New section 32E

133.     New section 32E introduces a power to make transitional provisions in relation to existing projects once a renewables obligation order containing banding provision is introduced. For example, it may be desirable to protect existing investments by enabling most existing generating stations which have been financed under the Renewable Obligation Order 2006 to continue to be awarded 1ROC/1MWh once banding is introduced. Subsections (1) to (3) provide that transitional provision may be made either when banding is first introduced or when it is revised.

134.     Subsections (4) and (5) provide that, for generators who first became operational after 11 July 2006 (the date when banding was announced), and who are in receipt of statutory grants, the banding provisions may be made conditional on giving up any entitlement to grant (and repaying sums paid under it). Provision might be made, for example, whereby the operator would have a choice between keeping the grant and continuing to receive 1 ROC/MWh for its generation or returning the grant and receiving more ROCs per MWh once banding is introduced. Subsection (7) provides a description of the circumstances in which a station will be judged operational for this purpose and subsection (8) defines the meaning of statutory grant.

     New section 32F

135.     New section 32F provides for an electricity supplier to be able to discharge its renewables obligation (to the extent provided for by the order) by presenting Northern Ireland Renewable Obligation Certificates which are issued by the Northern Ireland Authority for Utility Regulation ("the Northern Ireland authority"). The Northern Ireland authority administers the RO in Northern Ireland. The practical effect of this provision is that it allows the obligation in Great Britain to work alongside the obligation in Northern Ireland thereby providing a single market for ROCs across Great Britain and Northern Ireland.

     New section 32G

136.     New section 32G provides for the order to make provision for electricity suppliers to discharge their obligation by paying a 'buyout' price to the Authority. Subsection (1)(b) provides for late payments made by electricity suppliers to the Authority to be used towards discharging the obligation too. Subsection (2) provides for the buyout price to be determined through the order and subsection (3) allows the buyout price to be linked to, for example, the Retail Price Index.

137.     Subsections (5) to (8) provide that an order can make arrangements to require electricity suppliers to make additional payments where there is a shortfall in the amount due into the buyout fund for a particular obligation period. These additional payments are referred to in the current renewables obligation order as mutualisation payments. They arise in circumstances where an electricity supplier cannot fulfil its obligation and is unable to make a buyout payment; for example, if a supplier goes into administration. Additional sums are then required from the remaining electricity suppliers to cover the amounts that would have been paid by the insolvent supplier. Subsections (9) and (10) define shortfall for these purposes.

     New section 32H

138.     Subsection (1) requires that payments made to the Authority in respect of the buyout fund and late payment fund be paid to electricity suppliers using an allocation system specified in the order. Subsection (2) allows for these payments to not be made where the money in the fund is instead used for the purposes set out in Section 32I (which relates to the recovery of the Authority's costs in administering the RO). Subsection (3) allows for these payments to be made to specified categories of electricity supplier only.

139.     Subsection (4) allows an order to specify that if certain circumstances are met, monies in the late payment fund will be held over till a later period. This is intended to provide for situations where, typically, sums in the late payment fund are so small that the bank charges incurred by the electricity suppliers of receiving this money would be larger than the amounts received. In this situation the payments could be postponed, for instance, until the following year and paid out with the money for that year. The order may specify the amounts which may trigger such a carry over.

     New section 32I

140.     New section 32I is a new power which enables the order to specify that a proportion of the money received into the buyout fund and late payment fund from electricity suppliers can be used by the Authority to cover some or all of its costs of administering the RO in England, Wales and Scotland. Money from the buyout fund could also be used by the Authority to make payments to the Northern Ireland authority to cover some or all of the costs incurred by that authority of administering the RO in Northern Ireland.

     New section 32J

141.     New section 32J enables the order to provide for the Authority to require electricity suppliers and others (who may include electricity generators and agents acting on behalf of generators) to provide certain information in relation to their participation in the RO.

142.     Subsection (3) introduces a new power which allows the order to require operators of stations generating electricity wholly or partly from biomass to provide information relating to the biomass. This information could, for example, relate to the source of the biomass and the circumstances under which it is grown. The purpose of this provision is to enable the Authority to gather and make public information on sustainability. If generators fail to provide the information in the time and form specified, the Authority may be empowered to postpone the issue of ROCs until such time as the information has been provided, or not to issue ROCs at all.

     New sections 32K and 32L

143.     New section 32K enables the order to make general provisions about a number of matters, including transitional provisions. New section 32L concerns the procedure for making an order and requires the Secretary of State to consult the Authority, the National Consumers Council, electricity suppliers subject to the RO, appropriate electricity generators and such other persons as the Secretary of State considers appropriate before making an order. As at present, the order will be subject to affirmative resolution procedure. In addition, there is a statutory requirement to consult before the power is exercised. Clause 37(1) will allow the Government to start the consultation process before the relevant provisions in this Bill are brought into force.

     New Section 32M

144.     New Section 32M provides definitions for various terms within the preceding sections, including a definition of what constitutes a renewable energy source. That definition, in subsection (1), explains that 'waste of which not more than a specified proportion is fossil fuel' is a renewable source for these purposes.

145.     Subsection (2) enables the order to define 'waste' and say how the fossil fuel element of waste is to be determined. The provision is designed to enable energy from waste generators to benefit from the renewables obligation by making it easier for them to claim ROCs in respect of the non fossil fuel element contained in waste.

     Clause 37: Section 36: supplemental provision

146.     Subsection (1) of clause 37 enables the requirement to consult under section 32L of the Electricity Act 1989 (as inserted by clause 36) to be satisfied by consultation which takes place before commencement of clause 36 or the passing of the Bill.

147.     Subsections (2) and (3) of clause 37 enable the making of consequential amendments to certain references to Northern Ireland legislation contained in sections 32 to 32M. The Government anticipates that these references will need to be updated if the NI legislation is amended to take account of changes made by this Bill.

     Clause 38: Existing savings relating to section 32 of the Electricity Act 1989

148.     Clause 38 amends section 67(1)(c) of the Utilities Act 2000. This provision confers on the Secretary of State a power to modify, preserve, replace or otherwise deal with arrangements made pursuant to non fossil fuel obligation (NFFO) orders under section 32 of the Electricity Act 1989 in its original form. The amendment clarifies that the Secretary of State's powers under this provision extends to any arrangements which have replaced the original arrangements.

     Clause 39: The Northern Ireland renewables obligation

149.     Subsection (1) of clause 39 amends section 121 of the Energy Act 2004. Section 121 permits the Authority to carry out, on behalf of the Northern Ireland Authority, functions conferred on the Northern Ireland authority under or for the purposes of Articles 52 to 55 of the Energy (Northern Ireland) Order 2003. These functions relate to the administration of the RO in Northern Ireland. The amendments made by this clause ensure that the Authority can continue to act on behalf of the Northern Ireland authority even if Articles 52 to 55 are amended by an order under Article 56. Article 56 confers power to amend Articles 52 to 55 to reflect any changes made to the corresponding legislation for Great Britain.

150.     Subsection (2) ensures that the power in Article 56 of the Energy (Northern Ireland) Order 2003 to amend articles 52 to 55 of the order, extends to making provision corresponding to the amendments made by clause 36 (i.e. the new sections 32 to 32M of the Electricity Act 1989).

151.     Subsection (3) applies where an order is made under Article 56 amending articles 52 to 55 of the Energy (Northern Ireland) Order, and, by virtue of changes made by that order, a Northern Ireland Renewables Obligation Order is made under Article 52 of the Energy (Northern Ireland) Order 2003 ("the NI RO order"). It provides that the consultation requirements which have to be satisfied before the NI RO order is made may be satisfied by consultation carried out before the Article 56 order came into force or this Act was passed.

     OFFSHORE ELECTRICITY TRANSMISSION

     SUMMARY AND BACKGROUND

152.     The Government is putting in place a framework intended to encourage the development of generation of electricity from offshore renewable energy sources, for example offshore generating stations driven by wind. Offshore generating stations tend to consist of a device (for example, wind turbines placed on towers driven into the seabed) which power a generator to convert the (wind) energy into electricity. These offshore generating stations will need to connect to the main onshore electricity network (transmission and distribution) in order for the electricity generated to be supplied to end-users, including domestic consumers.

153.     Electricity transmission generally constitutes the movement of electricity around a national grid system using high voltage networks, whilst electricity distribution generally constitutes the delivery of electricity on local low voltage networks to end users.

154.     The Energy Act 2004 provides powers for the Secretary of State to make changes to the codes, agreements and licences - which regulate onshore electricity transmission and distribution - for the purposes of regulating offshore electricity transmission and distribution.

155.     Since the Energy Act 2004 was passed, the Government has been working with the Gas and Electricity Markets Authority ("the Authority") to establish an offshore transmission licensing regime to regulate:

• the conveyance of electricity along high voltage lines offshore (defined in the 2004 Act as those with a nominal voltage of 132kV or more), and

• associated plant and equipment which connect offshore generating stations to the onshore electricity network.

The high voltage lines and associated plant and equipment together make up the "transmission assets".

156.     The overall objective of the regulatory regime for these transmission assets is to enable large amounts of electricity from renewable sources generated offshore to connect to the onshore electricity network in a safe, economic and efficient manner, whilst maintaining the integrity of the electricity system as a whole.

157.     To date, the transmission assets for offshore generating stations have been built and operated by generator-developers.

158.     The new offshore transmission regime will:

• Require the transmission assets to be owned and operated by a separate licensed entity (not the generator).

• Extend National Grid's role as the onshore transmission system operator offshore.

• Introduce a competitive tender process for determining to whom the Authority will grant a transmission licence to build, maintain and finance the transmission assets for a project. The Authority will make regulations under section 6C of the Electricity Act 1989 to enable it to run competitive tender processes and determine the successful bidders. The regulations will need to be approved by the Secretary of State. The Government anticipates that the Authority will consult on the way in which these provisions will be implemented, before the regulations under section 6C are made.

159.     The new offshore transmission regime will come into force on commencement of section 89 (which makes changes to the Electricity Act 1989 so that certain activities offshore require a licence) and section 180 (which adds a new definition of "high voltage line" in the Electricity Act 1989) of the Energy Act 2004. From that date, those participating in offshore transmission will require a licence.

160.     In addition to the powers contained in the Energy Act 2004 for offshore transmission, two further areas have been identified where powers are necessary to ensure the effective operation of the new licensing regime.

161.     The Authority's new function of carrying out tender exercises will cause it to incur additional costs beyond those incurred in exercising its existing functions. The Bill contains new provisions relating to cost recovery. These will ensure that the Authority is able to use alternative mechanisms to cover its costs in running the tender process. These will include mechanisms to ensure commitment to the tender process from different parties.

162.     The combination of the offshore generating station and the transmission assets are described in these explanatory notes as the "offshore project". Some of the earliest projects for which a tender exercise for an offshore transmission licence will be required are offshore projects where the generator-developer will either:

• have funded and already built the transmission assets; or

• have funded and be part way through building the transmission assets; or

• be ready to construct the assets (in that it has all necessary funding in place to do so),

at the time the offshore transmission regime comes into force.

163.     These offshore projects will require the transfer of property, rights and liabilities (which might include the transmission assets) from the existing owner (e.g. the generator-developer) to the successful bidder (as a result of the tender exercise for an offshore transmission licence) in order for that successful bidder to be able to perform its licence and statutory functions. For offshore projects where the transmission assets will have already been built when the new regime comes into force, and where a transfer to the successful bidder has not taken place by that time, a generator-developer will be "stranded" since it will not be authorised to convey its electricity lawfully to the onshore network. Although in the majority of cases it is anticipated that the transfer will be agreed via commercial negotiations between the parties, the Government considers that a mechanism is needed to cover the possibility of such negotiations failing. This will enable the Government to ensure that property is transferred in a fair, timely and effective way, and avoid generator-developers being "stranded". The Bill enables the Authority to make a property scheme in those cases.

164.     In addition, section 64(1A) of the Electricity Act 1989 (inserted by section 180 Energy Act 2004) is being amended so that lines in internal waters which convey electricity from an offshore generating station are treated in the same way as such lines in the territorial sea and the Renewable Energy Zone.

165.     The provisions on offshore transmission may engage Article 1 of the First Protocol to the ECHR (protection of property). However, the provisions pursue a legitimate aim and are proportionate to the achievement of that aim. The provisions may also involve a determination of a person's civil rights and obligations and therefore engage Article 6(1) of the ECHR, which protects the right to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. The Secretary of State considers that the opportunities to make representations and the remedies available will provide an adequate safeguard of the rights which may arise under Article 6(1). Finally, the Authority's power to obtain information (paragraph 6 of Schedule 2A) may engage Article 8 of the ECHR (privacy). However, the Authority needs to be in possession of all relevant facts before making decisions concerning property, rights and liabilities which belong to others. The Secretary of State considers that this information power is therefore justified under the terms of Article 8(2) as being in the interests of protecting the rights and freedoms of others and is proportionate in achieving this aim.

     COMMENTARY ON CLAUSES

     Clause 40 and Schedule 2: Offshore electricity transmission and property schemes

166.     This clause and schedule amend Part 1 of the Electricity Act 1989 so as to confer on the Authority:

• power to recover costs related to competitive tenders for determining to whom offshore electricity transmission licences will be granted, and

• power to make property schemes to transfer property, rights and liabilities from the existing owner to the successful bidder for an offshore transmission licence.

167.     Subsection (2) inserts a new section 6D into the Electricity Act 1989. It supplements section 6C which (as mentioned in the summary and background above) gives the Authority the power to make regulations to enable it to run competitive tender processes and determine the successful bidders. These regulations can include provisions about the process the Authority will follow in making such determinations.

168.     New section 6D of the Electricity Act 1989 gives the Authority the ability, in making regulations under section 6C, to create new mechanisms to recover its costs in carrying out and administering tender exercises, including the ability to:

• seek payments from the participants in a tender exercise to cover its tender costs for a particular tender exercise (this is set out in section 6D(1)(a)). The participants are identified in sections 6D(2) to (4), being:

• a person who made a connection request to a transmission system or, if a project connects to shore at 132kV, a distribution system; this may include the generator-developer; and

• applicants for the offshore transmission licence.

• require the person who made a connection request to pay a deposit of an amount set by the Authority or require that person to provide other such security in respect of the Authority's tender costs (such as a letter of credit or bond) as the Authority agrees (set out in section 6D(1)(b)). The Authority will also accept payment of the deposit or other such security by an approved party, for example a parent company. This power could be used to obtain a financial commitment from a generator-developer to the tender process. For example, the Authority could use this power on the basis that such security would only be realised if the generator-developer withdrew from the tender exercise before the process was complete.

• require costs incurred by the Authority, in assessing the expenditure which has been incurred - or which in the Authority's view ought to have been incurred if done in an economic and efficient manner - on certain assets, to be met by the owner of the assets - see section 6D(1)(c). The Authority will need to undertake such assessments in cases where transmission assets need to be transferred to the offshore transmission licence holder from, for example, the generator-developer. The assessment will enable the Authority to determine the appropriate transfer value of assets for the purpose of arrangements between the parties for the transfer itself, and also for the purpose of calculating the offshore transmission licence holder's regulated revenue stream. This power applies to projects which are eligible for a property transfer scheme under the new Schedule 2A for the Electricity Act 1989. More details on how this property transfer scheme will operate and the specific circumstances in which interested parties can apply are given below;

• set out the timing of payments under these provisions;

• provide mechanisms for refunding payments to, or withholding payments (or deposits or other security) from, the persons providing the payments; and

• specify the consequences for the tender exercise or any participant in it should that participant fail to make a specified payment, or provide deposits or security, as required in new subsection (1) (a) or (b).

169.     The Authority's tender costs will include the costs which are incurred in relation to a specific tender exercise and an appropriate proportion of costs incurred in relation to tender exercises generally (and which are not specific to that tender exercise). The detail of how amounts will be determined will be set out in the regulations but they would reflect the direct and indirect costs of running tender exercises.

170.     New section 6D(5) prevents the Authority from recovering costs that are greater than those that it has incurred in carrying out each specific tendering exercise (with the proviso that it can also still recover in each case an appropriate proportion of costs incurred in relation to tender exercises generally). At any particular time during a tender exercise the Authority may hold amounts which exceed the amount of its tender costs. However, at the end of the exercise, it must ensure (for example, by making refunds) that it retains no more than its tender costs. In other words, the Authority's powers to recover costs are cost-reflective.

171.     New section 6D(6) and (7) would enable the Authority to charge for an assessment of whether someone wishing to participate in a tender exercise would be able to meet specified requirements (which might include, for example, general technical competence to undertake the activity of offshore transmission) before a tender exercise takes place. The level of the fee will be based on the cost to the Authority of undertaking such assessments.

172.     New section 6D(9) provides for all payments received by the Authority in respect of the tender exercises to be paid into the Consolidated Fund

173.     Subsection (3) extends the definition of "relevant offshore line" in the Electricity Act 1989 so as to include electric lines which are located within GB internal waters (in addition to lines located in the territorial sea adjacent to the United Kingdom and an area designated under section 1(7) of the Continental Shelf Act 1964 (which currently covers the Renewable Energy Zone)). As a result of this amendment, electric lines which are located in internal waters and which convey electricity from an offshore generating station will be categorised as "high voltage lines", i.e. transmission, if they are 132 kilovolts or more. Without this amendment, any such lines located in England and Wales would only be "high voltage lines" if they had a nominal voltage of more than 132 kilovolts. This amendment will not affect the treatment of lines in internal waters which do not convey electricity from an offshore generating station, for example a line which forms part of an onshore system and which crosses internal waters to connect one side of a river estuary to another.

     Property Schemes

174.     Subsection (4) introduces Schedule 2, which gives effect to a new Schedule (Schedule 2A) to the Electricity Act 1989, (see also the new section 6E to that Act inserted at the end of subsection (2)). The new Schedule enables the Authority, in certain circumstances, to make a scheme transferring property, rights and liabilities from the existing owner to the successful bidder for an offshore transmission licence. The Authority can only make provision in such a scheme where it is necessary or expedient for the purposes of the successful bidder performing its licence and statutory functions as an offshore transmission licence holder. The property scheme could, for example, include the transfer of electrical plant equipment together with rights and liabilities which are necessary for operation of the transmission system.