Motion to Approve
My Lords, this draft order seeks to amend the Renewables Obligation Order 2015, which provides the legislative framework for the operation of the renewables obligation scheme, referred to as the RO scheme, in England and Wales. This draft order makes provision for indirectly exempting eligible energy-intensive industries from up to 85% of the policy costs of funding the RO scheme. The 85% is the maximum that we are allowed to provide as set out in the state aid guidelines. The draft order aims to avoid putting these industries at a significant competitive disadvantage. Our policy of reducing renewable energy charges for energy-intensive industries is similar to that of a number of EU countries such as Germany, France and the Netherlands.
Energy-intensive industries, or EIIs, play an important role in our economy, providing highly skilled, well-paid jobs in manufacturing sectors such as steel, chemicals, glass and ceramics, often in areas of economic disadvantage. These businesses use a significant amount of energy in their production processes. While our industrial gas prices are internationally competitive, our industrial electricity prices are higher than those in other European countries. In the EU 15, the UK’s industrial electricity prices for large consumers were the highest after Italy’s in 2016. This places UK EIIs at a competitive disadvantage as they operate in a global marketplace and cannot easily pass on these increased costs to international consumers. As a result, EIIs may decide to move production abroad or make further investments overseas in countries with lower policy costs than the UK.
In order to meet our legally binding climate change and renewable energy targets, we have implemented a number of policies designed to incentivise generation of electricity from renewable resources, including the RO scheme being discussed today, the contracts for difference, or CfD, scheme and the feed-in tariff scheme. The costs of these policies are recovered through obligations and levies on suppliers, who pass these additional costs on to customers. The RO scheme has since 2002 been the main financial mechanism to incentivise deployment of renewable electricity generation in the UK. Renewables generating stations supported under this scheme contributed nearly a quarter of the UK’s total electricity supply in 2016, up from just 3% in 2002. The scheme is funded through an annual obligation on UK electricity suppliers to present a certain number of renewables obligation certificates, or ROCs, sourced from renewable electricity generators to Ofgem, the administrator of the scheme, in respect of each megawatt hour of electricity supplied.
The Government’s intention is to protect EIIs from these additional costs and, where possible, to do so using an exemption rather than compensation scheme. The reason for this is that exemption gives greater certainty to businesses that the support from government will continue as it is set out in legislation rather than being subject to potential uncertainties in budgets. Furthermore, exemption from charges rather than compensation can result in additional working capital becoming available for other business uses.
The CfD scheme already has an exemption scheme for eligible EIIs and regulations were made last month. Specifically, these cover an exemption for EIIs from up to 85% of the costs of the CfD scheme. On the RO scheme, which we are discussing today, we have been compensating eligible EIIs for 85% of the indirect cost of the RO since January 2016. In the 2015 spending review, the Government announced that they would move to an exemption scheme, and this order will do that. We consulted on our proposals for how we plan to deliver the RO exemption and received 69 responses to the consultation. The RO exemption is intended to be available to the same EIIs as are eligible for the CfD exemption. The administration of the RO exemption, including the EII application and the certification process, will be carried out through the same processes already set up in respect of the CfD exemption.
Finally, for the feed-in tariff scheme, the move to an exemption scheme may take slightly longer than originally anticipated, and the compensation scheme will continue. The reason for that is that state-aid considerations will necessarily take longer to resolve.
I turn to the impact of the EII exemption from the RO scheme on other electricity consumers. We recognise that it will redistribute the costs. We estimate that this would increase the average annual household electricity bill by around £2.30 or 0.2% each year to 2027-28. We estimate that the impact of this policy on the number of households in fuel poverty will, thankfully, be small. These measures should be seen in the context of steps that the Government have already taken to reduce household electricity bills. Our energy efficiency policies reduced the average household energy bill by £14 in 2016. The energy company obligation, or ECO, together with the warm home discount scheme provided at least £770 million of support for low-income and vulnerable households in the current year. We have published a draft Bill that would require Ofgem to impose a price cap on standard variable tariffs and other default tariffs that customers are moved on to at the end of a fixed-term deal, bringing an end to unjustifiably high prices.
Just last month, we also published Professor Dieter Helm’s independent review into the cost of energy. We will now take the time to assess carefully his proposals on how to reduce costs across the electricity sector and on how policy costs should be allocated.
Furthermore, as we set out in our Clean Growth Strategy and Industrial Strategy White Paper, we are developing a package of measures to support businesses to improve how productively they use energy. We will consult on this in 2018. We aim to improve energy efficiency by at least 20% by 2030. We will be working with the most energy-intensive sectors to implement the joint action plans we have developed with them on industrial decarbonisation and energy efficiency.
Turning to the detail of the legislation, this instrument makes a number of amendments to the Renewables Obligation Order 2015 to provide the legislative basis to exempt eligible EIIs from up to 85% of the indirect costs of the RO scheme. In particular, it makes changes to the methodology for calculating the size of the annual supplier obligation, referred to as the obligation level, to reflect the fact that it will be applied to a narrower consumption base. Noble Lords may be interested to know that in the light of stakeholder feedback during the consultation, we have revised the methodology for calculating the RO supplier obligation to adopt an equally robust but more straightforward option for implementing the exemption.
The order also changes the scope of the obligation to exclude electricity supplied to eligible EIIs. The draft instrument also imposes additional requirements on electricity suppliers to provide information to Ofgem and BEIS about the supply of electricity to eligible EIIs for the ROs end-of-year supplier compliance process.
The instrument sets out a process for introducing the exemption, which will entail calculating and publishing a revised version of the 2018-19 obligation level to take into account the new exemption methodology. This process has been designed to provide some lead-in time to suppliers and EIIs to ensure that processes are in place to administer the exemption and that suppliers, especially the small, independent companies, have a chance to adapt their systems.
The Government intended the exemption to be introduced in January 2018. However, as the timings for achieving that start date have now passed, subject to parliamentary approval, we now expect this to be implemented from 1 April 2018 and to publish a revised 2018-19 obligation shortly.
This draft instrument applies to and implements the RO exemption for England and Wales. It is intended that the exemption should apply across Great Britain. The Scottish Government have devolved responsibility for administering the RO in Scotland. They have approved an equivalent provision for delivery of the RO exemption through the draft Renewables Obligation (Scotland) Amendment Order 2017. The exemption will not be introduced in Northern Ireland at this stage. However, it may be extended to Northern Ireland in future. As a devolved policy matter, this would be for a restored Northern Ireland Executive to take forward if they so decided.
The House of Lords Secondary Legislation Scrutiny Committee raised two points following its scrutiny of the draft order: first, why has BEIS decided on this change so soon after the compensation scheme was introduced; and, secondly, whether BEIS is seeking state aid clearance to extend the RO exemption to direct competitors?
On the first point, the compensation schemes were introduced in January 2016 following the announcement in the 2014 Budget. However, the Autumn Statement 2015 then announced the Government’s intention to change to an exemption scheme, specifically to provide an exemption for energy intensive industries, including the steel industry, from the policy costs of the renewables obligation and feed-in tariffs.
On the second point, direct competitors are those businesses which compete with EIIs but are not themselves eligible for the exemption. The Government submitted a state aid notification to the European Commission to address the issue of potential intrasectoral competitive distortions, but the Commission does not think that our proposal is compatible with the relevant state aid guidelines. The Government are exploring alternative options which may be available within the scope of those guidelines, and we will consult on widening eligibility for the exemption schemes for EIIs to address this potential issue while taking into consideration the impact on consumer bills.
The draft order will make the necessary changes to the Renewables Obligation Order 2015 to allow us to exempt eligible EIIs from up to 85% of the indirect costs of funding the RO scheme. The measures set out in the order will provide these businesses with greater long-term certainty and potentially release working capital. Furthermore, they will mitigate the risk that these companies are at a significant competitive disadvantage and might therefore choose to move their production abroad. I beg to move.
My Lords, I declare an interest as chairman of the Committee on Climate Change. I thank the Minister for her introduction of this order. I do not wish to make comments on the best way of doing these things; that is a matter for the Government. I want to underline some of the points my noble friend has made. The first is on the effect of the actions of the Government on domestic fuel bills. Although this is largely—indeed, almost entirely—concerned with industry, it raises again the canard that somehow or other our green measures mean that people pay more in their bills. But, of course, they do not. The Climate Change Committee has carried out very extensive work on this. I think 85% of the population have a combined tariff and are paying some £9 a month more because of our green measures, but their bills are £20 a month less because of the energy efficiency actions that have resulted—in large part from those measures.
That was hugely attacked by those who do not believe in climate change, but they could find nothing wrong in the mathematics. That was their finest argument which has now been removed from the case. On these matters, we ought to be using facts rather than emotion, and we should be clear about it. If we have more efficient equipment, better boilers, better toasters and, if I may say so to Sir James Dyson, better vacuum cleaners, people will not need to use as much electricity, and this has been very notable.
I am glad that my noble friend raised that question because it is important for people to recognise that we have this in mind all the time, not least because the Climate Change Committee has a commitment to protect and help those who are in energy poverty. I do not want anyone to think that we do not think about it as a permanent part of how we work these things out.
She also said that the purpose of the order is to ensure that heavy energy users will still find it possible to manufacture and export from this country, and will not be forced elsewhere. The Climate Change Committee regularly investigates this, and has shown that there is no evidence that our green measures are driving anybody abroad. It is a matter that we have to look at all the time. It is not static. We have constantly to look at this, and I am pleased that the Government have taken these measures. However, I have to say—because it would be unfair not to from my independent position—that they were pretty slow in doing it, and we had to assure the industry that it was coming. When the committee looked at the effects of the reductions in compensation provided in that case, it seemed to us that by and large they were satisfactory—indeed, more than satisfactory if one had concern about it. I must say that it is not always the view of the industry, but it would say that, wouldn’t it? We have more or less got it right, and I want to say so, because sometimes I have to be pretty tough on what the Government have been doing. In this particular case, in the way in which it has been implemented—apart from the tardiness—it has been very effective.
I want to finish by saying something about industry itself. I was sorry that my noble friend did not raise this matter, but it is no good if industries which rely on a great usage of energy think that they are merely let off the hook. The reality is that we all have to fight the battle against climate change. If you are a heavy user of electricity, or, indeed, of energy in general, there is a heavier weight on your shoulders to reduce that use, be more efficient, use newer technologies and ensure that you use alternative methods of producing goods if they are available. It is also very important that these industries do not overstate their case as in many cases the energy costs which go into producing their products are nothing like as high as is suggested. We have chosen these industries because they are remarkable, in the proper sense of that word, in that they have high energy costs. However, that does not excuse any of them not seeking to reduce their costs and emissions.
I am not attacking the industries concerned as some have been extremely good but that behaviour is not universal. There is a tendency for people to say that someone else ought to help them. However, it is important and apposite to repeat that we are all in this together. Climate change is happening and everybody has to oppose and fight it. None of us can get off the hook by saying that we are a special case. Therefore, I hope that my noble friend the Minister will do her best to remind these industries that the community accepts that this burden has to be carried more widely, but in return it demands that they become more efficient as that is the only deal on offer.
In that regard, I hope that my noble friend will look very carefully at any changes that she intends to make following the publication of recent reports and the like as this area is very complex. We spend a lot of time looking at these issues and we have to be careful about some of the solutions that are put forward which appear easy or arise from prejudiced approaches. We need to be very clear that we need to listen to the whole range of advice before we make changes. Therefore, I am pleased that the Government have taken some time to decide exactly how to approach this issue and that they will look for other ways to satisfy the problem to which she referred, while ensuring that they act within the European Union rules. I hope that she will not mind my saying that it will be a great sadness for Britain when we do not have these rules as we will then be dealing with other people who are kept within sensible returns by what is on the whole a very good system in the European Union. That matter is for another day, but I hope that my noble friend realises that I am not going to let her off the hook on the subject of Brexit, which is, of course, the most disastrous policy that any of us have dealt with for many years.
My Lords, the noble Lord, Lord Deben, made some of the points I intended to make although he is somewhat more forgiving than I am. I want to put on record concerns about the exemption for the eligible energy-intensive industries from a proportion of the indirect policy costs of the renewables obligation scheme. Obviously, I can understand why it seems desirable to remove any cost to our industries that might make them less competitive. However, what would make them most desirable would be to reduce their costs by addressing the need to decarbonise, even in the most challenging of those industries. I am concerned by the message that this measure sends out—namely, that to an extent these industries are being made a special case, as the noble Lord, Lord Deben, said, and that environmental measures are dispensable when they come up against competition.
To meet our 2050 ambition to cut emissions from UK industries from 100 to 27 metric tonnes of carbon dioxide, we need to address the issue, not circumnavigate it. Obviously, that is challenging, as certain materials—such as those in steelmaking—require a lot of energy to reach the required temperatures, and certain materials developed for industrial use create emissions because of the chemical processes that they must undergo.
I know that the Minister referred to some of the things that the Government are doing, but they must encourage and, in a sense, force the issue. They need to make industries take action to reduce their carbon footprint, and push them to find suitable low-emission substitutes for materials, introduce radical resource efficiency programmes and reverse supply chains, as well as look at energy efficiency for industrial plants and CCS programmes.
The reallocation of financing for the exemption means that it will fall on those who have done nothing to deserve it. I am a great fan of the “polluter pays” principle, rather than it being put on the “canard” of energy prices, as the noble Lord, Lord Deben, said. The exemption is not the biggest of deals; I think some 130 companies will be affected by the scheme. As I said, it is not merely about the money; it is the fact that companies are being let off the hook and not being forced to do the right thing.
I thank the Minister for her introduction of the order. She explained it very well; I will not need to detain the House for very long. I am grateful to her for explaining all the technicalities, updates and timetabling.
As is customary on these occasions, I do not oppose the order. Indeed, I support it, albeit with some comments to make and questions to ask. This side of the House supports the objective behind the order to enable energy-intensive industries to be internationally competitive. They are large, important sectors of the economy; they are of key strategic importance to the UK’s future well-being, not only on their own merit but because they provide key core products needed in many other industries.
I have a few questions on the order that highlight some possible snags where clarity would be of great assistance. I thank the Minister’s department for the excellent memorandum that it produced for the order, although I was surprised by page 4, which states:
“This move will also reduce government spending and is in line with Government’s long term economic plan”.
I was wondering what long-term economic plan it means. Do the Government have one? The statement is perhaps pertinent where it states that this will reduce government spending. The order removes the cost borne by the taxpayer in the previous, post-event compensation scheme and puts it, via the exemption scheme, firmly on real-time bills, borne by the bill payer—the consumer. That element was keenly debated in the other place, as it transfers the costs from every taxpayer on to only those who are householders. The Government are correct to state that there is a huge cash-flow benefit for the energy-intensive industries to do this, and that it is administratively beneficial. That is recognised and agreed. However, behind the shift from taxpayers to bill payers, I have several questions where this effect should be clarified, so that one can judge whether we should be doing this. At this point in my remarks, I am grateful for the contribution of the noble Lord, Lord Deben—his points were very well made, and echoed by the noble Baroness, Lady Featherstone.
The memorandum explains that the RO exemption can be valued at £200 million a year to energy-intensive industries. That is further explained as being worth £3.2 million per annum to the average EII—a considerable sum. The memorandum states that the Government wish to expand the list of energy-intensive industries to many competitors in the industry. Does this value of £200 million relate only to the existing exempt participants, and, if so, what would be the total cost should the exemption be expanded? The memorandum explains that the Government are awaiting state aid clearance for this, whereas the Minister in the other place, since echoed by the Minister tonight, seems to suggest that this clearance has been denied by the EU. Is there time to seek other solutions or will the Government merely await the UK leaving the EU?
The costs of the RO exemption following this order will be redistributed to non-eligible domestic and business users, increasing their bills. The memorandum illustrates the redistribution between households and businesses of various sizes without defining the category of small, medium and large businesses. I presume that there is a continuum of business sizes rather than a banding. Would it not therefore be more transparent to include the increased cost in terms of cost per kilowatt hour? The key aspect to understand is the precise increase in percentages on each business size.
The memorandum has confused me, as it states on page 4 that to a small business energy user the cash cost average would be £160 per year, yet on page 7 of the impact assessment the figure is put at £4,300 as a best estimate. Can the Minister explain this discrepancy? Whatever the figure, if the average small energy user has their energy bills increased by the introduction of this measure—from what I have been able to research, by a figure of 10% or more—this is a significant amount and should have a bearing on the policy. Is this not a key disbenefit of the policy on the large entrepreneurial section of the economy—the small business sector? Similar arguments could also be applied to medium and large businesses.
Another key consequence of the transfer from taxpayers to bill payers will include the effect on the poorest of our society: those in fuel poverty. The impact assessment recognises this but makes no monetary impact assessment other than making the statement that,
“there will be a very small increase in the number of fuel poor households”.
This is hardly an appropriate position to take without explaining exactly what this will mean in their numbers, the increase in cost and what percentage that cost is, both with the narrow and the wider definition of those in the energy-intensive industry. Will the Government revisit the ECO and other measures in consequence of this measure?
This measure is also subject to the levy control framework. When the memorandum states that this matter will reduce government spending, will it result in a reduction of the budget of the levy control framework, allow another important aspect of expenditure to go ahead under the framework, or merely reduce the disputed amount of the overspend of the framework? Can the Minister explain? Are the Government making progress in their review of the levy control framework?
While I welcome the help this provides to the energy-intensive industries, there seems to be a bit-by-bit implementation of measures, first in relation to the CFD, now in relation to the RO, and soon in relation to the FIT scheme. The Minister indicated in her remarks that there are problems with the FIT scheme and that state aid difficulties could delay it further. However, what is the continuing extra creep on costs transferred to other businesses by the accumulation? Relentless increases on bills to the householder under the standard variable tariff is quite rightly an issue to be addressed. Have the Government thought this through and do they have a consistent and comprehensive plan?
I thank all noble Lords for their contributions to this very important topic. I turn, first, to the comments of my noble friend Lord Deben. I agree with him that there are pressures on bills both upwards and downwards. As he pointed out, thankfully the downward pressures are currently winning out, which is very positive. Clearly there is much more to be done in energy efficiency, but at the moment the downward pressures are far greater than the upward ones.
My noble friend mentioned that the Committee on Climate Change looked at the potential for carbon leakage by companies choosing to move abroad to take advantage of different policy environments. I am pleased that the committee concluded that the threat is small, although we should not ignore it completely. However, it is right to support these industries so that we are certain that they will stay in our country and continue to employ people, particularly highly skilled people, in diverse industries.
On timing, perhaps I may lay the blame at the feet of the EU Commission. We submitted our pre-notification on this matter in April 2016 and received a response in June 2017. We published our response to the consultation and laid regulations the very next month, so I believe we acted as quickly as we could. However, on a positive note, I hope that the energy suppliers will have used the time to make sure that they are fully prepared for the introduction of the regulations.
In which case my noble friend has my apologies. I am aware that the original compensation scheme was mentioned in the 2014 Budget but was then not introduced until January 2016. I hope that that was to make sure that the system was bullet-proof when it was introduced and not for any other reason.
My noble friend is completely right about businesses becoming more energy efficient. We expect all EIIs to bring down their costs through their own measures, and they are doing so—for example, through the joint industrial decarbonisation and energy efficiency action plans, which seven of the most energy-intensive sectors have already developed with the department.
The noble Baroness said that the policy will impact those who are worst off. I mentioned in introducing the order that we have taken huge steps to help those on the lowest incomes and the most vulnerable with the energy company obligation and the warm homes discount. I can only reiterate that we are doing these things.
I thank the noble Baroness and take on board that she said “those who did not deserve it”.
She also talked about the polluter pays principle. I do not think that the department would say that we are turning our back on that. We believe that all industries should be looking at energy-efficiency measures, particularly the EIIs. Many of them operate on very small margins. They are constantly looking at ways to increase their margins and energy efficiency is one of those ways.
I turn to the many points raised by the noble Lord, Lord Grantchester. If I cannot provide full clarity, I promise that I will write to him. He mentioned the long-term economic plan. Of course we still have one and it is made up of all the measures that we are putting in place. Most recently we had what I feel was a very successful announcement in the Budget. There is also the industrial strategy and there are many more things to come, so we will be building a Britain fit for the future.
Direct competitors are a very important issue and we looked at it in great detail. Direct competitors are companies that compete with the EIIs and, if they do not get this benefit, they will be at a disadvantage. When the state aid notification was put in in 2015—noble Lords will recall that there was much comment about the steel industry at that time—we split it into two sections, the first being for the EIIs which have 20% electricity intensity. With the second, we were hoping to build a group of people of average sector electricity intensity and EU nomenclature of manufacturing products. We need two different criteria to define these groups. We have not yet had approval for the second but we are not giving up. We are considering the options available to us for these direct competitors within the scope of state aid guidelines. Resolving this issue will need a fair amount of work and further discussions with the EU Commission.
The noble Lord, Lord Grantchester, mentioned how costly this would be for consumers of these additional direct competitors. We are not in a position to say this at this time because we do not know how many of those organisations would be included in this new group of people.
The noble Lord made a number of comments about the average cost and increases to bills. I have seen no figure greater than 0.7%. However, I should like to write in detail to the noble Lord. I believe there has been some mix-up in my mind, the noble Lord’s mind or the memorandum about whether a business is a small business or a small energy user. Obviously, a large business could use a small amount of energy.
I am afraid I shall have to write to the noble Lord on other issues around the levy control framework.
The RO exemption is a key component of our programme to reduce electricity costs for EIIs. It will help avoid putting these industries at a significant competitive disadvantage.