Clause 36

Energy Bill – in a Public Bill Committee at 4:30 pm on 26 February 2008.

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The renewables obligation

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I beg to move amendment No. 24, in clause 36, page 19, leave out lines 5 to 12.

Thank you, Mrs. Humble, for the helpful explanation that have just given. It has been a while since I served on a Bill Committee and the details sometimes slip away. I thought I had found a way by which we could dive back into issues that we had discussed some time ago and bring them forward again, but that is clearly not the case.

Amendment No. 24 takes us into discussion of the provisions on the renewables obligation, and it may be helpful to give some background. We broadly welcome the clause. It has to be accepted that the renewables obligation certificates are a hideously complicated mechanism. One of my aims when I took on the role of shadow Energy Minister was to end up with a simpler system of financing such aspects of energy that is transparent and simple. ROCs are anything but  transparent and simple, but they have delivered significant investment in some sources of renewable energy. However, those investments have been overwhelmingly in onshore wind and methane, because those are the cheapest forms of renewable energy. Only a small amount of investment has gone into offshore wind and virtually none has gone into photovoltaics and wave and tidal technology.

It is right that we should review the ROCs and move towards a banding system. Our goal must be to encourage emerging rather than mature technologies. However, that needs to be viewed against a backdrop of a poor take-up of renewables so far in the United Kingdom. Just 4 per cent. of our electricity production comes from renewables, making us the second worst in the European Union after Malta. We have 40 per cent of Europe’s wind. [Interruption.] My hon. Friend the Member for Billericay thinks that much of that wind is in this room. We have only 2 GW of installed wind capacity, with three times as much stuck in planning, compared with 18 GW of wind power in Germany. We are tied in to ambitious targets for renewables. Some 15 per cent. of all our energy must come from renewables, according to the EU’s targets for this country. We need a dramatic transformation of the process in order to achieve that.

Amendment No. 24 was brought to our attention by Drax Power in relation to its concerns that caps on the volume of non-energy crops will result in less biomass being burnt, which will mean more CO2 being released into the atmosphere. Drax Power is concerned that

“the threat of a cap will lead to the price of non-energy crop co-fired ROCs being discounted and will increase the risk associated with investment in the technology.”

It has advised us further that that will

“hit the public through deterring development in the cheapest form of renewables technology, leaving end customers to pay yet higher electricity prices for more expensive alternatives to enable the Government to achieve its target.”

Drax Power tells us that

“a cap is unnecessary under a banded Renewables Obligation regime, and particularly as there is provision for a review of the bands. The safeguard which allows for an early review of RO bands, should certain circumstances arise, is entirely appropriate.”

Photo of Hugo Swire Hugo Swire Chair, Speaker's Advisory Committee on Works of Art 4:45, 26 February 2008

My hon. Friend is making a good point. Further to that, a lot of farmers are being encouraged to grow non-energy crops for such power stations. Putting a cap on that will be a disincentive and many farmers will feel that they have been misled, having invested money in something that will now be worthless.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

My hon. Friend is right. That is an important point. The first time that I debated with the Minister was on a Statutory Instrument Committee relating to ROCs. Co-firing with biomass was an important element in that debate. The Minister was struck by the strength of opinion from all parties in the House. I was grateful to him for the way in which he reviewed that matter.

The amendment would delete proposed new section 32A(2)(d) to the Electricity Act 1989.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Environment, Food and Rural Affairs

I have been quiet so far this afternoon. I am just warming up. I have some sympathy with the amendment, although not for the reason that the hon. Gentleman has given. I have seen the briefing that he properly refers to. My understanding of what the clause would do is different from his, although that does not necessarily mean that it is right.

The proposed new section that the hon. Gentleman wants to remove allows the Government to require the energy companies to buy particular sorts of ROCs. It says:

“a specified number, or a specified proportion, of the renewables obligation certificates produced by” the

“supplier...must be certificates in respect of electricity generated” in various ways. As I understand it—I hope that the Minister will correct me if I am wrong—that gives the Government the power not simply to ban ROCs and let the market get on with it, but to superimpose on banded ROCs a further requirement. For example, let us suppose that we had ROCs from a particularly obscure renewable that the Government decided suddenly that they wanted to favour. Rather than just change the banding, they could require the energy companies to buy ROCs from that renewable source. That is how I read the provision. If that were right, it would bother me.

The whole principle of banding ROCs and picking technologies, for which I can see the case, makes me nervous. The idea that subsequent to having banded and picked technologies, and given them different rankings, the Bill would give power for indeterminate meddling—in specified ways, or other specified cases or circumstances—does not create the certainty that generators would want. That is what worries me about the lines that the amendment tabled by the hon. Member for Wealden would take out. They might create additional uncertainty and, given that we are talking about long-term investments in some cases, even having the banding reviewed, which we shall deal with under subsequent amendments, is a source of uncertainty. My worry is that the subsection is another source of uncertainty, and I hope that the Minister can clarify why the powers are needed, because I am not yet convinced that they are.

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

I am grateful for the chance to talk about a part of the Bill that raises some issues, and to explain how we arrived at the formulation before us. We shall be talking about the renewables obligation at some length today, so I wish to provide the Committee with some brief background information about how it works.

The renewables obligation or RO requires licensed electricity suppliers to source a specific and annually increasing percentage of the electricity that they supply from renewable resources. The current level is 7.9 per cent. for 2007-08, increasing to 15.4 per cent. by 2015-16. It is expected that the obligation, together with exemption from the climate change levy for electricity from renewables, will provide support to industry of up to £1 billion per year by 2010. Suppliers will fulfil their obligation by presenting renewables obligation certificates, often known as ROCs, which are awarded by Ofgem to generators for renewable  electricity. The generators then sell the ROCs either together with their electricity or separately. At present, all renewable generators are rewarded equally with one ROC per megawatt-hour.

The key reform in our proposed package of measures, which the Bill will give us powers to carry out, is the introduction of banding, so that technologies will be grouped and awarded with different numbers of ROCs per megawatt-hour. I am sure that we shall discuss the provision in more detail but, for now, I wish to focus on the amendment.

Amendment No. 24 would remove the power under proposed new section 32A(2)(d). The power is intended to enable the Secretary of State to require electricity suppliers in meeting their obligation to source a minimum proportion of their electricity from specified sources, descriptions of generating station or means of generation. It is necessary and should be retained. I want to describe first how the power is drafted and then deal with the concerns expressed over how it will be used.

Proposed new section 32A(2)(d) is a translation of an existing power. In reforming the RO under the new Energy Bill, we are repealing all the existing legislation and replacing it with proposed new sections 32 to 32M. I hope that that makes considering the entirety of the reformed RO legislation much easier. However, we have carried forward the existing legislation into the proposed new sections where the existing powers are still relevant. The subsection that we are considering now is one such case.

In the Electricity Act 1989, existing sections 32A(1)(b), (c) and (d) give the Secretary of State the flexibility to make provision so that only renewable electricity from certain forms of generation or renewable source can be used to satisfy the obligation. In other words, under the existing powers of the 1989 Act, the Secretary of State already has powers to focus the obligation on specific technologies or renewable sources if that is appropriate. To take a purely hypothetical example for illustration, he could use the power to require that a certain amount of the renewable electricity that electricity suppliers supply to meet their obligation must come from wave power.

Our challenge in creating the proposed new sections under consideration today is to ensure that the powers are translated so that they remain relevant to the new reformed RO, the changing renewables market and fast-developing renewables technologies. We have done that in two ways.

First, the references to the specified amounts of electricity counting towards the obligation need to be changed to reflect the fact that in future suppliers’ obligations will be expressed in numbers of ROCs, rather than the amount of electricity. The new provisions allow the Secretary of State, in an order, to specify that a number or proportion of the ROCs produced by an electricity supplier, in discharging the obligation, must be certificated in respect of certain types of generation.

Secondly, where the law previously allowed the Secretary of State to identify sources or descriptions of stations, we now need to be more flexible in order to take account of how technologies and ways of generating renewable electricity are developing and of  how distinctions are becoming more subtle. Certainly, we need to do that in order to introduce banding. For instance, in the new RO we will make distinctions between on and offshore wind, energy crops and regular biomass, large and small installations, and so on. As we move forward, we might need to make further distinctions.

That is why we wish to allow scope for the Secretary of State to identify specific types of generation and to focus the obligation on them. That means that the power requires sufficient flexibility to allow him to pin down the types, sorts or means of generation, if any, that he wishes the RO to focus on. The references in proposed new subsection 32A(2)(c)(iii) and (iv) to

“specified ways, or...specified cases or circumstances” provide us with that scope.

I hope that that explains how the new formulation of the power has been arrived at. Electricity companies want to know what it will be used for. I can confirm that it is not currently our intention to use it in order to focus the obligation so that suppliers would have to, for example, present a certain number of ROCs in respect of a single renewable technology, such as wind power. To a large degree, we anticipate that banding will allow us to provide the correct level of support to different technologies. However, given that the move to banding in the development of new technologies will add complexity to the renewables picture, we cannot rule out wanting to consult on using the power to boost a particular renewable type of generation as our policy evolves in pursuit of challenging targets. We certainly recognise that, before 2020, we will need to do more to support renewables in a changing and more complex environment.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Environment, Food and Rural Affairs

Presumably, if the Minister decided that he wanted to support a particular renewable technology, the alternative would be to whop up the banding. Why does he need, therefore, what appears to be a meddling power? We can do that by changing the banding, but the provision before us represents super-meddling, which is beloved of the Prime Minister. Why can the Government not just use different banding to achieve the same goals?

Photo of Malcolm Wicks Malcolm Wicks Minister of State (Energy), Department for Business, Enterprise & Regulatory Reform

Banding is our desired instrument and the one for which we are legislating, but it is difficult to anticipate the future of emerging technologies. We just want to keep our options open. I have said that at the moment it is not our intention to use the power to support a particular technology. Rather than removing one of the tools at our disposal, we should retain it, as I have been saying, in case we need it in the future. I stress, of course, that if we consider using it, a decision would continue to be subject to consultation and parliamentary scrutiny through the affirmative procedure. For those reasons, I wish to retain the power in the Bill.

I was asked about Drax’s call for a cap on co-firing to be removed. The amendment in question would not have the proposed effect. We have consulted on the cap on non-energy crops biomass. There is considerable concern that co-firing is particularly volatile, because the fuels are readily available. We have taken the view  that the cap makes RO more reliable for investors and, therefore, should be retained. I was asked by the hon. Member for East Devon about farmers and their encouragement to grow energy crops. We encourage the growth of energy crops, which are defined by legislation for the purpose of—sorry, I have lost my train of thought on a definition. Certainly, however, a cap on non-energy crops biomass—I think that I shall have to write to the hon. Gentleman. For some reason, my powers of scrutiny of notes have been lost. [Interruption.] The energy is there, but the handwriting is not helping me.

Photo of Charles Hendry Charles Hendry Shadow Minister (Business, Enterprise and Regulatory Reform)

I am grateful to the Minister for most of that answer, at least. He has reassured us to some extent, but I wonder whether, if organisations such as Drax Power continue to have concerns after hearing what he has said today, it would be possible for them to meet with officials in his Department, and whether he could facilitate that to ensure that their views are fully taken into account and they can be properly reassured. Based on what the Minister has told us, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.