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Draft Renewables Obligation Order 2006 (Amendment) Order 2007



The Committee consisted of the following Members:

Chairman: Mr. Martyn Jones
Allen, Mr. Graham (Nottingham, North) (Lab)
Burt, Lorely (Solihull) (LD)
Chapman, Ben (Wirral, South) (Lab)
Clarke, Mr. Charles (Norwich, South) (Lab)
Dowd, Jim (Lewisham, West) (Lab)
Efford, Clive (Eltham) (Lab)
Ellwood, Mr. Tobias (Bournemouth, East) (Con)
Farrelly, Paul (Newcastle-under-Lyme) (Lab)
Harris, Dr. Evan (Oxford, West and Abingdon) (LD)
Hendry, Charles (Wealden) (Con)
Jackson, Mr. Stewart (Peterborough) (Con)
Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
McCabe, Steve (Birmingham, Hall Green) (Lab)
Main, Anne (St. Albans) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Wicks, Malcolm (Minister for Science and Innovation)
Williams, Mrs. Betty (Conwy) (Lab)
Geoffrey Farrar, Sara Howe, Committee Clerks
† attended the Committee

Seventh Delegated Legislation Committee

Thursday 22 March 2007

[Mr. Martyn Jones in the Chair]

Draft Renewables Obligation Order 2006 (Amendment) Order 2007

8.55 am
The Minister for Science and Innovation (Malcolm Wicks): I beg to move,
That the Committee has considered the draft Renewables Obligation Order 2006 (Amendment) Order 2007.
I wish you a good day, Mr. Jones, on this sunny but snowy morning. The order will enable the Government to make changes to the renewables obligation that will improve its effectiveness. I remind the Committee that in 2005, about 4 per cent. of the United Kingdom’s electricity supply came from RO-eligible sources. That compares with just 1.5 per cent. in 2001 before the introduction of the RO. That is good progress, and renewables will increasingly play a key role in our objective of tackling the two major long-term challenges for UK energy policy. The first is climate change—since 1990, global CO2 emissions have risen by 20 per cent. The second is delivering secure, clean energy at affordable prices. Our aim is a balanced energy portfolio that maximises generation from domestic sources, as it will reduce imports and our reliance on unstable markets.
We are committed to the UK’s competitive energy market as being the best way to deliver a secure energy supply and competitive prices. We remain committed to renewables making a vital and growing contribution to that energy market. That commitment is further reinforced by the European Union agreement last week to source 20 per cent. of EU energy from renewablesby 2020.
The renewables obligation has brought forward the most economic technologies, such as onshore wind,but emerging technologies like offshore wind have not been deployed as successfully or as quickly as had been envisaged. That is why, following last year’s energy review, we now propose some important changes to the obligation. The proposals, including banding the ROto provide different levels of support for different technologies, aim to make further investment in technologies like offshore wind. We need to develop those technologies if renewables are to play a significant role in meeting the targets that we have set for emissions savings, as well as making a major contribution to our electricity generation mix.
However, those proposals are for the longer term. In the meantime, we must ensure that the RO enjoys continuing success. That is why the order contains no fundamental changes but instead introduces several limited amendments that will improve its effectiveness.
Small generators are those with generating capacity of 50 kW or less. Last year’s energy review made it clear that the Government are committed to the long-term future of microgeneration, and our microgeneration strategy sets out policies that will promote the greater uptake of those technologies. The RO was designed to encourage the maximum deployment of renewables, and it treats large and small generators in the same way. However, the administrative load faced by small generators is not proportionate to their size, which may discourage them from participating under the RO. The changes are designed to reduce the administrative barriers that some small generators may experience.
The first change allows agents to act on behalf of small generators, not only in the RO accreditation process but in claiming and receiving renewable obligation certificates, often known as ROCs. That will remove a level of administration that we know can be a burden. The second change requires agents acting on behalf of two or more small generators to amalgamate their output. As a result, small generators will be able to benefit from the RO by joining forces with others in the same boat, whereas previously they may not have generated enough to make claiming ROCs worth while. Although the changes allow small generators to use an agent, there will be no compulsion to do so. Small generators can continue to operate on an individual basis if they wish.
The final change specifically directed at small generators is a further administrative simplification. Small generators have the option to make monthly or annual claims for ROCs. Currently, however, if they want to make annual claims, newly accredited generators must provide notice to Ofgem—the Office of Gas and Electricity Markets—in a specified period. Depending on the timing, it can mean that not all their output is counted towards their ROC claim. We therefore propose to amend the legislation so that there is no minimum notification period for newly accredited small generators who want to make annual ROC claims. Instead, they will simply need to notify Ofgem at a point of their choosing as long as it is before their first annual ROC claim.
The next change is an administrative simplification for all generators participating in the RO, althoughit will be of particular benefit to microgenerators. Currently, to claim a ROC, a generator must demonstrate that the electricity has been generated and supplied in the UK. That means that generators consuming their own electricity must first sell it to a supplier before buying it back for their own consumption. To do that, generators must enter into a contractual arrangement called a sale and buy-back agreement. That is clearly an administrative burden, particularly for microgenerators, and we would like to remove it. The amendment to the RO means that generators who consume their own electricity will be able to claim ROCs for that without the necessity of a sale and buy-back agreement.
I shall outline the changes that affect generating stations burning biomass. The first change provides a new definition for energy crops. The new definition will mean that if an energy crop, which is miscanthus—often known as elephant grass—willow or poplar, was planted after 31 December 1989, there is no need for the generator to produce additional evidence for Ofgem demonstrating the growers’ intention at the point of planting to use those as energy crops. That change will reduce the administrative processes that generators who use those named energy crops currently have to undertake. The crops are invariably usedfor energy purposes and as such have very limited alternative markets.
The next amendment is a further change for generators burning energy crops. I mentioned that, in the long term, the Government are looking to band the RO, and that was announced in the energy review last year. The change to the RO that we propose today will ensure that the UK’s energy crop market continues to develop between the energy review announcement last year and the possible introduction of banding. That change will affect generators who are co-firing, especially those who are co-firing with energy crops. Co-firing refers to generators burning fossil fuel with biomass. It is one of the most economic technologies eligible under the RO and, to limit the amount of subsidy that it receives, current legislation places caps on the number of ROCs for co-firing with which suppliers can meet their obligation, and from 2009 onwards requires a minimum percentage to be sourced from energy crops.
If our proposals for a banded RO were introduced in 2009, the caps on co-firing would be lifted and support levels for non-energy crops reduced. However, until then, the provisions allow for an interim change to the co-firing rules to enable co-firing of energy crops outside the existing caps. That means that ROCs awarded for the co-firing of energy crops would not contribute to a supplier’s 10 per cent. co-firing limit, creating an additional market for energy crops and so removing the need for the minimum energy crop percentages that would have been required from 2009 onwards.
There is also a change to the treatment of biomass fuels. Under current legislation, fuels must derive at least 90 per cent. of their energy content from biomass to be eligible as biomass under the RO. If a power station burns two fuels and 94 per cent. of the energy content of one fuel derives from biomass and 88 per cent. of the energy content of the other derives from biomass, the power station is unlikely to be eligible for ROCs.
The proposed change to the RO would resolve that difficulty so that, if a power station burns more than one fuel stream, as long as 90 per cent. of the total energy content of those fuels is derived from biomass, the generator can claim ROCs for the biomass fraction of the fuel. These changes have been the subject of a statutory consultation, which closed at the end of last year.
It is rather early in the morning for all this, but if there is a great demand from the Committee, I will happily read out my brief again later. In the meantime, I commend the order to the Committee.
9.5 am
Charles Hendry (Wealden) (Con): It is a pleasure to serve under your chairmanship, Mr. Jones.
In a slightly disturbing start, the Minister welcomed us here on “this sunny morning”. Some people question the reliability of renewables and say that the sun does not always shine and the wind does not always blow. We have come here on the dullest, most dismal day of March so far, and when the Minister welcomes us on “this sunny morning” we begin to wonder whether he is seeing the future through slightly rose-tinted spectacles, or whether his vision has become entirely clouded.
Malcolm Wicks: I am still excited by the Budget.
Charles Hendry: For many of us and many people throughout the country, that excitement has already worn off, but I shall not stray too far in that direction.
We generally welcome the measures that the Minister has announced this morning, particularly the list in paragraph 7.2 of the explanatory memorandum. I thank the Minister and his officials for the clarity of the explanatory memorandum. The statutory instrument is not a beacon of clarity, but the explanatory memorandum does exactly what was intended, and makes the purpose clear.
I also thank the Minister for listening. In this debate last year, when we considered exactly the same issues, representations were made, led by the hon. Member for Selby (Mr. Grogan), about the need for changes in co-firing and biomass. He has clearly taken those representations on board, and we thank him for that. It shows that he has listened.
A letter that Committee members have received from Drax states:
“We...welcome this Order which will remove the artificial cap on co-firing energy crops. This will enable us to continue to develop the use of biomass and we have set ourselves the target of 10 per cent. of the Station’s output coming from renewables by the end of 2009, which is equivalent to the output from over 500 wind turbines and will save two million tonnes of CO2 each year.”
That is a significant contribution. Drax goes on to say in its background briefing:
“A new definition for energy crops will mean that no evidence will need to be produced to show that specific crops were planted with the primary intention that they were to be used as a fuel. It is important there are no barriers on the use of new fuels as they become available.”
One of the changes announced by the Minister this morning will enable the system to change and adapt more readily without the need to return to the Committee. However, paragraph 2.3 of the regulatory impact assessment says that the changes are needed to meet the target of 10 per cent. from renewables by 2010. I thought that we had moved on from that, and that almost everyone in the world had recognised that that was unachievable. The cardinal rule for targets is that a new date is set for well after the Minister andhis Government have left office, and setting a target of 20 per cent. by 2020 may be more achievable than10 per cent. by 2010. Will the Minister tell us whether the Government still intend to meet that 2010 target?
The order does not address the fundamental failings in the current ROC system. It is an expensive way of abating carbon, it disproportionately supports onshore wind and gas, and does little, if anything, for micro-renewables. The Government have offered tax relief on income from microgeneration, but there is still a great disparity between the cost of that investment and £3,000 for a wind turbine, which might generate an income of £90 a year. Frankly, giving tax relief on that will not significantly alter people’s attitude to investing. We must consider what more needs to be done to encourage investment in micro-renewables.
We welcome the extension of biomass, but whole sectors are still missing out, and we are scratching the surface of the contribution that renewables can make to our energy mix in this country. Some people say that the areas where offshore wind turbines are planned, such as the London Array wind farm and the Greater Gabbard project, will be feasible only if ROCs are made more generally available, and that, without ROC support, such projects cannot happen. It will be interesting to hear whether that is also the Minister’s view.
Big strides are being taken, particularly in the United States, with photovoltaics and solar. In Colorado, the first solar power station is being built. Significant progress is happening in the US, which is way ahead of us. The ROCs currently make no contribution to that sort of development.
Despite what was announced yesterday, we still lag significantly behind the US on carbon capture and storage. In Colorado and New Mexico, there are four pilot schemes for carbon capture and storage, with more in Texas. A great deal is happening in the US. It is easy for us to be lulled into thinking that America is doing nothing, but at state, governor and city level, a huge amount is happening. We are having to play catch-up with what is happening in many places. The ROCs are not playing a role in supporting such developments. The same applies to marine energy, which has phenomenal potential around the UK. The ROC system, as it stands, does not give the support that we would like.
Will the Minister update us on the Government’s thinking on banding? He said that, in principle, they want to go down the route of banding, but how would it be used to support other technologies? Members of the Committee will have had a letter from the Wood Panel Industries Federation in support of the principle of banding. It gives the federation’s perspective that banding might make its inclusion in the process more feasible. If we are to go down the route of banding, will it recognise regional differences, such as where the wind blows strongly and where it blows moderately? For example, in Scotland, where there are some of the strongest winds in Europe, less support will be required for investment in wind energy than in some areas of the UK, where the contribution of the wind is more marginal.
If the Minister moves to a banding system, will he respect grandfather rights or will the new systembe retrospective? How does he address the issuesand concerns that have been expressed by some commentators that banding will become a charter for lobbyists? Dieter Helm said in a Social Market Foundation report on the energy review that,
“the inevitable result will be for officials to rank technologies and thereby ‘pick winners’ on the basis of the government’s (not the market’s) ex ante assumptions about costs. It will, no doubt, provide a rich harvest for lobbyists”.
Indeed, Ofgem’s submission on the reform of the renewables obligation in 2006 states:
“Developers, trade associations and lobbyists will have more incentive than ever before to focus on managing their regulatory relationships rather than their market and cost performance. They will focus more effort and resource on making a case that justifies their preferred solution getting the ‘right’ classification.”
There is a danger that, by going down the route to which the Minister referred, we will end up simply with people pouring their money into lobbying and tryingto get the right ratio in the banding formula ratherthan putting effort into sorting out the renewables obligations.
Finally, our discussion needs to be seen against the backdrop of a Government who have not yet produced their White Paper. We are extremely disappointed that that has not come out. We expected it early this year, and then in March. Now we understand that it may be published in May. The delay is not just because of the judicial review; we believe that there is a range of outstanding issues. Key decisions need to be made about long-term investment in energy and our energy infrastructure. Those are being put off. We welcome the announcement of the changes to the ROC system, but to enable people to invest with confidence, we need that White Paper rather than merely smaller measures.
9.13 am
Dr. Evan Harris (Oxford, West and Abingdon) (LD): I, too, welcome you to the Chair, Mr. Jones. I am the reserve player for my party’s Front Bench on matters to do with the Department of Trade and Industry, as the spokesperson is otherwise disposed, but it was a privilege to be selected to talk about this interesting order. The hon. Member for Wealden raised a number of the issues that I would have raised. I shall not repeat his questions and look forward to the Minister’s answers. However, I have a number of small questions.
The hon. Member for Wealden made some interesting points about banding, although I do not think that we will be able to talk about that in depth. We look forward to an opportunity to debate the future of renewable energy and the future of the target, which is clearly going to be missed, in another forum at greater length. It needs debate and a statutory instrument Committee on a wet Thursday morning might not be the best place to do that.
The hon. Gentleman mentioned the correspondence that members of the Committee have had from two interested parties. I want to put some questions that have been raised by the wood panel industry lobbyists—I think that is a fair description of them, given what he said. Their message states:
“As the Wood Panel Industry cannot absorb the inevitable inflation of prices of its raw materials as a result of the increase in co-firing, the Government’s plans pose a grave threat to the industry’s survival.”
I understand that it is not possible to do everything for everyone all of the time, and I just want the Minister to tell us whether he is aware of that issue, whether the Department of Trade and Industry has understood it and what its response to the concern is.
The briefing continues:
“The plantation of new sources of biomass is growing at a slower rate than needed to meet the rapidly accelerating interest in wood fibre from existing and new wood processors and from the renewable energy sector. It is necessary for the Government to provide more incentives for the plantation of energy crops such as short rotation coppice or miscanthus, not to compete directly with already established industries.”
That point has already been made.
I was interested in something in the Government’s response to the consultation, set out in the final decisions document of January 2007. It states:
“This situation arises because removing the need for sale and buyback agreements also removes this element of generation from the obligation.”
I understand what the Minister said about sale and buy-back, because things have clearly been made easier, but the Government go on to say:
“Because this generation will no longer be counted towards any suppliers supply figures it may be difficult to monitor but we will explore ways that this can be achieved so that the impact can be assessed.”
I am interested to hear whether the Minister can add to those thoughts, because it will be necessary to monitor how the aim can be achieved. Otherwise, we will not understand or be able to measure the impact of the change.
On correspondence received from Drax and press coverage of issues relating to the behaviour of large generators, an article in The Independent on 8 March was headed “Green energy deals ‘mislead customers’”. It asserts:
“Britain’s biggest energy companies have been investigated by...Ofgem over the way they operate ‘green’ schemes that offer the public the chance to be supplied with wind, wave and solar power.”
This relates to our discussions, because on green tariffs the article goes on to say:
“A spokesman for Ofgem said: ‘Suppliers really must demonstrate that if they are marketing these tariffs they are doing something in addition to the Renewables Obligation.’ The regulator said it was revising its guidelines on how companies market the products.”
Friends of the Earth was quoted in the article as saying:
“Most suppliers have simply established green tariffs and then proportioned in some arbitrary way renewables to their green consumers. Their purchases ought to result in an additional pull on renewables, but that’s not happening. We have been calling for an independent auditing of these schemes.”
Clearly, there is consumer interest in buying so-called green energy from renewables. The concernis that the industry latches on to terms such as “renewable obligations” and simply reapportions without changing the proportion of its energy that it derives from renewables, and does so using the language that the Government give it in orders such as this. Will the Minister clarify that situation?
Although everyone wants more biomass to beused, there is a question over its source. If the sourceis overseas, we must consider not only the energy involved in transporting the fuel, but the environmental impact in some countries of reckless deforestation to produce energy crops. What further work is being done to discourage, within global trading rules, imports and to create the conditions for local sourcing of biomass? With those questions, I, too, welcome the order.
9.20 am
Malcolm Wicks: We have had a short but useful debate. The hon. Member for Wealden picked me up on my early morning confusion about the snow and the sun, so it might come as a relief to Members to know that I am no longer Energy Minister and that I am now learning some science. I am sure that, in the future, I shall be able to distinguish between the two—even at this time of the morning.
The regulations have been generally welcomed. Certainly, the administrative regulations represent common sense, simplifying what often appears to be—indeed, what often is—a complex system. Much of the discussion has been about biomass, and the hon. Gentleman is right to say that we have listened to people on that subject. In the past, there were numerous issues to consider—for example, we did not want co-firing at places such as Drax power stationsto distort the overall purposes of the renewables strategy and obligation. However, we listened to representations, and, in my time as Energy Minister, I ordered a re-review. We are now in a better place. These are very much interim measures, but I can confirm that long-term measures—the reform of the renewables obligation and the banding ideas—will be set out in the White Paper in due course.
We are committed to renewables. We should notbe tempted to turn the debate into a general debate about renewables or energy strategy. However, the commitment that, throughout the European Union,20 per cent. of our power should come from renewable sources is significant, and we all have a great dealof work to do on renewables development. That commitment lies behind our concern to put the renewables obligation in a better and—inevitably—more sensitive and detailed place. It has successfully brought forward onshore wind power, but it is open to criticism as a somewhat blunt instrument that does not recognise the more juvenile—if I can put it like that—technologies, such as marine technology, which have huge potential.
I shall not discuss carbon capture and storage, although I should love to. The Chancellor’s announcement yesterday of a competition for a major demonstration project in the UK is very welcome.
Charles Hendry: Will the Minister clarify the Government’s target? Is it, as the regulatory impact assessment sets out, 10 per cent. from renewables by 2010, or has it become 20 per cent. by 2020?
Malcolm Wicks: The White Paper will say more about renewables, but we remain committed to seeking 10 per cent. by 2010 and to a doubling of that figure by 2020. The 10 per cent. target is difficult to hit, but we are doing our best to get as close as possible to it, and there are significant and encouraging developments every year.
The hon. Gentleman also raised concerns aboutsale and buy-back. He asked whether we would be monitoring that, and yes, we will. I shall consider his detailed points more carefully and come back to him in writing if that makes sense.
We have regard to the important point about the environmental impact of biomass. Internationally, that has to be important. It would be a great irony if, inthe name of green and clean and of minimising environmental impact, we saw not only a great development of biomass, which I want, but one that had debilitating impacts on agriculture and the ability to feed people in Africa, south America and so on. I do not have a simple answer to the question, but the Government are well aware of it. With that, I again commend the order to the Committee.
Question put and agreed to.
Resolved,
That the Committee has considered the Renewables Obligation Order 2006 (Amendment) Order 2007.
Committee rose at twenty-six minutes past Nine o’clock.
 
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