Clause 7 - Sale of electricity produced by domestic microgeneration

Climate Change and Sustainable Energy Bill – in a Public Bill Committee at 4:00 pm on 25 January 2006.

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Question proposed, That the clause stand part of the Bill.

Photo of Joe Benton Joe Benton Labour, Bootle

With this it will be convenient to discuss amendment No. 28, in clause 11, page 6, leave out lines 8 to 10.

New clause 8——Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc.—

(1)Where the Secretary of State considers it appropriate to do so for the purpose of increasing the amount of the electricity consumed in Great Britain that is generated by microgeneration, he may make—

(a)relevant modifications of the conditions of a distribution licence or a supply licence held by a particular person;

(b)relevant modifications of the standard conditions of distribution licences or supply licences.

(2)For the purposes of subsection (1), “relevant modifications” means—

(a)in relation to a distribution licence, modifications—

(i)imposing conditions requiring the holder of such a licence to provide information to holders of supply licences about the connection to the distribution system, or use, of microgeneration plant, or

(ii)for the purposes of enabling or facilitating holders of supply licences to satisfy any conditions of such licences of a description mentioned in paragraph (b), and

(b)in relation to a supply licence, modifications imposing conditions requiring the holder of such a licence to offer to acquire electricity generated by microgeneration by the licenceholder’s customers; and also includes incidental, consequential or transitional modifications.

(3)A modification under subsection (1)(a) of part of a standard condition of a distribution licence or supply licence does not prevent any other part of the condition from continuing to be regarded as a standard condition for the purposes of Part 1 of the Electricity Act 1989 (c.29).

(4)Where the Secretary of State makes modifications under subsection (1)(b) of the standard conditions of distribution licences or supply licences, the Gas and Electricity Markets Authority must make (as nearly as may be) the same modifications of those standard conditions for the purposes of their incorporation in distribution licences or, as the case may be, supply licences granted after that time.

(5)Conditions included in a distribution licence or supply licence by virtue of a power conferred by this section—

(a)need not relate to the activities authorised by the licence, and

(b)may do any of the things authorised in relation to licences of that kind by section 7(2) to (4) of the Electricity Act 1989 (c.29) (which applies to the Gas and Electricity Markets Authority’s power with respect to licence conditions under section 7(1)(a) of that Act).

(6)In this section and section (Exercise of powers under section (Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc))—

“distribution licence” has the meaning given by section 6(1)(c) of the Electricity Act 1989 (c.29) (licences authorising supply, etc);

“microgeneration plant” means plant used, or intended for use, for generating electricity by microgeneration, where “plant” has the same meaning as it has in section 82 of the Energy Act 2004 (c.20) (microgeneration);

“supply licence” has the meaning given by section 6(1)(d) of the Electricity Act 1989 (c.29).

(7)In section 33(1) of the Utilities Act 2000 (c.27) (standard conditions of electricity licences)—

(a)omit “or” at the end of paragraph (a), and

(b)after paragraph (b) insert “or

(c)under section (Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc) of the Climate Change and Sustainable Energy Act 2005 (sale of electricity generated by microgeneration: power to modify distribution and supply licences etc)”.’.

New clause 9——Exercise of powers under section (Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc)—

(1)Before making any modification of a distribution licence or a supply licence under section (Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc), the Secretary of State must consult—

(a)the holder of any licence being modified, and

(b)such other persons as he considers appropriate.

(2)The Secretary of State must publish every modification made by him under that section.

(3)The publication must be in such manner as the Secretary of State considers appropriate.

(4)Where the Gas and Electricity Markets Authority makes modifications of standard conditions under section (Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc)(4), it must publish the modifications in such manner as it considers appropriate.

(5)The Secretary of State’s powers under section (Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc) are exercisable only during the period which—

(a)begins with the first anniversary, and

(b)ends with the third anniversary, of the commencement of that section.

(6)Sections 3A to 3D of the Electricity Act 1989 (c.29) (principal objectives and general duties) apply to the carrying out of functions conferred on the Secretary of State, or on the Gas and Electricity Markets Authority, by section (Sale of electricity generated by microgeneration: power to modify distribution and supply licences etc) or this section as they apply in relation to the carrying out of functions conferred on him, or on it, by or under Part 1 of that Act.’.

Photo of Mark Lazarowicz Mark Lazarowicz Labour, Edinburgh North and Leith

I invite the Committee not to allow the existing clause 7 to stand part but to replace it with new clauses 8 and 9, and to agree to amendment No. 28, a consequential amendment that is also in my name.

The clause would require the Secretary of State to establish a scheme enabling electricity produced by domestic microgeneration to be sold. I have had many discussions with those advising me on the Bill about the clause and I understand that the Government have raised a number of questions about it, in some of which I can see some merit. Even where I cannot see any merit, I accept that the changes must be made if we are to produce a coherent measure.

I understand that the Government believe that the direct requirement in the clause would not be consistent with their approach to intervention in the energy market, which I recognise as the overall Government policy on the issue. In any event I accept that, as there are specific difficulties with the wording of the clause, it is appropriate for changes to be made.

I accept that there are a number of difficulties with the requirement in the clause that a supplier buy electricity at the market rate. First, it is difficult to account for the range of different ways in which consumers might choose to supply the market. Because this is a growing technology, in some areas it would be difficult to specify what the market was and what was the correct rate to apply. There have been discussions about the appropriate wording. It has been suggested that a “fair” rate would be better than a “market” rate, but that again leads to potential difficulties with definitions.

Photo of Michael Weir Michael Weir Shadow Spokesperson (Work and Pensions), Shadow Spokesperson (Trade and Industry)

I appreciate what the hon. Gentleman is saying about the difficulty of setting a market rate. However, if I understand his modifications correctly, no rate will be set. Is there not a danger that if the matter is left to individual electricity companies, they will set a tariff for buying microcell electricity that is too low to make any difference to the supplier? By removing the clause and inserting the new clause, is the hon. Gentleman not reversing the problem back to the microgenerator?

Photo of Mark Lazarowicz Mark Lazarowicz Labour, Edinburgh North and Leith

I do not believe that that would be the effect, but if the hon. Gentleman will bear with me, I shall try to come to that point in a minute. I also want to explain a difficulty with the requirement to buy back electricity at the market rate. Although it seems a good idea, there may be circumstances in which it would be uneconomic to make such a requirement of a supplier, because the extra arrangements would create a large extra cost for the electricity company.

In addition, as was suggested to me by at least one person who contacted me, who appeared to be well informed, there are already some circumstances in which energy companies buy electricity at prices above the market rate. The individual who spoke to me was concerned that if my Bill came into effect, it would make his own arrangements uneconomic, because his company would no longer be able to buy back electricity at a rate higher than the market rate. For all those reasons, I accepted that the current wording would have to be changed.

The Government put it to me that the onus should really shift to the power companies; they should come forward with proposals to ensure maximum take-up of the opportunity for domestic consumers to produce electricity for microgeneration. Some power companies do that anyway. I understand from my discussions with the Government that they are keen for suppliers to develop a scheme on a voluntary basis. My proposed changes would give the Secretary of State back-up powers to require a scheme to be set up if the industry does not come forward with a scheme voluntarily within a certain time frame. I hope that the Minister can say a little more about how he envisages  the relationship between a voluntary scheme and the opportunity to impose a scheme in due course, if the Bill becomes law.

Photo of Philip Hollobone Philip Hollobone Conservative, Kettering

Would not the sale of electricity from microgeneration plants simply form part of the renewables obligations of electricity power companies, just as the power companies already buy power from wind turbines on a major scale? Should we not discourage the Government from over-complicating what should be a fairly straightforward system?

Photo of Mark Lazarowicz Mark Lazarowicz Labour, Edinburgh North and Leith

It is essential that the scheme is not over-complicated, but I accept that the reality is complicated. To take the point about the renewables obligation, which is to some extent covered by the next clause and the replacement clauses, if the renewables obligation certificate can be made available to the domestic consumer, it could provide additional resources that consumers could trade in the market to subsidise the their domestic microgeneration installation. However, in many cases the consumer will also require the ability to sell the electricity itself in the market to provide extra cash to justify the cost of installation, so we will need both the ability to sell the electricity, and the ability to make effective use of the renewables obligation certificate regime to bring together the financial advantages for microgeneration, so that the consumer can take advantage of them.

In any event, the purpose of the new clauses is to give the Secretary of State powers to develop a scheme that would make suppliers offer a tariff to their own customers to export electricity from microgeneration units. That aims to counter the perceived barrier to suppliers being willing to buy such electricity. It would be up to the Secretary of State to decide the exact details of how that scheme is put into effect. Given that this is a complex subject, I think that that is the correct way forward.

It is important to note that under new clause 9 the Secretary of State would be asked to decide whether to use his power within 12 months of the Bill receiving Royal Assent. That gives the industry a reasonable time to develop its own schemes, but does not put off until some vague date the time by which the question has to be addressed. It provides a time limit, both for industry and to concentrate the mind of the Department. With that explanation, I invite the Committee to agree to deleting the existing clause and to the substitution of the new clauses.

Photo of Gregory Barker Gregory Barker Shadow Spokesperson (Environment, Food and Rural Affairs)

I concur with a great deal of what the hon. Gentleman says; he has put his case extremely well, and this is a very complex issue. This is an ambitious little clause, the subject of which ought to be the subject of a whole White Paper on the decentralisation of the entire British energy system. If we are going to bring that about, and have a microgeneration revolution, we will need more than this little clause. There are a vast number of issues that need to be addressed thoroughly if we are going to achieve the truly flexible two-way supply system that microgeneration holds out the possibility of achieving. At the heart of such a decentralising White Paper must  be the proposition that ultimately, all electricity suppliers should be required to purchase surplus electricity from domestic power generators. If we do not have that, microgeneration will, effectively, always remain a niche offering.

I fully accept that simply compelling generators to purchase domestically generated electricity is a big matter: it requires the Government to intervene in the electricity market, which, under the previous Acts, they are not able to do, and it raises issues about market pricing and discounts. I should hesitate to push forward something so important that would have such profound economic consequences on the companies involved without thinking it through.

Photo of Philip Hollobone Philip Hollobone Conservative, Kettering 4:15, 25 January 2006

Is there not an obligation on power companies to supply residents in their area? Is that not a market intervention sanctioned by the Government’s Energy Act 2004?

Photo of Gregory Barker Gregory Barker Shadow Spokesperson (Environment, Food and Rural Affairs)

That is probably so.

When we talk about the obligation to purchase renewable energy, we are talking about a fundamental difference between electricity companies buying commercially generated electricity from commercial operators, which have the infrastructure to supply electricity regularly at an agreed tariff at agreed times through a fully commercial infrastructure, and making those companies replace or complement that supply by purchasing at all times electricity that is generated on a much smaller scale, intermittent, of a different volume, and taken through a different network. It remains to be seen whether the existing distribution network at household level is capable, on a large scale, of taking such inputs.

This is a complex area, but we as a nation and as an electricity market need to get our head around it. However much I wish it were not the case, I fear that, by themselves, the clauses will not be sufficient to bring about the microgeneration revolution that is so desirable. The hon. Member for Edinburgh, North and Leith has planted a flag on the subject by raising it in his Bill, but I do not think that the provisions are sufficient to secure the progress that we want. However, I accept the amendments that he has proposed and support the thrust of the Bill.

Photo of Malcolm Wicks Malcolm Wicks Minister for energy, Department of Trade and Industry

Again, I am grateful to my hon. Friend the Member for Edinburgh, North and Leith for tabling the amendments. He has indeed planted a flag. It is clear that being able to sell any excess electricity from microgeneration units is seen as one of the economic advantages of microgeneration and as a way to promote take-up. It is also clear—rightly or wrongly—that microgenerators believe that there are barriers to selling their unused electricity, in that very few suppliers offer a tariff for that exported electricity.

On Second Reading, I said that we could not support the original clause 7, which would impose a requirement on suppliers to buy electricity from microgenerators at the market rate. Supporting such a proposal would go against our commitment not to intervene in energy markets. The energy sector needs  certainty if it is to invest to deliver our energy goals. By and large, it is doing that, from network and infrastructure investment through to renewable and conventional generation.

Photo of Philip Hollobone Philip Hollobone Conservative, Kettering

I am not entirely convinced. We are confusing the distribution of electricity with the supply of electricity. The physical distribution of electricity through wires happens automatically. Electricity supply is a non-physical product—it is a financial contract between an electricity supply company and a consumer. Electricity supply companies have to make thousands of decisions each day about residents buying electricity from them—they are obliged to do that in their franchise areas. In respect of the generation of domestic electricity, would it not be simple for the Government to make it an obligation on the part of the supply companies to purchase from domestic consumers in their franchise areas?

Photo of Malcolm Wicks Malcolm Wicks Minister for energy, Department of Trade and Industry

Let me advance my argument further on that point. I was about to say that stability and certainty are a prerequisite for that development, which is why we are committed to delivering within a liberalised, competitive market framework.

The original clause 7 would have been an intervention in the market that would have made suppliers buy electricity from microgenerators at a certain price in a way that would not apply to any other form of generation. It would also push an unsustainable business model on to suppliers. Few businesses can sustain their viability by selling their product at the same price as they buy it. Microgeneration has been identified as a form of generation that can contribute to the Government’s White Paper goals. As such, it is up to us to look at how we can remove barriers, perceived or otherwise, that might be in the way of an increased take-up of microgeneration. Of course, microgeneration, which qualifies for renewable obligation certificates, will be a more attractive proposition for suppliers.

I can understand why suppliers, which are looking to buy large volumes of electricity and at a specified time, might wish to overlook the relatively small amounts of electricity exported from microgenerators. Not knowing when that exported electricity will be available does not make it more attractive. The purpose of the amendment is to give a clear steer to the market that we want it to play a full part in encouraging the growth of microgeneration. I am aware of at least one supply company that is now in partnership with a wind microgenerator. I am pleased that many suppliers are already developing their own programmes to demonstrate such action.

The new clauses would not set a specific tariff, but it is explicit that suppliers are expected to acquire the electricity. As the microgeneration sector develops, it is hoped that suppliers will use the tariff that they offer customers for exported electricity as a means of competing—as part of their overall energy packages.  Amendment No. 28 is consequential on the removal of clause 7. It would remove the reference to “licensed electricity supplier” in the original clause 7.

New clause 8 would allow the delivery of any scheme through the licensing regime. Ministers would have powers to amend both supply and distribution licences to ensure that microgenerators can sell their electricity. Licences are enforced by Ofgem and businesses can be fined if they do not fulfil their licence obligations. It is preferred that the market develops its own initiatives to support microgeneration, and I am confident that we shall see an increase in momentum in the short term.

That is why the suggestion that Ministers make a decision 12 months after Royal Assent about whether to use the power is sensible. It shows that we trust suppliers to support microgeneration. It gives them time to develop, in an unprescriptive way, initiatives to help microgeneration. However, it also sends a strong message that the Government will help microgeneration by ensuring that suppliers offer a tariff for exported electricity should the relationship between microgeneration and suppliers not evolve as we hope and expect.

Photo of Gregory Barker Gregory Barker Shadow Spokesperson (Environment, Food and Rural Affairs)

Will the Minister go a little further and explain the time scale in which he expects the relationship to grow? It is not something that we can leave be; we all want a rapid increase in take-up of the technology. What time scale does the Minister have in mind? If the progress he hopes for is not made in that time scale, what does he propose to do?

Photo of Malcolm Wicks Malcolm Wicks Minister for energy, Department of Trade and Industry

We need to look at development in the short term. I am reluctant to specify a period of months or years today. If I can come back at our next sitting, having reflected on the matter, I shall do so. I hope that I have demonstrated that we take the matter seriously. We must be careful about any specific intervention, but we expect suppliers to take the matter seriously and listen to what hon. Members have said.

It is important to note that by asking Ministers to make a decision 12 months after Royal Assent, the amendment will allow the sector to develop with the certainty of knowing exactly when a decision will be made. The Government oppose clause 7 standing part of the Bill and support its replacement by new clauses 8 and 9. We also support amendment No. 28, which is consequential on the removal of clause 7.

Question put and negatived.

Clause 7 disagreed to.