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Renewable Energy

1.26 pm

Mr. Andrew Robathan (Blaby): To great fanfares on 1 October, the Parliamentary Secretary, Cabinet Office, the hon. Member for Shipley (Mr. Leslie) announced that all electricity at 10 Downing street and two main Cabinet Office buildings was being generated from renewable energy sources. He said:

As hon. Members know, the Government's target is to produce 5 per cent. of their electricity from renewable energy sources by the end of 2003 and 10 per cent. by the year 2010. At the same time, their target is to double the use of combined heat and power to 10 GW by 2010.

Those are laudable targets, which all who care about climate change would like to see achieved. Unfortunately, the Government also chose to introduce new electricity trading arrangements, which are having a serious impact on renewable energy and the combined heat and power industry. Both consequences were entirely unintended, although they were predicted by the Royal Society for the Protection of Birds, which said:

The Association of Electricity Producers also said:

In March Alcan wrote to the then Minister for Energy, the hon. Member for Neath (Mr. Hain), stating:

It pointed out that there was a bias in NETA against small generators, encompassing most renewable and CHP generators.

I should say at the outset that I am an unpaid vice-president of the Combined Heat and Power Association, and vice-chairman of PARSEG—the parliamentary group on renewable and sustainable energy. My only pecuniary interest, which does not yet exist but is proposed for the future, is that I want to put my money where my mouth is and install a wind generator on my farm in Leicestershire. My wife is somewhat less keen, but I hope that I will be able to persuade her of its merits.

NETA was launched in March this year and replaced the pool system. In essence, NETA is about forward trading and is designed as a step forward in the liberalisation of the market—hopefully to the benefit of consumers. NETA was introduced by Ofgem, at the instigation of the Government. It has been followed by and probably contributed to—if it did not actually cause—a 10 per cent. reduction in electricity prices. I applaud that, although reducing prices might have the unintended consequence that it would not discourage the unnecessary and profligate use of energy and the world's resources.

In August, Ofgem published a "Review of the initial impact of NETA on smaller generators". From that came the startling conclusion that

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On the radio this morning Callum McCarthy, the chief executive of Ofgem, said that unpredictable supplies were less valuable than predictable supplies of energy, which is a more worrying conclusion to draw than that wind does not blow at the same speed all the time. Unfortunately, he has taken that view further because NETA, which was formulated by Ofgem under his guidance, requires predictable and constant energy output and penalises unpredictable energy producers.

The renewable energy sector was the genesis of today's debate—specifically a conversation I had three weeks ago with a small wind energy producer in Leicestershire. The unpredictability of supply from his two 25 kW turbines meant that his contract with Powergen was cancelled in April. In other words, it is no longer cost-effective to run his wind generators, a fact that is mirrored throughout the country. Large wind farms are seeing a 27 per cent. reduction in the price of their electricity, while other renewable prices are down by 26 per cent. The renewable energy price is being artificially depressed by NETA; far from encouraging renewables, they are being discouraged.

As another example, a report from the Tyndall Centre for Climate Change Research, partly funded by the Department of Trade and Industry, found that the imbalance penalties imposed by NETA outweighed the payments made for supplying energy. It suggested that a 10 MW wind farm would have had a net negative unit value of minus 0.41p per kW hour. That means that the farm makes a loss just by producing and selling electricity, not even taking into account any costs involved in setting it up. Indeed, experience shows that some wind generators are finding it easier to stop producing electricity and that turbines are being switched off.

Last year, as in 1999, renewables provided only 2.8 per cent. of the electricity generated in the United Kingdom. Besides wind, other energy sources such as solar power are similarly intermittent, and there must be a great deal of encouragement for renewable energy if we are to rise from 2.8 per cent. last year to 5 per cent. of electricity production by the end of 2003. It is interesting that electricity generation by renewables was nearly 2 per cent. in 1990 and, notwithstanding the non-fossil fuel obligation, was only 2.8 per cent. 10 years later. The renewables obligation is coming, but it is not yet clear how effective that will be. On 6 March, the Prime Minister announced an additional £100 million for the development of renewables, but we do not yet know how that will be spent. All the good intentions do not seem to be leading to greater capacity for renewable energy, largely because of NETA.

If we examine combined heat and power, which according to the Government's climate change strategy has

we can see that matters are even worse. I have heard the CHP industry described recently as "in meltdown". Power exports from CHP generators have fallen by more than 60 per cent. and British Sugar has cancelled two major 70 MW CHP schemes, which was a £100 million investment. Slough Heat and Power, a

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small local producer, is considering writing off £60 million of investment because of the impact of NETA. That would lead to 70,000 tonnes a year of additional landfill waste, which the company is currently turning into fuel. To quote the Minister for the Environment,

The problems facing CHP are not due only to NETA, but relate to the fall in electricity prices as a consequence of NETA and the unprecedented rise in gas prices. Moreover, CHP labours under the need to pay climate change levy on exports of power from CHP producers. The Combined Heat and Power Association was promised exemption from the levy but achieved only partial exemption. As almost everyone, including the Government, believes that combined heat and power is an efficient use of energy and leads to the reduction of carbon emissions into the atmosphere and therefore a reduction of climate change, it seems ludicrous to impose the climate change levy on the export of CHP-produced energy.

Furthermore, I understand that the levy is producing only £33 million a year in revenue, which is small beer compared to the £100 million investment that British Sugar has now not made, for instance. Exempting CHP from the climate change levy could be done quickly and easily, perhaps in the Chancellor's autumn statement—assuming that he is going to make one.

It is also currently intended that CHP should be subject to the renewables obligation, and that would cost CHP producers a further £100 million a year. Many people will argue that CHP should be treated as a renewable source—a complicated argument, which I do not wish to pursue here—but it does seem perverse to ask CHP to fund the renewables obligation. The whole purpose of that obligation is to encourage environmentally friendly forms of electricity and to discourage carbon release into the atmosphere, which causes climate change. It seems to me that CHP is an efficient, environmentally friendly use of electricity that does not release extra carbon into the atmosphere.

NETA was set up by Ofgem. To say that the arrangements are complicated is a gross understatement—I would describe them as arcane in their complexity. This makes it all the more difficult for small operators and generators to find their way around them. Candidly, I suspect that there are few people in the House of Commons who understand these arrangements. I do not know whether the Minister wants to intervene to explain them—apparently not.

I am not sure that I would put myself among those who understand the arrangements, but I do understand the consequences. The unintended consequences of NETA are that the renewable energy and CHP industries are being severely undermined, and the result will be that the Government's laudable targets on renewable and CHP generation are not met. Indeed, Callum McCarthy seems in his pronouncements specifically to exclude any consideration of renewable energy. He seems to take the view that his sole intention is to organise the arrangements so that reliable and cheap electricity is provided.

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I come to this debate more in sorrow than in anger, and I do not believe that this issue is party political. I want the Government to succeed in these targets for the good of the world's climate, but I see little likelihood of it happening. The Government gave Ofgem the task of creating these arrangements and the stipulation, as I understand it, that renewable energy and CHP should be encouraged and certainly not penalised—but that has not happened. It is now up to the Government to rectify the arrangements. This needs to be done urgently because it is easy to destroy something quickly, but much more difficult to set up viable renewable and CHP industries. The damage is being done now and the Government need to react quickly, not with another review that will report in a couple of years' time.

We should contrast what is happening here with the announcement on Monday in the United States of America that the environmental protection agency, at President Bush's behest, has set up a new compact to promote CHP with various partners. The Bush Administration have been criticised for their attitude to environmental matters, but they have obviously got it right regarding what the statement refers to as

I want to see the Government follow up their fine words with two swift actions. First, I suggest that both CHP and renewables should be taken out of NETA and given some special status—perhaps some transitional arrangements while electricity trading arrangements are again revised. Secondly, CHP exports should be exempt from the climate change levy.

I would like to wind up this debate with some quotations—the first from the Labour party manifesto issued earlier this year. On page 13 it states:

Those are fine words; I, too, want to see those obligations met. Nick Goodall is chairman of the Confederation of Renewable Energy Associations and is also the chief executive of the British Wind Energy Association. At the end of August, in response to the review of initial impact conducted by Ofgem's chief executive, Callum McCarthy, he said:

At the beginning of the debate, I quoted a Minister who said that the Government's commitment to green energy was symbolic. What is being symbolised? I hope that I have illustrated that on this issue the left hand of the Government has no idea what the right hand is doing. That gives the lie to the Government's claim that they have an holistic approach. I hope that the Minister for Industry and Energy will explain not only that he understands the problems, but that he is taking action to put things right for the long-term benefit of this country and the world's environment.

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The Minister for Industry and Energy (Mr. Brian Wilson): I thank the hon. Member for Blaby (Mr. Robathan) for his choice of subject and for the way in which he introduced the debate. I recognise his work as vice-chairman of PARSEG, a highly successful and valued parliamentary group on renewable and sustainable energy. I welcome the fact that he has focused attention on these genuine and urgent matters in an Adjournment debate. We agree on the fundamental fact that it is a big issue, which, as he said, is largely non-party political. It is also an issue that the Government are interested in addressing; we have commitments and targets, and it is therefore entirely in our interests to ensure that nothing inadvertent happens to prevent our achieving those targets. I recognise the hon. Gentleman's genuine concerns and the need for an urgent response. I hope that I shall make some progress in responding today.

Although I have come to the issue only recently, I have a long-standing record of supporting renewable technologies, so I have no interest in paying lip service to targets if events on the ground are running contrary to their fulfilment. If there is such a problem we must tackle it. Any inconsistency of approach will be picked up quickly by investors who will not make the investment and commitment that we will need in the renewable sector if the targets are to be achieved. The issue is how we maintain our renewables targets. How do we advance; how do we send out powerful messages about the Government's commitment to renewables while also recognising that there are certain forces at work, one of which may be neater in some of its operations but may have a counter-productive effect? I do not reject the contention that such a problem exists.

In response to the Ofgem report to which the hon. Gentleman referred, I intend shortly to issue my own consultation document which will contain proposals specifically aimed at addressing the concerns of the smaller generator community. This debate is timely; NETA has been introduced and we have received Ofgem's assessment of the impact of NETA on smaller generators. I am about to respond to Ofgem and consultations will be held on that basis. That might sound as if there will be a long, bureaucratic process, but I assure hon. Members that the process will be rapid. Ofgem reported quickly on the first few months of operation. We will respond quickly with our views about what has to be done, and await the generators' response. The process will be concluded within the next two or three months, and there will be some kind of outcome, and whether or not it is exactly what the hon. Member or I want, we shall reach conclusions on the debate in a reasonable time. I am keen to advance the development of NETA in an open and inclusive way, but I am also totally committed to renewables. We must somehow synthesise those two objectives and make them compatible.

The hon. Gentleman asked about the Prime Minister's announcement of £100 million for renewables. That figure comes from a separate performance and innovation unit report on the future of renewables. The allocation of that money to individual firms will be announced shortly. I am sure that the hon. Gentleman will become aware of that. Consultation has taken place and the allocation of the money, which is additional to other investment in renewables, will be

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announced shortly. The hon. Gentleman fairly recognised that a lot of money and commitment is being put into renewables, but we must ensure that the end product is as we intend it to be.

The new electricity trading arrangements, which have come to be known as NETA, made significant changes to the operation of the electricity market in England and Wales. Two Ofgem reports on the working of the arrangements over their first three months have made us better informed on NETA's performance and issues arising from it. It has been suggested—even in the context of this debate—that NETA was a disaster that had not produced positive results.

Mr. Robathan indicated dissent.

Mr. Wilson : The hon. Gentleman suggests that he does not think so.

In fact, NETA has been a success in its own terms. The introduction of a more efficient regime into a more transparent, inclusive and efficient pricing system has meant that wholesale electricity prices are up to 25 per cent. lower than the artificially high prices that existed under the pool arrangements. NETA has delivered quite spectacular results in a short time. Although it does not negate the argument made by the hon. Member for Blaby, I can say that the price reduction for renewables has been about 17 per cent., which is less than the overall reduction achieved under NETA.

Mr. Robathan : My figures, which may be out of date, suggest that the position is the other way around, but I accept that the figures may change by the day. I certainly do not criticise NETA in general, merely in specific ways.

Mr. Wilson : The figures may change by the end of the debate if I receive another piece of paper, but I do not expect that to happen. The figure on renewables is lower than that for overall price reduction. I do not mean to quibble over that. The impact on renewables, which are produced by smaller producers and have higher relative capital costs, is clearly proportionately greater than is the case for larger generators.

NETA's role allows market signals to set electricity prices. It is also vital that NETA delivers security of supply. Ofgem's report on the first three months of the operation of NETA shows the rapid emergence of a strong and liquid forward market, and all that contributes to reliable longer-term price signals for investors to use in planning new generation. NETA's development will secure our longer-term aims for encouraging a move towards a more cost-reflective and efficient system, within which the benefits of embedded generation and renewables are recognised. In the longer term, there will also be benefits for renewables. As the hon. Gentleman said, it was always predicted in some quarters that NETA would damage both renewables and the smaller generator industry in general. That is why my predecessor, my right hon. Friend the Member for Neath (Peter Hain)—now the Minister for Europe—asked Ofgem to complete a report on the impact of NETA over the first two months of operation. That report was based on the experience of 40 companies and organisations, including some

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renewable generators. Even that small sample should tell us how the predicted problems were working out in reality. The Ofgem report, which does not contain anything contradictory to what the hon. Gentleman said, states that the volume of trade in renewables is slowing down only slightly. Although the same volume of renewables is sold at market, prices have dropped substantially. I hope that improved future contract terms will address that problem.

The renewables contracts that were traded in the first two months of NETA were negotiated before 27 March, and I expect them to contain a speculative element, but as NETA settles down and the industry gains trading experience, future contract prices may stabilise. The report stated that in NETA's early days, sharp price hikes had occurred when trying to balance the market. That would have a greater impact on small generators. As the market has matured, the price spread has narrowed, and the balance and settlement system has been modified in the light of earlier experiences. The cost of balancing is now half of what it was. We should continue to reduce volatility, and ensure that electricity prices are cost reflective.

There were concerns that renewables would suffer when we moved to the NETA market because they are less predictable. The Ofgem report analysed the predictability of generating technology, and found that wind power was the only one judged to be less predictable. It is not a remarkable discovery that wind power is a less predictable technology, but it is interesting that it is alone in that.

The report also showed that consolidation services, which could group smaller generators into portfolios of predictable and less predictable generation, had not yet emerged in the market. That, possibly, is a partial solution. I do not deny that the issue exists, but we can take evolutionary steps to address the problem. In my response to the Ofgem report, I will reflect the hon. Gentleman's concerns—and mine.

The hon. Member for Blaby mentioned combined heat and power. I recognise the urgency of that matter; in addition to my departmental work, I spoke on the subject at a couple of meetings in Brighton at my party's conference, once for the Combined Heat and Power Association and once for GEC Alsthom. It was useful to hear straight from the coalface about the urgent problems that affect CHP. There is no point in proudly announcing targets for CHP if, as is the case now, something unexpected is happening on the ground.

As the hon. Member for Blaby acknowledged, it is not NETA but a combination of high gas prices and falling electricity prices that is the primary cause of CHP's problems, although NETA is a factor in falling electricity prices. We have done much on CHP, introducing, for example, the climate change levy exemption for good quality CHP used on site or sold direct to other users. CHP is a key option for energy-intensive industries that want to negotiate an 80 per cent. reduction in CCL.

About £70 million has been made available this financial year for enhanced capital allowance. We have offered tax incentives to companies investing in CHP, and have exempted electricity generating plant

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machinery in CHP schemes from business rates. The energy efficiency fund under the climate change levy is to be administered by the carbon trust, and CHP schemes are expected to benefit from it. A lot has been done in support of CHP. It has enjoyed a period of expansion, much interest from industry, investment and proposed investment, but if the reality is that people are now walking away from it, I have to treat that seriously. Indeed, the economic difficulties faced by CHP were highlighted by the findings in Ofgem's report on NETA and the smaller generators.

As a holding statement, I can say that my Department, working with industry and other Departments to address those difficulties, is collaborating with the Department for the Environment, Food and Rural Affairs—the lead Department in the development of the Government's CHP strategy. The strategy, which I hope will be published soon, will address both existing measures to support CHP and new measures to encourage development. High gas prices are a large part of the problem, and we have a three-point strategy to address that. We are pressing for greater competition in Europe, improving the function of the home market, and taking action against anti-competitive behaviour.

I accept that the problems of CHP are urgent and have to be considered closely if we are to continue to issue targets. At the moment, they are not in tune with events unfolding in the CHP industry. I recognise that major companies that had made major commitments to CHP have now reversed those decisions. In particular, I am aware of the British Sugar decision to cancel its investment. I assure the hon. Gentleman that I am aware of all those matters, and he does us all a service by drawing our attention to them.

As with CHP, the future of renewables is not only dependent on how NETA works, although that is important. I have formed a co-ordinating committee with Callum McCarthy to advise on the implementation of the recommendations of the embedded generation working group, which reported in June. That group identified a whole range of actions designed to improve the incentives for distribution companies to ease the connection of all small generation, including renewables. I am determined to see those actions implemented as soon as is practicable.

The renewables obligation underpins much of the discussion because it is the practical embodiment of our commitment to renewables. Shortly, I will be introducing to the House a draft order to implement the renewables obligation. That will oblige licensed electricity suppliers to provide a specified proportion of electricity from renewable sources in future. That will be the prime mechanism through which we will increase the uptake of renewable energy between now and 2010, and beyond. The renewables obligation aims to produce a secure market as far ahead as at least 2027. Our interim aim is that 10 per cent. of licensed electricity sales will be generated from renewables by 2010.

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I do not dissent from the thrust of what the hon. Member for Blaby has said. The extent to which NETA has been the direct source of problems is clearly a matter of degree, particularly in the case of combined heat and power, as many other factors are at work. NETA has delivered considerable successes in other ways, but I have no interest in denying or concealing the fact that there are problems for wind energy and CHP. I am very anxious to address those problems. One of my main

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obligations is to deliver on the Government's renewables targets, and to send out strong, consistent signals that we want to help to stimulate the renewables markets. If perceived, or real, problems stand in the way of those aims, I share the hon. Gentleman's wish to remove them and to give a clear commitment to the future of renewables and CHP.

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