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Baroness Carnegy of Lour: My Lords, before the noble Lord sits down, of course none of us wants cheating in the system, but it is very nice to hear the noble Lord defend the interests of Scotland in so far as matters have been devolved hitherto. There could be a distortion in the system if a measure such as that proposed by my noble friend—I know that she has done so in very good faith—was introduced at the wrong moment. Therefore, personally I very much welcome the noble Lord's reply and I am grateful to him.

Baroness Miller of Hendon: My Lords, I am grateful to the Minister for saying that evidence has been given about this manipulation and that it is a very serious matter which needs to be considered. I shall make only one or two comments. I said very clearly that this proposal could be implemented without any detriment to consumers. That is what the organisation that briefed me strongly on the need for the amendment made very clear. I was surprised to hear the Minister say that we must look into what its effect would be on consumers on the basis that nothing has been done until now.

I heard what my noble friend Lady Carnegy said on this issue and I understand her views clearly. However, the fact remains that at present the system is simply not working. In fact, it is continuing to distort the market and will continue to do so unless something is done about it.

I believe I heard the Minister say that somehow or other this matter can be dealt with by secondary legislation. I wonder how a certain matter can be devolved and then, in a sense, corrected by secondary legislation. Unless I did not hear the noble Lord correctly, it seemed to me that that was the gist of his comments. I want to make it clear that at this stage I have no intention of dividing the House. As the Minister said, the Government take this matter seriously, but I simply want an assurance that they will make an effort to see that it is dealt with in the other place. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Miller of Hendon moved Amendment No. 18:

(1) In section 25 of the 1989 Act (orders for securing compliance), in subsection (8), in the definition of "relevant requirement" for "32C" substitute "32D".
(2) In sections 32A(4) and 32A(7) of that Act (orders under section 32: supplementary), (which relate to information powers and other functions of GEMA), at end insert "or to any obligation arising under section 32D".

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(3) After section 32C of the 1989 Act, insert—
"32D Prevention and remedying of default in compliance with sections 32 to 32C
(1) An order under section 32 may provide that an electricity supplier must pay such a sum to the Authority, corresponding to the supply of a given amount of electricity by the supplier in a particular period, as may be—
(a) necessary to make good in aggregate so much of any unrecovered default in the payments referred to in section 32C(1) (payment as alternative to complying with order under section 32) by other suppliers in previous periods as may be determined by or under the order; and
(b) determined by the Authority and published at least so long before the start of that period as may be specified in the order;
(2) Any sums received under subsection (1) shall be paid by the Authority to electricity suppliers in accordance with a system of allocation specified in the order.
(3) The system of allocation specified in the order may provide for payments to specified categories of electricity supplier only.
(4) Where the Secretary of State is satisfied that it would be proportionate to do so, and that competition in the supply of electricity would not in consequence be unduly distorted, the order may also make provision as to the form and extent of any measures which a supplier is to take for the purpose of securing its discharge of the renewables obligation.
(5) Without prejudice to the generality of subsection (4), such provision may—
(a) apply only to so much of the obligation as may be determined by or under the order;
(b) include a requirement on electricity suppliers to deposit from time to time with the Authority sums of money, certificates issued under section 32B (green certificates), or other financial security; and
(c) authorise the payment of interest by the Authority on any sums so deposited.
(6) The order may provide that any figures necessary to make or provide for the derivation of any calculation under this section can be estimated by the Authority or the Secretary of State.
(7) This section is without prejudice to the enforcement powers available to the Authority in relation to any provision of section 32 (obligation in connection with electricity from renewable sources) to 32D that is a relevant requirement within the meaning of section 25(8).""

The noble Baroness said: My Lords, I feel like saying, "Here we go again", because I raised this issue in Grand Committee and at the Report stage. On Report, the Minister brought forward amendments relating to the handling of late payments and allowing for shorter obligation periods. However, those would have only the most marginal impact in dealing with the central problem of what happens when a supplier becomes bankrupt. Noble Lords may remember that when I discussed this matter in Grand Committee and on Report I called it "securitisation" on the first

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occasion and then argued the case equally for "mutualisation", hoping that somewhere along the line a solution could be found.

However, I think it is right to say that, in the absence of further action on this problem, we estimate that the failure of a company of the size of, for example, TXU could, by 2015, lead to a default 10 times bigger than that which arose last year from TXU's bankruptcy.

Such a risk is bad not only for the growth of renewable energy; it is also extremely bad for customers. They are paying extra for their electricity in order to secure the development of renewable energy, but a significant part of those payments is not flowing to renewable generators, simply because of the default risk.

We put forward on Report an amendment, which was designed to resolve that by giving the Government powers to implement either or both of the only two effective ways to deal with the problem. The first was for any uncovered cost to be recovered from consumers as an adjustment to future renewable charges. The second was for the amount of outstanding debt to be reduced through staged payments or by the provision of security.

Either route would involve some cost for consumers, and it is not clear at this stage which of the two would be cheaper. A combination may very well be the best answer. However, both would clearly be a more efficient use of consumers' money in support of renewables than the current system.

The Minister made a number of technical criticisms of our drafting on Report. We have accordingly taken note. We have simplified the amendment and made it more flexible. We have added safeguards to prevent undue distortion of competition. Discussions have been held within the industry in the light of the revised drafting. I am pleased to tell the House, and indeed the Minister, that the consensus that this amendment is the right way forward has been considerably strengthened since the issue was discussed.

On Report, I invited the Government to come back with their own proposals. I think I was a little ruder; I used language like, "Get on with it", which was not terribly parliamentary. I am trying to be more parliamentary at this stage. It did not prove possible, perhaps as a result of the time pressures. But inaction is simply not an option on this matter. It would be absurd to maintain a system with sums of this magnitude owing between commercial entities without any credit management.

The amendment does not commit the Government to specific action but it gives them the powers they need to take the matter forward. Tonight really is our last hope. I invite the Government either to accept our amendment, which is a serious and thought-through policy to resolve this serious problem, or to undertake to take the matter away, perfect the drafting if they think they can and bring it back in another place. I beg to move.

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9.45 p.m.

Lord Davies of Oldham: My Lords, the noble Baroness, Lady Miller, has presented these issues both on Report and again today with considerable insight and tenacity. Of course I share with her the concern which lies behind the amendment. I hope that the powers in Clause 117 of the Bill demonstrate our determination and commitment to take measures to address the issue. I shall attempt before I have completed what I think will be a fairly lengthy reply in the face of these real difficulties, to give a positive response by the Government on how we propose to tackle the measure.

I am not sure that it is possible to prevent suppliers defaulting in their payments to the renewables buy-out fund as we cannot prevent companies failing, although clearly we should take all reasonable steps to reduce that likelihood. But all forms of protection for the buy-out fund involve additional costs and we have to consider carefully the balance of costs and benefits. While the measures set out in the amendment would no doubt provide some additional security for the buy-out fund, and in doing so may increase confidence in the market, it would do so—and I emphasised this the last time we debated the issue—at a high cost. There may be additional unforeseen consequences.

I recognise the hard work that has been done by the Opposition, and particularly by the noble Baroness, Lady Miller, in her attempts to produce amendments which tackle this very difficult issue. I want to emphasise that although I shall ask her to withdraw the amendment this evening, we are at one with her about the need to tackle the problem. We are trying to strike the right balance on how the problem can be most effectively tackled.

The amendment essentially covers two options: first, what is termed mutualisation, which is aimed at recovering a shortfall after it has occurred; and, secondly, securitisation, which involves taking steps to prevent such a shortfall occurring. In that context, it may be worth spelling out what we mean by shortfall or deficit in that context. Deficits are in fact lower amounts than expected being paid to holders of ROCs, rather than actual deficits in the usual sense of the word.

Let me address mutualisation first. The first provision in the proposed order requires that electricity suppliers must, in effect, make good previous shortfalls by paying an additional sum over and above their share of the renewables obligation. I am glad that the provision provides for sufficient flexibility so that any such additional sums can cover part or all of the shortfall, as I think that we are all agreed that the default of a very small supplier should not trigger mutualisation. That would mean taking a sledgehammer to crack what is really a small nut. That may also serve to limit the impact of the provision, but it will still mean extra costs. From where is the additional money meant to come? I fear that the only credible answer is that it will have to come from consumers—who are in no way to blame for the

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shortfall. Is the noble Baroness suggesting that it is right that consumers should foot the bill for such costs?

We have always made it clear—including in the energy White Paper—that our renewables targets are subject to the costs being acceptable to the consumer. To require consumers ultimately to fund deficits in the buy-out fund subjects them to an ever-increasing liability for costs. We should not depend on consumers to bear the cost of such shortfalls.

There must also be some doubts as to whether the amendment would achieve its basic aim of providing a greater level of confidence in the renewables market. There are two possible difficulties. First, the amendment may actually increase uncertainty. Following the failure of a supplier, other suppliers will not know the extent of the additional payment that they will have to make, but they will have that threat hanging over them. That level of uncertainty, together with the prospect of additional costs may, far from increasing confidence for investors, have the diametrically opposite effect.

Secondly, we need to look at the slightly longer term here. When a shortfall occurs, the requirement to make up all or part of the lower than expected fund will inevitably place further pressure on other suppliers. There must be a risk of a further shortfall the following year—the noble Baroness expressed anxieties on that score—consequential to the initial shortfall, and, as a result, greater demands for payments. In fact, we might have a domino effect, and we could be worse off than ever.

In practical terms, that provision of the amendment also involves at least one clear practical problem for Ofgem in determining the amount necessary to make good any shortfall. It is not clear on what basis Ofgem would do that. What would be the extent of any shortfall? There seems to be no legal remit to do that. We should also bear in mind that adding such levels of complexity will inevitably increase the administration costs for all parties.

Under the amendment, an order could also require electricity suppliers to take other measures to secure the buy-out fund where the Secretary of State is satisfied that that will not unduly distort competition—that is the securitisation element. I am glad that the noble Baroness, Lady Miller, acknowledged the implication for competition between suppliers making regular payments on account to cover their share of the renewables obligation. As I understand the provision, that is an attempt to secure some or all of each supplier's share of the obligation in advance. Again, that would certainly provide security but at a high cost.

The proposal increases the upfront costs on electricity suppliers, and there must therefore be a strong risk that those extra costs will fall on consumers. In some respects, that is a greater risk than under the previous provision because with this proposal the additional costs apply whether or not there is a shortfall.

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Unlike mutualisation, the Secretary of State cannot wait until a failure occurs before introducing securitisation. It can therefore be likened to an expensive insurance policy—with all insurance policies the cost will depend on the party seeking the cover, with larger, well-established companies tending to have to pay proportionately less. But, as I have just said, I welcome the fact that the amendment recognises and seeks to address the competition implications, which are considerable. How easy that would prove in practical terms—in other words, whether such a scheme can be devised that does not bear more heavily on smaller suppliers and does not act as a barrier to entry into the market—is another question.

I also have concerns about how such advance payments will be calculated, and how the suitability of other forms of financial security, such as letters of credit, will be assessed. That seems to be a potential minefield with ample scope for disputes and challenges. Although the intention, as I understand it, is that the amendment in effect offers the possibility of mutualisation and/or securitisation to protect the buy-out fund, the wording is wide, referring to an order to make provision for any measures on the part of the supplier where the Secretary of State is satisfied that it is proportionate, and that competition will not be unduly distorted. Although the Government appreciate that concept of flexibility, the wording would give a very wide power, with consequent difficulties for Ofgem in assessing whether or not suppliers had made the necessary provision. The regulator cannot be made responsible for ensuring that shortfalls are avoided, which is an impossible task in a market-driven mechanism such as the renewables obligation.

I shall summarise why the Government resist the amendment. First, there are the potential additional costs, which are likely ultimately to fall to consumers; secondly, because there is some risk that such measures could make matters worse, although I accept that the noble Baroness's intention is to improve things; and, finally, because of the practical difficulties in implementation, in particular for Ofgem. In indicating in this protracted reply why we cannot accept the amendment, I emphasise that the Government are neither complacent nor pretending that a further shortfall could never happen. We are concerned that we could be taking powers that make matters worse rather than better whether or not a shortfall occurs. It must be open to question whether the additional costs, in financial terms and impediments to market entry, are justified.

The Government are concerned to provide some additional measures to help secure the renewables buy-out fund. There is a trade-off between achieving a very high level of security while keeping costs to consumers at a reasonable level. For that reason we are examining closely the option of reducing the compliance periods thereby reducing exposure by other suppliers if a supplier were to go into administration. There are added administrative costs for both suppliers and Ofgem in the proposal, but we consider that it is

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preferable overall to the level of regulation proposed in the amendment. It also strikes a better balance between effectiveness and costs.

We intend to consult this summer, with a view to taking forward the necessary secondary legislation next year. We have already agreed the primary powers for this measure; they are in Clause 117, which, I think the noble Baroness will recognise, is a base on which the issue can be tackled. But we need to get it right. If we produce a remedy that does not measure accurately the costs and benefits, we could end up in a situation even worse than the problem that we propose to tackle. The noble Baroness has assiduously devoted many hours in approaching the matter. She has twice tabled amendments of great importance, which, although I have felt obliged to reject, have prompted us to think very seriously about the issue and how we should respond to it.

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