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The renewables obligation is the Government's main mechanism for supporting the generation of renewable electricity in the United Kingdom. The order builds on what has been achieved thus far and will help to drive forward the additional generation necessary to meet our share of the target. Since its introduction in 2002, the RO has incentivised significant amounts of eligible renewable electricity. In 2008-09 there were 5,100 stations accredited under the RO, generating 19 terawatt hours. We have seen the amount of onshore wind electricity more than double since April 2006, delivering 6.2 terawatt hours. For the first time, more electricity has been generated by offshore wind sites in England than was generated by onshore wind. But we now need it to deliver even more.
The changes that we are introducing apply to England and Wales. Scotland and Northern Ireland are bringing in complementary orders which will work together to create a United Kingdom renewables obligation.
Perhaps the most significant change, and perhaps the most welcome, is the increase in the level of support from 1.5 renewables obligation certificates per megawatt hour to two ROCs per megawatt hour for offshore
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Offshore wind is an important technology for the United Kingdom and is expected to play a vital role in meeting our renewable energy targets. We are now number one in the world for offshore wind. It is crucial that we maintain the momentum and ensure that investment is attracted to the UK. We have worked closely with industry in developing the change. After commissioning a study into the costs of offshore wind and extensive consultation, we are confident that projects will now receive the right level of support to proceed. In accordance with our grandfathering policy we intend that, once a station or additional capacity qualifies for the two ROCs, the electricity that it generates should remain eligible for that level of support for 20 years from the date of accreditation, subject to the 2037 end date.
The order also allows us to take the steps to give investors the long-term certainty necessary to incentivise them to invest in new generation up to 2020. As announced in the Pre-Budget Report, the extension of the lifetime of the renewables obligation by 10 years to 2037 will ensure that projects in technologies such as marine and round 3 offshore wind, due to come online from 2017, will be able to benefit from RO support. However, in light of that extension, we are mindful of the need to avoid overcompensation and ensure value for money to the consumer, so we have limited support to a maximum of 20 years. This will apply to stations that receive full accreditation on or after 26 June 2008, which will receive support for 20 years or until 2037, whichever is the sooner. A further period of 20 years' support will apply when capacity is added to any generating station-again subject to the 2037 end date. As is currently the case under the Renewables Obligation Order 2009, generating stations accredited before 26 June 2008 will continue to receive support until 31 March 2027.
In order to allow renewable electricity generation to grow as much as possible, we have also removed the 20 per cent cap on the size of the obligation, and increased the level of headroom-that is, the set margin between predicted demand and supply of ROCs-from 8 per cent to 10 per cent from the 2011-12 obligation period, to ensure the stability of the market for renewables obligation certificates.
This increase in the level of headroom builds on our commitment to making the ROC price more stable and predictable. This not only provides greater certainty to investors but helps to ensure that in future years the consumer is not paying more than required to bring on this renewables generation. Given the current economic climate, I am sure that noble Lords will agree that these considerations are extremely important.
Over the past few years we have introduced a number of changes to the RO in order to make it easier and more attractive for microgenerators to join the scheme. Despite these however, we recognise that it remains better suited to professionals in the energy sector. The
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In anticipation of the FITs scheme coming into force, the order removes from the RO all microgenerators in the technologies that will be eligible to claim FITs, so that they can join the new scheme from its start. As FITs will be a more appropriate support scheme at the microgeneration scale, we intend for it to replace the RO completely in providing support for generators up to 50 kilowatts in anaerobic digestion, hydro, solar photovoltaic and wind power. Microgenerators in other technologies will of course remain eligible to receive support through the RO.
It is a slightly different story at the small scale-covering generators above 50 kilowatts and up to 5 megawatts in capacity-because the appropriateness of either the RO or FITs will depend on the circumstances and preferences of the individual generator. That is why small generators who joined the RO on or after 15 July 2009 and before the FITs scheme comes into force will be able to elect to transfer to FITs during a defined period. Small generators who had already joined the RO before 15 July 2009 will remain in the RO, and new small generators at this scale after the FITs scheme comes into force will need to make a one-off choice as to which of the two schemes they wish to join.
We are making a few small technical and administrative changes to the order to improve the way the RO works. For example, we have clarified when ROCs can and cannot be issued and revoked, and excluded landfill and sewage gas from sustainability reporting, because we do not believe that any value is added in requiring reports for those sources.
We have consulted extensively on these changes, which have been warmly welcomed by the renewables industry. However, I must point out that-as with previous renewables obligation orders-we have notified the European Commission about the amendments that we intend to make to the RO for state aids purposes, and we are awaiting its response. We intend that the order will come into force on 1 April.
The changes that I have presented to the Committee put us on a firm path to developing our renewable electricity industry, which will be vital for decarbonising our energy supplies. I commend the order to the Committee.
Lord Jenkin of Roding: My Lords, the Minister has been good in outlining the scope of the wide-ranging order. I assure him that I will not seek to cover the whole field.
The issue that interests me is not actually in the order; rather, it is the complaint that considerable effort has been made and discussions have been had with DECC on the suggestion that the cap on co-firing of biomass with coal of 12.5 per cent, set in the preceding 2009 order, is too restrictive, and that the figure should be raised to at least 17.5 per cent. That is what I am going to address today.
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I want to get one thing clear first, though. The Minister talked about the discussions with the European Commission on "state aids". I have long detected that, perhaps unintentionally, Ministers have sought to persuade the public that the subsidy for renewable is paid by the state. That is not so. I was surprised to read a short exchange in our debate on the national policy statements on 11 March when the noble Lord, Lord Willoughby de Broke, referring to the discussions that the Government had been having with the lady who is the chief executive of the Drax power company, said:
"I can guess how the conversation went. I expect that she wanted more taxpayers' money to make biomass plants viable".
Obviously, the noble Lord had bought the "state aids" possibility. The noble Lord, Lord Hunt of Kings Heath, then responded:
"My Lords, it pains me to say it, but the noble Lord is absolutely right".-[Official Report, 11/3/10; col. 161.]
The noble Lord was absolutely wrong. The cost of the ROCs does not fall upon the taxpayer but upon the companies that have to buy their ROCs. It is then passed on to the customer in higher prices. A proper description of what the Government do is that they have put in place a system that makes consumers pay.
I apologise to those who were here on Thursday because I am going to quote again the figures that were given to me by Ofgem at a briefing a couple of weeks ago, headed, "Estimated average cost impact per household customer (i.e. costs added to gas and electricity bills) of main environmental schemes in 2008, 2015 and 2020". The renewable obligation figure for 2008 is £10. I shall come to the other categories in a moment. By 2015 that figure will rise to between £38 and £47, and by 2020 it will rise to between £71 and £81-that is, between a sevenfold and an eightfold increase. That is the cost falling upon the consumer for the financing of the subsidy for renewable energy. The consumer is being asked to pay. Therefore, the noble Lord, Lord Hunt of Kings Heath, really surprised me when he said that the noble Lord, Lord Willoughby de Broke, was absolutely right. I suspect that he may have done so as a quick answer to an intervention.
4.30 pm
To complete the figures, by the time you have added the European Emissions Trading Scheme, the FITs, the renewable heat incentives, CERT, the new CCS levy that is provided for in the Energy Bill, and smart meters, you have a total, in 2008, of £79 per household bill; in 2015, of between £153 and £205; and, by 2020, of between £294-let us say, nearly £300-and £406-plus. I said last Thursday that I do not believe that any Government could possibly contemplate those additions to the average household energy bill, or indeed to the industrial energy bill.
I return to biomass, which is what I am on about. The co-firing of biomass is the burning of renewable biomass materials with coal, and is recognised in this order and its predecessors as a renewable technology under the renewables obligation. The Drax power company, which I mentioned a little while ago, is constructing what will be the largest co-firing project in the world. It will have a capacity of 500 megawatts, and from mid-2010 it will have the capability to produce
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Very little biomass is currently available from energy crops. The order clearly refers to the distinction between energy crops that are specifically planted to provide fuel for power generation and what is sometimes called regular biomass: that is, waste products from other industries, notably from the forestry industry and from agriculture. The majority of biomass that is currently available for firing generation is therefore regular biomass. The price of regular biomass is typically about three times more expensive than coal, which is why a power station such as Drax has to have the incentive and support that are afforded by the renewables obligation system simply to make it economically viable.
Suppliers of electricity can, of course, purchase and redeem ROCs to satisfy their obligation under the RO. However, the number of ROCs produced from co-firing regular biomass that suppliers of electricity can redeem is currently restricted to 10 per cent, although this will be increased to 12.5 per cent by April this year. That was the figure that I mentioned a moment ago. This cap applies only to power stations that co-fire with regular biomass; it does not apply to ROCs from power stations that co-fire with energy crops or with regular biomass from power stations with combined heat and power. I understand the logic of that, but you have to look at the effect on a company that invested millions of pounds in a new biomass plant. That is the problem.
I asked the company questions about the impact of this, and I had an e-mail from it this morning. First, it was pretty cross with the noble Lord's noble friend, who appeared to be saying that this was a call for more subsidy. It simply is not. As I explained, such subsidy as exists is paid for by the consumer and came about because the Government have stated that they want lower CO2 emissions. If anything, co-firing of biomass receives less ROC per megawatt hour than offshore wind. Because of that, it represents a cheaper transition to a low-carbon future.
The Government have accepted that biomass is a renewable. There was some suggestion that it might not be. They are quite right to do that. Even importing it from Canada as waste forestry products is still far better than burning fossil fuels. In fact, Drax states that, across the whole life cycle, co-firing coal and biomass produces 87 per cent less greenhouse gas. It estimates that its current portfolio of greenhouse gas savings relative to burning coal will range from 88 per cent to 93 per cent. It states:
"Even if we imported all our biomass from the Western US (which we don't) the GHG saving across the whole life cycle from field to furnace is 75-80% relative to coal".
Those are the company's calculations. We are talking about large figures when it comes to the question of the cap.
Another brief that I have received states that the Government have been considering this, and had a consultation with a firm of economic consultants,
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- "removal of the cap would not destabilise the ROC market or serve as a material disincentive to new investments in renewable generation".
I have gained the impression that this has worried the Government. They are so keen on offshore wind power that they are not prepared to envisage anything that might compete with it for the money that will be available for ROCs.
I will not read the whole report. It states that the,
- "existence of the cap exacerbates ROC market competition issues for independent co-firing generators".
Most importantly, it states that,
- "increasing the cap to 17.5% could ensure that technical constraints rather than policy constraints are binding, which would act to increase the ability of independent co-firing generation to compete".
This view was supported by the regulator, Ofgem. Its responses to the consultation were very similar. Ofgem states that the,
- "cap potentially disadvantages independent co-firing generators if vertically integrated suppliers self-supply a considerable proportion of their demand for co-firing ROCs ... the market for independent generators"-
including companies such as Drax-
- "may be smaller than that implied by the cap ... there is concern that the cap constrains the contribution to renewable energy targets from a relatively low-cost renewable technology".
I find it difficult to understand why, in the face of that advice both from the consultants and Ofgem, the Government still refuse to countenance the increase of the 12.5 per cent cap to the figure they were consulting on, that of 17.5 per cent. If I may put it this way, it seems to be simply perverse.
More important, what the Government are doing is confusing the ends and the means. The ends surely have to be the reduction of carbon emissions by a whole range of the measures which were set out in their publication, The Transition to a Low Carbon Economy, and many other statements. One of the means is wind power, but to subordinate the increased contribution that burning biomass could make to the reduction of carbon by their refusal to increase the cap in order to be able to have more offshore wind is simply confusing the ends with the means. It is not the first time I have had to complain about this. Some years ago, we debated at length the contribution that coal mine methane might make. If the gas could be recovered and burnt, it would save very large quantities of carbon dioxide, because methane is 23 times more carbon intensive than CO2. Again, we were told that it could not be done because it would restrict investment in wind power. All that is in Hansard. I said that that was simply confusing the ends with the means, and they are doing it again here. I do not understand why the Government have got themselves into this extraordinary position.
I want therefore to ask one or two questions, which I hope the Minister will be able to answer. Why did the Government reject the Oxera report? What were the reasons for refusing to accept its recommendation that
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I find the way in which the Government have approached this whole process, and indeed the treatment of the Drax company itself, really quite inexplicable. One must bear in mind that Drax was one of the first major companies to tackle issues of pollution by putting in at considerable cost special plant to limit nitrogen oxide and sulphur dioxide emissions, but it is now being penalised by having this cap put on the amount of co-firing that it can use and for which it can claim ROCs.
I hope the Minister understands that I am pretty indignant about this. I have no interest in Drax, but its argument is wholly compelling and I hope that the Government will perhaps be prepared to take it away. The problem is not what is in the order, but what is not in the order. They have chosen not to use this order to increase the cap to 17.5 per cent.
4.45 pm
Lord Reay: My Lords, the main purpose of this order is to increase the level of subsidy made available for new offshore wind generation. It also extends the system for an extra 10 years, from 2027 to 2037, while limiting the access to the system of individual subsidy recipients to 20 years. So much for the principle that no Government can bind their successors.
The Explanatory Memorandum explains that this increase is being proposed following evidence that costs have risen. The subsidy available for offshore wind will rise from 1.5 to 2.5 ROCs per megawatt hour, while the subsidy for onshore wind will remain at one ROC per megawatt hour. Thereby, offshore wind is judged to require twice the level of subsidy as onshore wind. That does not seem to leave with much value, or even meaning, the boast that we frequently hear from Government, and which we heard from the Minister last Thursday:
"We have the best wind resource in Europe, and it makes no sense not to use it".-[Official Report, 11/3/10; col. GC 172.]
This justification for increasing the subsidy also casts doubt on something else the Minister said here on Thursday:
"We think that it is best for us to go down the low-carbon route as quickly as possible, and the cost-effectiveness will become clear over time. I should also say that the more turbines we build,
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I do not know what costs the Minister had in mind, but for the moment it is clear that the order is based on the belief that costs have risen, not fallen.
On Thursday, the noble Lord confirmed that the Government have in mind 10,000 new turbines, delivering up to 25 gigawatts of electricity by 2020. Asked whether he was confident that this target could be reached, he answered with an emphatic yes, in col. GC 173. I believe that more than half this total is expected to come from offshore wind-something in the order of 6,400 additional turbines. Perhaps the noble Lord would confirm that. But how realistic is it to expect that that target could be achieved? The rate is over 600 a year, or perhaps two or three or even five a day during the months when work at sea is possible. Given the competition for, and expense and shortage of, installation vessels to lay them, the target seems to be improbable in the highest degree. In Denmark a rate of two additional turbines a week was never exceeded.
The first report of the Committee on Climate Change, which we debated in the House before Christmas, stated that 10 installation vessels were required for targets to be met, only two of which were operating currently in the United Kingdom, and that there was a three-year queue for new orders. We were also told that the new vessels cost between £50 million and £150 million each. Perhaps the Minister could tell us whether the position has improved.
In any case, that is the target. It is an enormous target that is, in the Government's view, worth imposing enormous additional expense on the electricity consumer. Page 22 of DECC's summary attached to the order, under the third paragraph of the section on distributional impacts, states:
"The very approximate estimate of the consumer cost of both policies together taking account of the overlap"-
which I take to be the sum total of the effects of the order as a whole-
As I said on Thursday, that breathtaking sum is likely to push us into the pole position of having the most expensive electricity in Europe-although it will be difficult to beat Denmark, which has a considerable lead in the reckless pursuit of wind power and very expensive electricity as a result-and at the opposite end of the spectrum to France, whose reliance on nuclear power has given it some of the cheapest electricity in Europe. Incidentally, France also has one of the lowest per-capita carbon-emission figures in Europe, unlike Denmark and Germany which have two of the highest. Altogether, that is a recipe for sending our industry overseas.
In the Explanatory Memorandum, we are not told in any detail how that figure of £46 billion is arrived at. I assume that it attempts to assess all the subsidy likely to be received in future years, until 2030, but not until 2037, by all offshore wind farms likely to be installed for the Government's target to be met. Will the Minister confirm that, or state the assumptions behind the calculation? Are the consequent and necessary
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The Minister explained that this order also makes provisions regarding the feed-in tariff scheme, which is also due to come in on 1 April, but this order is not responsible for bringing that scheme in. I therefore presume that its costs are not included in the estimates attached to the order.
Last Tuesday, when we debated the nuclear national policy statement, the noble Lord, Lord Turnbull, referred to an article in the Guardian by George Monbiot in which that well known patron saint of the green movement came out against the FITs scheme and estimated its costs at some £8.5 billion, once again to be paid by the consumer. I do not know whether the Minister would like to comment on that estimate. I do not think his colleague did so last week.
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