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Renewables Obligation (Amendment) Order 2010

Volume 718: debated on Monday 15 March 2010

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that it has considered the Renewables Obligation (Amendment) Order 2010.

Relevant document: 8th Report from the Joint Committee on Statutory Instruments.

My Lords, the purpose of the order is to make some changes to the renewables obligation, encouraging a higher level of renewable generation and providing increased support for offshore wind.

Decarbonising our energy system is more important than ever. By 2020 we want to be firmly on track towards achieving our commitment for an 80 per cent reduction in carbon emissions by 2050. Renewable energy from water, wind, sun and sustainable biomass will play a crucial role in making that happen and be vital for our energy security in years to come. That is why the Government have been instrumental in pushing for effective and binding EU targets, and have published a UK action plan for achieving our legally binding target of sourcing 15 per cent of our total energy from renewables by 2020. We will need radically to increase our use of renewable electricity, heat and transport to meet that challenging target, and large-scale electricity generation will have to play a central role.

The renewables obligation is the Government's main mechanism for supporting the generation of renewable electricity in the United Kingdom. The order builds on what has been achieved thus far and will help to drive forward the additional generation necessary to meet our share of the target. Since its introduction in 2002, the RO has incentivised significant amounts of eligible renewable electricity. In 2008-09 there were 5,100 stations accredited under the RO, generating 19 terawatt hours. We have seen the amount of onshore wind electricity more than double since April 2006, delivering 6.2 terawatt hours. For the first time, more electricity has been generated by offshore wind sites in England than was generated by onshore wind. But we now need it to deliver even more.

The changes that we are introducing apply to England and Wales. Scotland and Northern Ireland are bringing in complementary orders which will work together to create a United Kingdom renewables obligation.

Perhaps the most significant change, and perhaps the most welcome, is the increase in the level of support from 1.5 renewables obligation certificates per megawatt hour to two ROCs per megawatt hour for offshore wind stations for capacity accredited between 1 April 2010 and 31 March 2014. That increased support will apply to the whole station accredited within the period or to all the additional capacity accredited in the period. It therefore includes any turbines that form part of the station or the additional capacity, even if some of those turbines are yet to be installed.

Offshore wind is an important technology for the United Kingdom and is expected to play a vital role in meeting our renewable energy targets. We are now number one in the world for offshore wind. It is crucial that we maintain the momentum and ensure that investment is attracted to the UK. We have worked closely with industry in developing the change. After commissioning a study into the costs of offshore wind and extensive consultation, we are confident that projects will now receive the right level of support to proceed. In accordance with our grandfathering policy we intend that, once a station or additional capacity qualifies for the two ROCs, the electricity that it generates should remain eligible for that level of support for 20 years from the date of accreditation, subject to the 2037 end date.

The order also allows us to take the steps to give investors the long-term certainty necessary to incentivise them to invest in new generation up to 2020. As announced in the Pre-Budget Report, the extension of the lifetime of the renewables obligation by 10 years to 2037 will ensure that projects in technologies such as marine and round 3 offshore wind, due to come online from 2017, will be able to benefit from RO support. However, in light of that extension, we are mindful of the need to avoid overcompensation and ensure value for money to the consumer, so we have limited support to a maximum of 20 years. This will apply to stations that receive full accreditation on or after 26 June 2008, which will receive support for 20 years or until 2037, whichever is the sooner. A further period of 20 years' support will apply when capacity is added to any generating station—again subject to the 2037 end date. As is currently the case under the Renewables Obligation Order 2009, generating stations accredited before 26 June 2008 will continue to receive support until 31 March 2027.

In order to allow renewable electricity generation to grow as much as possible, we have also removed the 20 per cent cap on the size of the obligation, and increased the level of headroom—that is, the set margin between predicted demand and supply of ROCs—from 8 per cent to 10 per cent from the 2011-12 obligation period, to ensure the stability of the market for renewables obligation certificates.

This increase in the level of headroom builds on our commitment to making the ROC price more stable and predictable. This not only provides greater certainty to investors but helps to ensure that in future years the consumer is not paying more than required to bring on this renewables generation. Given the current economic climate, I am sure that noble Lords will agree that these considerations are extremely important.

Over the past few years we have introduced a number of changes to the RO in order to make it easier and more attractive for microgenerators to join the scheme. Despite these however, we recognise that it remains better suited to professionals in the energy sector. The Government are therefore introducing a feed-in tariffs—FITs—scheme from 1 April this year to support the generation of low-carbon electricity by small-scale projects up to a maximum of 5 megawatts. Offering a fixed level of reward for each unit of electricity generated should provide the simplicity and certainty required to encourage households and communities to generate their own electricity from low-carbon sources.

In anticipation of the FITs scheme coming into force, the order removes from the RO all microgenerators in the technologies that will be eligible to claim FITs, so that they can join the new scheme from its start. As FITs will be a more appropriate support scheme at the microgeneration scale, we intend for it to replace the RO completely in providing support for generators up to 50 kilowatts in anaerobic digestion, hydro, solar photovoltaic and wind power. Microgenerators in other technologies will of course remain eligible to receive support through the RO.

It is a slightly different story at the small scale—covering generators above 50 kilowatts and up to 5 megawatts in capacity—because the appropriateness of either the RO or FITs will depend on the circumstances and preferences of the individual generator. That is why small generators who joined the RO on or after 15 July 2009 and before the FITs scheme comes into force will be able to elect to transfer to FITs during a defined period. Small generators who had already joined the RO before 15 July 2009 will remain in the RO, and new small generators at this scale after the FITs scheme comes into force will need to make a one-off choice as to which of the two schemes they wish to join.

We are making a few small technical and administrative changes to the order to improve the way the RO works. For example, we have clarified when ROCs can and cannot be issued and revoked, and excluded landfill and sewage gas from sustainability reporting, because we do not believe that any value is added in requiring reports for those sources.

We have consulted extensively on these changes, which have been warmly welcomed by the renewables industry. However, I must point out that—as with previous renewables obligation orders—we have notified the European Commission about the amendments that we intend to make to the RO for state aids purposes, and we are awaiting its response. We intend that the order will come into force on 1 April.

The changes that I have presented to the Committee put us on a firm path to developing our renewable electricity industry, which will be vital for decarbonising our energy supplies. I commend the order to the Committee.

My Lords, the Minister has been good in outlining the scope of the wide-ranging order. I assure him that I will not seek to cover the whole field.

The issue that interests me is not actually in the order; rather, it is the complaint that considerable effort has been made and discussions have been had with DECC on the suggestion that the cap on co-firing of biomass with coal of 12.5 per cent, set in the preceding 2009 order, is too restrictive, and that the figure should be raised to at least 17.5 per cent. That is what I am going to address today.

I want to get one thing clear first, though. The Minister talked about the discussions with the European Commission on “state aids”. I have long detected that, perhaps unintentionally, Ministers have sought to persuade the public that the subsidy for renewable is paid by the state. That is not so. I was surprised to read a short exchange in our debate on the national policy statements on 11 March when the noble Lord, Lord Willoughby de Broke, referring to the discussions that the Government had been having with the lady who is the chief executive of the Drax power company, said:

“I can guess how the conversation went. I expect that she wanted more taxpayers’ money to make biomass plants viable”.

Obviously, the noble Lord had bought the “state aids” possibility. The noble Lord, Lord Hunt of Kings Heath, then responded:

“My Lords, it pains me to say it, but the noble Lord is absolutely right”.—[Official Report, 11/3/10; col. 161.]

The noble Lord was absolutely wrong. The cost of the ROCs does not fall upon the taxpayer but upon the companies that have to buy their ROCs. It is then passed on to the customer in higher prices. A proper description of what the Government do is that they have put in place a system that makes consumers pay.

I apologise to those who were here on Thursday because I am going to quote again the figures that were given to me by Ofgem at a briefing a couple of weeks ago, headed, “Estimated average cost impact per household customer (i.e. costs added to gas and electricity bills) of main environmental schemes in 2008, 2015 and 2020”. The renewable obligation figure for 2008 is £10. I shall come to the other categories in a moment. By 2015 that figure will rise to between £38 and £47, and by 2020 it will rise to between £71 and £81—that is, between a sevenfold and an eightfold increase. That is the cost falling upon the consumer for the financing of the subsidy for renewable energy. The consumer is being asked to pay. Therefore, the noble Lord, Lord Hunt of Kings Heath, really surprised me when he said that the noble Lord, Lord Willoughby de Broke, was absolutely right. I suspect that he may have done so as a quick answer to an intervention.

To complete the figures, by the time you have added the European Emissions Trading Scheme, the FITs, the renewable heat incentives, CERT, the new CCS levy that is provided for in the Energy Bill, and smart meters, you have a total, in 2008, of £79 per household bill; in 2015, of between £153 and £205; and, by 2020, of between £294—let us say, nearly £300—and £406-plus. I said last Thursday that I do not believe that any Government could possibly contemplate those additions to the average household energy bill, or indeed to the industrial energy bill.

I return to biomass, which is what I am on about. The co-firing of biomass is the burning of renewable biomass materials with coal, and is recognised in this order and its predecessors as a renewable technology under the renewables obligation. The Drax power company, which I mentioned a little while ago, is constructing what will be the largest co-firing project in the world. It will have a capacity of 500 megawatts, and from mid-2010 it will have the capability to produce 12.5 per cent of the power station’s output from renewable biomass. To put that into context, that is the equivalent of around 600 wind turbines. By substituting biomass for coal, carbon dioxide emissions have been reduced by more than 2.5 million tonnes a year. Again, to put this into context, this is the equivalent to taking about 700,000 cars off the road.

Very little biomass is currently available from energy crops. The order clearly refers to the distinction between energy crops that are specifically planted to provide fuel for power generation and what is sometimes called regular biomass: that is, waste products from other industries, notably from the forestry industry and from agriculture. The majority of biomass that is currently available for firing generation is therefore regular biomass. The price of regular biomass is typically about three times more expensive than coal, which is why a power station such as Drax has to have the incentive and support that are afforded by the renewables obligation system simply to make it economically viable.

Suppliers of electricity can, of course, purchase and redeem ROCs to satisfy their obligation under the RO. However, the number of ROCs produced from co-firing regular biomass that suppliers of electricity can redeem is currently restricted to 10 per cent, although this will be increased to 12.5 per cent by April this year. That was the figure that I mentioned a moment ago. This cap applies only to power stations that co-fire with regular biomass; it does not apply to ROCs from power stations that co-fire with energy crops or with regular biomass from power stations with combined heat and power. I understand the logic of that, but you have to look at the effect on a company that invested millions of pounds in a new biomass plant. That is the problem.

I asked the company questions about the impact of this, and I had an e-mail from it this morning. First, it was pretty cross with the noble Lord’s noble friend, who appeared to be saying that this was a call for more subsidy. It simply is not. As I explained, such subsidy as exists is paid for by the consumer and came about because the Government have stated that they want lower CO2 emissions. If anything, co-firing of biomass receives less ROC per megawatt hour than offshore wind. Because of that, it represents a cheaper transition to a low-carbon future.

The Government have accepted that biomass is a renewable. There was some suggestion that it might not be. They are quite right to do that. Even importing it from Canada as waste forestry products is still far better than burning fossil fuels. In fact, Drax states that, across the whole life cycle, co-firing coal and biomass produces 87 per cent less greenhouse gas. It estimates that its current portfolio of greenhouse gas savings relative to burning coal will range from 88 per cent to 93 per cent. It states:

“Even if we imported all our biomass from the Western US (which we don't) the GHG saving across the whole life cycle from field to furnace is 75-80% relative to coal”.

Those are the company's calculations. We are talking about large figures when it comes to the question of the cap.

Another brief that I have received states that the Government have been considering this, and had a consultation with a firm of economic consultants, Oxera. I am sure that the Minister has been briefed about that. I make it clear that the Government, not Drax, consulted Oxera. The findings of the Oxera report were that the cap constrains the development of co-fired renewable generation, and increases the cost to consumers of CO2 abated through the renewables obligation. The report stated that the,

“removal of the cap would not destabilise the ROC market or serve as a material disincentive to new investments in renewable generation”.

I have gained the impression that this has worried the Government. They are so keen on offshore wind power that they are not prepared to envisage anything that might compete with it for the money that will be available for ROCs.

I will not read the whole report. It states that the,

“existence of the cap exacerbates ROC market competition issues for independent co-firing generators”.

Most importantly, it states that,

“increasing the cap to 17.5% could ensure that technical constraints rather than policy constraints are binding, which would act to increase the ability of independent co-firing generation to compete”.

This view was supported by the regulator, Ofgem. Its responses to the consultation were very similar. Ofgem states that the,

“cap potentially disadvantages independent co-firing generators if vertically integrated suppliers self-supply a considerable proportion of their demand for co-firing ROCs … the market for independent generators”—

including companies such as Drax—

“may be smaller than that implied by the cap … there is concern that the cap constrains the contribution to renewable energy targets from a relatively low-cost renewable technology”.

I find it difficult to understand why, in the face of that advice both from the consultants and Ofgem, the Government still refuse to countenance the increase of the 12.5 per cent cap to the figure they were consulting on, that of 17.5 per cent. If I may put it this way, it seems to be simply perverse.

More important, what the Government are doing is confusing the ends and the means. The ends surely have to be the reduction of carbon emissions by a whole range of the measures which were set out in their publication, The Transition to a Low Carbon Economy, and many other statements. One of the means is wind power, but to subordinate the increased contribution that burning biomass could make to the reduction of carbon by their refusal to increase the cap in order to be able to have more offshore wind is simply confusing the ends with the means. It is not the first time I have had to complain about this. Some years ago, we debated at length the contribution that coal mine methane might make. If the gas could be recovered and burnt, it would save very large quantities of carbon dioxide, because methane is 23 times more carbon intensive than CO2. Again, we were told that it could not be done because it would restrict investment in wind power. All that is in Hansard. I said that that was simply confusing the ends with the means, and they are doing it again here. I do not understand why the Government have got themselves into this extraordinary position.

I want therefore to ask one or two questions, which I hope the Minister will be able to answer. Why did the Government reject the Oxera report? What were the reasons for refusing to accept its recommendation that this would not have any impact on the ROC market generally—that it would not destabilise the ROC market or serve as a material disincentive to new investments in renewable generation? The Government asked for advice, they got advice, and they are ignoring it. Another question is this. The Government have said that they will further consider the co-firing cap in October this year when the next banding review starts. What additional information do they think they are going to get between now and then that would lead them to a different decision, which is what they are holding out to the company? What discussions have taken place between the department and Ofgem on the effect of retaining the cap on the number of ROCs available for co-firing regular biomass? If there is to be a change—and what is the purpose of review if it is not to be open to the possibility of change—will it come into effect in 2011 or will the company have to wait until 2013, the date which the Minister mentioned in his opening speech?

I find the way in which the Government have approached this whole process, and indeed the treatment of the Drax company itself, really quite inexplicable. One must bear in mind that Drax was one of the first major companies to tackle issues of pollution by putting in at considerable cost special plant to limit nitrogen oxide and sulphur dioxide emissions, but it is now being penalised by having this cap put on the amount of co-firing that it can use and for which it can claim ROCs.

I hope the Minister understands that I am pretty indignant about this. I have no interest in Drax, but its argument is wholly compelling and I hope that the Government will perhaps be prepared to take it away. The problem is not what is in the order, but what is not in the order. They have chosen not to use this order to increase the cap to 17.5 per cent.

My Lords, the main purpose of this order is to increase the level of subsidy made available for new offshore wind generation. It also extends the system for an extra 10 years, from 2027 to 2037, while limiting the access to the system of individual subsidy recipients to 20 years. So much for the principle that no Government can bind their successors.

The Explanatory Memorandum explains that this increase is being proposed following evidence that costs have risen. The subsidy available for offshore wind will rise from 1.5 to 2.5 ROCs per megawatt hour, while the subsidy for onshore wind will remain at one ROC per megawatt hour. Thereby, offshore wind is judged to require twice the level of subsidy as onshore wind. That does not seem to leave with much value, or even meaning, the boast that we frequently hear from Government, and which we heard from the Minister last Thursday:

“We have the best wind resource in Europe, and it makes no sense not to use it”.—[Official Report, 11/3/10; col. GC 172.]

This justification for increasing the subsidy also casts doubt on something else the Minister said here on Thursday:

“We think that it is best for us to go down the low-carbon route as quickly as possible, and the cost-effectiveness will become clear over time. I should also say that the more turbines we build, the more the cost will reduce. The whole renewable obligations system is based on the expectation that costs will come down, and I am sure that that will happen”.—[Official Report, 11/3/10; col. GC 175.]

I do not know what costs the Minister had in mind, but for the moment it is clear that the order is based on the belief that costs have risen, not fallen.

On Thursday, the noble Lord confirmed that the Government have in mind 10,000 new turbines, delivering up to 25 gigawatts of electricity by 2020. Asked whether he was confident that this target could be reached, he answered with an emphatic yes, in col. GC 173. I believe that more than half this total is expected to come from offshore wind—something in the order of 6,400 additional turbines. Perhaps the noble Lord would confirm that. But how realistic is it to expect that that target could be achieved? The rate is over 600 a year, or perhaps two or three or even five a day during the months when work at sea is possible. Given the competition for, and expense and shortage of, installation vessels to lay them, the target seems to be improbable in the highest degree. In Denmark a rate of two additional turbines a week was never exceeded.

The first report of the Committee on Climate Change, which we debated in the House before Christmas, stated that 10 installation vessels were required for targets to be met, only two of which were operating currently in the United Kingdom, and that there was a three-year queue for new orders. We were also told that the new vessels cost between £50 million and £150 million each. Perhaps the Minister could tell us whether the position has improved.

In any case, that is the target. It is an enormous target that is, in the Government’s view, worth imposing enormous additional expense on the electricity consumer. Page 22 of DECC’s summary attached to the order, under the third paragraph of the section on distributional impacts, states:

“The very approximate estimate of the consumer cost of both policies together taking account of the overlap”—

which I take to be the sum total of the effects of the order as a whole—

“is around £46 billion total from 2010 to 2030”.

As I said on Thursday, that breathtaking sum is likely to push us into the pole position of having the most expensive electricity in Europe—although it will be difficult to beat Denmark, which has a considerable lead in the reckless pursuit of wind power and very expensive electricity as a result—and at the opposite end of the spectrum to France, whose reliance on nuclear power has given it some of the cheapest electricity in Europe. Incidentally, France also has one of the lowest per-capita carbon-emission figures in Europe, unlike Denmark and Germany which have two of the highest. Altogether, that is a recipe for sending our industry overseas.

In the Explanatory Memorandum, we are not told in any detail how that figure of £46 billion is arrived at. I assume that it attempts to assess all the subsidy likely to be received in future years, until 2030, but not until 2037, by all offshore wind farms likely to be installed for the Government’s target to be met. Will the Minister confirm that, or state the assumptions behind the calculation? Are the consequent and necessary extensions to the national grid included or are they additional to that figure? If separate from that figure, what do they amount to and how and when will the consumer be asked to pay?

The Minister explained that this order also makes provisions regarding the feed-in tariff scheme, which is also due to come in on 1 April, but this order is not responsible for bringing that scheme in. I therefore presume that its costs are not included in the estimates attached to the order.

Last Tuesday, when we debated the nuclear national policy statement, the noble Lord, Lord Turnbull, referred to an article in the Guardian by George Monbiot in which that well known patron saint of the green movement came out against the FITs scheme and estimated its costs at some £8.5 billion, once again to be paid by the consumer. I do not know whether the Minister would like to comment on that estimate. I do not think his colleague did so last week.

In one of his articles this month on the feed-in tariffs scheme, George Monbiot referred to a study recently produced by Ruhr University. It perhaps played a part in turning him against the scheme. Germany has had a feed-in tariffs system for 10 years or so that applies to large-scale wind power as well as to renewable microgeneration. Germany does not have a ROC system. The study shows that its subsidy regime has resulted in 6 per cent of the country's electricity being produced by wind power at a cumulative cost to the consumer of up to €20 billion, were the scheme to end tomorrow, and in 0.6 per cent of the country’s electricity being provided by solar power at a cumulative cost to the consumer, were the scheme to be cancelled tomorrow, of €53 billion. The study concludes with these words:

“Although Germany's promotion of renewable energy is commonly portrayed in the media as setting a ‘shining example of providing a harvest for the world’ (The Guardian 2007), we would instead regard the country’s experience as a cautionary tale of massively expensive environmental and energy policy that is devoid of economic and environmental benefits”.

Just at the moment that Germany discovers all that wasted investment, we proceed to embark down the same path. Like the CCS levy, to be introduced in the Energy Bill, our feed-in tariffs scheme amounts to yet another large charge to be laid on the poor electricity consumer. I suggest that this order is asking the consumer and, through him, the country to pay more than either can bear for a solution that brings no measurable advantage to us or to the world at large. I hope that one day a Government will wake up, see sense and revoke it.

My Lords, like the noble Lord, Lord Jenkin, I shall comment on Drax and other users of biomass. As noble Lords know, there are two uses for biomass: co-firing and dedicated, 100 per cent, biomass units. In introducing this statutory instrument, the Minister mentioned guaranteeing grandfathering for 20 years from the point at which a plant is accredited, not the point at which it is constructed. This is important, of course, because construction takes a long time and involves a lot of money up front. It has an effect on the rate of return on the capital employed if plants take two, three or four years to construct. What are the Government’s intentions on grandfathering rights on the same basis for dedicated biomass plant? As with co-firing, that is the dog that does not bark. It is not in here. The Government must have considered it, but they have not included it in the order.

Turning to the question of co-firing, I will not repeat the many points ably made by the noble Lord, Lord Jenkin, all of which I agree with; I shall just add one or two others. I very much hope that my noble friend will be able to give some reassurance about the Government's intentions—I do not expect them to change their mind about the order now, but it is important to know their intentions for the future.

I should like to make the distinction between a cap, which limits the contribution towards electricity supply that can be made by co-firing, and the degree of support that is given. The degree of support given to co-firing is 0.5 ROCs per megawatt hour. Offshore wind already gets 1.5 ROCs per megawatt hour. In the order, that is increased to two. In other words, the degree of support given to wind will be four times that given to co-firing biomass. That indicates that offshore wind could not compete if it was not given such large support. Co-firing generation is economically a much better deal to get renewable generation. Whatever the question of the cap to be imposed, there can be no doubt that co-firing is not being given an unfair advantage in support; on the contrary, the support given to it will be a quarter of that given to offshore wind.

I turn to the question of the cap—that is, the number of ROCs that suppliers can acquire under the order. As the noble Lord, Lord Jenkin, said, the Government intend to keep that at 8 per cent. In the supporting documentation to the order, under the heading “Summary: interventions and options” on pages 4 and 5, it is made clear that the consultation considered the question of retaining the co-fired cap at 12.5 per cent. In other words, as the noble Lord, Lord Jenkin, said, there was consultation on that. It has not been merely reaffirmed, it has been considered. As the noble Lord said, the department not only consulted Oxera, it commissioned it to produce an independent report on the issue of the cap. It did not simply consult it; it asked it independently to consider the issue. The report is not flimsy; it is substantial. The noble Lord fairly informed the Committee of the findings of that independent review.

The explanation of the costs and benefits of the proposals under review is set out in the document, entitled “Summary: analysis and evidence”. No evidence is given at all about the consultation on keeping the cap on co-firing at 12.5 per cent, as opposed to raising it to 15 or 17.5 per cent or removing it altogether. I find that strange because the other elements of the consultation—the options to be considered, including the benefits and costs—are all set out for those who want to study them carefully. My question to my noble friend is this: given that this was a policy option that was consulted on, why are the options not set out along with the costs and the benefits so that noble Lords could reasonably consider the virtue of keeping the cap at the current level? That seems extraordinary and indicates that the Government are either not sure that they have a good case or perhaps have overlooked it. Surely it cannot be right to ask us to approve an order that contains one element which is to remain unchanged but for which options were considered, but for us not to be told what those options were and what are their advantages and disadvantages.

The question of the cap is important for two reasons. First, but not in order of logic, is that one of the effects of the cap is that it prevents the electricity consumer, whether business or household, paying for their electricity at a lower price than they might otherwise because co-firing, as demonstrated through the ROC system, is assumed to be significantly cheaper than offshore wind. I agree with the noble Lord, Lord Jenkin, that this is a critical issue.

The second but less obvious effect of the lower cap we have at the moment is on the actual market for ROCs from the different types of co-fire producer. There are two types of these. There are independents like Drax, which produce only energy; they do not sell it because they are not suppliers. However, some integrated suppliers also own energy production units that produce electricity. The effect of a rather low cap is that, where the suppliers of electricity also own their own co-fired generation, they are inclined to buy their own in-house co-fired power generation rather than buy from the independents. This means that the independents are at the bottom of the food chain when it comes to selling their co-fired generation. If there is quite a bit of co-fired generation on the market but there is a low cap, it means that the co-fired generators are forced into accepting a lower price than they would get in a genuinely competitive market. This is well recognised.

Does the Minister agree that this is a problem, and of course that it is one of the two issues that Oxera looked at? Do the Government agree that keeping the cap where it is means that there is a danger that it is likely to distort competition in the selling of co-fired generation which will count against independent co-fired generation producers? Also, does he accept that raising the limit for the amount of co-fired generation that can qualify for ROCs would in itself significantly remove the anti-competitive element in the market? That was recognised by Oxera.

I hope that the Minister is able to give some comfort to the Committee that— while he is not in a position today to change the order, and although on this occasion it was not possible to change the cap—the matter is genuinely being reviewed again, that the Government’s mind is open to such a review and that the review can be done more speedily than by 2013-14, because that plant will be commissioned within a few months. If that is not done, the danger—and this has already happened in the past few months—is that they will pay co-fired generation coal power stations not to co-fire, because it will be cheaper to produce electricity with coal, buying emission allowances, than to sell their co-fired biomass generation off at an uneconomic price. Are the Government willing to look again at this issue in a timeframe that matches the commercial reality of investors, having invested tens or hundreds of millions of pounds, not having to wait for three or four years for a review, if any, to take effect?

My Lords, I have listened to the debate so far and there is very little left for me to say. Nevertheless, I am going to say it.

I am one of those people who are rather sceptical of the contribution that CO2 makes, and will make in future, to so-called global warming. Still, one has to look at the position of the Government, how they are going to meet their obligations and what effect that will have on industry, on consumers and, particularly, on the electricity supply industry. We have heard about some of those effects today.

I am also opposed to the dedicated growing of crops for energy generation. I have spoken, as have others, to Drax power station about the co-firing of its coal-fired station with biomass. Drax has assured me, and I believe it, that the biomass that it is using is from waste agricultural products, from forests that need clearing to enable them to regenerate and from sources that do not use good agricultural land for producing food. I have been quite impressed by what Drax says, and I understand its concern that the Government are giving it no particular priority—indeed, that they are shifting their priority to wind generation in order to meet their targets. As we have heard, Drax is currently constructing the largest co-firing facility in the world, with a capacity of 500 megawatts, and producing 12.5 per cent of its output from biomass will make enormous savings in CO2 emissions of 2.5 million tonnes. That is the equivalent of 600 wind turbines, saving the equivalent of the CO2 emitted by 700,000 cars. This is making a huge contribution to the Government’s obligations to Europe, and indeed to the rest of the world.

I do not want to repeat much more of what has already been said, but we have not yet dealt with the question of security of supply. Between now and 2015—and beyond—that will be one of the most difficult problems with which to deal. The great benefit of Drax, and perhaps other power stations later, is that it will be a base-load station and will produce electricity at maximum demand when needed and when the wind is not blowing. That really must be tackled, and it must be understood by the Government and by consumers—who, as we have heard, will have to pay an enormous premium on their fuel costs to finance 20,000 megawatts of wind power—that that power will not guarantee that we meet our demands in the winter, particularly at peak periods, or even make a large contribution to meeting them.

I urge the Government to look at this problem very seriously indeed, because they really are on the wrong track. It is essential that we provide power that will meet maximum demand. The maximum demand met during the recent cold snap was a record 58,000 megawatts, or just over, but this is likely to increase. Despite all the perhaps local savings in electricity, the very fact of population increase and more electricity use in what I hope will be additional manufacturing industry will increase the demand for electricity.

An Answer to a Question that I asked recently about wind power showed that, for most of the period since 15 January, the wind power system has provided less than 50 per cent of its capacity and frequently less than 30 per cent. Indeed, on three days of the winter freeze, it provided 10 per cent or less of demand. Its lowest output was 5 per cent, on 7 January. That is a warning to the Government that they need to look again at their policy on supplies if they are to meet maximum demand, particularly if we are going to have much colder winters than we have had for the past 10 years. They will fail in their duty to do so unless they re-examine their policy and reconsider the desirability of ensuring that co-fired electricity generation can take place, because it is economic.

My Lords, perhaps I can cast away some of the gloom that has descended this afternoon and congratulate the Government to some degree on the order, which concerns ROCs and FITs and which moves, on the whole, in the right direction. However, I will ask one or two questions. A couple of the issues have already been raised. I was interested that the Minister mentioned state aid. Having had a little bit to do with Europe, I know that DG Competition does not move fast. It probably has not escaped the notice of any noble Lord that we have 17 days left for this state aid to be cleared because the regimes start on 1 April. I would be interested to understand whether there has been any indication from the Commission that the state aid issue will be overcome. I presume that the Government do not think that it will be a major problem. I would also be interested to understand whether the state aid issue relates solely to ROCs or whether it relates also to feed-in tariffs. I am sure that the industry, too, would be interested in that.

After listening to the Minister, I was unclear about some of the microgeneration installations already in operation and about what options are available to individuals and households who have already put substantial amounts of money into generating renewable energy for their homes and to feed back on a small scale to the national grid. The Government and many of us have said that this is a good thing, but I am not sure that everybody will come off better from this order. What options are open to someone who put in a small-scale but quite expensive PV installation before July 2009? I thought that I understood them from part of the Minister's statement, but then he went through some other options that were less clear to me.

I am also concerned about the absence of co-firing. I find it difficult to understand the Government's position. I will not go into it at great length, because the noble Lords, Lord Jenkin, Lord Stoddart and Lord Woolmer, have discussed it. However, we all recognise the challenge of approaching, let alone achieving, the target of generating 15 per cent of energy from renewables by 2020, and we need all the ammunition that we can get. I find it strange that we put a restraint on a technology that can help to deliver the targets that all of us know are very important to decarbonise the economy by that date and onwards to 2050. I would like to understand the Government's logic in applying a cap. The rest of the issue has been well argued. Although I would understand if there were considerations around ensuring the sustainability of fuel, that is a separate issue from the cap itself.

Perhaps the Minister will also update us on where the renewable heat incentive has got to. That would be useful for the Grand Committee. Lastly, as so many matters have been covered, I would be interested to hear the Minister's prediction for the impact this package will make in terms of growth in jobs. How many jobs in the renewables sector do the Government hope to create through their strategy? I think that other noble Lords have said quite enough to enable me to sit down at this point.

Noble Lords will see from the previous order that the noble Lord, Lord Teverson, and I reverse our order on this subject because we learn so much from behind us before we stand up to speak and do not want to appear too foolish when we do so. The noble Lord said that we should be cheerier and more optimistic than we have been this afternoon. I think that the speeches we have heard from all sides of the Committee show unease with this order. That is worrying, and I am sure that the civil servants sitting behind the Minister will be having long talks with him afterwards.

We all agree that there is a pressing need to shape up Britain’s renewable energy regime. We know that the United Kingdom is third from the bottom in the European Union in the development of renewables. Only Luxembourg and Malta are behind us, in spite of us having one of the most generous systems of support. I shall leave out biomass and Drax because my noble friend Lord Jenkin and the noble Lords, Lord Woolmer, Lord Stoddart and Lord Teverson, described them well.

My general concern with the order is that I do not believe that it addresses the magnitude of the renewables challenge that we face. Perhaps the most important issue is the cost that these measures will impose on the consumer. The Minister alluded to this, as did the noble Lord, Lord Reay. Will the Minister provide the Committee with a greater understanding of the financial implications that the Government see these measures having on the public’s already ever-growing energy bills? Can the Minister explain the extent to which the British consumer will be paying to create jobs overseas by allowing renewable generation capacity to be developed overseas using British renewables obligation certificates?

The Government talk about the need to do more to support offshore wind, but I am concerned about the lack of consideration and development of other forms of marine renewable potential. We have 11,000 miles of coastline and the highest tidal reaches in the world. We should be a beacon for international investment and a place for developers to try out their projects and ideas. Can the Minister say what research is being done to explore these other methods and to attract international investment? What are the Government doing to protect and support wind technology companies that are already based in the United Kingdom? There are reports that two of the UK’s most advanced developers of wave technology—Pelamis and Aquamarine —are considering developing their technologies overseas. We must harness this section of the market and not let such a great opportunity to capitalise on forms of marine renewable potential other than offshore wind slip through our fingers. We cannot afford to do that. We believe that offshore wind has tremendous potential and an important role to play in the growth of renewables in this country. Does the Minister think that the temporary increase to two ROCs will be sufficient to deliver the increase that the Government want?

Beyond the financial practicalities of the Government’s offshore wind targets, the practicalities on the ground are harder to overcome. My noble friend Lord Reay outlined some of the problems that the Government are facing. We currently do not have the cranes, ships, money or skills for the sort of offshore operation that the Government will need to reach their targets. My honourable friend Charles Hendry estimated that:

“Currently, there are only a small number of ships in the world that can erect the turbines at sea. The most efficient of those can erect perhaps 80 turbines a year. The new ships will be able to erect 100 turbines a year. Even if every single ship in the world that can erect turbines was to come to the North sea to help us deliver our capacity, we would probably be erecting 400 to 500 turbines a year, but that is only if they started today and did nothing else for 10 years. However, we need to have about 1,000 turbines a year erected”.—[Official Report, Commons, Third Delegated Legislation Committee, 8/3/10; col. 7.]

What are Her Majesty's Government doing to address these problems, especially if we are to achieve the targets, which we all want? These questions aside, we support the order while recognising its shortcoming and seeing the trouble ahead.

My Lords, we have had a fascinating debate and, like the noble Baroness, I have learnt a huge amount from contributions made in all parts of the Committee. I thank everybody most sincerely for taking part in it. I shall do my very best to answer the points that have been made. If I leave any matters unanswered, I will of course write to noble Lords and make sure that copies are available to all Members who have taken part.

A number of Members of the Committee dealt with the issue of co-firing biomass. This was the main point made by the noble Lord, Lord Jenkin of Roding, and by my noble friend Lord Woolmer. We are aware of the concerns expressed by the Drax company, and it has clearly been very effective in getting its point of view across to Members of this Committee. I am sure that it will have been gratified by that.

Perhaps I should explain as background that the co-firing cap was originally introduced for stations that co-fired regular biomass because of concerns that, if it was not restrained, the co-firing ROCs could flood the ROC market and this could significantly decrease the value of ROCs for other technologies and result in investors placing a higher risk premium on their investment decisions. The Drax concern was that the cap on the co-firing ROC market restricts competition and disproportionately penalises independent co-firers, as vertically integrated suppliers purchase their own ROCs. Drax considers that the cap forces independent co-firers effectively to participate in a partitioned marketplace, which means that it has to accept significant discounts in price for its ROCs. I think that that is a fair summary of Drax’s point of view.

To help provide additional evidence on this, we instructed Oxera, to which a number of noble Lords referred, to look at these arguments and provide us with a report on the effect of the cap on the co-firing market. There were other points of view. Other respondents indicated that uncapped co-firing could lead to unpredictable fluctuations in the ROC price, so we asked Oxera to look at the effect on the wider ROC market of changes to the size of the cap, including its removal.

The Oxera report was published on 22 September. It did indeed say that increasing the cap would probably remove technical constraints in the short term, but it also said that in the long run the cap was unlikely significantly to affect the ROC market for co-firing. This is due in part to the banding allocated to co-firing in April 2009, which in effect doubled the amount of co-firing generation with regular biomass needed to receive one ROC: 2 megawatts as opposed to 1 megawatt. However, there is a suggestion that in the shorter term the cap may restrict independent generators’ ability to sell ROCs, as plants affected by emissions control legislation, under the large combustion plant directive, may now run at a higher capacity in the short term than originally envisaged.

In the consultation, we asked respondents whether the cap should be retained at 12.5 per cent or to provide evidence if they thought that it should be changed. Some respondents called for the co-firing cap to be tightened and for co-firing to be removed from the RO by 2016, as originally planned. However, the majority of respondents felt that the cap should continue at 12.5 per cent. The report also indicated that there would be a decrease in price and that biomass new generation would be delayed. The cost of raising the cap to 17.5 per cent was likely to be a decrease in the ROC value and a delay in new biomass generation that would come on stream, but we have decided to look at this in the banding review where we can assess the effect across the whole renewables market.

My noble friend Lord Hunt of Kings Heath has already had a number of discussions with Drax on how the department can help. I can announce today that officials will arrange further discussion and we have agreed to reconsider the matter as part of the banding review that begins in October.

The noble Lords, Lord Jenkin and Lord Teverson, raised the issue of state aids, and the noble Lord, Lord Jenkin, made the very fair point that this is not government money; it is money that is ultimately paid by electricity consumers. Of course we agree. I say to the noble Lord, Lord Teverson, that we are confident that clearance from the Commission will be received in time for us to start the new scheme on 1 April, but the RO is regarded as a state aid because it is administered by Ofgem, which administers money in the buyout fund. That is why the EU Commission’s state-aid rules require us to get approval for it.

My Lords, I apologise for intervening, but the noble Lord must recognise that the use of the words “state aid” implies that this is something coming from the Government, and therefore from the taxpayer. Does it not behove the Government to repeat on every possible occasion that in fact this is not paid by the taxpayer; it is paid by the companies and goes through to the consumer?

I do not disagree. The term “state aid” is almost a term of art that is used in Europe. All of us in this Room understand how the scheme is funded. We do not deny that driving up the deployment of renewables in this country will incur costs for consumers. However, I hope that all Members of the Grand Committee, with the possible exception of the noble Lord, Lord Stoddart, will accept that a reduction in the risk of catastrophic climate change and dangerous energy insecurity is the alternative to the move towards renewables. Those risks carry real and much higher costs than the increase in consumer prices which the renewables deployment will cause.

The report by the noble Lord, Lord Stern, showed that the damage caused by global climate change could cost five times more than the cost of action to stabilise global emissions by 2050. The Government believe strongly that the cost of meeting our renewables target should be seen as an investment to avoid much higher costs to the economy in the long term.

Members of the Committee asked for the figures for the RES on the impact of the measures to achieve about 30 per cent renewables electricity by 2020, covering large and small-scale generation. We estimate that under central fossil fuel prices, domestic electricity bills will be £77, or 15 per cent, higher than they would have been in the absence of the RES. The costs associated with the measures in the RO are expected to increase domestic bills by 12 per cent in 2020. For FITs, the latest estimate is £11—again, by 2020.

Returning to co-firing for a moment, I was asked about discussions with Ofgem. Ofgem has responded to consultations on that in the past. It is of the view that the cap should not be removed. As I said a moment ago, we take the view that we need to keep the matter under review and will look at it in the round.

Very briefly, I am remiss if the answer is straightforward, but are the various responses to the consultation on the co-firing cap, to which my noble friend referred, in the public domain?

I am assured that they are, indeed, in the public domain.

The noble Lord, Lord Reay, in a powerful speech, if I may call it that, questioned the thinking behind a lot of what we are discussing today and paid a lot of attention to the issue of offshore wind. He also drew attention to the fact that we are increasing the level of support for offshore wind projects that receive full accreditation between 1 April 2010 and 31 March 2014 from one and a half ROCs to two ROCs. We take the view that offshore wind is expected to make the largest single contribution to renewable electricity in the UK by 2020, so we have increased the level of support to ensure that momentum is maintained and there is confidence to take the projects forward.

The noble Lord also asked whether we are confident that we can meet the targets. The deployment of wind energy is rapidly accelerating, and the latest 1 gigawatt of capacity was added in less than a year. That compares with 14 years to deliver the first gigawatt, in 2005; 20 months to deliver the second gigawatt; and a year and a half to deliver the third. The experts in the industry predict that next year will see the installation of both the fifth and the sixth gigawatt in quick succession. To meet the lead scenario in the RES, we need to add about 1 gigawatt each of onshore and of offshore wind capacity per year from 2010 to 2020, with growth rates that rise towards the latter part of the decade. Our scenario suggests that we will need a total of 14 gigawatts of onshore wind and 12.5 gigawatts of offshore wind. That implies 15 and 21-fold increases respectively on where we are today. The noble Lord also asked how much all this offshore wind will cost. The Carbon Trust estimates that 29 gigawatts of capacity, to be installed in the next 10 years, will cost £75 billion, but, if he will forgive me, I will write to him with the other specific figures for which he asked.

The noble Lords, Lord Reay and Lord Teverson, asked about feed-in tariffs. By 2020, the feed-in tariffs are expected to lead to approximately 2 per cent of the United Kingdom’s electricity being generated by small-scale renewable technologies. This will allow households to generate their own electricity and raises awareness of green issues.

My noble friend Lord Woolmer talked about biomass grandfathering in the context of Drax and co-firing.

I apologise to my noble friend for misunderstanding him. I am assured that DECC is working rapidly to resolve the situation with biomass grandfathering and is reviewing its policy on the matter. It has formed two working groups consisting of investors and industry representatives who have been recommended by the trade associations to help to inform the review. We plan to announce the way forward later in March.

My noble friend Lord Woolmer asked about integrated suppliers. Drax has suggested that licensed suppliers in company groups with generation arms may choose to buy from generation in their own groups and companies, but that argument is not yet proven because companies in groups are independent and must act in the best interests of their shareholders, so it may not work out like that.

The noble Lord, Lord Stoddart, raised the question of biomass and energy crops. Grants are available to farmers in England to help establish energy crops, and from January 2010 they increased to 50 per cent of establishment costs. Grants are available to farmers and businesses to develop biomass supply chains. We are funding a £1.5 million, three-year research project to examine the feasibility of short-rotation forestry delivering greater volumes of biomass from the same land area as covered by current energy crops. Capital grants have been made available to help with the installation of small-scale heat boilers, community heating networks, combined heat and power plants and large-scale, dedicated biomass electricity generating plants.

The noble Lord, Lord Teverson, asked what happens to micro-generators in the existing system. As I said in my opening speech, we take the view that FITs will be a more appropriate scheme than renewables obligation as far as concerns micro-generators. As of 1 April, micro-generators in technologies that will be supported through FITs will no longer be eligible for support through the RO scheme. Any micro-generators in these technologies already in the RO will transfer to FITs, and any new micro-generators that have commissioned since we published our proposals on 15 July 2009 will be able to join FITs from its start. The only micro-generators that will be unable to access either the RO or FITs will be those that have already been operating without any form of financial support. Allowing these generators access to FITs would not only increase the cost of the scheme, but would also not encourage additional generation, which is the primary objective of the policy. This simply does not represent value for money and we cannot justify the additional cost to consumers that the support would bring.

The noble Lord also asked about jobs. We have the offshore and service skills, and the potential to develop a lead in this sector. As I said earlier, we are now the leaders in offshore wind. There is the potential here for up to 70,000 jobs by 2020. The Carbon Trust estimates that up to two-thirds of the domestic value chain could be supplied by the UK, as well as providing significant export potential. These are high-value jobs in manufacturing, research and development, engineering, installation, O and M and services. We intend to ensure that developers and manufacturers, working with the Crown Estate, will create these jobs in the UK.

The noble Baroness, Lady Wilcox, raised the question of opening the RO to stations outside the UK. We are aware that concerns have been raised about spending United Kingdom consumers’ money on foreign investment, where the benefits stay overseas. I hope that I have summarised her point exactly. She and we are right to focus on value for money for United Kingdom consumers. However, we must also be open to the opportunities that the renewable energy directive presents, as there could be benefits to such projects. Analysis suggests that using joint projects—for example, electricity generated outside the UK—to meet a proportion of our target could offer cost savings, with a correspondingly reduced impact on United Kingdom consumer bills. This is something that we are looking into further as we take forward the work in this area. We set out in the RES that one principle according to which we will be open to projects under the flexibility mechanism will be if they offer genuine cost savings to the UK. But the responses that we received to those proposals in the RO consultation last summer raised a number of concerns that need to be addressed before any changes can be made. We need to take account of discussions at the European level on how trading would work, as well as the wider context of the issues such as grid interconnection and the route through to 2050, before any final decisions are taken, so we shall be consulting further on the matter.

The noble Baroness also raised the question of marine energies. Again, she is right not to underestimate this potential. Indeed, the reason that I am speaking to the Committee today rather than my noble friend Lord Hunt of Kings Heath is that he has been visiting Strangford Lough in Northern Ireland, where Marine Current Turbines Ltd has in operation a working tidal stream technology, to announce the publication of the marine action plan. The plan considers the full range of challenges and opportunities facing the industry, and will ensure that we retain our position as the world leader in this industry. We have committed over the past decade some £160 million on a range of measures to support the wave and tidal industries, which accelerate the development and deployment of wave and tidal energy in the UK. Six of the most promising wave and tidal energy technologies, including Pelamis to which the noble Baroness referred, and Marine Current Turbines, have been chosen to receive a share of £22 million of the Government’s marine proving fund with the aim of securing large-scale deployment of marine energy technology by 2020.

I am conscious that I have not answered all the points that have been made in the debate. I apologise for that, but, as I said at the beginning, I hope that I will be able to do so in writing.

Will the noble Lord deal with the question that I asked about security of supply? It is a very important matter and needs the attention of the Government. We are to rely to quite a large extent on 20,000 megawatts of wind power, both at sea and on land—incidentally, the facilities at sea will be subject to stormy weather and be difficult to maintain in winter. Therefore, if we are to maintain security of supply with advanced gas reactors, existing oil-fired power stations and certain coal-fired power stations coming offline, wind power will have to be augmented by new baseload power. The Government should be seriously considering what will happen over the next 10 years when all these power stations are taken out of service to be replaced only by wind. If we are to replace the wind power with a similar amount of conventional generating power, it will be a very costly exercise indeed.

My Lords, the noble Lord has more or less answered his own question, and I would not disagree very much with the answer he has come up with. Security of supply—keeping the lights on and keeping us warm—is of paramount importance, of course. Those of your Lordships who have attended the debates in this Room on the various aspects of the energy plan will know that that has been a central feature of our discussions and of the speeches made by my noble friend Lord Hunt of Kings Heath.

We believe that a mix of low-carbon energy, which will include nuclear power, carbon capture schemes, the opportunity to use gas and possibly investing in more facilities to import gas, along with the range of renewables that we have been discussing in the debate on the order, is the mix that we will need in future. But it is one on which we cannot be complacent and I am sure that the points made by the noble Lord today will be taken very much to heart.

Motion agreed.