Renewables Obligation Order 2005

HL Deb 09 March 2005 vol 670 cc823-34

8.19 p.m.

Lord Triesman

rose to move, That the draft order laid before the House on 9 February be approved [9th Report from the Joint Committee] [12th Report from the Merits Committee].

The noble Lord said: My Lords, I just heard the noble Baroness, Lady Hanham, say that there was a commendable lack of obscure terminology in the last orders. I fear that I can make no such claim for this order. I apologise in advance for the textual density of the order, but there we are.

The Government are bringing forward the order to make changes to the renewables obligation to address some current concerns. A number of those changes give effect to powers taken under the Energy Act 2004. In that context, I should like to express our gratitude to the noble Baroness, Lady Miller of Hendon, for her contribution to our consideration of those issues and for enabling several of the debates that touched on them during the passage of that Bill.

Other changes respond to recent developments in the renewables market. The change has been subject to widespread consultation with industry, consumer organisations and regulatory bodies over the past year.

As noble Lords will be aware, the renewables obligation was introduced in April 2002 as the Government's key mechanism for encouraging the development of renewable generation capacity. We committed in the energy White Paper to carry out a review of the obligation in 2005–06. That review is taking place separately to address longer-term issues concerned with the obligation and to ensure its continued effectiveness.

However, the first years of operation have raised some issues that need dealing with now. That is what the order seeks to do. The draft Renewables Obligation Order 2005 before your Lordships introduces five main changes. In addition to those modifications, it also takes the opportunity to consolidate into one order the Renewables Obligation Order 2002 and the Renewables Obligation (Amendment) Order 2004.

The obligation currently requires all licensed electricity suppliers in England and Wales to provide the Gas and Electricity Markets Authority—Ofgem—with renewables obligation certificates, known as ROCs, issued under the 2002 order or under the Scottish Renewables Obligation, demonstrating the supply of a specified quantity of renewables electricity to customers.

I will be referring to a variety of different certificates—ROCs, Northern Ireland ROCs and Scottish ROCs—bringing back, I hope, happy memories of the debates in Committee. For convenience, I will use the term "ROCs" throughout. The quantity is set as an increasing percentage of the electricity supplied by each supplier. As an alternative to providing ROCS, suppliers can pay a buyout price to Ofgem for all or any part of that percentage which is not covered by the presentation of ROCs, or they can combine the two options.

The money paid to Ofgem, known as the buy-out fund, is then recycled to suppliers who have presented ROCs. The recycling mechanism provides the incentive for suppliers to obtain ROCs, as suppliers who rely on the buy-out route in effect subsidise their competitors.

The first change in the order increases the level of the obligation for the years between 2010–11 and 2015–16. The level of the obligation is currently set at 4.9 per cent, rising to 5.5 per cent in 2005–06 and in stages to 10.4 per cent in 2010. To help achieve the Government's target of 10 per cent of electricity generation from renewable sources of energy by 2010 it is essential that the industry has the confidence to invest in longer-term projects in the knowledge that that will be supported beyond 2010. We have therefore responded to calls from industry for increased confidence in the longer term. The order will extend the level of the obligation, in stages, to 15.4 per cent by 2015–16.

The second change relates to the introduction of the Northern Ireland Renewables Obligation—known also as the NIRO—which is expected to come into force from 1 April this year. Noble Lords will recall that the Government took powers in the Energy Act 2004 for the recognition and tradability of ROCs between Northern Ireland and Great Britain. The change to our order gives effect to those powers by allowing certificates issued to generators under the NIRO—known as NIROCs—to be produced to Ofgem by suppliers in England and Wales in compliance with their own renewables obligation.

Those changes, together with corresponding changes being made to the Scottish Renewables Obligation and provisions in the Northern Ireland Renewables Obligation, enable us to move from a Great Britain-wide system of tradable certificates for demonstrating the supply of eligible renewables electricity to a UK-wide one. By allowing NIROCs access to a wider market, the Northern Ireland Renewables Obligation will become economically viable, despite the small size of the Northern Ireland market. The third change made by the order introduces a single recycling mechanism for the UK buy-out funds. ROCs are portable and can be redeemed in either Scotland or England and Wales—and soon in Northern Ireland—without the need to prove the physical flow of electricity. The current arrangements could offer an opportunity for a supplier with a large share of one of the smaller markets to under-present ROCs there and to present extra ROCs in England and Wales so forcing the recycle payments per ROC in the smaller market to rise at the expense of those in the larger.

That situation could be further complicated with the introduction of the Northern Ireland obligation. Following representations from industry, the Government are committed to taking steps to end this opportunity for what is simply arbitrage between the funds through the introduction of a single recycling mechanism. That will ensure that the recycling value of a ROC will be the same throughout the UK.

The fourth change concerns measures to address the issues raised by the shortfall in the buy-out fund, following the failure of a major supplier during the first year of the obligation. As noble Lords will recall, that matter was discussed a great deal during the Energy Bill. The Government are grateful for the contributions, which we took as being wholly positive, from Members on all sides of this House. This draft order contains two measures exercising the powers taken under the Energy Act to mitigate such shortfalls. These are surcharges on late payments and a mutualisation process in the event of a shortfall.

We intend that by imposing a surcharge on late payments to the buy-out fund, suppliers will have a strong incentive to treat their commitments under the renewables obligation seriously and comply with the obligation on time. The surcharge will be set at 5 per cent over the Bank of England base rate to ensure prompt payment and it will be chargeable on a daily basis. Any late payments made, and the associated surcharges, will go into a separate fund that will be recycled to ROC holders in the same way as the buyout fund for that period. The late payment period will run for two months, after which time suppliers who have not complied with their renewables obligation in full will be subject to Ofgem's enforcement procedures.

Under mutualisation provisions being introduced, where a shortfall has occurred in the buy-out fund, each supplier in the market at the time when the shortfall occurs will be required to contribute an additional sum to make up the shortfall. The resulting mutualisation fund will then be distributed to those suppliers who presented ROCs during the obligation period in question.

Under mutualisation, each supplier bears some of the cost. However, those suppliers presenting ROCs will receive recycled payments from the mutualisation fund. The aim of mutualisation is to protect ROC prices and investor confidence in the renewables market following a shortfall.

To prevent mutualisation being triggered for very small shortfalls a trigger level of £1 million per 1 per cent of the obligation has been set. To put that into quantified terms: for the 2005–06 period mutualisation would not be triggered unless the shortfall totals at least £5.5 million. Just as we have set triggers for mutualisation, we have set a cap on the level of mutualisation payments recovered. Our aim is to set the cap at a level that will ensure that the cost to consumers is kept at an acceptable level while still sufficiently high to retain confidence following a shortfall. The cap will be set at £200 million linked to RPI. That would mean that the cap would be triggered only in the event of the failure of one of the major suppliers.

In order that suppliers can recover the costs of their mutualisation payments, payments will start in the second obligation period following the shortfall and will be spread over four quarterly payments. That reduces the risk of increased contributions causing further supplier failure.

I should perhaps note that two steps were discussed during the passage of the Energy Bill which we are not planning to take at this stage. One is netting off defaults in a supplier's obligation against that supplier's share of recycling payments. While it is an attractive idea, it has proved impossible to implement without delaying recycling of the buy-out fund. The other is shorter obligation periods. Research from consultants showed that if mutualisation were introduced, shorter obligation periods would be unlikely to add significant value in terms of restoring confidence. That said, there are other potential benefits from shorter obligation periods. It is unquestionably a balance between two propositions. These are being addressed in the context of the RO review, which, as I said, is taking place.

The last change will provide small generators with more flexibility on how they claim ROCs. Last year we made an amendment so that the entitlement of small generators—those generating up to 50 kilowatts—to ROCs for their electricity would be calculated annually, thus giving small generators access to ROCs for the first time.

We shall now enable smaller generating stations to elect for either annual or monthly ROC declarations. I commend the order to the House.

Moved, That the draft order laid before the House on 9 February be approved [9th Report from the Joint Committee] [12th Report from the Merits Committee].—(Lord Triesman.)

8.30 p.m.

Lord Dixon-Smith

My Lords, I am grateful to the Minister for his explanation. As he said, it is a massive paper, and with the explanatory notes and the regulatory impact assessment attached to the back, it makes an impressive document.

I shall begin by introducing one or two concerns about the order. Since it establishes a United Kingdom regime for dealing with renewable obligation certificates, it is not quite right to say that the order extends only to England and Wales. I accept that the order deals largely with England and Wales, but at the very least, it imposes obligations on Northern Ireland to establish a system that complies and is consistent with this order. There is also an obligation on the Scottish Parliament to pass its own legislation in a form that is consistent with the operation of this order. The description of it applying only to England and Wales is inaccurate. I may be being pedantic, but I am in that sort of a mood. We have galloped through the other orders so quickly that a little delay is perhaps permissible.

I have another problem with the order. Paragraph 4(10)(d) and (e) refers to a body called "the Authority". I have been unable to find a definition. It is not in the Electricity Act 1989 under which power the order is published. If it were in the earlier orders, it has been rescinded because they are revoked by this order. It is not in the interpretation paragraph 2. I gave the noble Lord notice of my questions, and hope that he has a satisfactory answer to them. I am sure that he has, and I shall be interested to hear the explanation.

While we support and welcome the order, it raises a number of questions. We accept that we are in a rapidly moving situation with regard to energy supply. The order takes the renewables obligation forward to 2016 and then says that the level achieved then will apply until 2027.

The first statement is just about consistent with the Government's targets for renewables, but the second part of the statement certainly is not consistent with the long-term ambition to have 60 per cent of energy coming from renewable sources by 2050. I wonder what the Government intend to do.

Another review of the subject is coming up this year. We are led to believe that there might be an energy White Paper later this year, or perhaps next year, depending on circumstances, in which no doubt all the balls will be thrown in the air, revealing a different pattern when they fall. I cannot ask the Minister to anticipate that, but an indication of the scope of the review will be helpful.

The background to this is the need to reduce carbon dioxide emissions. One aspect that causes some concern is the almost total reliance of the Government on wind energy as the great renewable solution.

The problem that I have with what we are doing at this stage is simply this: the electricity industry always runs with a certain amount of spare capacity spun up and running—and therefore emitting carbon dioxide—in case something goes wrong. For example, if another power station breaks down and there is a sudden surge in demand, you cannot start a power station at the flick of a switch, by and large, although gas power stations are fairly quick.

As we all know, the problem with the wind is that it is unreliable—it is as fickle as the wind we generate in this chamber, dare I say—and once we take the capacity of wind generation above the spare capacity which the industry would normally expect to carry, we would have to begin to increase the spun-up and running reserve capacity in case the wind dropped. At that point, we would start to increase the emissions of carbon dioxide and the wind would cease to be quite as beneficial as we would wish. So there is a little problem there.

The order deals with small generators, but how will it affect a place such as Woking where the council has put in place a remarkably effective programme to reduce its own energy emissions? This includes a great deal of electricity generation within the borough which, at times, has to be exported to the grid when it produces a surplus. The council has a number of its own-line systems and, because it does not have the overhead transmission and other costs of the grid, it can produce electricity for the people in the borough cheaper than can be done on the grid. So, of course, everyone signs up to it.

My next question—perhaps it is not affected by this grid but I shall touch on another aspect in a moment—is how far are we moving to adapting the grid in the new system so that instead of being a grid that conveys electricity from the generator to the customer, it becomes a circulation pool in which in many instances—as will have to happen if we are to get our energy sources under control—the customers supply energy back to the grid? That very fundamental change will have to come about and the grid will become a kind of reservoir of electricity, with far more sources than we are at present accustomed to seeing.

My final question concerns the report of the Merits of Statutory Instruments Committee, which draws attention to the report of the National Audit Office on Renewable Energy published on 7 February. Paragraph 26 of the NAO report states: In 2001, the Department decided to include live Non-Fossil Fuel Obligation sites in the Renewables Obligation. This more than doubled the supply of Renewables Obligation Certificates … and thus significantly aided the introduction of the Renewables Obligation". That is a matter of history. The report continues: However, the inclusion of these sites has increased the cost to electricity consumers, but has benefited the Exchequer in equal measure. The size of this transfer is likely to be in the range £550 million to £1 billion over the period to 2010. The additional payments made by consumers are held in a fund administered by Ofgem". I assume that it is in a little box marked "Ofgem" in the Chancellor's general fund and not in a wallet in his back pocket.

Can the Minister throw some light on what the Government think should happen to those funds which are being contributed at this time by electricity consumers and appear to be accumulating without a destination? I have no doubt that all sorts of people will be able to think of all sorts of wonderful ideas. That is in part relevant to the order. I would welcome anything the Minister can tell us.

In general we support the order but we have some questions.

Baroness Miller of Chilthorne Domer

My Lords, we on these Benches welcome this order and the further developments it makes in the renewables markets. I particularly welcome the Minister's statement that part of the intention of the order is to encourage more certainty in the market. That is to be welcomed. There was wide consultation on the order and the fact that there were very few grumbles about it shows that the Government have by and large got the order right.

I am glad the Minister clarified the point about small electricity generators because there has been confusion over whether they would be able to claim monthly or yearly payments. The Minister made that clear in his statement.

I agree with the noble Lord, Lord Dixon-Smith. I too searched for the definition of who the authority was, both in the Explanatory Notes and in the order. I came to the conclusion that it was Ofgem, but that is not made clear. I am glad that the noble Lord could not find it either. It probably does not exist as a definition and that is an oversight. If one takes a wider view of how the Government intend this order to work and how they see it being superseded in time by another order, the role of Ofgem is particularly important.

The order envisages that Ofgem will act as the administrator for the scheme as it has since the scheme's introduction in 2002. The Minister will recall that Ofgem has the role of a regulator. During the passage of the Energy Act, I was pleased that the Government conceded to our amendment and brought in their own in order to give Ofgem a sustainability duty. That duty as a regulator is extremely important and not only in the context of the UK. As the European Union looks to regulate the energy market that is becoming liberalised all over Europe and looks towards models of how to regulate such a market, it may well look towards Ofgem as an excellent model of regulation, particularly now that Ofgem has a sustainability duty. It will be a useful model for Europe to look to.

However, there are a couple of problems in the way that this order envisages Ofgem's role. I am grateful to the Renewable Power Association for laying out the problems so clearly. They are as follows. As the Minister admitted, the order is very wordy because at the moment Ofgem is the administrator for the scheme. Ofgem has to administrate the renewables obligation order and it is laid down in legislation exactly how it should do that. That conflicts with its role as a regulator. Surely the regulator should be looking for the outcome that produces sustainability. In having to act as the administrator of the scheme, it will probably take its eye off the ball when it comes to being the regulator—which should be looking for outcomes.

I realise that this argument is some way down the road, because we shall live with this order for a while. When whichever party forms the government after the election considers renewing the order, and changing it, it will be really important to consider the role of Ofgem and the kind of split that there should be in the governance structure from market operation to regulation.

I want to make a couple of other points as we are talking about how the renewables obligation works. The most important one is how this affects consumers. A difficulty that I have come across personally and from talking to other people who have tried to switch to renewable energy electricity—the so-called greener electricity—is how one can tell whether the energy is green. Some generators supply all their electricity, and some seem to supply as little at 10 per cent of their electricity, from renewable energy sources. Some invest quite large amounts and some invest remarkably little in new forms of renewable energy. I am sure that, much of the time, consumers assume that the figure, in both cases, is 100 per cent.

My household has just switched to a firm called Good Energy, and 100 per cent of its energy comes from renewable sources. The clearest website that I have found so far is that of Friends of the Earth, which details all the tariffs. The Minister may well be aware of the ins and outs of each company, but if he went to that website he would find that only four suppliers are acceptable in terms of where they source their supplies and investments. There is a much longer list of suppliers which advertise widely to consumers as supplying green electricity but which do not meet the Friends of the Earth criteria. I do not believe that Friends of the Earth has set its expectations ridiculously high.

At the moment the Energy Saving Trust is running a campaign on these matters. I believe that the Government need to help people—also Ofgem may want to consider such a role—to find out whether they are buying green energy or apparently very light green energy and so, in my view, being conned.

Some of those issues need to be resolved because the Government, with this renewables obligation order, clearly have the good intention of encouraging the market, but if consumers are not clear about what they are buying, the market might fall into disrepute, which would be an enormous shame. Those are my current concerns.

One remark about Ofgem that I believe is worthy of mention is the fact that at the moment it is running an excellent series of seminars, the first of which I attended last week. They look at the future of the energy market and how it might be regulated. Ofgem invited several Members from this House and the other place. I hope that officials in the Minister's department will also benefit from some of the forward-looking thoughts that will arise during the seminars. In the mean time, I am pleased to support the order.

Lord Triesman

My Lords, I thank both noble Lords for their contributions. I should pay tribute to the work that both undertook during the passage of the Energy Bill. This evening feels like a reunion.

I shall start with some practical matters. First, the definition is found in Section 3A of the Electricity Act 1989, which was inserted into the Utilities Act 2000. It was further provided in Section 3A of the Electricity Act, and it is the Gas and Electricity Markets Authority. I am happy to say that, even without the benefit of notes, reading the order last night 1 found on page 31—at the top, in the Explanatory Memorandum—that it does explicitly say that it is the, Gas and Electricity Markets Authority (`the Authority')". That is the authority as it is referred to throughout the order. I hope that clarifies the position.

Secondly, I should like to say a few words about the geographical extent of the order.

Lord Dixon-Smith

My Lords, I am sorry. I do take what the Minister has said but that is part of the Explanatory Memorandum. I am not sure how far the Explanatory Memorandum is part of the order.

Lord Triesman

My Lords, the noble Lord, Lord Dixon-Smith, is quite right. The Explanatory Memorandum is not part of the order. The two Acts I referred to provide the definition. With so many other words in the order perhaps it would not have suffered greatly if it had had those words repeated as well. The Explanatory Memorandum refers to how it is used in the order, and its provenance is the legislative elements that I mentioned.

As I have said, the order applies only to suppliers who supply electricity in England and Wales. So the order is accurate in referring to them. I also refer noble Lords to another of the documents which I painstakingly went through, the Explanatory Memorandum to the Renewables Obligation Order 2005. In two paragraphs, it sets out these matters. The article of the Energy (Northern Ireland) Energy Order 2003, as amended by the Energy Act and so on, going through the string of provenance issues, covering Northern Ireland, links Northern Ireland to the order, in as much as it is in scope for those purposes. I understand that that legislation was completed in February. I do not have the exact date, for which I apologise.

In the case of Scotland, following the Executive devolution of the relevant powers, a process is being gone through which will be completed on 24 March. It is not completed yet, but we do not at present have any reason to think that it will not be, in terms which put the final bits of the jigsaw together.

In a document that was as long and as complicated, I was also looking for the bits of the jigsaw. I am not sure whether it is a relief that it was not longer or that it should have been there. Separate orders, in other words, along similar lines have or will be provided. It is not nitpicking in any way to ensure that we have got all of this right.

I turn to the points that noble Lords have made. First, on consistency with targets, what is the relevance of the dates 2016 and 2027? The forthcoming renewables obligation review will consider the future levels of the obligation beyond 2015. The point in going to 2015, as the noble Baroness, Lady Miller of Chilthorne Domer, said, is of course a matter of confidence that people can feel in the market. The Government's target, however, must be consistently looked at. The 2050 target is a 60 per cent reduction in carbon emissions, not a 60 per cent increase in renewables. Those two may not be exactly the same thing. One may be arrived at slightly differently from the other. In any event, the review will take place.

I turn to the question of wind capacity and the reliance on it, and how it meshes with spare capacity at times when that is needed, a point made by the noble Lord, Lord Dixon-Smith. While wind is obviously intermittent, we nonetheless need to keep in proportion the nature of the problem that intermittency might cause. Spare capacity, as the noble Lord said, is maintained anyway, to cope with any breakdown of plant.

We believe that no significant additional spare capacity would be needed to meet the 10 per cent target. I expect that we will talk about many sources of energy as we go forward, but we will talk a good deal more about waves, tidal movement, biomass, cleaner coal, and carbon capture—all of those things to which we are committed and about which we have had many good debates.

I turn to the interesting example of Woking, just to clarify its position. Woking is an unlicensed network, and so Woking council is not subject to the obligation, nor does it benefit from ROCS from the electricity that it generates. In the RO review, we are looking at ways to improve access to ROCS for the micro generators—a point that I made in replying to the noble Lord, Lord Redesdale, in his Renewable Energy Bill. It is plainly right that we should look at micro generation in a way which is more imaginative. I think that the points made by the noble Lord, Lord Dixon-Smith, illustrate that greater sense of imagination about the flow backwards and forwards that will be needed.

The final point, I think, is about the NFFO contracts and the money being generated. A surplus has accumulated. It continues to do so from sales of electricity under the NFFO contracts and auction proceeds of electricity and ROCS under those contracts. Noble Lords will be aware—we went over this in Committee in the Sustainable Energy Bill as well—that the Sustainable Energy Act 2003 has made provision for £60 million of the surplus to be spent on renewable energy projects. No decisions have as yet been taken on the use of the remainder of the fund in England and Wales, apart from the need to keep £30 million in reserve. Noble Lords will be familiar with that answer from a previous occasion. I have just to acknowledge today that we are no further forward than when I had the last opportunity to deal with that issue. It is public money. It should be lodged in the Consolidated Fund. But no decision has been taken on how it should be used. I turn briefly to the points made by the noble Baroness, Lady Miller. I agree very strongly with her that we may have a model for sustainability here that will be of interest to other partners in the European Union. I dearly hope so. I think that it may be the case—I do not want to make a commitment that would be out of place, but I think it may be the case—that, as part of our presidency when we are dealing with climate change issues and so on, it may very well be an opportunity to see that discussion progress. I welcome her insertion of that thought into not just this evening's debate but the work that we carry forward.

I think that it is too early to make any judgment about whether Ofgem as an administrator and as regulator will find that its roles are in any kind of conflict. I can only say that any new machinery should always be looked at and that any reviewing process should take account of that. But I think at this stage—and I do not mean this as any disparagement at all of the point made—that it would be overly bureaucratic to create two organisations. We are quite good at creating organisations, but I suspect that we are not so good at getting rid of them.

Baroness Miller of Chilthorne Domer

My Lords, perhaps I should have included one detail just to explain to the Minister why I think it is so important. Not only does Ofgem's holding of two roles mean that legislation has to be written in this sort of detail, rather than looking for outcomes, but the sheer scale of the sums involved is huge. The sum for ROCS is currently £400 million, but by 2015 it will be £2 billion. At such a scale, it is really something to allow the market to decide how that investment is being made and administered and for the regulator to be so busy regulating in the way envisaged when the regulation was initially set up.

Lord Triesman

My Lords, the point is very well made and I take it very positively. We do not yet know how the developments that have started relatively recently will mature, but they will mature against a background with some very large changes. I wholly accept that point. All I would say is that the administration of the RO and consultation on it is in the review that is due to be issued shortly. I think that we will have the opportunity to reconsider in some detail all of those matters.

Finally, again, I agree that consumers need to be clear about what they are buying, and whether it is green—although I know that with electricity you cannot tell that just by looking. The green offering should be subject to advertising regulation and the greatest possible transparency about sourcing. Those were points made by the noble Baroness, Lady Miller. I note her concerns, and we will keep this matter under close review.

On Question, Motion agreed to.