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16 Nov 2004 : Column 405WH—continued

Renewable Energy

4.13 pm

Ian Lucas (Wrexham) (Lab): It is a pleasure to speak before you this afternoon, Mr. Deputy Speaker, and to have my hon. Friend the Economic Secretary listening to me. I am also glad to have the opportunity to discuss the important issue of fiscal matters relating to renewable energy.

The Government have made clear their strong commitment to reducing emissions from carbon fuels. They have made it equally clear that their chosen vehicle for encouraging the development of renewable energy is the renewables obligation. Earlier this year, they announced a review of that obligation, which we are approximately two years into, and set out their terms of reference for the review in a helpful fashion.

I want to state at the outset that nothing that I say today is intended to challenge the future existence of the renewables obligation, and that the suggestions that I   proffer humbly to my hon. Friend are made to encourage an adjustment within the obligation to bring about what I hope will be greater diversity in the means of providing renewable energy in the UK.

The renewables obligation seeks to ensure that 10 per cent. of our electricity is produced from renewable sources by 2010. It is fair to say that progress is being made. According to the DTI's digest of UK energy statistics, during the year to 31 March 2004, 3.3 per cent. of UK energy was attributable to renewable sources. However, the target is a challenging one, and the issues are important.

I attended a meeting in Wrexham with my constituents and Welsh Water, one of the local water companies, to discuss three 100-year record flooding events that had happened in the past five years. Pressing problems have been caused in local communities—problems that accepted science now recognises to be attributable to global warming. Our task to extend renewable energy production is an important answer to the challenges posed by global warming.

Progress in the UK is overwhelmingly in the sphere of wind power, both offshore and onshore. I welcome that development; I have always been a strong supporter of wind power. There is little doubt, however, that the development of wind as a source of renewable energy increasingly encounters opposition. The Campaign for the Protection of Rural Wales has a particularly negative attitude to onshore wind power in particular. Even offshore wind power is causing a great deal of controversy, and there was recently particular difficulty with a proposed wind farm in south Wales. Wind is becoming an increasingly controversial renewable energy source, and the renewables obligation needs to be refined to allow other forms of renewable energy to prosper.

Mr. Andy Reed (Loughborough) (Lab/Co-op): On wind and the possibility of using wind turbines, does my hon. Friend agree that it is important not only that we produce renewables through wind turbines, but that British industry succeeds in providing those turbines? Is he aware that DeWind in my constituency has now pulled out of the wind turbine market because it is unable to secure contracts in the UK and abroad? The
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big players are squeezing some of the new companies out. Does he agree that the fiscal measures introduced by the Government need to assist British firms, make use of the growth in renewables and benefit local economies, such as my own in Loughborough?

Ian Lucas : I agree entirely with my hon. Friend. In fact, he touches on issues that I hope to return to later. It is important that we see the development of renewable energy as an important energy and manufacturing industry for the future. I hope that the company in his constituency will be part of that.

Diversity in renewable energy supply will help the wind industries to which I have referred. If there were slightly fewer applications for wind farms and more applications for the development of renewable energy in other fields, I suspect that the pressure imposed on wind farms, and the opposition to them, some of which is pretty cynical, would be lessened.

To touch on the remarks that my hon. Friend the Member for Loughborough (Mr. Reed) has just made, the renewable energy industry in the United Kingdom is waiting to happen. It is primed, and companies are willing to enter the renewable energy market. They are simply waiting for the right incentives and indications from the Government. At this stage, it would be helpful for me to make it clear that I was delighted that the Sharp Manufacturing Company of Japan opened its European manufacturing base for photovoltaic cells in Wrexham earlier this year.

Sharp has been in Wrexham for more than 20 years now, and in the past it has been involved in the production of microwave ovens and video recorders. Video recorders are now a passing industry, and it was essential that a new product be brought to Wrexham for    the plant to prosper. The decision to situate photovoltaic cell manufacturing in Wrexham is a testament to the excellent work force in the town, the superb relations with the local trade union, Amicus, and the excellent stewardship of the Chancellor of the Exchequer and his marvellous team at the Treasury, which includes my hon. Friend the Economic Secretary. The decision cannot really have been taken because of the photovoltaic cell market in the UK, because, unfortunately, it is extremely small at the present time.

For Wrexham, the prime market for European PV    cells is Germany. Most of the units that are currently produced in Wrexham are exported there. The   100,000 roofs programme in Germany has been a    phenomenal success. Capacity in photovoltaic electricity increased from 40 MW in 1997 to 400 MW by 2003. In 2003, there was 50 per cent. market growth in Germany. It is worth while to examine the instruments used by the Germans in achieving their success. The German Government concentrated on revenue rather than capital support, and I think that that is one of the major distinctions with regard to the approach that is being pursued in Britain. They specified a fixed long-term price for electricity produced from PV cells. The price was higher for photovoltaics than for some other renewable sources, but it brought certainty to the market for PV manufacturers. German Government advisers emphasised in conversations with me that it was the certainty that fuelled the successes of the programme. The necessary private investment was further encouraged by fixed interest, long-term loans for consumers.
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As I mentioned, the approach to support for photovoltaics in Britain has been quite different. The Government have supported the industry by the use of capital grants and initiatives ranging from the domestic solar PV systems field trial in May 2000 through to the    major photovoltaics demonstration programme. Unfortunately, the effect to date has been limited. As Keith Howarth points out in his useful article "The poor    man of photovoltaics" in the Autumn 2003 edition of Building for a Future, PV in the UK just seems to be too expensive, and it takes 70 years to recover present installation costs. That contrasts markedly with the situation in Germany, where revenue support, combined with cheaper installation costs, gives payback within 17 years.

How can we achieve greater diversity in our renewables supply? I have seen the terms of reference of the review of the renewables obligation, and I have noted that, despite the fact that the obligation is itself an instrument that interferes with the operation of the free market, there is a marked reluctance to interfere further with the renewables market. Both fixed price tariffs and feed-in mechanisms are rejected. I am pleased, however, that the Government have recognised in the terms of reference the importance of developing longer-term technologies and have left the door open on providing revenue support for them.

To date, I do not think that we in the UK have recognised the potential that exists for industry here in the renewables field. In north Wales, we are at the forefront of those developments. The North Hoyle wind project off the Rhyl coast is already producing energy, and phase two of the project will introduce a step change in the scale of production. St. Asaph business park has the largest single solar cell power source in the UK and Sharp in Wrexham is expanding rapidly. Last week, I was delighted that a call from the company for 60 extra employees by Christmas appeared on the front page of my local newspaper; its solar cell production is increasing so rapidly that it is taking on that number of jobs in the local economy.

At present, the demand comes from abroad. We have   much to learn from the German experience. Even with the current difficulties in the German economy, 3,000 people are employed in the German photovoltaic manufacturing industry. The potential in the UK is huge. The Deputy Prime Minister has announced his intention to build a large number of new homes in the south-east. For example, up to 170,000 homes are to be built in the Milton Keynes and south midlands area in the coming few years. In my constituency, there is increasing pressure for new housing in the public, housing association and private sectors.

Let us imagine for a moment what would happen if PV cells became as standard as double glazing. First, a new form of renewable energy would have become a significant player in the UK. Secondly, householders could supply their own energy to the grid, easing problems of security of supply. Thirdly, a manufacturing industry with thousands of high-quality jobs could be created.

In Wrexham, we have experienced just an indication of what can be achieved by new investment from abroad in a market that is developing. The company has decided to enter the European market and is expanding rapidly, in both Germany and Spain, because of the action that
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has been taken by the Governments in those areas. I urge the Treasury to consider the types of incentives that have been provided in those countries. There is a    thirst for new manufacturing industry in my constituency, and I think that that could be responded to by developing the industry in question.

I am sure that a way can be found, compatible with the renewables obligation, to encourage a more diverse renewables base in the UK. I know that the Renewable Power Association will forward its ideas when the review is considered. It is fortunate that a Treasury Minister is responding to the debate, because the Treasury will play an important role in decisions about the development of renewable energy in the years to come.

The 2010 target is a very challenging one. All parties recognise that that is the case, and much work needs to be done in the coming five years. The prize could be to tackle our renewable energy problems, approach solutions to our climate change challenges and create a new manufacturing industry. That is a prize that is well worth striving for.

4.27 pm

The Economic Secretary to the Treasury (John Healey) : I congratulate my hon. Friend the Member for Wrexham (Ian Lucas) on securing the debate. I have known him since he was elected to the House, and he has always been articulate on the challenges of global warming, as his speech made clear. I have also seen how strong an advocate he is of the interests of his constituency and the companies there. I may return to the points that he made about the developments at Sharp PV.

My hon. Friend made it clear that his principal concern is for a greater diversity of sources of renewable energy in the UK. He set out a clear and practical long-term vision of PV cells being as commonplace as double glazing. The context of the debate is important. The policy developments and reviews that he mentioned are taking place in the context of the energy White Paper that the Government published in February 2003. Underlying everything that we are doing and may consider doing are the four principal objectives that were set out in that White Paper.

The four goals of our overarching energy policy are, first, to set ourselves on a path to cutting the UK's carbon dioxide emissions by 60 per cent. by 2050; secondly, to maintain, at the same time, the reliability of our energy supplies; thirdly, to promote competitive markets in the UK and beyond—which perhaps distinguishes us from Germany—and thereby to help to raise the sustainable energy growth rate and improve the UK economy's productivity; and, fourthly, to ensure that every home is adequately and affordably heated.

In general terms, the effective way for the UK to achieve those goals is to conserve our existing energy resources and use them better. My hon. Friend has argued persuasively for improving energy efficiency and increasing the use of alternative energy sources such as renewables; those have been identified as important ways of doing that. That is why the Government have   set targets for energy efficiency and the use of renewable energy.
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The energy White Paper reiterated the aim that we set out first in January 2000 for renewables to supply 10 per cent. of UK electricity by 2010, subject, of course, to those costs proving acceptable to the consumer. Our aspiration is to double the renewables share of electricity by 2020 from that 2010 target. We have introduced a comprehensive set of measures to pursue those targets and secure those general energy policy aims.

Although my hon. Friend's debate is about fiscal measures, they are only one part of the strategy. It seems from his speech that he is more interested in non-fiscal measures, particularly the renewables obligation. Fiscal measures that we have taken include the introduction of the climate change levy, with exemptions for renewable generation; the introduction of reduced rates of VAT, which benefit renewable sources such as ground-source heat pumps and micro-CHP systems; backing biofuels through the fiscal system; and the introduction of the world's first emissions-trading scheme.

If we look beyond all the fiscal measures, however, we can see that we have also taken several steps to promote energy efficiency and the use of renewable energy. Principal among those for renewables is the renewables obligation. However, I think that my hon. Friend is aware that, alongside that obligation, the Government are funding further research and development, as set out in the spending review published by my right hon. Friend the Chancellor in July.

The renewables obligation is the main non-fiscal instrument by which we are encouraging renewable energy. It requires all licensed electricity suppliers to supply a specific proportion of their electricity from certified renewable sources. As my hon. Friend knows, that obligation increases steadily from 3 per cent. of sales in 2002–03 to 10.4 per cent. in 2010–11. Late last year, that obligation was extended to 15.4 per cent. by 2015–16 to give potential investors, whom he is concerned should be encouraged, greater certainty with which to plan returns in respect of business investments of the sort that we want to encourage them to make over the next few years. With the climate change exemption, those two mechanisms are expected to provide about £1 billion of support to renewable energy by 2010.

Early indications are that the renewables obligation is working well, with investor confidence growing. In 2003, 2.2 per cent. of electricity was supplied by sources that are eligible under the renewables obligation. We expect that by 2010, wind source will provide 7 to 8 per cent. of electricity, half of which will be from onshore sources with the rest coming from large-scale hydro and landfill gases.

Mr. Reed : Will my hon. Friend give way?

John Healey : I was about to come to a powerful point that my hon. Friend made in an intervention about his keenness for British business to win a share in the growing and increasingly important market in green technologies and green generation. I will ensure that my colleagues in the DTI are aware of his point, as I know that it forms part of their concerns.

My hon. Friend the Member for Wrexham is right to say that we will shortly begin a review of the renewables obligation. In the original White Paper, we committed
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ourselves to reviewing it in 2005–06 and to taking account of the carbon prices anticipated under the new EU emissions trading scheme, as well as the emerging costs of renewable technologies. The DTI, not the Treasury, is leading the review and aims to complete it by December 2005, with a view, potentially, to introducing any changes to the obligation around the beginning of April 2006.

A central consideration of the review will be to ensure   the delivery of the 2010 target, while maximising value for money for consumers. My hon. Friend rightly   said that the terms of reference were published on 4 November, following the publication of draft terms of reference in the summer.

From the 90-odd submissions that were received by the DTI when it published the draft terms of reference, it was clear that there was strong support for a limited review on how to improve the effectiveness of the renewables obligation while avoiding changes to the main operating principles of the scheme. The final terms of reference reflect that. The key areas for the review to    examine are the effectiveness of the renewables obligation since it began in April 2002; all aspects of the working arrangements for the renewables obligation; the potential impact of the EU emissions trading scheme on carbon; the prices and future cost competitiveness of renewable technologies; and the extent of the obligation beyond 2015–16—the longer term that my hon. Friend is concerned about.

I shall ensure that my hon. Friend's points are brought to the attention of DTI Ministers as part of the consultation. They and I look forward to receiving the submission from the Renewable Power Association, which he mentioned. I am sure that that will contribute to the consultation.

It is clear that there is widespread support in the renewables industry for a technology-neutral renewables obligation that rewards low-cost technologies, coupled with wider support for the longer-term technologies. In the Chancellor's spending review settlement in July, he allocated to the DTI £60 million in each year up to   2007–08 to deliver projects identified under the renewables innovation review, bringing to over £500   million the support between 2002 and 2008 for longer-term renewable technologies.

In addition, £20 million has been allocated in each year of the spending review for 2004 onwards for future energy research and development. That will allow the DTI to fund fuel cells, cleaner fossil fuels, carbon dioxide capture and storage, and hydrogen research. The money has gone into the DTI technology strategy fund.

Turning to solar and photovoltaics, in 2001 the Government made a commitment to embark on a major initiative with the industry and others to achieve a UK solar photovoltaic cell programme, in line with those of our major competitors. That was the start of the Government's provision of significant funding for photovoltaics. The initiative consists of three separate programmes—domestic and large-scale field trials, to which £10 million has been committed; a major photovoltaics demonstration programme, for which the commitment was increased in September to £31 million; and support for PV research and development, through the DTI and the Engineering and Physical Sciences
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Research Council. The additional £6 million that was added to the major PV demonstration programme in September will allow the DTI to run the programme for a further year, until March 2006. That will support the market until decisions on the future funding of PV are taken.

In that context, my hon. Friend mentioned Sharp. I was aware that Sharp had been in Wrexham for at least two decades, but I was delighted to learn that it had, within the past year, chosen Wrexham as the base for its European PV manufacture. It is new to the UK market in that field, but not to the UK. As he said, it is likely to sell much of what it manufactures in the PV field to Germany rather than to the UK domestic market, which is still in its infancy.

On the major PV demonstration programme that I mentioned, Sharp is already involved. It is aware of that programme and my hon. Friend might like to know that it is involved both in stream 1—the small scheme for householder applications in which, I think, 57 of the householders who successfully applied used Sharp to supply their installations—and in the larger community building schemes of stream 2. Its contribution to that programme is second only to that of BP Solar.

Although photovoltaics is unlikely to make a significant contribution to the target of 10 per cent. of our UK electricity being provided from renewable sources by 2010—we may argue about the contribution that the technology might make towards our 2020 targets—it is clear that its potential contribution to UK
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electricity supplies in the long term will be significant. It also has the potential to make a significant contribution to our exports.

The Government are considering the next steps for photovoltaics funding. In that respect, the debate is rather timely. The Government, and principally the DTI, are considering those questions in the context of the spending review settlement and the renewables innovation review. That review proposes a technology-blind capital grants programme, under which renewable features are integrated in the fabric of buildings alongside energy efficiency technologies. Support for building-integrated PV would be an important part of such a programme.

The Government first set out their climate change policies in 2000. The programme made provision for the review to commence in 2004. That review has now started. Since the publication of the first climate change programme, Government policy on tackling the climate change challenge has moved on substantially. The review of the climate change programme provides an opportunity to examine all our policy measures and to value the most cost-effective ways of meeting our climate change objectives. It will be an opportunity also to ensure that our domestic actions are in line with, and in many cases in advance of, what is being achieved internationally—

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