Draft Renewables Obligation Order 2002

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Third Standing Committee on Delegated Legislation

Wednesday 6 March 2002

[Mr. Eric Illsley in the Chair]

Draft Renewables Obligation Order 2002

4.30 pm

The Minister for Industry and Energy (Mr. Brian Wilson): I beg to move,

That the Committee has considered the draft Renewables Obligation Order 2002.

The order heralds a new era of support for renewable energy. It will deliver a key part of our commitment to combat global warming and to deliver secure, diverse and sustainable electricity supplies. It creates an obligation on licensed electricity suppliers to obtain an increasing proportion of their sales from renewable energy sources. That proportion will increase steadily year on year, reaching 10 per cent. in 2010, and the obligation will remain in place until 2027. Those of us who have read the performance and innovation unit's energy review will know that 10 per cent. is only the beginning.

Renewables have the potential to deliver considerably more energy to 2020 and beyond. As the Committee will have noted, the order is complex. In putting in place a long-term 25-year commitment to develop renewables, legislation must be robust and comprehensive. I shall explain how it works in a moment, but first I shall sketch out where we have come from in the context of a broader, sustainable energy and renewables policy.

For many years, we have supported renewables and already have more than 1,000 MW of capacity installed under the old non-fossil fuels obligation regime, and we expect further contracted capacity to come on stream during the next few years. An order was made at the end of last year to free up current non-fossil fuel contracts installed under the planning regime, but times change, as do needs. The renewables obligation marks a step change in our support. It is the main plank of a much more aggressive policy that we are putting in place to meet the challenges of renewables in the 21st century. The non-fossil fuel order was fine in its day, but it did not fit with the needs and workings of a liberalised and fully competitive electricity market, nor did it unleash the full vigour of market forces to deliver the rapid growth and innovation that is now required.

Following consultation in March 1999, we added powers under the Utilities Act 2000 to place an obligation on electricity suppliers to secure specified amounts of electricity from eligible renewable sources. Our proposals are the result of extensive consultation with the electricity industry, green groups, consumers and the public. The detail of the obligation has also been developed in close partnership with the renewables industry and the Scottish Executive, who are putting in place a similar obligation in Scotland. Throughout the development of the proposals, I have

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been encouraged by the overwhelming consensus from all sides on the need for a rapid, substantial and sustainable increase in the level of renewables. Our target is challenging, but achievable. It represents a fair balance between the needs and interests of all stakeholders. We have gone to much trouble to get the detail right, so we now need to implement the proposal.

Before running through the key provisions of the order, I shall outline the broader policy context and the other steps that we are taking to deliver our target. Liberalised and competitive energy markets are part of the essential framework of future energy policies. However, as the energy review made clear, tackling climate change is likely to be a dominant theme of those policies, if indeed it is not already. Promoting renewables must therefore be a core element of the Government's climate change strategy and at the heart of energy policy. It is not necessarily the cheapest way in which to cut carbon, but it will be increasingly essential if we are to move towards a sustainable future with targets such as the 60 per cent. cut in carbon emissions suggested by the royal commission on environmental pollution.

Energy is a long-term business. If we are to be able to deliver big emissions cuts in the medium and longer term, we must start now. That is why, through the obligation, we are setting suppliers the challenging target of securing 10 per cent. of their sales from eligible renewable sources by 2010 as a contribution to the United Kingdom climate change programme, our Kyoto target and our domestic goal of a 20 per cent. reduction in carbon dioxide emissions by 2010. On their own, targets are not worth much. Setting targets and leaving industry to get on with it is not enough, and we must work in partnership with industry and the wider community to deliver more sustainable forms of energy.

Progress under NFFO has been slower than had been hoped. Difficulty with planning consent at the original sites to which the contracts were tied was a factor, and we have amended the order in order to enable projects to move to sites where consent can be obtained. We hope that that will enable up to a quarter of the 400 outstanding contracts to proceed. Even with that measure and ongoing work on revised planning guidance, I suspect that the current target of a 5 per cent. contribution to electricity supplies by 2003 will be delivered late, as it depended on the timely development of NFFO projects.

We know that to achieve 10 per cent. by 2010 will be tough, and to do so we must start building up our capacity and capability. We must develop the supply chain and grow our national renewables industry, and we must stimulate enterprise and innovation to drive down costs and develop new technologies. We must tackle the financial and non-financial barriers impeding progress, and we must tackle public perception and harness public support to carry the measures through into the marketplace. Although it is perhaps the most significant part of that programme, the obligation is only one part of a package of measures that we are putting in place.

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We have already exempted renewables from the climate change levy. By 2010, the new obligation will help create a total market value for renewable electricity of approaching £2 billion a year. We have also introduced a three-year package of other support measures worth £260 million, which will kick-start offshore wind and energy crops power, invest in solar photovoltaic and provide an enhanced research and development budget.

Planning is always regarded as the bugbear of energy projects, in particular in the case of renewables, and in the case of wind farms above all others. As someone who has just announced in principle consent for Cefn Croes, I know all about the pressures that militate against new developments. However, across the board statistics suggest that renewables have had about the same success rate as other planning applications over the past decade or so, although that success rate has decreased recently and has varied by technology.

Ultimately, we have to have more renewable energy projects, and they have to go somewhere. It is not good enough merely to pay lip service to the environment and to oppose sensible action to help tackle its problems. Although the countryside will not be covered with wind turbines, or any other type of renewable project—far from it—there is no point pretending that there will be no impact on the countryside.

It is, as always, a question of balance, and the key is to get public opinion on our side. Developers have a major job to do in that respect, ensuring that they develop sensible and sensitive proposals and keep local communities informed and involved. The public at large is in principle hugely supportive of renewable energy, and that support must be harnessed in practice.

The Government have a role to play, too. We supported regional planning and resource assessments to feed targets and policies into local plans. Those assessments, an overview of which I shall publish today, confirm that, although our target for 2010 is, as we intend, challenging, it is achievable. To back up that work, we allocated a further £2.5 million to support planners and local decision makers. We also allocated £10 million to support community-based renewables projects.

We issued a planning Green Paper to promote faster, better and more predictable decision making. Planning policy guidance on renewables, PPG 22, is being revised to reflect learning from experience over the past decade. The national planning policy guidelines for renewables in Scotland have already been revised, and as an impartial observer of all things Scottish, I cannot help feeling that that is an example that we could usefully follow in the rest of the country.

A further aspect that the PIU report highlighted is the impact of the new electricity trading arrangements and the way in which local distribution networks are organised and financed. Progress is being made in that, too. We developed the obligation in parallel with NETA, the expected impact of which was one of the factors that led us to set the price premium for

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renewables at the level now proposed. It is important to remember that by making the electricity market as efficient as possible, we create the headroom to afford the renewables obligation without undermining our international competitiveness or imposing an unacceptable burden on consumers, and especially the fuel poor.

That does not mean that there is not more to do, and ensuring that network charges for distributor generation are fair and equitable is high on the agenda of the distributed generation co-ordinating group. The Office of Gas and Electricity Markets has consulted on the need to change the way in which connection charges are levied, and I will publish a response to our earlier consultation on proposals to help smaller generators under NETA soon.

I turn to the renewables obligation and the order itself. The obligation applies to all licensed suppliers that supply customers in England and Wales, and it requires them to obtain a percentage of their sales from renewable energy sources. That percentage rises from 3 per cent. in the year beginning 1 April 2002 to 10.4 per cent. in the year beginning 1 April 2010, and remains at that level until 31 March 2027. We may introduce further orders to reflect increases in our target, and we will review our progress in 2006–07.

Suppliers do not have to buy electricity that is generated from renewable sources themselves if they can show that others have done so, by presentation of the requisite number of renewable obligation certificates—ROCs, to use the jargon of the trade—each year. The obligation does not apply to licensed-exempt supply such as the on-site use of electricity that is generated by combined heat and power. That will give a small but important boost to the market value of such licensed-exempt supplies. We examined carefully exempting all CHP generation from the obligation, but we reluctantly concluded that that is outside our powers under the Electricity Act 1989.

The promotion of renewables in Scotland is a devolved matter, but I am pleased that the Scottish Executive are introducing a similar order in Scotland that puts an identical obligation on licensed suppliers that supply customers in Scotland. The promotion of renewables in Northern Ireland is also a devolved matter, and I understand that the Northern Ireland Executive are considering the introduction of a similar order. We will explore how we can create a common scheme for the United Kingdom as a whole as their ideas develop. However, the Electricity Act 1989, under which this order is made, does not extend to Northern Ireland, and primary legislation would be required to put such ideas into practice.

Ofgem will oversee the implementation of the obligation. It also administers the issue of levy exemption certificates—commonly known as LECs—under the climate change levy. Many of the procedures will be the same, and that will minimise the administrative burden on industry. Ofgem will publish an annual report on the obligation and the compliance of suppliers.

Ofgem will issue ROCs to generators for their eligible generation. The certificates will be tradable,

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and tradable separately from the electricity to which they relate. Suppliers will meet their obligation each year by surrendering certificates to Ofgem. We have provided that surplus certificates that are issued in one year may be carried over to the next year. Suppliers may meet only a quarter of their obligation by using banked certificates. That will prevent any hoarding that could cause market distortions. Certificates that are issued under the Scottish order will be eligible under this order and vice versa, so there will be a seamless join between the two obligations.

Suppliers may meet all or part of their obligation by paying a fee to Ofgem. If there is a shortage of ROCs, suppliers may make up the shortfall. The buy-out fee is not a penalty or a tax. At the end of each year, Ofgem will redistribute all the buy-out fees for that year to the suppliers in proportion to the number of certificates that they surrender. In that way, suppliers will be encouraged to purchase ROCs rather than simply paying the buy-out price.

The market will operate to balance supply and demand for renewables around the level set by the obligation. Prices will rise if the market expects a shortfall, which will encourage new capacity. Prices will fall, and discourage excess capacity, if a surplus is foreseen. That shows market forces at work.

That mechanism will protect consumers from excessive costs. The maximum cost of the obligation each year is limited to the total obligation multiplied by the buy-out price. Initially, that is set at 3p per kWh, and it will rise in line with inflation.

By 2010, the market for ROCs throughout Great Britain will be about £1 billion a year. The addition of the value of the electricity itself, including that outside the scope of the obligation, and the value of the climate change levy exemption points will amount to a total market value for renewable energy of somewhere between £1.5 billion and £2 billion per year by 2010.

After allowing for offsetting savings and the cost of supporting NFFO and SRO projects, the additional cost to consumers will be around £780 million by 2010. Consumers in England and Wales will meet about 90 per cent. of the costs of supporting renewables in line with their share of total electricity sales in Great Britain. We estimate that that will result in an average increase in electricity prices by 2010 of around 4.5 per cent. compared with 1999 levels. However, the potential increase should be seen in the context of falling electricity prices over the past decade, including reductions that stem from the introduction of NETA. That compares with a fall of more than 25 per cent. in the average bill for standard credit customers over the past decade.

We are creating a substantial market. It is big enough and attractive enough to bring renewables into the mainstream of the energy industry and to stimulate investment, not only in generating capacity but in the supply chain, from energy crops to offshore wind farms. That represents a worthwhile investment in our future, at a cost to consumers that is acceptable—a price worth paying, equivalent to an increase of less

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than 0.1 per cent. on retail prices index over the decade. I am always being asked which renewable sources will be eligible and whether this source or that source is okay. Let me be clear: our policy, with a few limited exceptions, is to let the market decide. As a result, it is easier to say what is excluded than what is included.

I am sorry to say that peat is not included. It cannot be regarded as a renewable resource—it has many other qualities, and beyond the way in which it is used now, we should not encourage its use as a fuel on any massive scale.

In line with UK waste strategy, we have excluded the incineration of mixed waste. However, we are boosting the development of advanced technologies such as pyrolysis and gasification. Electricity generated from mixed waste using these technologies is eligible. Those exciting technologies have a huge potential and I believe that it is right to encourage their development through the obligation. Only the proportion of electricity attributable to the biodegradable element—wood and paper, plants and animal material—is eligible. That is consistent with the UK waste strategy and the hierarchy of waste disposal, as well as with the recent directive on the promotion of renewables in the electricity market.

Last year I announced a new deal for hydro. We are determined to encourage the industry to maintain and expand the existing capacity, which has provided the bulk of our renewable electricity to date. All new hydro stations will be eligible and existing stations of 20 MW capacity or less will become eligible once they have been refurbished. Existing large hydro stations, those of more than 20 MW capacity, will not, however, be eligible for support, even after refurbishment, as such refurbishment is seen as commercially attractive in its own right. A small number of very small, privately owned ''microhydro stations'', which were not supported under NFFO, will be eligible immediately.

Generating stations using other renewable sources and built before 1990, when NFFO was introduced, will be excluded until they have been refurbished. That will help to ensure that such stations get the investment that they need in order to continue to contribute to our targets in the longer run, while avoiding unnecessary subsidy for those that were built on a commercial basis.

If otherwise eligible, the output from stations built under both current and expired NFFO and Scottish renewable obligation contracts will be eligible for the obligation. Ensuring that a significant volume of certificates is available in the market will help to guarantee a liquid ROC market from day one. It will also help to prevent the premature closure of any project that is struggling financially at the end of its initial NFFO contract.

The proceeds from the sale of ROCs for contracted NFFO output will, however, be used to offset the cost to consumers of those original contracts through the fossil fuel levy. The Non-Fossil Purchasing Agency has already conducted a successful auction for the first six months' output.

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Electricity generated from biomass in co-firing stations—those that also generate energy from fossil fuel—will be supported for a limited period only, until April 2011. After March 2006, at least three quarters of the biomass must be energy crops, and our intention is to encourage the early establishment of a biomass and energy crop supply chain, while limiting the risk that subsidies will encourage increased use of fossil fuel.

Our expectation is that the industry will increasingly look to developing pure biomass projects, but to kick-start the development of supply chains, existing fossil fuel stations will be able to convert to co-firing for this limited period without major refurbishment. To ensure that the conversion of large existing power stations does not flood the market, we have limited suppliers to satisfying no more than a quarter of their obligation in any year in this way.

The order excludes electricity generated outside the United Kingdom. A high proportion of renewables generation in Europe has been or is subsidised and we do not intend to let anyone double-dip from the British consumer's pocket. Until certificates of origin are in place across Europe, it would be difficult for Ofgem to police overseas generators. In any case, such policing would not be very welcome.

We would also want to ensure that any such generation supported by the obligation contributed fully to our emission reduction targets, not just our renewables targets. We also want to secure fair and reciprocal access for UK generators to the markets in other member states. We shall be exploring bilateral arrangements with some of the many other countries currently developing schemes similar to our own. However, this is likely to be a slow process, despite the commitment across Europe to developing internationally accepted green certificates. Introducing such arrangements here will require amendments to this order and probably to the primary legislation, following consultation with the electricity and renewables interests.

My statement was rather lengthy, but it illustrates the complexity of the issues and the lengths to which we have gone to get right not only the broad policy but the detail. I am confident that, combined with the other measures that I have talked about, the obligation will deliver our 10 per cent. target for 2010 and contribute an additional 2.5 million tonnes a year of carbon reductions to our Kyoto target. It will also stimulate the development of a new and thriving industry in the UK through innovation and the introduction of new technologies such as wave energy to the market, and provide a solid foundation for delivering further progress towards even more challenging emission targets in future. I have absolutely no hesitation in commending the order to the Committee.

It is also the practice for a Minister inviting Parliament to approve a draft statutory instrument to volunteer a view regarding its compatibility with the convention rights as defined in Section 1 of the Human Rights Act 1998. I can confirm that, in my view, the provisions of the draft order are indeed compatible

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with the convention rights. Again, I commend the order to the Committee.

4.52 pm


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