HL Deb 15 July 2004 vol 663 cc1387-91 17 Clause 118, page 95, line 15, leave out from beginning to "insert" in line 26 and insert— () For subsection (3) of that section substitute— (2A) An order under section 32 may provide that, where—

  1. a renewables obligation is one in relation to which provision made by virtue of subsection (1)(b) applies in the case of the electricity supplier who is subject to the obligation, and
  2. the period ending with such day (after the day by which the obligation had to be complied with) as may be specified in or determined under the order has not expired,
  3. the taking of steps under section 27A in respect of a contravention by that supplier of that obligation is prohibited or otherwise restricted to the extent specified in the order.

(2B) An order under section 32 may provide that, in a case in which the amount received by the Authority, or by the Northern Ireland authority, by way of discharge payments for a period falls short of the amount due in respect of that period, persons who—

  1. were subject to renewables obligations for the relevant period, and
  2. are of a description specified in or determined under the order, must, by the time and in the circumstances so specified or determined, make a payment (or further payment) to the Authority of an amount calculated in the manner so specified or determined.

(2C) An order under section 32 may not by virtue of subsection (2B) confer an entitlement on the Authority to receive a payment in respect of the shortfall for any period—

  1. in the case of a shortfall in the amount received by the Authority, if the receipt of the payment is to be while a prohibition or restriction by virtue of subsection (2A) applies, in one or more cases, to the taking of steps in relation to contraventions of renewables obligations for that period; or
  2. in the case of a shortfall in the amount received by the Northern Ireland authority, if the receipt of the payment is to be while a prohibition or restriction by virtue of a corresponding provision having effect in Northern Ireland applies, in one or more cases, to the taking of steps in relation to contraventions of Northern Ireland obligations for that period.

(2D) The provision that may be made by virtue of subsection (2B) includes—

  1. provision for the making of adjustments and repayments at times after a requirement to make payments in respect of a shortfall for a period has already arisen; and
  2. provision that sections 25 to 28 are to apply in relation to a requirement imposed by virtue of that subsection on a person who is not a licence holder as if he were a licence holder.

(3) The amounts received by the Authority by virtue of the preceding provisions of this section must be paid by it to electricity suppliers in accordance with a system of allocation specified in an order under section 32." () In that section, at the end" 18 Page 95, line 29, at end insert— "(7) For the purposes of this section—

  1. 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
    2. 1388
  2. 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—

  1. 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;
  2. 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
  3. 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"—

  1. in relation to a shortfall in amounts received by the Authority by way of discharge payments for a period, means that period; and
  2. 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 Amendments Nos. 17 and 18.

These amendments take further steps to reduce the impact of a future shortfall in the renewables obligation buy-out fund so as to improve investor confidence. I think we know what lies behind this from the discussions we had in Committee and elsewhere. The noble Lord, Lord Jenkin, was prominent in those.

The arguments for mutualisation have been put forward here and in another place. They reflect the failure of TXU and, more recently, Atlantic Electric and Gas. That strengthens the case for mutualisation. However, it must be remembered that the renewables obligation is a market mechanism and, as such, there is always an element of risk companies can, and do, fail. Therefore, a balance must be struck between reducing the impact of shortfalls in the buy-out fund while at the same time avoiding undue additional burdens on consumers or adversely affecting competition. This means that although the amendment reduces the impact of a shortfall to suppliers, it does not entirely remove the risk of it happening in the first place.

The amendment is not a complete answer to removing all risk, and I do not think that it can be. But taken together with other measures contained in Clause 118, such as reducing the length of obligation periods and imposing surcharges on late payments, I think that it offers a balanced response to the problem.

Before changes are made to the renewables obligation order, we will need to engage in detailed consideration of issues such as how the payments are assessed, when the suppliers need to make those payments, and over what period those payments are to be made. As part of this consideration, a statutory consultation exercise will take place later this year. when these issues will be addressed.

I think that the noble Baroness, Lady Miller of Hendon, will shortly be moving her amendment, for which I have some sympathy. I shall reserve my remarks on her amendment until I have heard her speech.

Moved, That the House do agree with the Commons in their Amendments Nos. 17 and 18.—(Lord Whitty.)

12.45 p.m.

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—

  1. was subject to a renewables obligation for the relevant period or for a subsequent period specified in or determined under the order, and,
  2. 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. 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 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.