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Baroness Miller of Hendon rose to move Amendment No. 17A, as an amendment to Commons Amendment No. 17:

17A Line 16, leave out from "period" to end of line 20 and insert ", every person who—
(a) was subject to a renewables obligation for the relevant period or for a subsequent period specified in or determined under the order, and,
(b) is of a description so specified or determined,"

The noble Baroness said: This amendment relates to the so-called mutualisation provisions introduced in the other place in order to secure the renewables obligation against default following the difficulties with TXU, Maverick and Atlantic. These clauses were introduced by the Government following concerns expressed in both Houses by both opposition parties.

The Government's clause, however, has a potentially significant problem, in that it requires any default to be recovered from the other suppliers according to their supply in the year of default, rather than according to supply in a later year. We have been advised by the electricity supply industry that this could have the potential to introduce distortions in the supply market, especially for industrial customers. This could negate the benefit of the Government's clause and may leave some smaller suppliers facing risks if their market share were to fall.

The industry's view is that recovery of the deficit should take place according to supply in a later year so that the parties can take account of it in their commercial behaviour. This reflects the approach for the main renewables obligation and other government measures for the electricity industry to achieve public policy objectives.

Our amendment is designed to increase the flexibility of the legislation so that the Government can consider this matter further in consultation and, if they agree with the views that have been expressed, implement a mutualisation scheme which avoids the market distortions that I have mentioned.
 
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I hope that the Government will be able to accept this amendment as a technical, but valuable, improvement to the Bill. I beg to move.

Lord Jenkin of Roding: My Lords, I cannot possibly add to my noble friend's words, and I shall be very interested to hear the noble Lord's reply. It seems to me that in these circumstances, there needs to be some flexibility.

The noble Lord will remember that when we addressed this matter in Grand Committee, it was extremely unclear whether mutualisation was a preferable way forward rather than what was at that stage summed up in the word "securitisation". The more I have thought about this and discussed it, the more I realise that securitisation could have some very damaging effects on some of the more vulnerable producers and suppliers. The interest rates they would be charged by the market for putting up in advance a security for their payment into the buy-out fund could be very severe and could tip them over into insolvency.

The advantage of mutualisation, as my noble friend has said, is that it spreads the burden, although it may appear unfair to some who have paid on the nail, regularly, that they have to pay for their defaulting colleagues in the industry. The fact is that the damage that would be done by allowing the buy-out fund to fall into deficit would be considerable.

It would damage the Government's policy for the encouragement of renewables. This is a mechanism by which consumers generally, from whomsoever they buy their power, subsidise the renewables industry. It may be argued, as we may in regard to a later amendment, that how much consumers are paying towards the renewables obligation should appear more explicitly in consumers' bills. The Government are not paying that subsidy; the consumers are paying it. Nevertheless, that is a separate argument. In the end, I believe that mutualisation is the right answer, perhaps with the amendment suggested by my noble friend.

My only other point is that I am sure that the Government in their consultations will consult all branches of the industry, but I hope that they will also consult those who make the market—the noble Lord introduced the matter by saying that it is a market—in renewable obligation certificates. I was first alerted by the market to the danger that came from TXU going into administration. I am sure that the noble Lord, Lord Whitty, will remember a conversation that he and I had outside the Chamber very soon afterwards, in which I sought to impress upon him the damage that that would do to the Government's policy. He accepted that without demur. Many months later, the result, after a good deal of travail and consideration, is what we have before us today.

The market makers and those who operate in the market—the brokers and others—will certainly have some views to offer. I hope that they will be consulted too.

Lord Whitty: My Lords, I shall respond to the amendment of the noble Baroness and to the noble
 
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Lord, Lord Jenkin. Clearly, the mutualisation proposition, which everyone is proposing, helps to reduce the risk significantly without the straightforward cost that securitisation would impose, with the dangers to which the noble Lord, Lord Jenkin, rightly referred. I am happy to accept the amendment tabled by the noble Baroness as it gives flexibility in this regard. There are situations in which we would want to look at the current suppliers at the point when the mutualisation payment was made rather than at the point when the shortfall arose, when there may be a very different market share.

Therefore, we want the flexibility to consult with industry. I say to the noble Lord, Lord Jenkin, that the industry would be broadly defined and would include the market itself. Therefore, I am very happy to accept the amendment of the noble Baroness.

Baroness Miller of Hendon: My Lords, I am very happy that the Minister is very happy. We are grateful and sure that the industry will be very pleased as well.

On Question, Amendment No. 17A agreed to.

On Question, Motion, as amended, agreed to.

COMMONS AMENDMENT
18 Page 95, line 29, at end insert—
"(7) For the purposes of this section—
(a) the amount received by the Authority by way of discharge payments for a period falls short of the amount due in respect of that period, and
(b) the amount received by the Northern Ireland authority by way of discharge payments for a period falls short of the amount due in respect of that period,
if, and to the extent that, the Authority or (as the case may be) the Northern Ireland authority would have received more by way of discharge payments if every renewables obligation or (as the case may be) Northern Ireland obligation for that period, so far as it was not otherwise discharged, had been discharged by payment.
(8) In this section—
"discharge payment", in relation to a period, means—
(a) a payment by virtue of paragraph (a) of subsection (1) for discharging (in whole or in part) an electricity supplier's renewables obligation for that period;
(b) so much of a payment by virtue of paragraph (b) of that subsection for securing that such an obligation is treated as discharged to any extent as does not exceed the payment that would have discharged that obligation to the same extent if it had been made before the day mentioned in that paragraph; or
(c) so much of any payment to the Northern Ireland authority as corresponds, in relation to a Northern Ireland obligation for that period, to anything falling within paragraph (a) or (b) above;
"Northern Ireland obligation" means a renewables obligation of a Northern Ireland supplier under Article 52 of the Energy (Northern Ireland) Order 2003 (S.I. 2003/419 (N.I. 6));
"the relevant period"—
(a) in relation to a shortfall in amounts received by the Authority by way of discharge payments for a period, means that period; and
 
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(b) in relation to a shortfall in amounts received by the Northern Ireland authority by way of discharge payments for a period, means any period that includes the whole or a part of that period.""

Lord Whitty: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 18.

Moved, that the House do agree with the Commons in their Amendment No. 18.—(Lord Whitty.)

On Question, Motion agreed to.

COMMONS AMENDMENT
19 Clause 120, Leave out Clause 120

Lord Whitty: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 19.

This debate has engendered much interest. The amendment tabled in the Commons removed CHP. The amendment made here would remove CHP from the renewables obligation base. In the Government's judgment, the effect of that would be a small benefit to CHP but would affect the renewables target, just when we are seeing some progress on that. It does not seem to the Government to be the best way of supporting CHP.

However, throughout the debate on this matter there has been support on all sides for recognising that CHP needs further measures to support it. While the focus of the debate has been on whether we should remove them from the renewables base, it does not alter the argument that at present the CHP target of 10 gigawatts is unlikely to be achieved on existing measures. Therefore, we recognise the need to do something about CHP, but we do not want a measure that would introduce a range of uncertainties and which would not be helpful in achieving other targets.

As I have said during the course of the Bill in this House, the Government will certainly look at CHP in the review of the renewables obligation to see whether there are other ways in which the obligation could help CHP without damaging the renewables sector. The discussions in this House and elsewhere have been very helpful in that regard.

In the latest stage of the Commons' consideration of the Bill, an alternative proposition for CHP support was proposed, which was described as similar to a fixed-rate mortgage. The Government would guarantee a certain level of spark spread from CHP; that is, the difference between the price paid for gas and the price paid for electricity generated. In times when the spark spread was below a certain threshold, it would be topped up by the equivalent of a mortgage fund and on other occasions when the spark spread was above the threshold, it would be capped and the mortgage fund would receive an income.

That seems to be an interesting new suggestion, but my colleague, Alan Whitehead, MP, with support from the industry, and my colleague Stephen Timms and I met with them a few days ago to discuss the practicability of such a measure. We are certainly willing to support further consideration of it and to
 
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look at the cost benefits and mechanisms. That applies to my department and to the DTI working with the Combined Heat and Power Association; they will look at the matter in more detail. That would not require a legislative change in the way in which this Bill is constructed, but we would have to consider what would be needed to make such a mechanism work. We would also need to avoid the downside risk associated with the price of CHP generated electricity, so that the cost to consumers remained acceptable.

I recognise that there is a need for further help for CHP and that CHP at the moment is undershooting the target for 2010. We believe that a number of measures that we have introduced will help to improve that performance, but something else is probably needed. Therefore, we are not in favour of keeping the change in the renewables obligation which was introduced in this House, but we are in favour of considering other ways of helping the CHP industry that will work in the interests of CHP and the renewables sector. Therefore I hope that the House will accept Commons Amendment No. 19.

Moved, That the House do agree with the Commons in their Amendment No. 19.—(Lord Whitty.)

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