Renewables Obligation (Amendment) Order 2013
Baroness Verma
That the Grand Committee do report to the House that it has considered the Renewables Obligation (Amendment) Order 2013.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, the renewables obligation is currently the Government’s main mechanism for supporting large-scale renewable electricity generation in the UK. Since it was introduced in 2002, the renewables obligation has succeeded in tripling the level of renewable electricity, from 2.9% of total UK generation in 2002 to 9.4% in 2011. It supports some 11.5 gigawatts of accredited capacity. As such, the renewables obligation plays a major role in helping the UK meet its renewables targets and carbon reduction goals.
The renewables obligation places an annual obligation on licensed UK electricity suppliers to source a specified proportion of the electricity that they provide to customers from eligible renewable sources. The scheme is administered by Ofgem, which issues renewables obligation certificates to electricity generators in relation to the amount of eligible renewable electricity they can generate. Generators sell their ROCs to suppliers who use them towards meeting their obligation.
The banding of support—allowing different technologies to receive different levels of subsidy—was introduced to the RO in April 2009 to drive greater and more rapid deployment of renewable electricity generation. This order will implement the outcome of the second major four-yearly review of banded renewables obligation subsidy levels, which took place between 2010 and 2012. The review attracted more than 4,000 consultation responses and substantial amounts of new evidence from a wide range of stakeholders across four separate consultation exercises, which was used to refine our original proposals. The results are set out in the government responses to the RO banding review, published on 25 July and 18 December last year. The order will set the support levels in England and Wales for the next four years from 1 April 2013 until 31 March 2017 for new developments or capacity added to existing generating stations accredited under the RO during this period.
Before I outline the key changes being introduced by the order, it is worth reflecting on the importance of the UK renewables electricity sector and how the new subsidy package will help us achieve our goals. The changes in subsidy levels in this order recognise the key role of renewables in the UK’s future. Renewable energy generation is a crucially important low-carbon technology with a central role to play in helping us reach our carbon emission reduction targets. It is also essential to our economic growth and energy security. It reduces our reliance on imported fossil fuels, and helps keep the lights on and our energy bills down. We have some of the best renewable energy resources anywhere in the world, and the Government are absolutely determined that the UK will retain its reputation as one of the best places to invest in renewables. We have also legally committed to ensuring that 15% of our energy will come from renewable sources by 2020.
The subsidy package balances growth and affordability, providing reassurance to investors and value for money for consumers. The subsidy levels introduced through the order provide certainty for developers and will ensure continuity of support as we transition towards the new contracts for difference to be introduced as part of our electricity market reforms. It will help unlock generation and network capital investments worth around £20 billion to £25 billion at today’s prices in the period 2013-17, and deliver the kind of sustainable, long-term growth and green jobs that we need to get the economy moving again. This represents a very significant part of the £110 billion that we need to attract this decade to overhaul our ageing power system.
It is not the Government’s policy to support renewables at any price. Our ultimate aim is for renewables to become competitive without the need for subsidy. The Government’s decisions on RO subsidy levels send a strong signal to industry that we expect this to happen over time. To get this moving in the right direction, we are reducing support where it can be done, while bringing on the deployment that we need from key technologies such as offshore wind, onshore wind and biomass, to achieve our aims.
The order contains a large number of changes and I do not wish to detain the Committee by going through them all. I therefore turn to the main changes that we are introducing.
We are setting the level of support for offshore wind at two renewable obligation certificates per megawatt hour in 2014-15, reducing that to 1.9 ROCs in 2015-16 and to 1.8 ROCs 2016-17. This is consistent with our consultation proposals and reflects our expectation that the costs of offshore wind will fall as mass deployment takes place and industry innovates. We are already working closely with key representatives from industry to reduce costs. The new support levels will ensure that the UK retains its position as the leading location in the world for offshore wind deployment.
Onshore wind is one of the most cost-effective forms of large-scale renewable electricity generation. The Government are committed to onshore wind as part of a diverse energy mix. We believe it is right to continue supporting onshore wind through the renewables obligation, but propose to reduce support by 10% to 0.9 ROCs per megawatt hour for new developments coming online from 1 April this year. This cut in support is in line with evidence of falling costs. We also know that the cost of onshore wind may fall faster than expected. To ensure that support continues to reflect costs, we are running a call for evidence and if we find that there is a significant change in costs, the Government will expect to review onshore wind support rates again. Any new arrangements arising from a potential review would not take effect before April 2014, and financially committed projects would be protected through grandfathering and grace periods.
We understand that some people have concerns about the pace of wind turbine developments in the British countryside and believe that communities should have a greater say over, and stake in, onshore wind developments in their area. Our planning reforms are already putting local communities in the driving seat by giving them new powers to write their own plans. However, because this is a priority, our call for evidence is also looking at what should be done to improve engagement with communities and ensure that communities that host onshore wind receive appropriate benefits. We expect to publish in May a final report on costs and, in the summer, a final report on community engagement and benefits.
Around 30% of our total renewable energy in 2020 could come from biomass heat and electricity. To ensure that we support the most cost-effective and sustainable forms of biomass, we are creating several new support bands for coal plant converting fully to biomass generation or increasing the amount of biomass they co-fire. These offer the quickest and cheapest ways to decarbonise electricity from biomass and will extend the life of existing assets, thereby helping to maintain the security of electricity supply.
Our policy on new dedicated biomass plant remains cautious because this technology is a relatively costly means of decarbonisation. Support levels are set at 1.5 ROCs from 2013-14, reducing to 1.4 ROCs in 2016-17. Last December, we announced our intention to introduce a 400 megawatt cap on the deployment of new dedicated biomass plant. We are currently working with industry to develop a process requiring developers to preregister potential projects. We will bring forward legislation later this year to introduce the registration requirements into law.
We will continue to support innovative technologies that can play a long-term role in our energy future, such as energy from wave and tidal stream and innovative processes for generating electricity from waste, such as anaerobic digestion and advanced conversion technologies. Both AD and ACTs will continue to receive two ROCs in 2013-14 and 2014-15. Support will reduce to 1.9 ROCs in 2015-16 and to 1.8 ROCs in 2016-17 in line with our aim to reduce subsidies over time.
I am sure the Committee will welcome the news that support for wave and tidal stream technologies will more than double from two ROCs to five ROCs from 1 April this year. This level of support will be available for installed capacity up to 30 megawatts at each generating station. The UK has an unrivalled abundance of marine energy and is currently the world leader in developing wave and tidal stream technologies. Increasing supporting for marine energy recognises the potential and importance of marine energy for the UK.
We are establishing two separate bands for solar PV under the RO: one band for building-mounted solar PV and the other for ground-mounted solar PV. We want to see a healthy solar industry that grows in a sustainable way and moves away from the boom and bust cycles that we have seen in the past. That is why the lower support levels for these new bands reflect the substantial fall in technology costs in recent years.
We have listened to industry about the need to differentiate support between building-mounted and ground-mounted installations, and we have introduced two bands as a result. In order to incentivise solar projects on buildings, building-mounted solar PV projects will receive higher rates than ground-mounted projects. Our proposals for solar projects on commercial buildings will encourage businesses to consider solar PV as a serious option for meeting their power needs.
Hydro-electricity makes an important contribution to our renewable energy generation. While opportunities for further large-scale developments are limited, we believe it is right to incentivise as much of the remaining cost-effective hydro-electricity potential in England and Wales as we can. For that reason, and following careful consideration of new consultation evidence, we are proposing to set support at 0.7 ROCs instead of the 0.5 ROCs that we proposed in consultation.
The RO is paid for by consumers through their energy bills. For that reason, delivering the best possible deal for consumers has been at the heart of the RO banding review. In considering the final shape of the banding package, we have focused on the need to balance cost-effectiveness with the range of objectives that the RO must deliver. This package therefore reduces the lifetime subsidy cost of the renewables obligation per megawatt hour of renewable electricity generated by 11% compared to current bands.
These proposals cost around £900 million less than implementing the consultation bands while driving higher deployment. The banding changes, therefore, will deliver more clean power at less unit cost, representing better value for money than the current RO subsidy levels. They will also reduce consumers’ energy bills by £6 next year and £5 in 2014-15 compared to the current subsidy regime, a total of £11 across the remainder of this Parliament.
The changes that I have set out today apply to the RO for England and Wales. There are separate but complementary obligations for Scotland and Northern Ireland. RO policy in Scotland and Northern Ireland is devolved, but colleagues there have advised that they intend to make changes to their obligations similar to those I have set out today. Similar orders will be laid before the Scottish Parliament and the Northern Ireland Assembly shortly.
The European Commission is in the process of assessing the changes made by the order for the purpose of providing state aid approval. We anticipate that we will receive this approval before this instrument is made.
The measures contained in this order are good for the country and good for consumers. The renewable energy infrastructure that this package will bring forward will create a multibillion-pound boost for the UK economy, driving growth and supporting jobs across the country. This investment will have lasting benefits for our country, helping to modernise the electricity grid to keep the lights on, building resilience against spiralling fossil fuel prices and keeping carbon emissions down. Importantly for consumers, the changes we propose will deliver real reductions in energy bills across the current Parliament. I commend this order to the Committee and beg to move.
Lord Grantchester
I thank the Minister for her comprehensive explanation of the order before the Committee. She has correctly identified it as the main financial policy mechanism for encouraging large-scale renewable electricity generation to put it on a sustainable footing as part of the UK energy mix. The order updates the band support levels, introduces new power sources and increases the importance of certain fuels such as biomass. I certainly support the order. A lot of what the noble Baroness has said is eminently sensible and can agreed by noble Lords all around the Committee. It will help to deliver the UK target of 15% from renewable generation by 2020. It will help UK energy security by reducing reliance on imported fossil fuels. It will assist in the conversion to cleaner generation and it will deliver on decarbonisation targets. It will also help to secure necessary capital and supply chain investment and, not least, it will help to deliver good value for money for consumers.
That said, the Government have presided over a rather disruptive process. There have been public disagreements between Ministers in the noble Baroness’s department and challenges with the Treasury. These do not engender the certainty that is so necessary to the industry if it is to invest with confidence. Uncertainties remain over elements of biomass and solar generation which will be subject to further separate consultation and orders. It is extremely damaging to the industry’s confidence if it experiences constant downward revisions of its support and to the targets of the renewable transport fuel obligation as well as the carbon reduction targets. Can the Minister confirm that the target under the renewables directive is safe? New renewables stations will be ineligible from 1 April 2017. This amending order increases generation per annum to 79 terawatt hours a year by 2017, as explained in the Explanatory Memorandum. However, the target for 2020 is 108 terawatt hours a year. By what measures is the Minister confident that the shortfall of 29 terawatt hours per year will be generated?
One of the key points of the order before us is that from 2014 onwards, support for large-scale renewable electricity will be through a new feed-in tariff with a contract for difference scheme, as proposed under the forthcoming Energy Bill. Does the Minister agree that there is a need for a smooth and well managed transition from the renewables obligation to the contracts for difference regime? If there is any delay for whatever reason, can she confirm that the RO scheme can be extended to give investors the certainty that projects which need longer timeframes have the necessary clarity in terms of levels of support that are needed for their investment?
In its examination of this order, the Secondary Legislation Scrutiny Committee noted that the lives of some existing coal-fired generating plants, which had been expected to close due to carbon emissions reduction targets, may be extended through support to convert to cleaner biomass generation. The committee asked for clarification on how the banded support would allow this to happen. In its reply, the Minister’s department pointed to Ofgem’s Electricity Capacity Assessment 2012, which identifies a tightening of generating margins from 15% this winter to 4% in 2016. While it makes sense to utilise existing stations and convert them, perhaps I may suggest to the Minister that not only may this delay decarbonisation targets, it will delay the necessary urgent investment in fit-for-purpose energy generation. Are the Government seeking the flexibility that will allow them to rely on coal as a back-up supply to help keep the lights on? Is that the more pressing reason, and will it comply with the industrial emissions directive, which replaces the large combustion plant directive with more stringent emissions limits, that is to come into force from 1 January 2016?
Having made that point, I note that both the Committee on Climate Change’s bioenergy review and DECC’s own energy strategy conclude that coal firing with biomass offers a cost-effective way to decarbonise existing coal-fired power stations. The Explanatory Memorandum is also correct to point to energy efficiency and demand reduction as important elements in the calculation of targets that renewable generation needs to fill. However, I do not see any figures in the Explanatory Memorandum to clarify that. Previously, I have asked the noble Baroness for her assessment of the success of the Green Deal and other measures to reduce demand. Is she now able to come forward and put any figures on these measures?
There is much in this order to consider and I welcome the support increase to five ROCs for both tidal stream and wave. That should help reduce the risks of not achieving decarbonisation targets. I welcome the section on rural-proofing within the context of the Government’s overall reforms of the planning system.
The final issue of importance concerns bioenergy crops. Quite rightly, there is anxiety over land use that may be taken away from food crops, and deforestation may also result. The use of palm oil has already been excluded from supply chains. Could the Minister clarify that her department’s bioenergy strategy has now taken account of the sustainability standards recommended in the RO recognition of the environmental assurance scheme’s requirements? To sum up, I support the order and would be grateful if the Minister could give reassurances on the points that I have raised.
Lord Teverson
My Lords, I must admit that when I saw this order on the Order Paper, got a copy of it from the Printed Paper Office and opened it, I thought it was my maths O-level paper all over again. It took me back I will not say how many years to that dreaded moment. I passed in the end but it was quite a struggle. The formulae in the order as I went through it got more and more complicated: E=MC2 was rather simple by comparison. I hope the people that have to interpret this have a lot more time and mathematical and computerised power than my brain normally does.
I thank my noble friend for going through the order and particularly for highlighting something very important to the south-west and my part of the world: the wave side. Yes, DECC and the Government have put that back up to five ROCs but what is important about this, which my noble friend did not mention, is that that has put it back on a par with what they pay in Scotland. We in the south-west can now compete with our northern brothers and sisters in terms of marine energy. I very much welcome that.
One of the particularly good things about this is that we are moving into a much more professionally and better managed transition in terms of ROC values. I know that ROCs are about to disappear anyway but we are able to make measured and predicted changes in the regime to keep investor confidence, yet knowing that we will have the mechanism to, we hope, keep these numbers within what I thought was a very good settlement in terms of the levy control framework between DECC and the Treasury. That was a good outcome. I hope this approach now means that we will not have that backwards and forwards in trying to second-guess in the short term, and that we have an environment where the investor community is able to put its money where its mouth is—and where our mouth is—in getting renewable capacity, and that that actually happens.
My main question is very much the same as that of the noble Lord, Lord Grantchester. We have a marvellous list here of all the technologies that there are in renewables, some of them which even I forget about. Some, like co-firing bioliquids sounds definitely like something I would not want to get involved in but there are some really interesting technologies there. A number of them are biomass-related and I would also be interested to know where the Government have got to in terms of these quite complicated supply-chain issues around sustainability. It is sometimes all too easy to condemn everything and to give excuses for things not to happen, rather than to bring them forward. However, sustainability is important, and I am very interested to hear my noble friend’s comments in response to my question and to that of Lord Grantchester.
The Duke of Montrose
I would like to raise a couple of small questions. One is out of curiosity. We all understand that Scotland administers its own renewable energy regime and the quantities of ROCs that are administered. However, when it comes to providing the certificates, can the Minister tell us whether this is done centrally? Is a Scottish ROC equivalent to an English ROC, and able to be traded across the border? When we get to this horrible question of a referendum in Scotland and Mr Salmond asks whether the Scots want to be devolved, will they suddenly find themselves having to set up ROC administrations that they do not presently have? I am sure that if that is the case, it will be one of many aspects that have not been costed.
The other point comes from what the Minister said about the extent to which the Government expect to have a conversion of coal power stations to biomass. If conversion does take place to the full extent that the Government anticipate, how much of the biomass required is available from the UK and how much might have to be imported?
Lord Teverson
Before my noble colleague sits down, I would like to say something important about co-ordination between Scotland and the south: we definitely need a ROC concert.
Baroness Verma
My Lords, I was trying to recover from that helpful contribution that we have just had from my noble friend. I begin by thanking all noble Lords for their support for this order and very much welcome what they have said in recognising the great benefits that it will provide.
I was slightly disappointed that the noble Lord, Lord Grantchester, does not recognise that it brings greater certainty for investors, simply through what we are trying to achieve. The expected benefits initially will be £20 billion to £25 billion in 2013-17. That gives greater certainty to investors, given that they will know that they are working towards the contracts for difference in the Energy Bill.
I will answer some of the questions that the noble Lord has put down, as have my noble friends, but if I fail to answer any questions I will write to noble Lords and make sure that there is a copy in the Library. The noble Lord, Lord Grantchester, asked about the Green Deal. It is on track and doing very well. However, because I was not expecting a question on the Green Deal, I do not have the specific figures here with me. If he will allow me, I will also write to him on those figures and give him an update on where we are.
The noble Lord asked whether the target is safe. I can assure the noble Lord that it is. The target is unchanged and there are no plans to change it. He also asked if I am confident that the shortfall of 29 terawatt hours will be met. Through the contracts for difference, we expect that target to be met and, through our capacity mechanisms, to have some capacity in lieu in case there is ever a shortfall. Of course, we will have greater discussions on this when the Energy Bill arrives in our House.
The noble Lord also asked if the RO would be extended to allow a smooth transition to CFDs. We have no plans to extend the RO. The EMR and the CFDs are on track and we are working very closely with industry to ensure that the transition is as smooth and secure as possible.
The noble Lord also asked if coal would continue as a back-up supply. I have just mentioned the new-capacity mechanism and this will be a matter for that mechanism, rather than the renewables obligation, but renewables, particularly biomass, will have an important role to play in keeping our old coal-powered stations open in a much more sustainable way.