Draft Renewables Obligation Order 2006

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Second Standing Committee on Delegated Legislation

The Committee consisted of the following Members:

Chairman:

†Mrs. Janet Dean

Blunt, Mr. Crispin (Reigate) (Con)
†Campbell, Mr. Alan (Tynemouth) (Lab)
†Campbell, Mr. Ronnie (Blyth Valley) (Lab)
†Dunne, Mr. Philip (Ludlow) (Con)
Evans, Mr. Nigel (Ribble Valley) (Con)
†Gibson, Dr. Ian (Norwich, North) (Lab)
†Hendry, Charles (Wealden) (Con)
†Jones, Helen (Warrington, North) (Lab)
†Milton, Anne (Guildford) (Con)
†Mudie, Mr. George (Leeds, East) (Lab)
†Palmer, Dr. Nick (Broxtowe) (Lab)
†Robinson, Mr. Geoffrey (Coventry, North-West) (Lab)
†Rogerson, Mr. Dan (North Cornwall) (LD)
†Skinner, Mr. Dennis (Bolsover) (Lab)
†Smith, Sir Robert (West Aberdeenshire and Kincardine) (LD)
Stringer, Graham (Manchester, Blackley) (Lab)
†Wicks, Malcolm (Minister for Energy)
Emily Commander, Rhiannon Hollis, Committee Clerks

† attended the Committee

The following also attended, pursuant to Standing Order No. 118(2):

Grogan, Mr. John (Selby) (Lab)

 
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Wednesday 1 March 2006

[Mrs. Janet Dean in the Chair]

Draft Renewables Obligation Order 2006

2.30 pm

The Minister for Energy (Malcolm Wicks): I beg to move,

That the Committee has considered the draft Renewables Obligation Order 2006.

I welcome you to the Chair, Mrs. Dean. The Government are introducing the order to make changes to the renewables obligation in order to improve its effectiveness. I shall begin by emphasising the importance that we place on renewables and the significant contribution that they can make to addressing the key challenges that lie before us, which include maintaining the long-term security of our energy supplies and addressing the threat of climate change.

It is becoming increasingly clear that we cannot stand by and do nothing. A radical change in how we generate and use energy will be needed, which is why we need a range of policy instruments on matters such as carbon sequestration, greater energy efficiency and, of course, the renewables obligation itself. The obligation is working well and encouraging increased renewable generation.

Wind energy remains the fastest growing renewable technology. All records for wind energy in the UK were surpassed in 2005. The landmark 1,000 MW level was reached in June 2005, making the UK one of only eight countries in the world to have installed more than 1,000 MW of wind capacity. The renewables obligation encourages more than wind-generated electricity—in 2005, the Scottish Executive gave permission to Scottish and Southern Energy to go ahead with the first major hydro scheme in years, the 100 MW Glendoe scheme. In October last year, E.ON UK took the decision to proceed with its £90 million, 44 MW, dedicated biomass power station, which will be built at Lockerbie in Scotland and which will help to create more than 300 jobs. We want the renewables obligation to continue to encourage such developments.

Before I go into further details about the proposed changes to the renewables obligation, I shall turn, if I may, to a matter that is not part of those changes. A number of hon. Members have raised the status of co-firing—the burning of biomass with fossil fuels. Support for co-firing through the renewables obligation is restricted—currently, suppliers may fulfil up to 25 per cent. of their obligation through co-firing, although the cap will change to 10 per cent. on 1 April this year.

 
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A number of people have expressed concern about the changes to the co-firing cap and how that will impact on the Government’s renewable-energy and carbon-reduction targets. Co-firing support has always been capped within the renewables obligation because of three major considerations. First, a main purpose of the renewables obligation is to establish new renewable plant, which co-firing, of course, will not do. Secondly, there have been question marks over the environmental benefits of co-firing—the carbon cost of transporting the fuel, the impact on generation from existing coal plants, which emit more carbon dioxide than any other form of generation, and the sustainability of the sourcing of biomass, which is often imported. Thirdly, co-firing was seen as a transitional step on the way to the development of dedicated biomass power stations and a market for purpose-grown energy crops.

Since we last reviewed the co-firing rules in 2004, it is arguable that the situation and the market have changed. The importance and challenges of reducing carbon emissions are becoming increasingly apparent, and there is a growing interest in clean coal. Carbon capture and storage form a significant part of our long-term generation mix, in which co-firing could play a part by reducing net emissions from coal plant. It is clear that both the technical capacity for, and interest in, co-firing will exceed the renewables obligation from this April, and I believe that there is now a case for re-examining the co-firing rules.

I would like to announce today that we will consider co-firing as part of the ongoing energy review, focusing on its potential contribution to our energy policy goals and the level of support that it will require. A careful assessment of the impact of changes on other renewable technologies and on other industries that use biomass will be a key factor in the review. We will also ensure that we continue to incentivise the development of purpose-grown energy crops.

Mr. John Grogan (Selby) (Lab): Will my hon. Friend confirm that the cap on co-firing, which the order reduces from 25 per cent. to 10 per cent., may be increased following the review? That would be supported not only by the Renewable Energy Association, but by the major co-firing generators.

Malcolm Wicks: I know that my hon. Friend takes a keen interest in this matter, which we discussed only this week with members of the industry. I do not want to make any suggestions about the conclusion of the review within the energy review, but what he suggests could be possible. As I have said, however, there are several considerations, not least the impact on 100 per cent. renewable sources of energy.

Turning to the changes in the order, the Government committed themselves in the energy White Paper to carrying out a review of the obligation in 2005–06, and the changes in the order are the result of that review. We have made it clear that we are committed to the obligation and to maintaining the key principles behind it, which sends the important message to existing and potential investors in renewables that the obligation is here to stay. This has
 
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not been a root-and-branch review of our whole renewables support system, but a focused look at specific issues.

The changes fall into two parts. First, there are the eligibility rules on energy from mixed wastes, on which we aim to deliver additional renewable generation from biomass and mixed waste without undermining the wider operation of the RO. Secondly, there are several changes to processing, which relate to the administration of the obligation. The changes are designed to improve administration and reduce regulatory burdens.

Let me deal first with the changes affecting energy from mixed wastes. Under the current rules, generators burning biomass are required to demonstrate that what they are burning has a minimum animal and plant matter content of 98 per cent. Reducing that level to 90 per cent. will expand the range of eligible fuels and, in particular, maximise the potential contribution of waste woods to the RO. It will also increase the amount of biomass burned for electricity generation, which would otherwise go to landfill.

I asked my colleagues for an example of what that change might mean in practice, and I have a very useful one, which relates to the burning of waste wood from a kitchen refurbishment. Such wood might contain glue—indeed, I suspect that it would be helpful if it did, although I am not really a DIY expert—paint or small amounts of plastics. It would therefore not meet the current 98 per cent. purity standard and would probably go to landfill. Under the new 90 per cent. rule, such waste woods could instead be burned to generate electricity.

Still on energy from waste, we also propose that mixed-waste generators which use combined heat and power, or CHP, will be eligible for RO support. The change proposed to CHP is more costly than electricity-only generation from wastes, but it is a more energy-efficient use of fuel. The change will provide support only for the biomass element of the waste fuel.

As I have said, the order contains several small administrative simplifications, all of which ease the burden of the regulations. They are fully in line with the Government’s deregulatory agenda, and I shall briefly describe them. First, the introduction of a pre-accreditation procedure for generating stations that have not yet been commissioned will remove the uncertainty that a project may not be eligible for support under the RO, which can inhibit the development and financing of new renewables projects.

The second change is to provide Ofgem with more flexibility in dealing with renewables obligation certificates, which are known in the business as ROCs. Ofgem currently has limited flexibility in that respect, which can result in ROCs not being issued where late claims are made or in incorrect numbers of ROCs being issued where the issuing is based on erroneous data. The circumstances in which that flexibility will apply will be set out in guidance.

 
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The third and fourth changes are about simplifying the measurement of fuels. The order will allow Ofgem to reduce the frequency of requirements to submit sampling data where biomass generators can demonstrate past evidence of a fuel’s calorific value and biomass purity. It makes it clear that the measurement of biomass fuels away from the generating station is acceptable where Ofgem is satisfied about the accuracy of those measurements. Guidance on both changes is being developed through the Department of Trade and Industry and Ofgem biomass fuels working group.

So far the changes have been aimed mostly at generators, but the fifth change will have an impact on suppliers by moving the compliance process forward by one month. The time between the end of an obligation period and the recycling of the buy-out fund will be decreased, thereby increasing cash flow to ROC holders and decreasing the risk of supplier default impacting on the size of the buy-out fund.

The sixth change concerns ROC claims made by generators. Although Ofgem aims to issue ROCs within its published timetable, problems sometimes arise when that is not possible because delays can affect market participants’ calculations. It is anticipated that there would be increased transparency in the market if information on ROCs claimed but not yet issued were available, so an amendment is being made to require Ofgem to publish data on the number of ROCs claimed but not issued.

There are two minor technical changes—for some anoraks they may be major, but for most of us they are minor. The first is to allow generators to confirm annually rather than monthly that renewable electricity on which ROCs are claimed has been supplied to customers in the UK. The second is a change to close a potential loophole relating to the claiming of ROCs for the use of hydrogen from renewable sources.

Finally, I should mention an issue on which there was consultation during the review, but which is not being pursued in the 2006 order, namely changes which affect small generators. Such changes would allow agents to act on behalf of small generators and remove the need for a sell and buy-back agreement. Both proposals received strong support in the review, but a change is required to primary legislation before they can be implemented through the renewables obligation. We therefore intend to make those changes through the Climate Change and Sustainable Energy Bill, which has been introduced by my hon. Friend the Member for Edinburgh, North and Leith (Mark Lazarowicz). In fact, we introduced those changes yesterday as Government amendments in Committee.

Mr. Dan Rogerson (North Cornwall) (LD): On microgeneration, although the increase in energy costs was an unfortunate event for many businesses, it has undoubtedly encouraging them to consider alternative sources of energy, and last week I visited a business in my constituency that is doing just that. That matter is not strictly the matter under discussion, but the Minister has referred to it. Is the Minister convinced that the changes that the Government are proposing in
 
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the Climate Change and Sustainable Energy Bill will not discourage businesses from examining alternatives, which they are currently doing?

Malcolm Wicks: There should be no discouragement at all. The Bill introduced by my hon. Friend the Member for Edinburgh, North and Leith will encourage the development of microgeneration as an alternative technology.

2.43 pm

Charles Hendry (Wealden) (Con): It is a pleasure to serve under your chairmanship, Mrs Dean. I am grateful to the Minister for outlining the background to and the effects of the order. His final comments related to a couple of technical changes, but having listened to him for the previous 10 minutes, it all seemed fairly technical, which emphasises the complexity of the whole system. Many outsiders will look at the order and think that perhaps it is a way forward which can help them, but when they examine the detail, they must wonder whether they will need a battery of advisers and an army of lawyers to see their way through it. Indeed, the cost of an army of lawyers would probably outweigh the benefit derived from the change.

Nevertheless, the order will play a useful role in helping the Government to move closer to achieving their target of 10 per cent. of energy coming from renewable sources by 2010. I think that that is still the Government’s target, although if it is, the Minister will become increasingly lonely in thinking that it can be achieved, because there is a growing recognition that it is simply unachievable. At present, renewables provide only some 3 per cent. of our energy generation, and it looks likely that only an additional 0.8 GW of energy will come on stream from renewable energy sources this year. If that is the case, how does the Minister think that the target can possibly be met?

That aside, the Conservative party agrees with many aspects of the draft order—indeed, we campaigned on many of those issues during the past election—but we think that other measures are a step in entirely the wrong direction. No doubt the Minister has read with tremendous interest the Conservative party’s general election pamphlet “Action on the Environment”. He may shake his head, but the old adage that impersonation is the most sincere form of flattery clearly rings true. In that pamphlet, the Conservative party promised to promote both the growth and greater diversity of renewables. More specifically, we wanted to reform the renewables obligation to provide a more supportive framework for less developed technologies such as combined heat and power. We called for the integration of combined heat and power and microgeneration into the Government’s energy efficiency and renewable energy policies. The order does just that, and it is a change that we welcome.

That is the good news, but other aspects of the order are far less good. The timing is peculiar, because the Government have recently launched their energy review, which is due to report before the summer, yet
 
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we are changing the rules on renewables obligations just a few weeks into it. Will the Minister tell us why we are debating the order now and not after the conclusion of the Government’s energy review, especially in light of his comments about re-examining co-firing? The rules on co-firing will change on 1 April, and it makes more sense to put those changes on hold and return to the issue after the energy review is completed so we can consider the long-term effects for energy policy as a whole and set the order in that light.

The main problem with the order is not the timing but the simple fact that it leaves out so much. It will not provide the necessary incentives for energy efficiency, off-grid generation, microgeneration, clean coal or carbon capture and storage. That is a major omission that will create an unstable investment environment for energy companies, which is another reason why the order should have been left until the review is completed.

Surely the Minister recognises that renewable sources of energy face an uphill battle to become viable. Planning matters are understandably causing tremendous delays for onshore wind farms, and offshore wind farm technology still has much to prove. Denmark, for example, which is so far ahead of us, is having to replace turbines after just two years because of salt corrosion, pushing investment costs way above initial expectations. It is profoundly disappointing that the Government are not using the order to provide extra support to that young but vitally important industry.

More importantly, the order may have the perverse effect of raising carbon emissions, which is surely the complete opposite of the Government’s intentions. The Minister has spoken of his willingness to re-examine co-firing, but co-firing biomass with coal in power stations is already delivering significant savings on CO2 emissions. Co-firing has the advantage of building on a coal-fired power station’s existing capacity, which makes it both low-cost and efficient.

With the potential to reduce CO2 emissions from power stations by up to 20 per cent., co-firing has a significant contribution to make to the Government’s renewables target. As the Minister has said, however, the proportion of an electricity supplier’s renewables obligation that is allowed to come from co-firing will fall from 25 per cent. under the 2004 order to 10 per cent. on 1 April, with a further reduction to 5 per cent. on 1 April 2011 and to 0 per cent. in March 2016. Those involved in the biomass industry understandably think that 1 April has been chosen because the measure is some kind of unfortunate joke.

It is good that the Minister has said that he will re-examine the situation, but because of the impact that the 1 April reduction might have, we must ask him to put that re-examination on hold until the energy review has been completed. Instead of encouraging the growth of co-firing, the measure will phase out the eligibility of co-firing as a component of an electricity supplier’s obligation to supply energy from renewable sources. The industry argues that that is likely to lead to the over-supply of co-fired renewables obligation certificates and to a collapse in their market price.
 
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There is concern that the economics of co-firing simply do not stack up without ROCs, as the increased costs inherent in using biomass will not be offset.

Reduced use of biomass would not only put at risk a remarkable agricultural source of energy, but result in an increase in CO2 emissions. This country has an enormous potential for biomass production, and many farmers see it as the best way to secure the future of farming in the UK. The Minister will also be aware of initiatives that would make this country a world leader, but just as such initiatives are showing the valuable contribution that they can make to the vital task of reducing CO2 emissions, the Government have moved the goalposts.

Drax power station alone could reduce its CO2 emissions by 4.4 million tonnes a year through the use of biomass. For that to happen, the right policy framework is needed, but the Government are currently dismantling that framework, which prompts the question whether they have adequately thought through the implications of the order. On one hand the Department for Environment, Food and Rural Affairs is spending £60 million to set up the biomass taskforce, but on the other the DTI is getting rid of the system that makes co-firing viable. The Minister must show that he understands such concerns and has answers to them.

The order contains elements that are a step in the right direction, but it is flawed because of what it omits and because it allows the environmentally friendly measures that are being put in place to be undermined. The Minister should recognise those flaws, take the order back to his Department and rethink it. The order should return for further consideration only when the flaws have been addressed and when we know thed ¤likely future shape of the industry in this country at the conclusion of the energy review.

2.51 pm

Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): I recognise that there are many technical measures in the order but, as the Minister has said, it needs to be seen in the wider context of the importance of renewable energy in tackling climate change. The order alone will not deliver our climate change agenda, and carbon tax, emissions trading and the setting of a price for carbon are other important factors in trying to produce a balanced energy policy. The Government will hopefully recognise that in the energy review and see the wider context of how to deliver a strong renewables market.

The Minister has said that the order contains limited changes, but that some of those changes will be filled out by guidance that is yet to appear. The order is meant to come into force on 1 April, so when will guidance be produced on the parts of the order for which the Minister promised it? In one sense, the guidance is a welcome development for the Renewable Energy Association, because as the orders have come out year after year, it has noticed that mistakes in one order have to wait a whole year to be corrected in the next order. There is a chance that guidance can be
 
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redrafted more quickly if a mistake is spotted, so using guidance to flesh out parts of the order is a welcome development, but if the order is meant to come into force on 1 April, it would be sensible if the guidance were available now.

The regulatory impact assessment states that Ofgem must introduce a new IT system by 1 April to make parts of the order deliverable, subject to the order coming into force following parliamentary approval. It is already March: did Ofgem assume that Parliament would see the order through and has the Minister received assurances that the system will be delivered in time by Ofgem? Efficient administration of the order is important to its acceptance by those who must work with it.

The Minister has said that double charging for hydrogen is an anorak issue, which it is in many ways, but it raises the important question of the promotion of hydrogen as a storage medium for renewable energy. The use of hydrogen in our energy economy could play an important role in unlocking a lot more potential, because the intermittent nature of much renewable generation can be smoothed out by the use of hydrogen. By its nature, pre-burning carbon sequestration involves the use and production of hydrogen. Anything that the Government can do to make the development of the hydrogen economy more effective and efficient will therefore help to deliver the order’s objectives on renewables, and an assurance would be welcome on how the Government see the hydrogen economy developing.

I have also heard the concerns expressed about co-firing. If we are to develop an indigenous biomass industry that provides a new use for our rural economy in a time of change in agriculture, then there needs to be a market for that biomass. There seems to be an argument that if we do not get the steps right so that there is demand for biomass, we shall never be able to develop the supply-side industry in our country, because it will not have an outlet. It would be extremely helpful if the Minister were to provide more reassurance about how he sees an indigenous biomass industry being developed under the policy.

I recognise that there are more changes to come, as the Minister has said, through microgeneration and the incentives that the Government are considering on renewable energies that get ahead in the market, such as methane gas from landfill and onshore wind. It is important for the Government to make a commitment that they will grandfather the rights that investors already have under current systems. It is most important for the market to have confidence that taking advantage of the orders will result in their being delivered.

2.56 pm

Mr. Grogan: I am delighted to make a brief contribution to the debate. My constituency contains many diverse interests, and it is very rare to get farmers, miners, representatives of the renewable energy industry and representatives of the three coal-fired power stations to agree on one issue, but co-firing, to which the Minister has referred, is one such
 
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issue. It is very welcome that he has announced a review of the co-firing arrangements. The number of ROCs that can be used for co-firing was reduced in 2004, and the order reconfirms that drastic reduction from 25 per cent. to 10 per cent.

Why does that matter? Co-firing is a green success story. Coal-fired generators back co-firing because it allows them to burn coal and helps them to cut CO2 emissions. It is backed by the Renewable Energy Association and by the National Farmers Union, because it provides an extra market. What will happen as a result of the reduction from 25 per cent. to 10 per cent? According to the Renewable Energy Association, the theoretical maximum level of co-firing will be reduced from a potential 4.44 terawatt hours to 2.16 TWh, based on the total electricity sales volume. A result of cutting back the amount of co-firing is that CO2 emissions will increase and the momentum of the co-firing sector will slow, with knock-on effects for sourcing energy crops as well as other biomass.

The Renewable Energy Association does not accept the idea, which some civil servants support, that co-firing is not a proper green way of going about things. I am pleased that the Minister is considering the matter, which he needs to do as a matter of urgency because the reduction will be imposed in a few weeks’ time. I said that I will not detain the Committee, but I want to mention the effect on the Drax coal-fired power station in my constituency, which is the biggest coal-fired power station in Europe. I shall set out the relevant figures and explain why the market is in danger of being destroyed.

The present 5.5 per cent. renewables obligation on suppliers allows for just short of 8 million renewables obligation certificates in total. Of that number, 25 per cent. are currently allowed to come from co-firing, which is just short of 4.5 million ROCs. From 1 April, the total number of ROCs available under the obligation will be just more than 22 million, but only 10 per cent. of that number—2.2 million—can now come from co-firing, which is a reduction from 4.5 million to 2.2 million in the number of ROCs that can be used for co-firing.

Drax is currently co-firing 2.5 per cent. by heat of biomass, which means that 2.5 per cent. of its output is provided by biomass. Today, 600,000 ROCs, accounting for 13 per cent. of the total allowable co-fired ROCs in the country, come from Drax. From 1 April, if Drax were to continue to co-fire at 2.5 per cent. of its total production, the 600,000 ROCs would account for not 13 per cent. of the market but 27 per cent. of the total allowable co-fired ROCs. Of course, Drax is not the only coal-fired power station that uses ROCs, so there will be an excess supply of co-fired ROCs and a reduction in the price. The market is in danger of being destroyed, and I urge civil servants carefully to consider that point, because the situation is urgent. What will happen next year? Drax and other coal-fired power stations will co-fire less, and if they
 
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continue to have the same coal burn, there will be more CO2 emissions, which will make it more difficult for the Government to reach their CO2 targets.

The need for the review is urgent. After two years of lobbying by the coalition that I have mentioned, I am pleased that the Minister understands the technicalities far better than I do and recognises the need for a review. No one in the sector objects to a review, and any further words of comfort that the Minister could give would be crucial in maintaining the market over the next few months, when the effects of the order will be felt. He has given us some hope that things can be changed in the future, but anything that he can say in summing up to reinforce that would be welcomed by farmers, miners, co-fired power generators and the Renewable Energy Association.

3.1 pm

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Prepared 2 March 2006