why the Government support the European Union’s target for 20 per cent of energy to come from renewable sources by 2020. The order under discussion is a significant step forward towards delivering the additional generation necessary to meet our share of that target.
The order has been rightly drawn to the attention of the Committee by the Merits of Statutory Instruments Committee on the grounds that it gives rise to issues of public policy likely to be of interest to the House. I do not need to be convinced of the interest that is always generated by these issues in the House, and certainly not of the interest of Members present on this Committee. During its progress before this House, noble Lords worked with us to ensure that the Energy Act 2008 delivered real benefits for the renewables industry. I am sure it will be appreciated that this order is an extension of that work.
There is of course a great deal more to do, including bringing forward a feed-in tariff for small-scale generation, which was the subject of an important amendment. But we are here to debate the changes we will make to the renewables obligation. We are confident that these changes will drive significant investment in new renewables generation, building on our success to date, and set the stage for the delivery of further new build.
Since its introduction in 2002, the renewables obligation has increased eligible renewable electricity generation from less than 1.8 per cent of total UK supply to 4.9 per cent, almost three times as much, in 2007. The RO was originally designed to be technology-neutral and has been particularly effective at encouraging the cheaper forms of renewables generation, bringing forward large amounts of co-firing, landfill gas and onshore wind.
If we are to meet our targets we will need to do more. In particular, we will need to encourage deployment of other technologies—technologies which are some way off commercial deployment at present—which have the potential to deliver large amounts of new generation, such as offshore wind and biomass. It is these technologies that our proposals to band the RO aim to encourage. It is already working—our proposals to provide additional support for technologies have encouraged significant investment in new generation. DONG Energy, E.ON and Fred Olsen Renewables have formed a consortium to bid for thousands of megawatts of offshore wind capacity in UK offshore waters. Drax has announced its intention to develop three new biomass plants of about 300 megawatts each by 2016, as well as upgrading its co-firing facilities. The PDM Group is proceeding with its plan to develop a 2 megawatt anaerobic digestion plant in Doncaster, as well as looking at other opportunities around the country.
We have done this by working closely with industry to develop a mechanism that provides the necessary support for those technologies that are further from commercial development to come forward alongside the more developed technologies. Whereas currently each megawatt hour of eligible generation is awarded one renewables obligation certificate, a banded RO will mean that different technologies will get different numbers of ROCs. As well as supporting new technologies, this will allow us to ensure that the most economic renewables, such as the co-firing of biomass alongside coal, are not overrewarded in future.
The level of support offered to different technologies by the different bands is based on research carried out for us by Ernst & Young into the costs and market potential of different technologies. This includes providing microgeneration with a greater amount of support, recognising that it does not benefit from economies of scale. We will continue to monitor the renewables market, and we have set out a timetable of banding reviews allowing us to respond to market developments so that banding levels continue to provide the right level of incentive for project developers.
The order allows us to take important steps to ensure a more stable and predictable price for renewables obligation certificates. We have done this by introducing a mechanism to ensure that the level of the obligation remains above the level of actual generation. We refer to this as a headroom mechanism, as it aims to ensure that on average the level of the obligation will always have an 8 per cent headroom over the expected level of the obligation.
Headroom will allow investors greater certainty by making the ROC price more stable and predictable. It will also ensure that in future years the consumer is not paying more than required to bring on this renewable generation. Given the current economic climate, I am sure that the Committee will agree that these considerations are of the highest importance.
We have taken steps to maintain investor confidence by protecting previous investments. This is the principle of grandfathering. Subject to certain exceptions, those stations which were operational prior to our announcement on 11 July 2006 will continue to receive one ROC per megawatt hour. This is a principle which we also intend to follow at the next banding review, ensuring that existing investments are protected, should technologies be banded down in future as costs fall.
The order includes a number of changes aimed at developing the biomass and waste markets. Provisions in the order allow us to better utilise the renewable fractions of municipal and commercial wastes, which are currently underused. Our aim is to encourage the development of more efficient technologies, such as combined heat and power, anaerobic digestion or gasification. In order to achieve this, we have simplified the fuel measurement requirements, making the RO more accessible to these technologies.
Recognising that any move to increase biomass and waste usage raises concerns about the sustainability of their sources, we are introducing a sustainability reporting requirement on generators with a declared net capacity of over 50 kilowatts. While the evidence is that the great majority of biomass fuels used for electricity generation in the UK are sustainable, we seek to better understand where these fuels come from and the effect of using them.
The order also makes a number of small technical and administrative changes to make the RO more accessible to microgenerators, removing some administrative requirements that disproportionately weigh on smaller businesses. It introduces provisions ensuring that the costs of administering the renewables obligation are met by those who benefit from it. Currently, the costs for Ofgem’s administration of the scheme are met by the network operators. We believe that this is unfair, and we have taken steps to provide that, henceforth, the costs for Ofgem’s administration are met from the buyout fund. Ofgem’s costs will be removed from the buyout fund prior to it being recycled. In the event of a shortfall, the additional costs will be met by the Government.
The changes before the Committee today are the culmination of an extensive consultation process, working closely with industry and others, to develop the policy which was given shape by the Energy Act 2008. These changes have been well received by the renewables industry, which is keen to see them introduced. Accordingly, I commend the order to the House.
The temptation is to go over the some of the ground on the Economic Affairs Committee’s report when we debated that on 24 February, but I reassure the noble Lord, Lord Davies, that I will not do that. There seems to be no point; it was a good debate. However, I want to come back initially to one point on it, the cost to the consumer. When the noble Lord, Lord Vallance, introduced that debate, he talked about the increase in renewables required if we were to meet the 15 per cent target, suggesting that the share of electricity generated from renewable sources should be 34 per cent. He said:
“We concluded that the extra annual cost in 2020 would be £6.8 billion, an increase of 38 per cent. In terms of the average household bill, that would mean an extra £80 a year”.—[Official Report, 24/2/09; col. 143.]
Nobody seriously challenged that figure. It is a number of years ahead, so it is of course difficult to quarrel with or endorse the figure. However, noble Lords may remember that in debate on the Energy Bill last year, I used statistics provided to me by Ofgem on the cost to the consumer of all the environmental measures being imposed on suppliers. I was given the figure of £79 a year. I asked whether Ofgem could bring that figure up to date, including a number of new elements, such as prospective increases in the CERT—the carbon emissions reduction target—and the introduction of CESP. I asked Ofgem also to look at what had been happening to the cost of the European emissions scheme and the impact of the order. It does not cite the figure in any of its printed material for the good reason that it is extremely uncertain. When I asked why it did not put the figure into the papers it circulated about the gas and electricity markets, the answer was quite clearly, “But it is only a guess”.
The figure that Ofgem gave was, rather remarkably, £80, but that is of course a completely different £80 from that cited by the noble Lord, Lord Vallance, in the debate based on the report of the Economic Affairs Committee. Is the Minister prepared to give a view on whether the figure of £80 for the total cost of the environmental measures that falls on the gas and electricity consumer is about right? The £80 referred to by the noble Lord, Lord Vallance, was simply the additional cost of going to 15 per cent of energy from renewables. Those seem quite substantial figures.
The noble Lord, Lord Davies, and certainly his noble colleague sitting next to him, will recognise that I have repeatedly asked that there should be some mention in consumers’ bills of what they are paying towards environmental measures. That has always been resisted, but the case for resisting it is getting weaker almost by the day. Consumers want to know what they are paying towards the environmental salvation of this country. My noble friend put it succinctly when she welcomed the noble Lord, Lord Hunt of Kings Heath, to his post and said, “We are looking forward to together saving the planet and keeping the lights on”. I repeat my question: can the Minister offer any prospect that the Government will require suppliers to show in the bills what consumers are paying towards this?
In a moment, I shall turn to one or two issues arising from the order, but it is worth asking one other question that arises from the Explanatory Memorandum, which is a very helpful document, as always, once one wades one’s way through it. Paragraph 3.8 concerns the issue of competition approval. It states: “DG Comp”—that is of course the directorate-general of competition at the Commission—
“have signalled informally that they are content to approve the Order and we are waiting for formal notification that it has been approved”.
Have the Government now received that formal notification? There is many a slip twixt cup and lip and although an initial informal indication may be of some value, one would like to know that the whole thing has now been formally approved. If it has not, and if there are likely to be hiccups, that will be a substantial hurdle for the Government to overcome.
The order is a substantial document. I am sure that I am not disclosing any embarrassing secrets when I confess that I have not read it the whole way through. I have, however, taken advice. I asked: is there anything different from what was envisaged when we debated the enabling legislation in what is now the Energy Act 2008 and, if so, could my attention be drawn to it, and should any other issues be raised?
The main change under the order from the previous order is, as the Minister said, the banding proposals. The impression that I have been given from the consultation I have undertaken is that now that the industry has had a good deal of notice—consultation documents were issued—on the whole, it is prepared to live with this. However, there is a very strong view that if the renewables obligations certificate procedure is to continue to command the confidence of the industry, it must be stable. There was great welcome for the fact that the Chancellor in the Pre-Budget Statement last autumn increased the period up to 2037. That has been welcomed because it implies great stability.
The question of further review, which the order seems to indicate may happen, is more difficult. It is important that the system is not repeatedly tinkered with. That, of itself, will undermine confidence. Very large sums of money will have to be invested not only in offshore wind but, as the Minister suggested and as they achieve maturity, other forms of renewable energy. There could not be a bigger investment than the Severn barrage, which is still very much on the agenda. If people are to invest such sums, they must have certainty that the system will have the stability for which I have been asking.
I shall raise two or three other short points. One effect of banding is to reduce to one of the lowest bands—0.5, I think, in the new ROC levels—direct injection equipment into large coal-fired power stations. The impression I get is that although the industry will be disappointed to lose what it has received so far, it is prepared to live with that; but it totally supports the reintroduction of a cap on the number of co-firing ROCs that can be used by suppliers. If you have a reduced amount of the ROC, it is important that users in other systems should not be able, as it were, to drain off the available money, so that those who are interested in investing—they are often very long-term investments—in renewables and co-firing are protected. All I would ask is this: can the Government give a clear undertaking that the cap will not be lifted in the short term? Of course I cannot ask the Minister to say that it will never be lifted—that would be silly—but at the moment the industry wants the cap to be stable.
The view has been put to me that energy crops should be included in a supplier cap. Without doing that, there is a significant risk that these too could flood the ROC market. I should say that there the variety of energy crops is growing. I have on my desk papers about a new plant nearing completion in the north-east based on crops that cannot be used for food but which would otherwise go towards producing animal feed. This struck me as an extremely good scheme, but if it was unlimited, those who are investing in wind power and other forms of renewable energy may feel that they are going to suffer.
The order also looks at the question of using the ROC procedure to support heat. This is arousing a good deal of anxiety. The renewable obligation is a support mechanism for renewable electricity, and the view has been put to me quite strongly that there is in fact a separate renewable heat incentive. Indeed, my noble friends will recall that we got that into the then Energy Bill. We are running the risk of duplication if renewable heat is also going to be incentivised by an obligation that is primarily intended for renewable electricity. Can the Minister say anything about that?
Finally, I turn to the question of the differential between energy crops and biomass. I have been told that there is no climate change justification for the differential between regular biomass and energy crops. There are no additional carbon benefits through the use of energy crops, and research by a company called Themba Technology Ltd in collaboration with the Edinburgh Centre for Carbon Management suggests that co-product biomass tends to have lower life-cycle greenhouse gas emissions per unit of energy than dedicated energy crops. I have not examined the research and I would not be qualified to assess it, but can the Minister say something about it? What is being suggested is that by treating energy crops preferentially, there is a risk that the environmental impact will be negative as the displaced biomass is likely to have a lower overall environmental footprint. In the absence of any additional environmental benefit, and some evidence to suggest a reduced benefit, we believe that the 0.5 renewable obligation certificate per megawatt hour premium attributed to energy costs will be very difficult to justify to consumers. It may be a minor point in the context of the entire order, but it is one which the Government should answer.
Other than that, we debated these things fully during the course of the Energy Bill and the order fulfils almost entirely what was expected of it—it is a very long order—and all I can say is that I hope it works.
I do not know quite how I follow that. I do not think that I have ever been in the Moses Room when there has been such an expansive explanation of an order. The fact that the noble Lord, Lord Jenkin, has not yet read the whole thing suggests that I should give it scant consideration during this debate. On these Benches, we welcome anything, such as this legislation and the banding, that helps to bring forward the renewable energy programme for the United Kingdom. We have to see it within that context, which we welcomed generally during the passage of the then Energy Bill. Now we are going through the administrative procedures to apply it. However, we must remember that we have a huge target. By 2020, we must meet a target of 15 per cent of all energy being generated by renewables. I should remind the Minister that that target does not refer to generating capacity, which is what we often talk about in terms of renewables, but to actual energy generated. We have a long way to go in the next 11 years.
Certainly, this is a long order. I seem to remember reading that this was supposed to be rather simpler than the previous order, which I am delighted to say I did not have to deal with. The Explanatory Memorandum is quite strange in terms of plain speaking. It states:
“It is also worth noting that the Order distinguishes between renewables obligation certificates and ROCs”.
I always thought a renewables obligation was a ROC. It continues:
“The former is a collective term used to describe any of the certificates issued under any of the UK renewables obligations and the latter is a certificate issued under the renewables obligation in England & Wales”.
I do not know, but it does not seem to me to be a great day for plain speaking.
I turn to some of the issues raised in the Minister’s helpful opening remarks. He mentioned the banding, which we welcome as we hope that it will bring forward new technologies in renewables. We on these Benches see that as very important, given the time it takes to bring forward these technologies. Do the Government have any technologies in mind? I believe the round 3 bids are in and I would be interested to know whether the Government feel that round 3 for offshore energy has been successful. It seemed to me that there was a good take-up of bids in that area, but does the Minister feel that we are on a trajectory to meet what we need in terms of capacity?
During the passage of the then Energy Bill, we also debated where renewables obligation certificates finish and the feed-in tariff starts, which is very important. One of the issues was whether, until the Government decide where that boundary will be, there is a great risk, because of that uncertainty, that you will not get investment in that area. We did a sort of Dutch auction at Third Reading when the cap went up every time we spoke about it, but I think it perhaps landed up at 20 megawatts or around that figure. Clearly, organisations will not invest in that technology now if they think that they might be able to have feed-in tariffs in the future which give them a higher rate.
I would also be interested to understand from the Minister whether—in terms of the carbon reduction commitment, which is one of the other strategies being put forward by the Government in terms of climate change—they will still reconsider treating renewable energy differently in terms of carbon reduction commitment costs and certificates. It still seems utterly counterintuitive to me that a business that comes under the CRC umbrella because of its size is given no credit for generating its own renewable energy in the form of electricity and is treated just as if it were coal-fired energy or fossil fuel. That is still, as I said, counterintuitive.
Those are the areas that I would like to understand, but we on these Benches generally welcome the order and say, “Let’s get on with it. Let’s set out these rules”. We will then, I hope, urgently push forward the renewables programme that we need to meet our targets for climate change.
I thank the Minister for describing so well this important order. The Committee is obliged to the Merits of Statutory Instruments Committee, particularly to its chairman, the noble Lord, Lord Filkin, for drawing the Committee’s attention to such an important order, particularly as it gives rise to issues of public policy. I also thank my noble friend Lord Jenkin of Roding, who makes my job much easier because he is so on top of this subject, and I shall be interested to hear the Minister’s answer, particularly on the cost to the consumer.
I will not take up too much of the Committee’s time, but I will say that although we have many reservations about the past performance of the renewables obligation and have criticised what one of my honourable friends in another place likes to call,
“the one-club golfing approach”,
which it has created, banding is, as he said yesterday,
“a major improvement to what has been a deeply disappointing programme, given the huge potential we have to be a global player in the 21st-century renewable energy sector. I hope the Minister will listen harder to the industry and work to improve the RO, so that we see the delivery of major renewables projects, with all the jobs and economic advantages that that will entail. We must focus not only on the 2020 renewables targets, as hard and as stretching as they are, but on our carbon-abatement targets, as well. We have to ensure that the measures in the draft order do not over-prioritise one at the expense of delivering value for money in the other.
The renewables obligation disappointed and frustrated those who wanted to go harder, faster and wider in the development of the British renewables sector in its first phase. We will look closely to see whether a radical restructuring of the RO with banding is sufficient. It is clear that, with a feed-in tariff, renewable energy can be developed much quicker than we have been able to do. I hope the new banding system succeeds, but to do that it requires a sense of ambition, open-mindedness and pragmatism to be shared in the Government. My suspicion is that we still have a one-size-fits-all approach from a system that is too Whitehall-centric and does not do enough to encourage the entrepreneurial smaller, newer and exciting technologies”.—[Official Report, Commons, Sixth Delegated Legislation Committee, 17/3/09; cols. 9-10.]
I was delighted to hear the Minister today talking more warmly about this very important small section of our community.
I will be interested to hear the answer to the question asked by my noble friend Lord Jenkin about the cost to the consumer, but, for the moment, we are happy just to support the order.
I am grateful to noble Lords who have spoken in this debate. I detected a general welcome for the order. The noble Lord, Lord Teverson, cheered me up immediately by saying that he was very much in favour of it. I think that the noble Lord, Lord Jenkin, got there eventually as well, although his detailed questions led me at one stage to fear that the order presented more problems than its merits justify. However, we recognise the advantages that the order brings. Like the noble Lord, Lord Jenkin, I have no wish to go back to the very full debate that we had in February on these issues, nor do I want to revisit the 2008 Act too much, although there are cost references because the order is derivative from the Act. If I may, as I have quite enough on my plate in dealing with these specific questions, I will concentrate more on those than on the more general issues that were raised about the order. It fulfils the position that last year’s Energy Act set out to establish.
I shall begin with the question of costs, which the noble Lord, Lord Jenkin, identified as a difficult issue. He even said at one stage that the reason why not too much is specific in this area is that elements of it are not much more than a guess. Perhaps they are a little more than a guess—perhaps an estimate—but there are manifold uncertainties, and the noble Lord is as aware as anyone on the Committee of these uncertainties. I am not in a position to answer his question in specific terms.
The noble Lord also linked that with the question of information for the consumer. That was a debate that we had with regard to the Bill. As he said, the Government were resistant then, despite his strenuous efforts to persuade us of the virtues of that approach, and he will not be surprised that I have not come along to a debate on an order armed with a change to government policy of such significance. We do not expect the renewable energy strategy to have any large impact on bills in the immediate future. In the medium term, as the noble Lord indicated, it will cause some price increases. That has implications for fuel poverty, and the Government will have to address those issues at the time.
We seek to ensure that we take the most cost-effective approach to meeting our targets. We will look after those consumers who are most exposed and most in need, and the Government have a record on combating fuel poverty of which we are proud. We are concerned to promote energy efficiency. We want households to play their part so that energy efficiency improves because it reduces consumption, which is an important way of keeping costs down.
I am not going to be able to satisfy the noble Lord on the question of figures, and I do not really think that he expected me to do so, except to indicate that we recognise that there will be some increase in costs as a result of the order in the medium and longer term. I hope that he will appreciate that the targets we have set and are committed to meeting, although they involve increased costs, are part of an obligation that the Government—and, I think, wider society—regard as of the greatest significance with regard to the threats from climate change unless we have effective strategies.
I agree with the noble Lord when he says that an underpinning principle behind the introduction of ROCs and the changes with regard to banding is that, over a period of time, stability is important. You cannot expect serious investment decisions of the size that is required if companies feel that there may be rapid changes which they cannot take into account in their forward planning strategies. We will follow the same process for the future as we have followed in determining these bands. We will commission modelling of costs from consultants on a UK basis. We will have the banding based on these costs from consultants. We will have peer review consultants working with the industry groups. We will make sure that we consult Ministers in the devolved Administrations. We will recognise that this process has to be the product of understanding and consensus, not one that is subject to arbitrary decisions by the Government which might relate to aspects of wider policy with regard to the economy. There has to be some consistency and stability with regard to the process. I entirely accept the noble Lord’s comment on that point.
The noble Lord asked me a specific question about whether we had approval from the European Community in a formal notification. The answer is in the affirmative; we do have that, so we are able to make progress on that part. He asked whether the co-firing cap might restrict the market. We do not think that it is significant in those terms. We have included the cap on the number of co-fired ROCs that a licensed supplier may use to meet its target due to concerns expressed by a number of members of the industry in consultation responses that unrestrained co-firing could lead to dangerous unpredictability in the value of the ROCs. We will look at this again, and if we are provided with evidence that such a threat materialised or could materialise, we revise our position.
I think the anxiety is that the cap might at some stage be lifted or removed. The danger that the noble Lord has just outlined might then become a reality. The argument that I was making is that, in fact, the cap is quite a reassuring measure for the industry, because it means that the overall amount available for ROCs will not be swallowed up by a large number of co-firing objectives. If the noble Lord would like to write to me about that, I would be very happy.
I would be delighted to do that; I am sure that I will make a better job of the letter than I am making at present in this fairly difficult area. I reassure the noble Lord that we are fully seized of the point that he made during his earlier speech, and I offer at least some reassurance on that. I will write a letter which is not only reassuring but, I hope, deadly accurate in comparison to the rather broader generalisations that I can manage from the Dispatch Box at this stage.
The preferential treatment of energy crops is intended to develop energy crop supply chains, not just for short-term greenhouse gas savings. The greenhouse gas effects of all fuels are the subject of ongoing research, not just in this country but Europe-wide. The noble Lord also asked whether I could comment on other issues that might be different from the Energy Act. That is rather a tall order to ask of me. That is how I interpreted what he was saying. The noble Lord is enormously knowledgeable in these areas, and I know that he can press me very hard. He will know the limitations in preparation for an order of limited dimensions. I am reassured by the fact that I have my noble friend alongside me, but I will not even press him for a quick resumé of the changes and developments that might be consequent upon the Energy Act—that would test the patience of us all.
I emphasise that where we are able to talk more specifically about issues of electricity prices—for instance, we suggested that the introduction of a banded RO might increase prices by 7 per cent by 2015, against a 5 per cent increase if we make no change—it will relate to today’s changes. The cost of the renewables target for 2020 is a more difficult issue for us to analyse. The noble Lord asked me about combined heat and power stations. They will receive more support under the RO than stations that generate only electricity. That reflects their greater efficiency, which we want to encourage.
The noble Lord, Lord Teverson, cheered me up by being positive in his general position on the order. We had many debates on the then Energy Bill on this, and he appreciates the significance of this strategy in terms of our overall policy objectives. He asked me about the boundary between ROCs and feed-in tariffs. That is also a difficult and complex issue. We will be consulting on it over the summer so I am not in a position to be definitive, but we recognise that this issue is important and we are going to do a great deal of work on it. We hope that we will make progress in answering that question before long.
The noble Lord also asked me whether the renewables obligation could be expressed in simpler terms, and he castigated us somewhat about the English in our memorandum. We all know that technicalities can overwhelm the soul in this area. The RO sets out specific definitions. The difference specified between “ROCs” and the “renewables obligation certificates” is to ensure that the England and Wales order is quite clear when speaking about certificates issued, against the position of the Scottish or Northern Ireland orders. We are obliged to take on what the noble Lord was suggesting was a certain abstruse quality to our language, in order to identify just which area we are talking about.
The noble Baroness, Lady Wilcox, also broadly supported the order. I reassure her that we have looked again at our financial support mechanisms for renewable electricity generation to ensure that we maximise contributions on all scales. We are well aware of the challenges that we face with regard to the policy, and she is right to remind us of them. I do not underestimate the challenges that face the Government in this important area of policy, and I was grateful for the emphatic way in which she made that point.
On the whole, I commend the measure. It is predicated on the Act that we debated so extensively last year. I remember an amendment being passed at the time, against the Government’s better judgment, which will be reflected in the way in which we implement the policy because it is now part of the law of the land. The obligation is the Government’s key mechanism for encouraging the development of renewable generation in the UK. Since its introduction in 2002, we have seen a step change in the number of developments coming forward. Banding will bring forward another step change necessary to launch us towards the 2020 target. I think that we are all excited by aspects of the new technology that may come on stream. The noble Lord, Lord Jenkin, referred to the Severn barrage but there are other technologies, with very interesting potential dimensions, which use aspects of tidal flows and currents to supply electricity. That is why this is such an exciting area. But by the same token, it is an extremely difficult area about which to predict with any certainty. That is why the challenges from the opposition Benches, which I accept are entirely legitimate, are bound to be met with a rather vague response from the Government. We are dealing with uncertain developments but the targets we have to hit and the objectives of the public policy are clear. This order is an important part of that and I commend it to the Committee.