Motion to Consider
My Lords, the renewables obligation, or RO, is a long-standing support mechanism to encourage the generation of electricity from renewable sources in the UK. It is designed to ensure that it provides effective support for the renewables sector as a whole and is managed within the department’s levy control framework. As noble Lords will know, that sets annual limits for the overall cost of the department’s levy-funded policies, enabling the Government to meet our renewable energy and decarbonisation targets while providing value for money to the consumer.
Solar PV is an important part of the renewable energy portfolio, and the sector has seen strong growth in recent years due to support from the RO and the small-scale feed-in tariff scheme. In 2013-14, we saw record levels of new capacity, with the industry maintaining strong levels of deployment at both domestic and large scales. Thirty-seven per cent of all RO accreditations by Ofgem were attributable to solar, amounting to more than 1 gigawatt of capacity.
Our solar strategy, published last year, set out the actions that we will take in partnership with the industry to ensure the sector’s ongoing success. Although in many ways this progress is good news, making a valuable contribution to our renewable electricity generation, noble Lords have raised concerns about its impact on the levy control framework budget and the need to introduce cost control measures. Back in 2013, when we published the Electricity Market Reform Delivery Plan, we set out a potential range of between 2.4 and 4 gigawatts for large-scale solar, a range assessed as being affordable which we expected to support through the RO and through contracts for difference by 2020. However, following our consultation last year, we now expect significantly more deployment and, without intervention, we estimate that between 6.6 and 10 gigawatts could be deployed. That poses a significant risk of breaching the levy control framework within the next two years, putting at risk our commitment to deliver value for money to consumers.
The draft order would amend the RO closure order to close the scheme early to large-scale solar—above 5 megawatts—across Great Britain from 1 April 2015. It would apply both to new generating stations and to existing stations that wish to add additional capacity that would take them over the 5 megawatt threshold.
As well as controlling costs, however, the Government are committed to protecting investors who have already made significant financial commitments. That is why the order provides for a number of grace periods that will enable new solar stations, and existing stations wishing to add additional capacity, to continue to be eligible for the RO after 31 March 2015 if they meet the eligibility criteria.
Sitting suspended for a Division in the House.
My Lords, I will continue from where I stopped and get my thread back.
The grace periods are not, however, designed to provide protection against the reductions in support that were set out in the last comprehensive banding review. The first grace period is for operators of generating stations that were granted preliminary accreditation by Ofgem on or before 13 May 2014—the day on which we published our consultation. The second is for generating stations where significant investments had been made on or before 13 May 2014. There was extensive engagement with the industry during the consultation period and we have listened and made changes to the eligibility criteria in response to its views. As a result, the requirements around grid connection, land rights and planning are now more aligned with the practical realities of solar PV project development processes and timelines.
The final grace period is for operators of generating stations that have been subject to grid connection delays that are outside their control. Again, the case for this grace period was made by the industry during consultation to reduce the risks to investments. It has been designed to align with that available to other technologies experiencing grid delays when the scheme closes to new generation in March 2017. This will enable Ofgem to take a consistent approach to the administration of the grace periods.
To benefit from one of those grace periods, the new generating station will need to be commissioned and accredited by 31 March 2016. To reduce the administrative burden, a decision on eligibility for both accreditation and the grace period will be taken at the same time by Ofgem. Similar grace periods for significant investments and grid connection delay will also apply to existing generating stations wishing to add additional capacity.
When the closure comes into force, we believe that there will still be a valuable route to market for large-scale schemes, with developers being able to apply for support under the contracts for difference regime. The announcement last week that five solar projects have successfully competed in the first auction round, all at less than £80 per megawatt hour—far below the support rate under the RO—indicates that the new allocation process can work for solar PV.
Those developers with projects at or below 5 megawatts are not affected by this closure and can continue to apply for accreditation until the scheme closes to all new generating capacity on 31 March 2017. That decision was taken on the basis of the available information, which suggested that they posed less of a risk to the levy control framework. However, consistent with our responsibility for managing RO expenditure under the levy control framework, we are closely monitoring deployment of sub-5 megawatt projects and will consider taking measures to protect it if deployment is growing more rapidly than can be afforded.
I am sure that noble Lords will agree that there is a need to avoid the kind of spending bubble we saw in the feed-in tariff scheme back in 2012, which still costs the levy control framework budget £300 million a year over and above what was originally planned to the solar PV sector. Our current assessment of expected deployment without intervention under the RO would cost up to £400 million a year more than our delivery plan projections and would cause us to exceed the levy control framework cap, putting at risk our commitment to deliver value for money to consumers. It is therefore important that we take steps now to ensure that large-scale solar PV remains affordable in the context of the RO and contracts for difference, not least because without action it is likely there would be little or no money for the early years of new contracts for difference, which has been shown to offer better value for money than the RO.
I commend the order to the House.
My Lords, may I ask the Minister a general question about the role of solar PV in our energy strategy? Quite large amounts of electricity are being planned and spoken about, as the Minister told us. I assume it is the case that photovoltaic generation is available only during daylight and is negligible after dark. Therefore, I assume that this capacity will not be available when we have peak demand, which occurs after dark, typically in the early hours of darkness. Therefore, are we in a sense subsidising capacity that will not be available when we need electricity most?
My Lords, I am grateful to the Minister for presenting this order and for the comments from the right reverend Prelate. This is a very good example of a difficult balancing act; clearly, having intervened in the market to take on important decisions about where we put money, which technology to support, how much it should cost and at what volumes, it is challenging.
However, it is true in all of this that we have to think about investor confidence. Just today an article appeared in the Telegraph saying that a lack of clarity over UK energy policy is forcing the UK’s ranking in the green power league down; we are now at number eight, having dropped a place. Also, if you look at where we are in the ranking of renewable energy deployment in the EU, we are almost in the relegation zone, at the bottom of that league table when you look at energy across the piece, with a very modest deployment of renewable energy into all primary energy, with only the Netherlands, Luxembourg and Malta below us in that table in the EU.
Clearly, we cannot afford to throttle back completely on any success story. Although it is true that solar has a limited availability in winter peak moments, it is also true that the costs are coming down and that, in terms of least-cost decarbonisation, solar is potentially an important component of what we need to deploy to hit our targets.
The Minister has already referred to one of my questions—namely, that there is a fear that we will have a boom in investment and in applications, and that this will cause a repeat of what happened with the feed-in tariff. I think it is fair to say that the feed-in tariff process was pretty badly handled. My bigger question here is: what mechanisms are the Government using to track these potential bubbles? How can we signal in advance—as we do with the RHI, although I am no fan of it—a steadier approach to how the levy control framework funds will be deployed? It is not easy, and I do not think that there is a silver bullet or an answer to this. The long-term goal has to be to try to get this back more into the market so that we have to do less of this administrative handling. We understand the reasoning but we need to think again about how we are going to manage this because I suspect that we will come back to it again and again.
My Lords, I am extremely grateful to the right reverend Prelate and the noble Baroness for their contributions. The right reverend Prelate raised the wider issue of daylight peak capacity of solar. One has to look at this as a whole, and solar has to be part of the energy mix. We recognise that solar is a successful part of our energy mix. We do not want to see it drop out of the mix, given that we want to increase our usage of renewables as opposed to traditional fuels. While solar may have a downside, in that when there is no sunlight there is no solar production, we should not—I was going to say “excommunicate” but I think that is the wrong word—remove it from the mix simply because it is not a 24-hour supply. As I say, it plays a very important part in the energy mix.
With regard to the noble Baroness’s comments, we have to recognise that past mistakes enable us to learn lessons. However, we should celebrate the fact that solar has become a successful part of our energy mix and we are seeing costs come down. We are working closely with the solar industry to ensure that we do not impose great difficulties in this area, but at the same time we need to respond to the costs that will be imposed on the consumer. As with all these things, compromises need to be made and these are hard balancing acts to achieve. However, the noble Baroness is absolutely right that we should constantly review our responses to technologies that were new but are now maturing and are very much part of our framework.
However, the bigger issue is that we need to have greater consistency in what we mean by energy policy because our energy policy needs to instil confidence. Investors need to know that politically there will be no dramatic changes, so it is very important that we work towards a long-term consensus on what we want to deliver. It is true that over the past four years or so we have seen record amounts of investment coming to the UK renewables sector. We should celebrate the fact that investors want to invest and generate jobs in the long term, and that they view the UK as a good place to invest. However, that needs to be viewed against the backdrop of ensuring that the political landscape aligns itself with not uprooting very sensible policies when they are put in place, and we have a role to play in that. Overall, though, the fact that the noble Baroness has acknowledged that this is a good thing to do and that the right reverend Prelate by and large recognises—
I wonder whether I can come back briefly. I would not want to excommunicate any form of renewable energy, or burn it at the stake for that matter. I would not want to sell indulgences either at too high a price, though, especially if we are selling them to generate electricity at times when it will not be available when we are facing peak demand. I have anxieties that two or three years down the line we may suddenly get exceptional winter weather and no electricity will be available from the continent at the level that typically comes in. I take the view that such indulgences as we sell—subsidies—should be available for electricity that will be available when we most need it. Is the Minister confirming that solar PV is not part of our calculation as to how we meet peak demand?
I do not want my views to be taken out of context. It is important to see solar as part of our energy mix. The capacity markets and auctions are there to ensure that we have the balance: when we need peak, other means of energy generation are available to us, but when we have tight periods we do not run the risk of the lights going out.
We need to be clear that we have a number of targets that we need to meet. Part of that is our carbon emissions, part is trying to strengthen the renewable sector and part is to ensure that there is not an unreasonable cost to the consumer when those technologies are maturing. The steps that we are taking recognise that. We will find technologies that, just as we are trying to displace coal, may one day displace some of the technologies that we see today as being far more effective. I hope I have allayed the fears of the right reverend Prelate, although I think not.
I am a simple soul in a complicated world and, no doubt, speak as a fool. Still, there is a syllogism that solar PV is not available after dark but peak demand arises after dark, so solar PV capacity is not available at times of peak demand. It is a relatively simple logical proposition, and I wonder whether the Minister is denying or agreeing with it.
That is a fair point. However, peaks may shift. We may have a summer peak, especially if we have very hot summers and need air conditioning, due to climate change. Summer peaks happen quite a lot on the continent. We have probably dealt with this question—we will have storage. There will be times when we have a great deal of solar power during the day going into storage to be used at night. These are engineering problems that can be solved.