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Energy: Feed-in Tariffs

Volume 731: debated on Monday 31 October 2011

Statement

My Lords, with the leave of the House, I shall now repeat as a Statement an Urgent Question made in the other place by my honourable friend the Minister of State for Climate Change.

“Since the feed-in tariffs scheme started it has been successful in encouraging people up and down the country to get involved in local, clean, green energy generation. Solar PV has led the way and over 100,000 homes now generate their own electricity. But let us be clear: the current returns now available on solar PV investments, funded by consumers through their energy bills, are unsustainable. Falling PV costs mean returns are double those originally envisaged under the scheme. This does not provide value for money for the consumer.

If we do not act now, the entire £877 million FITs budget for the current spending review period will be fully committed within the next few months. That would limit the number of people able to benefit from feed-in tariffs in general. We are therefore urgently consulting on new tariffs for solar PV installations. Because of the urgency, we propose that these new tariffs apply to all new installations that become eligible for FITs on or after a reference date, which we propose should be 12 December. We are also seeking views on other proposals, including one to strengthen the link between feed-in tariffs and energy efficiency. It cannot be right, and it is a fault of the system we inherited, that we currently subsidise renewable energy generation for inefficient buildings.

We are determined to secure successful feed-in tariffs through sustainable growth rather than through boom and bust. That is why we are consulting today on new tariffs for solar PV: to save the FITs budget in the interests of all eligible technologies and to bring much greater coherence to this Government’s ambitious policy to green Britain’s homes”.

My Lords, I thank the Minister for repeating the Statement in your Lordships’ House today. It is not the first time that we have discussed feed-in tariffs in your Lordships’ House. I have to say to the Minister that I was surprised to receive an e-mail this morning announcing that a Written Statement was due to be issued. Given the public interest, I was surprised that the Government wanted to issue a Written Statement rather than an Oral Statement. I appreciate this, and I am grateful to the Minister for repeating it. With thousands of jobs and businesses at risk, he will understand the concern that this could have been slipped out as a Written Statement without the opportunity to seek answers to some very important questions in your Lordships’ House.

The Minister will recall that we discussed this issue in your Lordships’ House just before the Summer Recess. Given that the order we debated then made significant changes to the feed-in tariff system following a previous consultation, can the Minister tell us why, so very soon after one consultation and legislative change, the Government have now initiated another?

When I asked the department about this previously I was informed that the consultation was required because of a loophole in the law. I found this quite surprising, because I was concerned about whether the issues addressed in this consultation that seek to plug that loophole were evident or should have been evident at the time of the last consultation. When did the Government become aware of this loophole, and would it have been reasonable for them to have been aware of it sooner, prior to this consultation—indeed at the time of the previous consultation?

Does the Minister really understand—I am sure he does—how difficult it is for investors to have any confidence in the Government if the goalposts on feed-in tariffs keep moving, making it more and more difficult for them? Are they supposed to guess what the next so-called loophole will be that the Government will try to plug? This is the second significant change in a matter of months. I have to say to the Minister that it seems to be a bit of a shambles. I am sure he is aware that investors need certainty, and this merry-go-round of consultations and changes provides exactly the opposite for investors and for the industry. What message will the Minister give to current and potential investors, and will he offer an apology to them for the chopping and changing that we have witnessed over the past two months?

As I said in our previous debate on this issue, to say that only the Government wanted to see any changes in the feed-in tariffs and that everybody else wanted to leave the feed-in tariffs as they were creates a false dividing line. Investors and others are aware that installation costs have fallen by around 30 per cent, and it was recognised that feed-in tariffs would change in line with that. Many preferred a tapered change.

What is not understood is why the Government have reduced the tariffs by more than 50 per cent, which is a significantly larger amount than the reduction in costs. With a new rate of 21p per kilowatt hour, less than half the previous rate, has any assessment been made of the impact on jobs and businesses? Last year the solar industry employed 3,000 people in 450 businesses. Today it employs 25,000 people in 3,000 businesses. Has any impact assessment been undertaken of the impact on jobs and investment in business?

In the previous consultation just a few months ago, over 80 per cent of those who responded opposed the Government’s plans. What level of support do the Government expect for the plans they have issued in this current consultation? What notice will be taken of the consultation this time? Although the consultation does not finish until 23 December, the cut-off date for eligibility under the current scheme ends before that on 12 December, in just six weeks’ time. Will the Minister take any note of the responses to the consultation, or is this a pronouncement of government policy rather than a consultation on possible or intended changes to government policy?

I listened with interest to the Statement in the other place earlier today, and I thought I heard the Minister, Greg Barker, say, if I understood him correctly, that there could be individual exceptions to the cut-off date. Does the Minister know what these are, or what the process will be for those individual exceptions? Can any advice be given to those who have already commissioned domestic solar power systems and paid a deposit but who will not have been able to manage the installation, certification and official registration by 12 December?

Has any assessment been made of the impact on community projects, and are the Government worried that the changes being made will mean that those on lower incomes are now far less likely to benefit, while those on higher incomes are more likely to be able to do so? It might be helpful if I quote to your Lordships’ House a gentleman called Nigel Farren from Energise Barnet, who says: “Churches, synagogues, mosques, schools, sports clubs and other community organisations across the country are getting together to establish energy saving initiatives so they can lower energy bills, reduce carbon emissions, and eradicate fuel poverty among their members. Unless community-owned projects and community-buying group initiatives are ring-fenced from the feed-in tariff cuts, the trust of these organisations and thousands of volunteers will be lost, setting back the whole green agenda in keeping secure their help in delivering the Green Deal”.

Finally, the Secretary of State Chris Huhne said to the Corporate Leaders Group on Climate Change earlier this year,

“The next time someone asks where the growth is coming from, you can tell them. Green energy”.

It is a sad irony that on the very day the Deputy Prime Minister Nick Clegg announces funding for 35,000 new jobs, a successful industry that has created 20,000 jobs in the last year seems to have had the rug pulled from right underneath it.

At the beginning of the Minister’s comments he said that this was a successful scheme. It is, and we want it to remain so—we take great pride in the capacity that it has built up and those who benefit from the current scheme. We know that there have to be some changes, but these are very serious issues that I have raised today, and I hope the Minister will be able to answer my questions.

My Lords, I am grateful to the noble Baroness for her questions—quite a lot of them—which I will deal with. I will, I hope, cover the canvas of this particular issue.

The motive for the Government here is putting consumers first. That is absolutely fundamental in these difficult times. I was delighted that Consumer Focus should say that the Government are,

“taking a sensible approach to protect energy bill-payers with the proposed changes to Feed-in Tariffs. Incentives to overcome the high set-up cost of solar panels and help make our energy supply greener are necessary. But the cost for this is passed onto bills of energy customers and we need to strike a balance”.

I do not think you can say it more clearly than that. That is at the very heart of the difficult decision that we have had to take in changing these rules.

Why was this initiated? It was initiated simply because if we carried on at the current rate at which people are taking up this thing, we would have run out of money by March. Therefore there would have been no money available to pay for other excellent initiatives that have the benefit of feed-in tariffs such as anaerobic digesters and other projects that we have out there.

We read in the St Albans & Harpenden Review that a solar panel company is advertising panels at £3,995, which is down enormously from the original cost—not by 30 per cent but by nearly 60 per cent. There is also a guaranteed IRR of 14 per cent, backed by the Government through an incentive scheme that frankly has become overheated and bloated and is in danger of ripping off consumers and those who invest in it. So of course the goalposts have been moved for the investors who the noble Baroness wants to have a clear path. Of course, they brought it upon themselves to a large extent by advertising schemes that show that government-backed schemes have outstanding benefit beyond the normal rate of investment return. It is reasonable in the current world that we have an investment return of 4.5 per cent or 5 per cent, which is what the new tariff would offer.

The impact on jobs is regrettable, given that an industry has developed. I am sure the employers will look very closely at that and will hopefully look to the export market, where, as we all know, the sun shines more often than it does in this country. I have just been on a visit to China, and I offer to support any solar panel manufacturer in their export endeavours. As we all know, one of the unfortunate things about this country is that the sun does not always shine when we need energy most, and we have the shortest days of the year.

The Government are left with a choice. Does the tariff represent value for money for the customer? Does it represent value for the taxpayer? Does it have a real impact on the supply of electricity to homes, which is currently 0.1 per cent and could go up to 0.3 per cent? Do we have the climatic environment that is necessary or beneficial for this type of product? The answer is that we believe it could be used better elsewhere.

The noble Baroness asked further questions on cut-off dates, the response to the consultation and community things. Of course, the whole point of consultation is that we are consulting. This is not an edict but a consultation period. We want to listen to views before we go ahead with our proposals and we will look at exceptions, which is the point. On community projects, it is important that we maintain community buy-in. That is why we have agreed to keep 80 per cent of this tariff for aggregated schemes, which will still provide a return on investment of around 4 per cent. Because the purchasing power of these solar panels can drive greater economies of scale, they should be able to benefit more from IRR. Therefore, it is wholly in tune with this Government’s policy, which is to be the greenest Government ever and to deliver a benefit for consumers. That is at the heart of these proposals.

My Lords, it is clear that one of the challenges, as mentioned by the Minister and the noble Baroness, is the sustainability of this industry. One area in which I would give sympathy to the Minister is that if we have an industry that steams ahead until next April but then there is no money and everything stops, we will be in the situation that Spain and Germany have been in in the past whereby we have built up an industry that then completely disappears. We need to make sure that that does not happen and that we have a sustainable industry. We want a sustainable environment that works over a number of years and builds up, which is why I am sympathetic to trying to achieve that in these measures.

Having said that, one of the most unfortunate things is that we are moving to the second review on FIT rates in a short period. Where we have a global investment market in energy—in the United Kingdom we have a requirement, estimated by Ofgem, which is often quoted, of £200 billion of investment over the next 10 years—how can we make sure that the investing community remains confident in government schemes and that investment in our energy systems, energy plants and energy distribution systems can be sustained? One change to FIT rates is unfortunate, two might be careless, but another one would mean that we could destroy confidence in investment in this industry. It is not perhaps so much of a problem for manufacturing industries, but the installation industry in this country is far less mobile.

Although I applaud the Government’s efforts to make sure that this business and this industry stay sustainable over a number of years, how will the Minister ensure that that confidence, not just of households but of other larger investors, remains in the UK energy market?

As always, my noble friend Lord Teverson is well informed about these matters and I am grateful for his broadly supportive comments. I totally agree and accept that the confidence of the investor is paramount. However, put yourself in the position of the Government. We inherited a scheme of feed-in tariffs that did not consider the fact that the more solar panels that are bought, the cheaper they become, as illustrated by this argument; and that a pot of money is available to support this scheme, which becomes a scheme for which the IRR is way beyond most people’s dreams and beyond what is reasonable for consumers. At some point, a decision has to be made to say stop or pause or to take action. That is broadly the step that we have taken on this.

I wholly agree that getting future investment and the infrastructure of this country right is fundamental, but we have to get that right against the backcloth of heavy lifters in the game changes for the electricity supply. As I have already indicated, I do not believe that the 0.1 per cent, or the £3.2 billion that we will have saved the consumer, is the right change of game plan for electricity in this country.

Perhaps I may remind the House that this is an Oral Statement and that interventions should be limited to brief comments and questions.

My Lords, I am grateful for the Minister’s comments. My concern is that this is merely about the Government’s priorities, which are being set by a modelling of the energy system that is proving to be utterly incapable of modelling what happens in the real world. This is now the second set of changes whereby a successful industry is essentially being cut off at the knees because of an unexpected success rate, when this is something that we should be championing and backing. The Government must accept that if their modelling is incorrect, they must go back to first principles and work out which technologies are going to deliver the step change that they describe. No matter how much money is thrown at some technologies, they may not succeed—I am thinking of CCS and the current generation of nuclear.

The Government saying, “This is just too successful, we cannot afford it”, is not a good answer. We must go back to first principles and ensure that our successes continue to be successes. If they are having trouble now with feed-in tariffs, they will have even more trouble when they look at energy market reforms and try to fix prices for the long term on the big generators. That should be settled by the market. I am very concerned that the modelling is incorrect and that trying to fix prices is just the beginning. We should probably look at market-based solutions.

The noble Baroness is completely right. The modelling was incorrect. We inherited it and we have sought to get it right. As I asked earlier when I talked about government priorities, do we think that this is a game changer in electricity supply and that it is in the best interests of the consumer? The answer from Consumer Focus is no. As regards the game change in the electricity supply of 0.1 per cent, even if every house had them the figure would get to only 0.3 per cent. Therefore, this goes down the list of priorities. I am afraid that it is not a government priority, given the massive problem that we will have for electricity in the 2020s.

My Lords, first, I declare my interest: I chair a very small community interest company, a social enterprise, that was set up in order to get cheaper, more sustainable fuel into poor and deprived communities. It has had a good success rate in doing that and the next phase was to seek to introduce solar PV. I am interested that the Minister thinks that it is not very successful. I could take him to some elderly residents in my previous constituency who have solar and which works remarkably well for them. They were looking forward to solar PV to deal with electricity. The reality is that the Government are taking a huge risk with the market. I want to be sure that they are watching that they do not kill off the market altogether with these actions.

The other issue is that nationally—not just in the north-east and Yorkshire from where the company to which I referred operates—the work on due diligence, tenant consultation and so forth has meant that very little work has been done in terms of installing solar PV on social housing. I want to be sure that in the changes the Government will not penalise tenants in social housing. I confess that I have not read all of this very thick document, although I have tried to do so, but I am not convinced that the Government have really thought their way through getting to social housing. Will the Minister tell us what his thinking is? Would he also meet people and a delegation from those organisations concerned to tackle fuel poverty and to use solar PV as one of the means of enabling social housing tenants to avoid paying the high end of energy costs, as they often seem to do at the moment?

Obviously, the whole point of the consultation is that we have representation from the noble Baroness and those communities that she represents. I would be delighted to meet them and pursue this issue in greater detail.

The scheme has been successful—too successful—and that is why we are taking these steps. As I referenced earlier, there is a continuation for aggregated schemes. From the communities’ point of view, surely the most important thing that we can do to support them is to have a retrofit programme. If we start from that end, solar PV makes sense. That is why the Green Deal is so important and is a banner product for this new Government.

My Lords, I apologise that I was not here for the start of my noble friend’s Statement, but I had already read it. I welcome what he said about the importance of protecting consumers. I am not sure the noble Baroness, Lady Armstrong, recognised the fact that the cost of this is actually borne by the consumers of electricity; it is not paid for by the Government. The Government put an envelope around the maximum sum. In fact, the figures show that it will increase by nearly three-and-a-half times over three years. Nobody could accuse anybody of being stingy on that one. The fact is that any of these subsidies for special help to different forms of electricity generation goes straight through the companies on to electricity bills. I do not know whether the noble Baroness studies her own electricity bill; mine shows the amount that is being paid towards government subsidies—at the moment. What is it going to be in 2020? Ask Ofgem and it will tell you.

Why is it that not until paragraph 19 is there is a reference to the,

“placing a financial obligation onto energy companies, which is then passed onto the consumer through energy bills”?

If this consultation document had paid as much attention to that factor as my noble friend did in his Statement, I think it would be a great deal easier to understand.

As always, I am very grateful to my noble friend Lord Jenkin of Roding for his intervention. It sets up the fundamental question: what is going to be the cost of FITs on the consumer’s energy bill by 2020? It is going to be £26. Bringing in these steps will reduce it to £3, which some people might not want to spend, but it is a considerable reduction. My noble friend is quite right about putting the consumer first, and I apologise that those in my department are masters of disguising that fundamental point.

My Lords, given that the coalition agreement includes a strong commitment to encouraging community ownership of renewable energy projects, what advice can the Minister give to the community energy co-operatives around the country? I am aware of three in my area that have live share offers at this moment. It is now unclear whether their proposed projects remain viable. Should they continue to solicit funds? Does the Minister recognise, as I do, that further reductions of the feed-in tariffs for installations at more than one site—which, I understand, were put in in order to get rid of the “rent a roof” schemes—actually threaten community projects that cover more than one site, such as local hospitals in Warwickshire or local schools in my area in Wey Valley?

I am very grateful to my noble friend. The fact is that if we did not act now, there would be nothing in the pot for those schemes to which she is referring because it would be empty by March for the next spending review period. We have taken this action to allow community schemes, among others, to carry on. This is not retroactive. If you are in the scheme already, you are still benefiting from it. It is new regulation that we are bring in. I hope that gives her a degree of comfort. I am, of course, happy to explore it during the consultation process and, as always, I am delighted to hear my noble friend’s views.

My Lords, I welcome the Statement, which I hope will be one of a series aiming to reduce the subsidies available for renewable energy, as the Government seek to limit their cost to the consumer and to the economy.

The Written Statement issued today in the name of Mr Gregory Barker stated:

“Over 100,000 homes now generate their own electricity”.

Will the Minister say whether he meant all their own electricity or just some of it, perhaps including those who generate only a very small part of their own electricity? Will he give any figures to indicate how much electricity is being generated or has been generated to date by solar PV, and how much do the Government hope or expect will be generated in the future?

I will have to write to my noble friend on the latter question. The answer to the first question is as in the Statement—that over 100,000 homes now generate their own electricity.