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Session 2004 - 05 Publications on the internet Standing Committee Debates |
Fifteenth Standing Committee on Delegated Legislation |
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Column Number: 1 Fifteenth Standing Committee on Delegated LegislationThe Committee consisted of the following Members: Chairman: David Taylor †Ainsworth, Mr. Peter (East Surrey) (Con)†Barker, Gregory (Bexhill and Battle) (Con) †Cohen, Harry (Leyton and Wanstead) (Lab) Cormack, Sir Patrick (South Staffordshire) (Con) †Cotter, Brian (Weston-super-Mare) (LD) †Hopkins, Mr. Kelvin (Luton, North) (Lab) †Jenkins, Mr. Brian (Tamworth) (Lab) †Jones, Helen (Warrington, North) (Lab) †Joyce, Mr. Eric (Falkirk, West) (Lab) †O’Brien, Mr. Mike (Minister for Energy and E-Commerce) (Lab) †Robertson, Mr. Laurence (Tewkesbury) (Con) †Simon, Mr. Siôn (Birmingham, Erdington) (Lab) Stunell, Mr. Andrew (Hazel Grove) (LD) †Watson, Mr. Tom (West Bromwich, East) (Lab) †Wright, Iain (Hartlepool) (Lab) Colin Lee, Committee Clerk † attended the Committee Column Number: 3 Thursday 10 March 2005[David Taylor in the Chair]Draft Renewables Obligation Order 20059.55 amThe Minister for Energy and E-Commerce (Mr. Mike O’Brien): I beg to move,
Good morning, Mr. Taylor. The order makes technical but important changes to the renewables obligation. The changes are the result of informal and formal consultation with industry, consumer organisations and Government bodies over the past year. The obligation was introduced in April 2002 as the Government’s key mechanism for encouraging the development of renewable generation. Early signs are that it is working well, with last year being a record year for the building of new wind generating capacity, but it is important to recognise that the renewables obligation is neutral in terms of the means of renewable generation; it does not apply only to wind. We are committed by the energy White Paper to carrying out a fundamental review of the obligation now that it is up and running, and that is taking place separately this year. However, the first years of its operation have raised issues that need dealing with, and that is what the order seeks to do. It introduces five key changes. In addition to those modifications, it takes the opportunity to consolidate into one order the Renewables Obligation Order 2002 and the Renewables Obligation (Amendment) Order 2004. It may be helpful for the Committee if I briefly explain how the obligation works before setting out the detail of the proposed changes. The obligation currently requires all licensed electricity suppliers in England and Wales to provide Ofgem, the gas and electricity markets authority, with certificates issued under either the 2002 order or the Scottish renewables obligation. Those certificates demonstrate the supply of a specified quantity of renewables electricity to customers. The quantity is set as an increasing percentage of the electricity supplied by each supplier, in order to increase the amount of electricity supplied from renewables year on year. As an alternative to providing the certificates, suppliers can pay a buy-out price to Ofgem for all or any part of that percentage that is not covered by the presentation of their certificates. They can combine those two options; that depends on how they want to play it. The money paid to Ofgem is known as the buy-out fund, and it is recycled to suppliers who present
I come to the first of the changes. The obligation is currently set at 4.9 per cent. It will rise to 5.5 per cent. in 2005–06, and will increase in various stages to 10.4 per cent. in 2010. To help achieve the Government’s target of 10 per cent. of electricity generation coming from renewable sources of energy by 2010, it is important that there is confidence in the renewables market up to 2010 and beyond. In a change that reflects calls from industry, the order will extend the level of the obligation to 15.4 per cent. by 2015 or 2016. The second change relates to the introduction of the Northern Ireland renewables obligation, also known as the NIRO, which is expected to come into force on 1 April this year. The change to our order will allow certificates issued to generators under the NIRO—known as NIROCs—to be produced to Ofgem by suppliers in England and Wales in compliance with their own renewables obligation. That change, together with corresponding changes that are being made to the Scottish renewables obligation and provisions in the Northern Ireland obligation, will allow us to move from a Great Britain-wide system of tradeable certificates demonstrating the supply of eligible renewables electricity to a UK-wide one. The Northern Ireland electricity market is small, and through this measure it is intended that by allowing NIROCs access to a wider market, the Northern Ireland obligation will be made economically viable. There are currently two buy-out funds operating, and with the introduction of the Northern Ireland obligation this year, there will be a third. The third change concerns the introduction of a single recycling mechanism for the UK buy-out funds. Certificates are portable and can be redeemed in either Scotland or England and Wales without the need to prove the physical flow of electricity. The current arrangements could offer an opportunity for a supplier with a large share of one of the smaller markets to under-present ROCs there and to present extra certificates in England and Wales, thus forcing the recycle payments per certificate in the smaller market to rise; so there is a market effect. This problem will be further extended with the introduction of the Northern Ireland obligation. Following representations from industry, the Government are committed to taking steps to end this opportunity for arbitrage between the funds, and the introduction of a single recycling mechanism will ensure that; so, we will be able to deal—to a substantial extent, at least—with the problem. In 2003, following the failure of TXU, there was a shortfall in the buy-out fund of some £23 million. That caused a temporary loss of confidence in the renewables market, and so the fourth change seeks to mitigate the impact of any future shortfalls. The order contains two measures to mitigate such shortfalls—surcharges on late payments, and a mutualisation process. We intend that imposing a surcharge on late payments to the buy-out fund will act as a deterrent to
Mutualisation will mean that where a shortfall has occurred in the buy-out fund due to a supplier defaulting on their buy-out payments, each supplier in the market at the time when the shortfall occurs will be required to contribute an additional sum to make up the shortfall. The resulting mutualisation fund will then be distributed to ROC holders. Each supplier bears some of the cost, regardless of whether they are to receive any sums from the mutualisation fund. However, as those suppliers with ROCs will receive recycled payments from the mutualisation fund, ROC prices and investor confidence should be protected. In effect, they are paying into the fund, and the money then goes back out. The defaulting supplier will not be required to make mutualisation payments, and neither will it receive recycle payments from the mutualisation fund. To prevent mutualisation being triggered every time there is, for example, a small shortfall, a trigger level of £1 million per 1 per cent. of the obligation has been set. For 2005–06, that will mean that the mutualisation would not be triggered until the shortfall is at least £5.5 million. We are dealing with quite large sums and we do not want the trigger to be set by small amounts—£5.5 million should be the basic level. Just as we set a trigger for mutualisation, we have put a cap on the mutualisation payments recovered. That will ensure that the cost to consumers is kept at an acceptable level, and also that mutualisation does not put too much of a burden on some employers, causing a domino effect that will involve more suppliers failing. Some in the industry take the view that we should not have a cap, but in our view there should be one because we do not want to hit several suppliers with the result that there are defaults, and the effect of getting involved in the process could produce a number of defaults. Mr. Peter Ainsworth (East Surrey) (Con): These are sensible and welcome measures. I look forward in due course to the Government’s review of the whole issue. When TXU failed, it turned out that the renewables money was very low in the pecking order in terms of debt priorities, and it ended up with nothing, whereas other creditors got some money back. Has the hon. Gentleman thought of looking at the priority afforded to the renewables regime in the event of future bankruptcies? Will the Minister comment on that situation? Column Number: 6 Mr. O’Brien: The point about TXU is a good one. Before making overly complex changes in how the priority of creditors is ordered, we want to consider the matter as part of a wider consultation. I am a little concerned that we would be going into the area of particular companies involved in renewables, which would perhaps have a wider impact, and people would then say, “If the order prioritises this particular area of renewables over other types of creditors when a company has problems, should not other things also be included?”. As part of a wider examination, we need to look at things in the broader, rather than the narrower, sense. The hon. Gentleman made a good point, but I would like to look at it in the longer term. The cap will be set at £200 million, linked to the RPI. So that our suppliers can recover the costs of their mutualisation payments, payments will start in the year following the shortfall and will be spread over four quarterly payments, which will also reduce the risk of further supplier failure. Finally, the fifth change will provide small generators with more flexibility. Last year, we made an amendment so that the entitlement of small generators of up to 50 kW to ROCs for their electricity would be calculated on an annual basis. The proposed change will allow the small companies to elect for either annual or monthly ROC declarations. Having set out the five changes recommended in the order, I commend it to the House. 10.10 amMr. Laurence Robertson (Tewkesbury) (Con): It is a pleasure to serve under your chairmanship again, Mr. Taylor): As the Minister says, the order is technical in nature, but it is important. By and large, we support the measures contained in it, although I want to ask one or two questions. In general terms, we support the principle of a renewables obligation, and we have made it clear that, should things go according to plan on 5 May or whenever, and we, the Opposition, find ourselves in Government and on the other side of the Committee, we would continue with the renewables obligation and its targets. I am pleased that the Minister is extending those targets today. However, as my hon. Friend the Member for East Surrey (Mr. Ainsworth) pointed out, a wider review of the renewables obligation is taking place. Again, we support the principle of that review, because there are certain parts of the renewables obligation that are not working internally as we would have wished them to do. One of the problems is that we are not achieving the required levels of electricity generated from renewable sources; indeed, the regulatory impact assessment, which I was studying only this morning, makes the point that the amount of electricity that suppliers require from renewable sources is outstripping the supply of electricity from those sources. The Minister helpfully went through the figures. I believe that the current requirement is 4.9 per cent. The Minister will correct me if I am wrong, but I believe that the last recorded amount of electricity produced from
There are also one or two aspects of the renewables obligation that are not working properly; I hope that they will be picked up in the overall review, which we would continue, should we be in Government in a month’s time. I now turn to some aspects of the order. Extending the level of renewables to 2015 is a welcome step, but many commentators doubt that those targets can be achieved. We need to do more to encourage the production of electricity through renewable sources. It was rather disappointing that the Minister, in an otherwise clear and good speech, mentioned only wind power. As I have said many times in this very Committee Room, one of our concerns on this side of the Committee is that the Government are obsessed with wind, at the expense of encouraging other renewable sources. I believe that the Government have put £170 million into offshore wind—I will stand corrected if I am wrong—and that that outstrips by a long way the investment in any other form of renewable electricity production. Can the Minister indicate how we will obtain more electricity from sources other than wind? Wind has a significant contribution to make, but it also is limited in what it can provide, not least because of its intermittency. On a beautiful, cold, still winter’s morning, we would not get much electricity from wind at the very time when we would need it, because of the temperature of the day. Mr. O’Brien: As the hon. Gentleman knows, the renewables obligation is renewables-neutral. It does not apply only to wind; it applies across the board to other renewables. Mr. Robertson: The Minister is correct, but I was making the point that wind was the only renewable source that the Minister mentioned. That is of concern, because we want to see an expansion of all renewable sources. Unless that happens, we will not achieve the targets that the Minister has sensibly set and that we support. Targets are all right, but they must mean something. We must be able to achieve them by bringing on more renewable sources. There are many untapped possibilities that we ought to explore, but we are not doing so. Gregory Barker (Bexhill and Battle) (Con): My hon. Friend makes a good point. Not only does the Government’s policy deliberately, or by default, channel the money towards wind—unfortunately, mostly onshore wind—it also means that our research and industry in other valuable technologies is falling behind. That is in stark contrast with what is happening in north America, where hundreds of millions of federal dollars are being pumped into research programmes in these new technologies, which represent not only the energy of the future, but industries and employment
The Chairman: Order. Could we keep the debate to the terms of the order, not the wider issue of renewable energy? Mr. Robertson: Thank you for that guidance, Mr. Taylor. Perhaps you would permit me to say that I entirely agree with my hon. Friend. I welcome the extension of the renewables percentages, but I hope that we can do more to achieve them. We welcome extending the system of renewables obligations to Northern Ireland, through the NIROCs, but I seek some clarification. I understand, again from the RIA—this may sound obvious—that NIROCs can be used only with regard to electricity generated in Northern Ireland, not on the mainland. I think that that is the system, but I would welcome further explanation from the Minister. Mr. O’Brien: I am not sure I quite understood the question. Did the hon. Gentleman ask whether NIROCs applied only to Northern Ireland? Of course the electricity will be generated there, but the aim is to allow them to be sold more generally. Mr. Robertson: I thank the Minister for answering my question. The single recycling mechanism is part of the same process, which we support. Mutualisation was introduced largely in the Energy Act 2004—indeed, I participated in the Committee that considered that Bill. I am concerned by the RIA, paragraph 48 of which talks about, basically, winners and losers. It says that
I think that I am right in saying that the amount of money in the system will not change because the mutualisation will make up for the shortfall, and that the purpose is to sustain the price of the ROCs. However, I am concerned about the winners and losers. If there are winners, that is all right; but if there are number of losers, there could be problems. The RIA says:
If my maths is correct, presumably 26 would have lost out. How crude a mechanism are we talking about? The amount of money in the system will remain the same, but will the system be fair? I should like the Minister to give more detail on that, because although the matter is covered in the 2004 Act, the proposals take things a little further. Exactly how will the system work? Will it be fair to those people who have complied and not defaulted? Will they lose out because of the new system? That is the only aspect of the obligation that concerns me, in particular, and I should like an explanation. Column Number: 9 I do not see a problem with small generators and I am happy to support them. I welcome the order, but I should like more information about the mutualisation point. 10.20 amBrian Cotter (Weston-super-Mare) (LD): I am happy to support the measures in general, the most important of which is the extension to 2015–16. The Liberal Democrats welcome it; we have been encouraging the Government to take such action. I want to encourage them to extend the proposal to 2020. It is important to have a sustainable situation as that will ensure progress with forward planning. It is right to deal with renewables. It is also important that the Government consider energy efficiency. It is the cheapest and best way in which to solve our energy problems. We hope that progress is made in that direction, too. Many worries have been expressed about energy use, not least of which concern climate change. Conservative Members are looking forward to the possibility of their being in Government soon, but it is important for them to have a more sustained view about matters and not flip-flop around on issues such as climate change. Only this week, a Conservative Member said that he did not believe that there was a problem. Mr. Robertson: I hope that I am not straying too far from the order, but will the hon. Gentleman accept that my right hon. and learned Friend the Leader of the Opposition has made several speeches— The Chairman: Order. I have already pointed out that the debate is about the terms of the order, and I ask the hon. Member for Weston-super-Mare (Brian Cotter) to return to such matters. Brian Cotter: I apologise for unwittingly straying from the order, Mr. Taylor. I shall certainly return to it. The order is very much the sustainable way forward. We appreciate the way in the Government have taken on such matters. I shall be interested in the Minister’s comments about the lack of sufficient renewables at the moment, although with the right pressure and spur on the market, they can be encouraged as a way forward. 10.23 amMr. O’Brien: I welcome the support from both Opposition parties for the order. We believe that it will be welcomed broadly by those in the industry, although some of them have different views about particular aspects of the changes that we are making. We have tried to put together a consultation process to achieve a final order that will deal with most of the concerns that have been raised. The arguments advanced during the debate have been helpful. The renewables review will take place this year, when we can consider the broader impact of such issues. There needs to be an increase in the use of renewables. I was asked about the types of power-generating sources that would result from the order.
As for wind development, there are no grants as such for wind turbines on shore, but grants are available for a range of renewable programmes, including those involving wave and tidal power. We have just announced £50 million for wave and tidal. I have been examining projects that will, I hope, gain not only from that type of RO benefit but, in due course, from other Government grants. There is quite a large programme of support for a broad range of renewables. The key issue, on which the hon. Member for Tewkesbury (Mr. Robertson) is probably right, is that the operation of the RO will mean that, at least for the next five years, we will realistically have a chance of hitting the 2010 target only if there is significant expansion of wind generation, onshore as well as offshore. There is a great deal of talk about research and yes, many sources of renewables, such as biomass, solar panels, wave and tidal, may, a decade from now, provide quite a substantial amount of renewables, but between 2005 and 2010, the most practical and, indeed, the only real, source of substantial renewables is likely to be wind. Any party that seriously takes the view that we need to hit the targets needs to accept that that is the practical reality, whether its members desire it or not. Mr. Robertson: The other sources of renewable energy, such as solar and hydro, are well developed. They are far more widespread in a number of countries than they are here, so what is holding them back here? The technology has already been developed. Mr. O’Brien: With regard to hydro, I am not sure how many valleys the hon. Gentleman wants to flood. If he could identify which valleys his party proposes to flood and in which areas, I would certainly be interested, and I am sure that many other people would be. Solar energy is important to the renewables obligation, but solar panels are developing slowly; some of the efficiency work on them still has to be done. There is growing interest in solar panels and I hope in the course of the next month to be able to see the largest warehouse-factory in Europe that will be powered by solar panels, which is open just a short distance from my home in my constituency. However, some of the economics of that industry are not yet in a position whereby we can see solar making a substantial contribution. We are dealing with something that could make a contribution to about one third of the electricity bill of a house or that could, if there were a large enough array of panels, covering the whole roof of a warehouse, have substantial input into the electricity generation of that warehouse. However, the cost of installing solar is considerable. Therefore, it will not be seriously competitive with wind in the next five years, although I hope that it will be in the longer term. Mr. Ainsworth: I appreciate, Mr. Taylor, that you are ruling the Committee with a rod of iron and ensuring that we stick to the terms of the order.
Mr. O’Brien: It is not only the renewables obligation that will ensure that we develop renewables over the coming decades. I think that all parties believe that we should have that development. We also provide grants for particular industries, and all these things need to be seen as part of a broader package. The hon. Gentleman is right that it is important that we continue to provide our support to the solar industry, and we intend to do so. The industry is starting to develop—the economics and companies are starting to move forward. He is also right that there is a level of concern among some in the solar industry about the change from the blue skies and other programmes that we had adopted. We have given clear assurances that we are developing a new strategy to provide funding, that we want to ensure that long-term funding is available for the solar industry, and that we hope that the new project will provide a better basis for developing the long-term future of the companies now involved in the solar and photovoltaic industry. Our view is that there is nothing for the industry to fear. There is certainly no reduction in Government support for it in the broader sense—our commitment remains, and will do so in the long term. The industry will find that in terms of putting solar PV panels on to new buildings, the new way in which grants are provided will give it a longer-term and more reliable level of support than the current one-off grant system. We hope that when we can provide the detail of that announcement, we will get a broad welcome from the industry as a whole. I have talked to some in the industry, and hope to talk to more in the near future, to ensure that through both the renewables obligation and the wider grant system—which, as I said, needs to be seen as a whole—we can keep the industry not only carrying on but expanding and continuing to develop. We think that, from a national interest point of view, the solar panel industry is important. Indeed, I would go further than that and say that it is essential that we keep the industry developing. The hon. Member for Tewkesbury also asked about winners and losers. |
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