House of Commons
|Session 2008 - 09|
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Public Bill Committee Debates
The Committee consisted of the following Members:
Chris Stanton, Committee Clerk
attended the Committee
Sixth Delegated Legislation Committee
Tuesday 17 March 2009
[John Bercow in the Chair]Draft Renewables Obligation Order 2009
The Parliamentary Under-Secretary of State for Energy and Climate Change (Joan Ruddock): I beg to move,
That the Committee has considered the draft Renewables Obligation Order 2009.
As always, Mr. Bercow, it is a pleasure to serve under your chairmanship. The Government are introducing this order to introduce important changes to the renewables obligationchanges that make it more effective, more efficient and so better able to deliver our targets for renewable energy. Renewable energy is a vital part of our strategy for tackling the two major challenges we face: combating climate change and ensuring a supply of secure energy for the UK.
As the Governments main mechanism for encouraging new renewable electricity generation, it is crucial that the renewables obligation is a successas, indeed, it has been. Before the RO was introduced in 2002, eligible renewable electricity generation was less than 1.8 per cent. of total UK supply; by 2007, it was 4.9 per cent., almost three times as much. There is much more in the pipeline. As of October last year, more than 2,000 MW of renewable electricity generating capacity was under construction; 6,300 MW has been consented; and 8,700 MW is at the planning stage. The UK has become No. 1 in the world for offshore wind, overtaking Denmark in October last year. Clearly, however, even that success is not enough, and we need to do much more. That is why the order makes some fundamental changes to the RO that will allow it to bring forward a higher level of renewables generation from a wider range of sources. The most significant of those is the introduction of banding.
The RO was originally designed as a technology-neutral instrument intended to pull through the most economic forms of renewable generation. It has delivered on that, proving particularly successful in bringing forward technologies such as landfill gas and, especially, onshore wind, which have huge potential for mass deployment. However, if we are to meet the challenging targets we have set ourselves for increasing the proportion of our electricity that comes from renewables, we need a greater contribution from technologies that have been less deployed, such as biogas and offshore wind. Banding will enable us to provide higher levels of support to the technologies that are further from market. Whereas currently each megawatt-hour of eligible generation is awarded one renewables obligation certificate, or ROC, a banded RO will mean that different technologies will get different numbers of ROCs. For example, offshore wind and biogas will receive more ROCs than onshore wind and hydro, which will in turn receive more than landfill or sewer gas. All microgenerators, defined as those with a
In addition to banding, there are several other aspects to the changes that we are making. To ensure that the level of the obligation always remains above the level of actual generation, we are introducing a headroom mechanism. That will give certainty to investors by making the ROC price more stable and predictable, as well as ensuring value for money for consumers. Given the current economic climate, I am sure that hon. Members will agree that these considerations are even more important than ever. To protect investment decisions made on information available at the time, we are committed to the principle of grandfathering. Subject to certain exceptions, stations in existence when we announced our proposal to introduce banding will continue to receive one ROC per megawatt-hour. The banding levels in the draft order were based on research into the costs and market potential of each technology type, and the order details a process for these to be periodically reviewed. That balances the need to provide investors with a stable support network, while ensuring that we can respond to market developments so that banding levels continue to provide the right level of incentive for project developers.
Technologies such as wind, solar and wave power are the subject of most comment, but we also have considerable potential to generate electricity from biomass and waste. Questions of sustainability are rightly raised over these new sources of generation. The evidence is that the great majority of biomass fuels used for electricity generation in the UK are sustainable. However, to ensure that we have better understanding of the issue, we are introducing with the order a sustainability reporting requirement for all but the smallest generators who use biomass. The renewable fractions of municipal and commercial waste are currently underused resources. Conventional waste incineration plants are not eligible for support under the RO but should of course be economic under the landfill tax regime. However, because we want to encourage the development of more efficient technologies such as combined heat and power, anaerobic digestion and gasification, we have simplified the fuel measurement requirements to make the RO more accessible for eligible generation.
We are also making a number of small technical and administrative changes under the order. In particular, we are changing the administrative requirements for microgenerators to remove the barriers to participation in the RO that some small generators experience. We believe that the costs of administering the RO should be met by those who participate in the scheme and will benefit from the changes that we are introducing. That is why we are making a further change so that the costs of Ofgems administration of the scheme are met from the buy-out fund rather than through the network operators, as is currently the case.
The order is the culmination of a programme of work involving close consultation with industry on the development of the policy. The changes were subject to a statutory consultation, which closed in September last year. These changes will set us on the way towards meeting our share of the target of 20 per cent. of EU energy to come from renewables by 2020. But we will not stop there. We will continue to work closely with
Gregory Barker (Bexhill and Battle) (Con): It is a pleasure to serve under your chairmanship today, Mr. Bercow.
I am grateful to the Minister for her remarks on this important draft order. As I am sure she is aware, it is urgent to take these measures. The renewables sector, in particular that part dealing with newer technologies, especially wind, was already struggling to remain economically viable before the credit crunch, but since the global economic crisis hit, that sector has been affected by the downturn. If we are to meet our 2020 target, much more needs to be done to help the UK renewables industry to ride out the financial storm. The offshore sector in particular was struggling before the credit crunch, and now it is struggling even more.
To illustrate that point, the chief executive of Siemens, having seen his company take a 38 per cent. year-on-year decline in renewables orders, said,
If I had to take one division out of our 17 for deferrals or pushouts, I would probably take wind.
The investment bank UBS is predicting a 20 per cent. decline in investment in wind capacity below predicted levels for 2009. Paul Goldby of E.ON has remarked specifically that the economics of the London arraythe flagship of UK offshore windare on a knife edge.
Even before the sector was hit by the financial crisis, it was struggling to meet the ambitious targets because of the failure to invest in a broader range of renewable technologies beyond one or two, such as onshore wind. Investment was massively skewed towards just one or two technologies. So, what is the problem and are these measures a fitting solution to the very significant challenges that the renewables sector faces? To understand that, we have to look briefly at the success, or otherwise, of phase one of the renewables obligation certificates regime.
The renewables obligation was set up to provide support to renewable technologies to allow them to develop a maturity in the marketplace, with a particular focus on technologies that were not yet at the front of the cost curve, in order to make their final progression to being cost-competitive with fossil fuels. As certificates were issued equally, however, regardless of particular technologies, capital logically flowed to the cheapest renewable technologies. For most of the life of the RO, that meant that, in practice, the largest single beneficiary of the consumer subsidy was not offshore wind, marine, exciting solar technology or any of the cutting-edge technologies that we are likely to envisage when we think about the exciting world of 21st-century clean energy, but landfill methane gastapping gas coming off old rubbish dumps.
The first phase of the RO attracted into development a significant number of proposed wind projects, which, with landfill methane projects, earned the lions share of the subsidy, gaining 30 per cent. and 28 per cent.
As we now face the fallout from the financial crisis, and with large offshore wind projects such as London array sitting on a knife edge, what assurances can the Minister give that the increase in the ROCs allocation will make those projects deliver the returns that prudent investors require to proceed? Many projects, such as the London array, have argued that they should qualify for two ROCs, and have plausible figures to prove it. What consideration has the Minister given to those reports and to the representations that the Department has had from the industry, particularly in the light of the most recent economic circumstances? Is the Minister certain that the London array will go ahead and that the investment will flow with just 1.5 ROCs to support the project?
The economics of the London array have changed substantially in the past few months alone. Before, we were receiving lobbying from a coalition of investors that the economics did not quite stack up. We saw evidence of that when Shell withdrew from that project last summer and publicly announced that there was simply not enough profit in the project for the private sector. The company went instead to the United States, and I understand that it will invest in wind in Texas as an alternative.
Luckily, Masdara company from the UAEdecided to step in, but we are still hearing that the economics of the project do not stack up, particularly because of the collapse in the pound. The substantial devaluation of sterling in the past few months has forced up set-up costs very substantially. More than 70 per cent. of the projects capital costssteel and concrete for the huge turbines that are proposed to be erected in the North seaare in euros, because very little of the infrastructure is manufactured here in the UK. Can the Minister say with sincerity that the Department has looked clearly, in detail, at the individual economics of offshore projects, or has a more broad-brush approach been taken, as I suspect it has?
If, as the regulations state, policy U-turns are an acceptable reason to rethink the banding, are the crash in sterling or the credit crunch not enough to change the banding from what was proposed last year? The 1.5 ROCs proposal has been on the table for some time. I am sceptical about whether the proposals in the draft order reflect the latest state of the economy.
The bottom line is that had we developed the renewables sector early enough, we would be insulated from some of the effects of the fluctuation in sterling because we would have developed a stronger domestic manufacturing base to support the investment in our offshore infrastructure. It is sad that so much of the machinery and capital equipment is manufactured overseas. What assurances can the Minister give that the Government have a
How seriously can the Minister brandish a target of 30 GW of offshore wind capacity by 2030 if the same projects are telling her that 1.5 ROCs are not enough? Will she explain how the measures in the draft order will deliver better value for money? The first phase of the renewables obligation was delivering carbon abatement at approximately £110 per tonneroughly the same as those projects delivered by the Carbon Trust and 10 times the current emissions trading scheme price. Purely in carbon terms, we would have been better off simply retiring certificates. Dividends have been paid to developers at levels far above those that simply provide a marginal subsidy to allow the projects to go ahead. The National Audit Office has found that the best sites have received more support from the renewables obligation than was strictly necessary to ensure that they were developed. We have overcompensated some of the most economic sites, while those technologies that need support to pull them through have been starved of funding.
In a report for the National Audit Office in 2005, consultants Oxera estimated that up to 21 per cent. of the emissions avoided by replacing coal with biomass in co-fired coal plants was eroded by increases in the output of those plants. The RO delivered a couple of percentage points of new renewables to the total energy mix, but if one looks further afield one sees that over the same period since 2002, a different form of technology supportfeed-in tariffstook Germany to the forefront of the global renewables technology sector, building a strong worldwide position in those new, fast-emerging energy sectors.
Feed-in tariffs on the continent have provided a fixed, predictable income stream that has lowered the costs of capital by giving long-term certainty to investors in a way that the tradeable scheme can never do. Ironically, despite our so-called liberal market, the more interventionist German system has done more with less support from consumers. We eagerly await details of the Governments feed-in tariff scheme for smaller-scale renewables, for which we have been arguing for some time.
I was cautious when the Government announced consultation on a further iteration of the renewables obligation. The Minister boasted of its success in her opening remarks, but the bottom line is that it has not delivered the same number and breadth of projects that the same money has delivered in Germany under the feed-in tariff system. Although we do not want to undermine or upset existing investments in any waywe too are committed to the principle of grandfatheringit is clear that we need to direct more support to the
It is typical of the present Government to have taken nearly two years of consultation to introduce the measures in the draft order. The question is: will they deliver? It certainly seems that by reducing the share of the pot for co-firing and landfill gas to 0.5 and 0.25 ROCs respectively, the measures get a handle on the historically disproportionate nature of the subsidy directed to those now well established technologies, and we welcome that. By rewarding offshore wind, biomass and co-fired combined heat and power with 1.5 ROCs, the Government acknowledge the need for extra support, but we question whether that goes far enough, because the numbers seem to just be pulled out of the air.
It cannot be the case that the technologies in each of those bands are exactly equal in their need for support. In contrast, continental feed-in tariffs use a more sophisticated range of metrics to generate more precise levels of support for individual technologiesa tailored and constantly monitored form of support, rather than the broad-brush banding approach, which we are to adopt. In the present economic circumstances, it is more important than ever that, as the level of economics and the dynamics of funding change, the system of support remains up to date, fair and competitive.
It is not clear from the extensive literature on the subject where the choice of banding came from. What specific matrix is there to support the Governments choices? Given the change of pace in the sector, it seems likely that the Minister will have to re-juggle sooner rather than later, to avoid more severe distortions in the market. Indeed, with more than 10 technologies at two ROCs apiece, the field is wide open for some technologies to continue to be favoured disproportionately, and for others that may also have huge long-term potential to be left washed up high and dry, lacking that crucial extra bit of consumer support. With long-established technologies such as tidal barrages and tidal lagoons in the mix, is Minister sure that she is not creating another open door to utilities to profit at the expense of consumers, who bear the costs of the scheme on their electricity bills?
The proof of the pudding is in deliverymegawatts on the ground. Of the 19 GW of wind projects brought forward, only 3 GW-worth were constructed. Current planning delays add millions to the costs of developing even a medium-sized project. Grid connectivity leaves planning-consented projects waiting in a queue for connection and paying crippling connection fees. What is the Minister doing to ensure that those and other bottlenecks are resolved? It is not only the renewables obligation that has held back the development of British renewables.
What consideration has the Minister given to suggestions of a low-carbon obligation approach, as proposed by many experts in the field, including Dieter Helm? Such a scheme will support technologies such as gas-fired CHP, which have a huge part to play as transition technologies in the next few years and which are in need of support to justify investment to get them over the economic hurdle. The large capital costs of district heating networks, for example, are often justified when seen as a longer-term investment in the low-carbon economy. They represent true transition technologies as
Unfortunately, however, under the proposals in the draft order, CHP competes without support with subsidised renewables, including biomass co-firing. The focus on electricity generation in the draft order also ignores the huge potential of renewable heat and heat efficiency. Thanks to our proposals in the Energy Bill, the Minister is now consulting on renewable heat incentives, albeit in some hurry. I urge her to work with her colleagues to learn the lessons of the renewables obligation and to start from a tariff rather than an obligation-style system.
Will the Minister comment on how those two sets of measures might overlap, for example, in biomass CHP, where projects might be claiming ROCs and a heat tariff? How do the measures deal with problems identified in the last Ofgem renewables obligation annual report, such as moderations to landfill gas sites not reported to Ofgem, poorly calibrated flow meters at biomass stations, discrepancies in procedures for sampling fuel at co-firing sites, and many others?
Does the Minister consider that adjustments to the buy-out price have achieved the desired result, and what is her strategy for making adjustments under the draft order? Does she think that Ofgem has delivered genuine value for money in running the scheme? How does she think the investment in software to fix bureaucratic bottlenecks during the first phase of the renewables obligation will translate into value in the new phase? What estimates has she made of the costs of grandfathering the existing renewables obligation allocations?
Does the Minister regard two ROCs as the absolute upper limit to allocations, when we know that the Scots are issuing a greater number of renewable obligation certificates for technologies such as wave power? Has she considered whether the RO is a subsidy to the Scottish renewables sector at the expense of the English consumer? That is what would happen if a higher level of ROCs were deployed in Scottish waters, drawing on English consumer subsidy to fund that. I am not arguing against higher support for the Scottish industry. What I want is a level playing fieldif that is possible at seaacross British waters, so that we see the fast deployment of these exciting new technologies in British waters all the way round the British isles, and do not have particularly favourable conditions just north of the border. How does the Minister account for such a potential discrepancy arising out of the measures?
Although we have many reservations about the past performance of the renewables obligation and have criticised the one-club golfing approach that it has created, banding is a major improvement to what has been a deeply disappointing programme, given the huge potential we have to be a global player in the 21st-century renewable energy sector. I hope the Minister will listen harder to the industry and work to improve the RO, so that we see the delivery of major renewables projects, with all the jobs and economic advantages that that will entail. We must focus not only on the 2020 renewables targets, as hard and as stretching as they are, but on our carbon-abatement targets, as well. We have to ensure that the measures in the draft order do not over-prioritise one at the expense of delivering value for money in the other.
The renewables obligation disappointed and frustrated those who wanted to go harder, faster and wider in the development of the British renewables sector in its first phase. We will look closely to see whether a radical restructuring of the RO with banding is sufficient. It is clear that, with a feed-in tariff, renewable energy can be developed much quicker than we have been able to do. I hope the new banding system succeeds, but to do that it requires a sense of ambition, open-mindedness and pragmatism to be shared in the Government. My suspicion is that we still have a one-size-fits-all approach from a system that is too Whitehall-centric and does not do enough to encourage the entrepreneurial smaller, newer and exciting technologies.
I rise to make a very brief contribution, not least because I do not want to feature in the next volume of memoirs by my hon. Friend the Member for Sunderland, South because I have detained him for too long. I welcome the announcement on the policy direction that the Minister outlined this morning. [Interruption.] My contribution seems to be driving Conservative Members from the room. They must think that they are about to be bested in debate and have fled the field.
I welcome the order, but I want to ask a couple of specific questions. The original proposal to introduce such banding to the ROCs came first from the previous Labour-led Administration in the Scottish Parliament, at the instigation of a Liberal Democrat Environment Minister. It is therefore surprising that we have yet to hear from the Lib Dems. I hope that they will point out that the Administration in Scotland was on the mark in this respect, unlike the shambles that we are seeing there today.
The interoperability of ROCs north and south of the border is vital. Energy and environment Ministers north of the border have some Executive devolution on these matters, but the policy areas rightly remain here. Although Scotland has a third of the UKs coastline and climatic conditions that make it particularly attractive for an offshore wind facility, we must ensure that we have a single GB market for energy. Central to that is the market for renewable energy, and central to that, in turn, is the interoperability of ROCs north and south of the border. That has been a key factor in ensuring that the industry north of the border has developed to the extent that it has, as I have seen for myself.
The hon. Member for Bexhill and Battle was a little grudging about what has been achieved with onshore wind. We have real-world targets that we have to hitinternationally binding targets and treaties that we have signed up to. We want to produce more renewable energy from whatever source, and the first wave of ROCs has brought on onshore wind to a great degree. The truth is that the technology for offshore wind is not nearly developed in terms of its cost structure; nor does the technology for wave and tidal have anything near the potential of what there is for onshore wind. It was therefore right to focus on the first wave of ROCs in ensuring that we maximised our capacity from onshore wind.
I share the hon. Gentlemans regret that we are not manufacturing or fabricating turbines to the degree that we should. I lament the passing of the Vestas factory in Campbeltown and Machrihanish, which I visited a couple of years ago. It is still going, but nothing like in the way that it should be. The Norwegians clearly have a great advantage over us in this regard. I hope that the Minister is giving careful consideration to what can be done to ensure that our ability to manufacture, or at least fabricate, these turbines is encouraged in whatever way possible.
We also have a strategic advantage in technology associated with clean coal and the construction of supercritical boilers in Scottish companies such as Clyde Blowers and Doosan Babcock, which are exporting massively to China. Whatever we do in this country to mitigate climate change and CO2 emissions, the big challenge comes from places such as China and India. China is still opening coal-fired power stations at a tremendous rate of knots. If we in this country can introduce technology significantly to mitigate the damage that is being done to the environment there, we will not only be helping to ensure that our industry flourishes but doing a great thing for the future of the planet. The key to that is ensuring that the industry in this country gets a share of the domestic market, which means that the Government must push forward with clean coal technology and consider fitting new coal-fired power stations with that technology, as well as retro-fitting existing ones. Coal still has a very significant role to play in providing energy for this country.
In Scotland, we have seen significant developments in onshore wind. The first phase of the ROCs played a part in that; the largest wind farm in Europe is being constructed in Lanarkshire. However, we must guard against false claims for renewable energies offshore or onshore. The First Minister of Scotland is particularly prone to confusing installed capacity with potential output if wind farms worked at 100 per cent. capacity 100 per cent. of the time. If they did, they would provide more energy than Scotlands two nuclear power stations, but they do not. To pretend that we are getting as much energy from renewable sources as from our nuclear power stations is to perpetrate a complete falsehooda fantasyon the people of Scotland, and the First Minister should stop doing it.
The First Minister also needs to get a grip on the looming energy crisis that is heading Scotlands way. Although banding of the ROCs and bringing on offshore wind technology will play their part, they can only ever provide a minority share. If we are to avoid the looming energy crisis, he must get a grip on his attitudes towards clean coal technology and towards nuclear power, of which a majority of Scots demonstrated that they are in favour in an opinion poll this weekend.
I welcome the order, which is a big step in the right direction. It will help in developing offshore wind and other technologies that will make a contribution towards our targets on clean energy and climate change. However, it will only ever be part of the overall energy solution. Although this Government are tackling the issue in the round, sadly the Government of Scotland are failing the people.
Martin Horwood (Cheltenham) (LD): It is good to be serving under your chairmanship once again, Mr. Bercow.
I thank the hon. Member for Bexhill and Battle for his enlightening history of the subject of renewable energy. He made some important technical points. I am glad that the Conservatives previous aversion to interference by Government does not prevent them from offering opinions on Ofgems software. The speech by the hon. Member for Inverclyde was very helpful; to hear anyone saying that a Liberal Democrat Environment Minister is on the mark is music to my ears. To be honest, even the phrase Liberal Democrat Environment Minister is music to my ears, and I hope that it will be repeated in future.
The renewables obligation has been an essential part of the architecture of promoting renewable energy in this country but, as the hon. Member for Bexhill and Battle said, it has so far failed to deliver. This country has had a lamentable performance in promoting renewable energy, and we still languish near the bottom of the European league on that front. The European average is some 13.6 per cent. share of electricity coming from renewables, but we are proud of being at 3 or 4 per cent. and, in the Ministers words, overtaking Denmark. Given the size, population and coastline of Denmark compared with that of the UK, it is a matter of shame that we were ever behind Denmark.
There have been some worrying trends, even in the latter years of the previous phase of the renewables obligation, particularly as regards the percentage of the renewables obligation being met by the presentation of genuine ROCs as opposed to companies using buy-outs to meet the obligation. The proportion of the former fell from 96 per cent. in 2004-05 to 76 per cent. in the following year and to only 68 per cent. in the year after that. That is in the context of the obligation increasing, but the statistics are still important. What does the Minister think that the future trend is likely to be over the next couple of years? Will we see an increasing renewables obligation, but with an increasing percentage being met by buy-outs rather than through genuine renewable energy?
The new architecture for promoting renewable energy should not just include the renewables obligationas the hon. Member for Bexhill and Battle said, it must now start to include feed-in tariffs. Liberal Democrat Members, too, called for those during the passage of the Energy Act 2008, and we were pleased that the door was opened to them. Will the Minister enlighten us on her latest thinking on feed-in tariffs, particularly how they will interact with the renewables obligation? Concerns have been expressed in some parts of the industry about how the different schemes may affect each other. There is a precedent with which the Minister is very familiar; I brought it to her attention and to that of companies such as BT. The interaction between the carbon-reduction commitment and the renewables obligation is causing perverse problems for companies such as BT that generate quite a lot of their own energy from renewables. I am sure that she will get around to dealing with that problem at some stage.
The banding of the ROCs is very welcome if it gives the right signals to investors, but, as we discussed during the passage of the Energy Bill last year, it carries the
Innovation and investment are vital to renewable energy, so it is right that we are giving a higher incentive to new technologies which are not as commercial as onshore wind and biomass, such as wave, tidal stream, photovoltaics, geothermal, gasification and anaerobic digestion. Those are all important technologies and it is right to give them additional support, but I am worried that we may accidentally also be supporting unsustainable forms of non-renewable energy, such as the wrong types of biomass. I was encouraged by the Ministers remarks about the reporting requirements that are included in the order. She may wish to expand on how that will stop the importation of unsustainable biomass for co-firing.
The provisions on time scale and headroom are welcome as technical fixes to prevent perverse incentives. There are, however, still questionsas, again, the hon. Member for Bexhill and Battle said; I echo him on several mattersabout whether one ROC for onshore wind and 1.5 ROCs for offshore wind are sufficient incentives in the current economic climate. What flexibility will the Minister have to review those incentives at an early date in the light of threats to projects such as the London array? It would be a great shame if there were any serious threat to that going ahead.
Banding may be necessary, but it is not sufficient. We still need a wider business environment that sends clearer signals to investors in the renewable energy sector. On that front, I am afraid that the Government are giving some very mixed signals. Some of us were gathered here a week or so ago to discuss the European energy strategy and found that the Government are currently unwilling to sign up to a European supergrid as a matter of policy. I find that regrettable. The Minister may wish to correct that impression and confirm that the Government are behind a supergrid after all, as it must surely be an essential part of Europes renewable energy future.
It also sends a poor signalnot from Government, but from the marketthat the price of carbon has fallen so low. That damages the investment signals on renewables. The Government are fiddling the shadow cost of carbon, which is used to assess large-scale projects. That has given a helpfulfrom their point of viewgreen light to the third runway at Heathrow, which is not a great contribution to tackling climate change. In the long term, if it is maintained, it may also undermine investment in areas such as renewable energy. It is a shame that when the Government were looking for stimulus packages they chose to waste £12.5 billion of public money on a largely useless cut in VAT, which has been neither helpful to retailers nor particularly noticed by consumers. An alternative might have been to spend billions on energy efficiency, which could have reduced the demand for electricity significantly.
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