HL Deb 23 March 2004 vol 659 cc679-84

8.42 p.m.

Lord Davies of Oldham rose to move, That the draft order laid before the House on 24 February be approved [10th Report from the Joint Committee].

The noble Lord said: My Lords, the draft order is the culmination of a technical review of the Renewables Obligation Order 2002, set up to check that the order was working as originally intended. It also represents the outcome of a consultation on the issue of late payments made into the buy-out fund. The changes proposed are divided into two types: those designed to enhance the likelihood of achieving a 10 per cent target by 2010, and those of a more administrative nature. In explaining the provision, I will of course focus primarily on the former.

I would like to say a little at this point on how effective the obligation has been since it came into force in April 2002. We have seen a step change in renewable energy projects commissioned and planned. When I say "planned" I mean the number of projects which have now come off the drawing board and for which planning consent is being sought. The wind industry trade association has calculated that nearly 500 megawatts of new capacity will be built this year, out of 2,000 megawatts of consented projects. Offshore wind and electricity production is now really taking off, with over 1,200 megawatts consented under round one and, of that, North Hoyle at 60 megawatts has now been commissioned. A further 7.2 gigawatts of offshore wind projects have been offered site leases under round two. It is the renewables obligation that has stimulated this level of renewables development, and the order before us today is designed to improve the investment climate for renewables even further.

Investor confidence is clearly very important and the extension of the profile of the obligation—from 10.4 per cent in 2010–11 to 15.4 per cent in 2015–16—will also be an important factor in this. We have already announced this, and we shall be consulting on it later this year with the intention of legislating in a year's time. The Renewables Innovation Review confirmed that 10 per cent renewables electricity by 2010 is achievable, while highlighting the importance of wind energy in achieving this.

Let me turn to the main provisions of the order. There are five main provisions on which I wish to focus: co-firing, conversion of fossil fuel stations to biomass, smaller generating stations, NFFO sites and the recycling of late payments into the buy-out fund. Of these, the most significant change is to the rules for co-firing.

By co-firing, we mean the dual firing of biomass with fossil fuel, usually coal. We are using the co-firing of biomass, which includes energy crops, as a transitional measure to encourage the planting and use of energy crops as a fuel for electricity generation. Our existing fossil-fuelled generating stations are able to burn a proportion of biomass, including energy crops, and this is what the renewables obligation encourages by awarding ROCs for the electricity produced from the biomass element. At the moment, to be eligible for renewable obligation certificates—with the leave of the House, I shall now refer to them as ROCs—co-firing generating stations must have 75 per cent of their biomass by energy content as energy crops from 2006 and the eligibility of co-firing for ROCs ceases in 2011. After a detailed study on co-firing, we have concluded that more time is needed to develop energy crops and that farmers and generators need greater security. The requirement for some biomass to be energy crops has therefore been deferred until 2009, rather than 2006, and thereafter there will be a stepped increase. Co-firing stations will continue to be eligible for ROCs until 2016, giving time for farmers to harvest three full crops of new short rotation coppice. To balance this and to reduce the risk of co-firing ROCs flooding the market, the amendment order tightens the cap on co-fired ROCs that may be used to meet an individual supplier's obligation. This will be progressively reduced from 25 per cent currently to 10 per cent in 2006 and to 5 per cent in 2011 until 2016.

I am aware that concerns have been raised that we have not limited energy crops to those grown in this country. I should like to comment on that briefly. Electricity generated from biomass is eligible for ROCs whether the biomass is imported or produced here. This will not change as a result of the order. The obligation is a market mechanism, leaving generators free to decide on the source of their fuel. Any restriction on the source of the fuel would not be permissible under international trade rules and would also deprive generators of a source of fuel, some of which is waste with no other end use. However, we expect the amount of imported biomass to decline as home grown energy crops increase. DRAX power station, one of our largest, last week announced trials of UK-sourced biomass for its co-firing; it has previously been using imported fuel.

Staying with biomass, the amendment order will permit fossil fuel generating stations to convert to biomass without refurbishment. At present, most generating stations, other than co-fired stations and micro hydro, if built before 1990, have to refurbish before they can claim ROCs. By eliminating this requirement for stations converting to biomass, we shall give a boost to this sector.

We have also made provision for small generating stations—those of 50 kilowatts DNC or less—to accumulate output and to claim ROCs on the basis of their annual rather than their monthly output. Although eligible for ROCs, at present their monthly output is often too low to claim any ROCs, but in future they would be able to acquire a few on the basis of their annual use. This will benefit those such as homeowners who have put a PV panel on the roof of their house.

Another of the changes relates to NFFO contract sites that have not been developed. There are a large number of NFFO contracts not yet commissioned—some 1,500MW of capacity. As the order currently stands, projects on those sites are deterred from being developed by others as they would not attract ROCs. The amendment order will now allow third parties who are not connected or linked persons to the NFFO contractor to develop renewables projects on these sites and qualify for ROCs for eligible output. It also has the effect of encouraging NFFO contract holders to move ahead and develop their, as yet, undeveloped projects as there is now no point in holding off in the hope that they will in time be able to qualify for ROCs. This amendment will be beneficial all round, encouraging NFFO contractors to develop their projects and, if they fail to do so, making ROCs available to those who will move ahead with these developments.

Finally, as a result of TXU going into administration last year, it became clear that the current order did not make provision for any late payments and their recycling to suppliers. There is now a provision in the amendment order that allows any late payments received into the buy-out fund to be recycled to eligible suppliers for the relevant obligation period.

As the other changes are mainly designed to facilitate the administration of the obligation, I do not believe that I need to go into detail. I confirm that, in my view, the provisions in the amendment order are compatible with convention rights, as defined by Section 1 of the Human Rights Act 1998. Accordingly, I beg to move.

Moved, That the draft order laid before the House on 24 February be approved [10th Report from the Joint Committee].—(Lord Davies of Oldham.)

Earl Attlee

My Lords, I thank the Minister for his detailed and interesting explanation of the order, whose complexity may be judged by the fact that his department's Explanatory Memorandum is just about double the length of the order itself. I say at once, as my honourable friend the Member for Tewkesbury told the Standing Committee on Delegated Legislation in the other place, that we do not oppose the order.

Your Lordships have had the benefit that another place has not yet enjoyed: we have had a lengthy and well informed Second Reading debate, followed by 11 sessions in Grand Committee and, so far, three days on the Report stage of the Energy Bill. I suspect that some of your Lordships may, by now, be suffering from what sounds like a paradox—energy fatigue.

The purpose of the order is to give a stimulant to an important renewable source of energy, both to assist in our Kyoto commitment and—to my mind, no less importantly—to reduce the United Kingdom's reliance on fuel from abroad while our own domestic sources almost totally disappear over the next 15 years or so. So far, we are woefully short of our target for renewables. I do not say that in any recriminatory sense, but facts are facts.

The Minister quoted some impressive figures, but by far and away the largest component is wind. Therefore, anything that can stimulate growth in our use of renewables is to be welcomed. Biomass can be a reliable and non-intermittent source of fuel and, to repeat the word, a stimulant to our agriculture industry at the same time. It is hoped that the co-firing concept for this new source of fuel will rely on homegrown material without the need for further imports. However, I listened carefully to what the Minister said about the temporary need for imports.

As a result of an opposition amendment to the Energy Bill passed by your Lordships on 18 March by a majority of 22, the Government are required to provide annual reports of information on various sources of renewable energy, including biomass. In supporting this order, perhaps I may say that we look forward to that report so that we may see the progress made in this area.

Baroness Miller of Chilthorne Domer

My Lords, first, I apologise for missing the first few words of the Minister's opening statement. As mentioned by the noble Earl, I, too, believe that I am suffering from energy fatigue. I recognise that the Minister must be suffering in the same way, having spent all day on the Report stage of the Energy Bill.

I very much welcome the order and the practical approach that it takes further to encourage biomass. I also welcome the recognition that the Government have given to the fact that more time and encouragement is needed so that farmers can develop energy crops, as the Minister said.

I noted the Minister's comment about home-grown crops. At some stage—I certainly do not expect him to comment on this tonight—it would be useful to have a joint letter from Defra and the DTI explaining how growers of energy crops, and in particular short-rotation coppice, will fare under the CAP reforms as proposed and also how they will fit into the entry level or higher-tier agri-environment payment system. Coppice may well qualify as a higher-tier environment, although I suppose that if coppicing has taken place frequently, it may not. I simply seek, at some stage, a letter which lays out how farmers looking to their future see the attitude of the two departments interrelating.

My second comment on the order is that it recognises that small generating stations can earn ROCs. They should be allowed to accumulate and be put on an annual basis. The Explanatory Notes spell out what is in the mind of the Government: that the change will enable smaller generators to offset some of the cost of their investment. Although that is true, if the Government really wanted to help small generators—I mean domestic households—they would look at net metering. That means that people who invest in a small generator could sell the electricity that they generate into the grid at the same price at which they buy their electricity. At the moment they have to sell it at a pathetically low price and buy it at a more expensive price. That is the true disincentive. I hope that that is the next matter that the Government address in what is otherwise a welcome commitment to fulfilling their obligations under Kyoto.

Lord Davies of Oldham

My Lords, I am grateful for the positive, sympathetic way in which noble Lords have responded to the order. One cannot be fatigued by the Energy Bill. It provides such stimulation to the intellect and keeps us occupied. I am sure that we have all enjoyed every sitting on the Bill, not least today. I recognise that the order represents a slight return to old haunts. Only an hour after we suspended discussions on Report stage of the Energy Bill, we find ourselves discussing an energy order.

I hear what the noble Earl, Lord Attlee, says. We shall have an annual report, which will monitor progress in the area. He will know that we disagreed on that and that was why we voted in different Lobbies on the question. There is a necessity for an annual report on progress in those terms but he has the obvious right to delight in the victory secured in an earlier stage of the Bill. I can confidently predict that as the reports come through they will show the stimulus that the Government are providing to essential developments of alternative energy strategy and we shall be pleased and encouraged by the results. He is right to say that one cannot disavow the central issue on wind energy which is to reach the targets by 2010 and 2015. However, it is important that we recognise the contribution that other technologies can make and, with encouragement, will make as the years go by.

I am grateful to the noble Baroness for her comments. She will recognise that I appreciate that there is a danger that coppicing—I am not sure of the correct verb for developing coppice—may fall within different categories of the CAP. I shall write to her on that point as I do not have the details to hand. She will appreciate, as I am sure all sides of the House do, that a great deterrent to the lack of stimulus for the development of coppicing is less a matter of the CAP and its position, and rather more the fact that one needs to know that there is a market for it. Inevitably, such investments take time to mature, so there is a long-term nature to that market and to the guarantees. Under the order we have sought to give assurances in that area so that the generating stations have the assurance that there will be an increased amount of home-produced biofuel that they will be able to use and that farmers will have a longer-run projection of how worth while it will be to invest in development. That is the purpose.

On the issue of very small generators, I hear what the noble Baroness says. It is not the first time that I have heard it. I am sure that we have not progressed far enough through our consideration of the Energy Bill to prevent me from hearing the noble Baroness press her point on a third occasion. I recognise the validity of a great deal of what the noble Baroness says. However, she will also know that there are considerable on costs involved in the development of the link-up to the national grid, and we cannot at this stage pretend that we have ready and easy solutions to that. Of course, that does not mean that we should in any way underestimate the contribution that individual householders and small generators can make to our future energy production, nor the inevitable lesson that goes alongside electricity generation; namely, the obligation on all of us in smaller units to conserve energy.

On the basis of those constructive responses, I hope that I have answered the points made. I commend the order to the House.

On Question, Motion agreed to.