Grand Committee
Energy Bill
Lord Roper
“Regulations: backstop power purchase agreements
(1) Regulations made under section 6 must include provision under which—
(a) every eligible generator who is a party to a CFD may, in specified circumstances, by notice in writing require the Authority (or such other person on whom the regulations confer functions) to secure, within no later than one month after the notice is given, that an electricity supplier (or a person of such other description as may be specified) enter into a power purchase agreement on terms set out in, or determined in accordance with, the regulations (a “backstop PPA”); and(b) for the duration of the backstop PPA, the strike price under that CFD (or under any other CFD entered into in connection with the backstop PPA) is set at a level specified in, or determined in accordance with, the regulations.(2) In determining the provision to be made under this section, the Secretary of State must have regard, in particular, to—
(a) the desirability of ensuring that every eligible generator who is a party to a CFD is able to borrow money commercially for its business purposes at reasonable cost and over a reasonable period (including borrowing which involves the lender taking an equity stake in the generator);(b) accordingly, the need to ensure that the terms of every backstop PPA, and the level of the associated strike price, are such that every backstop PPA is demonstrably viable for the eligible generator.(3) Where, at the time a CFD is made, regulations make provision for any matter referred to in subsection (1), subsequent regulations may not alter that provision in relation to that CFD during its term.
(4) The Secretary of State may exercise the powers conferred by Chapter 6 of this Part (modification of licence conditions) for the purpose of giving effect to provision made under this section.
(5) The Secretary of State must keep under review the effectiveness of provision proposed or made under this section for achieving the objects set out in paragraphs (a) and (b) of subsection (2).
(6) In this section, “specified” means specified in the regulations.”
Lord Roper
My Lords, Amendment 55AB is also in the names of my noble friend Lord Jenkin, who unfortunately is unable to be with us today, the noble Baroness, Lady Liddell of Coatdyke, and the noble Lord, Lord Cameron of Dillington. The amendment, which is fortunately grouped with the very interesting amendments that the Government have tabled on the same subject, tries to guarantee the independent renewable energy generators who have a vital role to play in ensuring that we have secure, affordable and sustainable energy in the United Kingdom.
The independent generators feel—they certainly did before the Government tabled their amendments last week—that the Energy Bill puts at risk their ability to raise the funds necessary to invest in vital infrastructure because it does not provide a clear route to market for them once they have carried out that investment. They feel that the Bill effectively entrenches independent generators’ dependency on the big six through their power to provide long-term power purchase agreements. They therefore feel, and have felt for some time, that the lack of effective competition for those long-term power purchase agreements means that the terms available to the independent generators make their position unviable and make it that much more difficult for them to raise the funds necessary to carry out the investment that we all believe is important.
This is a problem, in their view—I realise that others may have a different analysis—of a structural market failure that will not be solved by Ofgem’s liquidity reforms. Nor will the move to a new structure of CFDs provide to a market source the sort of competition that would enable them to obtain PPAs. This problem of market access by the independent generators was, I understand, first raised by them with the department two years ago when it was first announced that the renewables obligation was to be withdrawn and replaced by the generation support mechanism that we have been discussing this week.
The failure to tackle the problem earlier reflects to some extent—I do not want to be unkind; I understand the difficulties that the department has had in trying to model these problems—inadequacies in the assumptions that were made about how the market would operate in this situation. There was an assumption that it would operate rather more effectively and that, therefore, there was no need to guarantee a route to market for the independent generators.
Of course, those of us who have had a chance to study the Baringa report on which the Government’s amendments for a backstop PPA proposal are to some extent based, was received by the department in its final form less than 10 days ago. Therefore, one understands why there is still a great deal more work to be done before final decisions can be made as to the way in which a backstop could be set up. On the other hand, the independent generators feel that there is an urgent need for the Energy Bill to be amended in such a way that it includes a solution which incorporates plurality in the market for PPAs from the beginning. It will not be possible for them to make applications for CFDs without having some assurance that they will be able to market what they produce on that basis.
As was discussed in Committee in the other place, many in the industry prefer the solution of a green power auction market to solve the problem. The Government have claimed that this would be a more expensive way to achieve the objective. There is, of course, a dispute about that. The independent generators would argue that they could achieve a £2 billion saving for consumers by removing a middleman charge that the current market generates. I am not sure about that but one of the problems that I have, and why this amendment has been tabled in the way that it has, is the complexity of developing the backstop PPA. The more I read the Baringa report, the more difficult I feel this is going to be. That complexity is such that I believe it is important that there should be a backstop in the form of a green power auction market if it is not possible to implement the backstop PPA. That is why this amendment has been put down in the way that it has. If the backstop PPA is not viably implemented and in place when the first CFDs are in operation, the independent generators will be under a clear disadvantage compared with the big six and the foreign state-backed utilities, contrary to what the Minister in the other place pledged in Committee, and UK energy security will be at risk.
According to what we have read in the department’s helpful briefings, the regulations will not necessarily be laid until next year. What we need to hear from the Minister today is an assurance about when they will be implemented so that the independent generators can be sure that they will be available at the appropriate time. With the detail of the backstop proposals still to be finalised, it seems to us necessary that the Bill also empowers the Government to implement as a backstop to the backstop the GPAM, which is the only clearly worked-out solution, and one which could operate, even though I realise it has some disadvantages.
I have a further amendment in this group, which is the traditional amendment with which, I am afraid, I have teased the Committee in the past—that is, the power to make regulations by the affirmative procedure rather than the negative procedure. I am sure that the Delegated Powers and Regulatory Reform Committee would have recommended that provision if it had had a chance to consider these amendments. I beg to move.
Lord Cameron of Dillington
My Lords, I have put my name to this amendment. Our energy markets are dominated on both the generation and supply sides by the big six integrated utilities. Meanwhile, we have a very complicated situation whereby the Government are trying to maintain semi-market conditions in a marketplace that is obviously rigged, and rightly so, in order to decarbonise it and ensure security of supply. As a result, the contortions and complications in this marketplace are mind-boggling, as my noble friend Lord Roper said. It is hard to see how the EMR game will evolve in this respect over the next decade.
One basic principle if we are to have an efficient marketplace is that we need to balance as far as possible the amount of power generated with the demand for that power—with a capacity margin, of course. There is no doubt that the integration of a power supply chain makes achieving that balance much easier but having all the power generated by only a few is not in anyone’s interest. We need as many independent generators as possible and that means they need to be able to secure investment for their projects. The Government recognise both these facts in their amendments in this group.
To touch on the principles involved here, I understand the argument made by some that no business should have the right to make a guaranteed return for its investors, but in the electricity market we are dealing with a special situation. We have to make the big jump from fossil fuels to renewable power. In a competitive, international financial marketplace, with many variable investment opportunities in many less risky and possibly less complicated fields, investors and banks are reluctant to commit to the renewable generation industry without a reduction in the long-term risk. For the sake of our energy security and energy decarbonisation, not to mention our overall economy, we need that reduction in risk and thus that commitment. The Government’s recognition of this in their amendments is very pleasing.
To continue to defend the principles behind the Government’s amendments, it is important to remember that an increased risk inevitably leads to an increased cost of capital, which in turn leads to higher costs for consumers. We do not want that increased risk. Bear in mind that renewable technologies are pretty much all about the cost of capital because after the initial capital cost the actual source of the power—wind, sun, tide or waterfall—is usually free, provided that the management is satisfactory.
So far I could have been speaking in favour equally well of the new government amendments as our own. My only real worry about the government amendments is that, with all the “may”s rather than “must”s, and all the possible provisions that might or might not appear at some undecided time in the future, these amendments descend on one like an amorphous cloud of uncertainty. One recognises that somewhere within them are the right intentions but no one is quite sure how it will all work out. I suspect that we will return to these amendments on Report to get greater clarity.
Returning to our amendments and Amendment 55AC in particular—the noble Lord, Lord Roper, spoke about this—it might be worth touching on the choice between a backstop power purchase agreement, or PPA, and a green power auction market, or GPAM. My own view is that of the two options GPAM is the better one. I would very much prefer it if the Government could keep Amendment 55AC up their sleeve in case their backstop PPA does not do the trick for the investors. I cannot see what harm it would do to have it in reserve. That would make it much easier in future to revert to the existing, proven system. I stress those last three words: the NFPA exists and works. It would be crazy not to put this option in the Bill now just in case investors lose confidence in the backstop powers. It does not matter how confident the Government are that their way will work. It is the confidence of the investors that matters. There is no way of second-guessing the marketplace.
As I said, the existing NFPA is already a proven option and works extremely well selling six-month contracts six months ahead—because it is only for six months. The balancing risk is low for the supplier. They will not get caught out buying too much power at the wrong price that will look silly in five or six years’ time. That is very helpful to the small supplier and therefore encourages greater diversity and competition at that end of the marketplace. That may be why the big six do not like it. Meanwhile, we already know that GPAM creates enough flexibility and reliability in the marketplace to boost the confidence of the investor, who is needed to support the independent generator. All that is already proven.
The other element that persuades me that GPAM is best is that I do not like the idea that the backstop PPA leaves DECC or Ofgem in overall command of the marketplace, setting both the strike price and the electricity floor price. I prefer some semblance of a working market, even though a true market may be some way off. I guess that this is my main preference for GPAM. We all hope that in 25 or 30 years’ time, our reliance on CFDs and strike prices will be considerably less. I hope that we will not need a floor price set by a backstop PPA.
The renewable power industry in all its diversity will be strong enough to stand largely on its own feet, and it is at that point that we will need a real marketplace with as many players as possible to help create competition, both for generators and suppliers, and thus help provide cheap energy. There is more chance of the currently proposed GPAM transmogrifying into a body fit for purpose at that time than a state-controlled backstop PPA. I am surprised that a Conservative Government do not also see that.
I am not saying that we should attempt to create a power marketplace in 2013 that is fit for the 2030s but let us focus now on the needs of today. We should stick as closely as possible to a real market, even if it is at this stage only an embryonic market. Thus, I believe that as a backstop to the backstop, Amendment 55AC is an option that is very worth while considering while we are in legislative mode.
Baroness Liddell of Coatdyke
My Lords, I am delighted to have this opportunity to follow the noble Lords, Lord Roper and Lord Cameron, because I, too, lent my name to the amendment. I draw attention to my entry in the register of interests and apologise for my croakiness. It will have one advantage: I will be brief.
I am delighted that the Government have tabled broadly similar amendments but I am very concerned about their tentative nature. I started out by being concerned about the backstop and how it would operate because the reality is that at the point at which the backstop kicks in, you are already at the 11th hour. If I may mix my metaphors, it is like saying to someone who is standing on at the edge of a crumbling cliff, “Don’t worry if you fall off; the RAF has a very good search and rescue operation”. It is very troubling that there is no recognition of the stage at which a company or project would be when the backstop was applied. I am delighted that someone as eminent and knowledgeable as the noble Lord, Lord Roper, found the Baringa report a bit impenetrable; I found it totally impenetrable. One of our main problems is that no one is certain about how this will work.
I am slightly jealous of the Minister because this is a classic situation in which a Minister could bring common sense through the middle. The Bill has been about two years in gestation—it has the gestation of an elephant—and we are still at a stage where we do not have the kind of clarity that, frankly, the funding market really needs. There is a fantastic opportunity over the summer for the noble Baroness, with her officials, to go through some rigorous testing of what is proposed here. There is no doubt that we will come back to this on Report because when cold towels are wrapped around heads there will be recognition that we need to go beyond the theoretical and look at the practical. If there is one warning from how the market has operated so far, it is the current attitude of the financiers, the investors.
As the noble Baroness said, when we were discussing Amendment 53BB, no one is blessed with perfect foresight and energy markets are wonderful at knocking people sideways. Things happen off stage that disrupt the functioning of energy markets. That makes it all the more essential to have a degree of flexibility. I can understand why the department has relied so heavily on the big six because they are the big operators in the field, but they are not entrepreneurs. We had an interesting side debate the other day about capitalism. What we are talking about here is entrepreneurialism on the part of the independent generators.
If noble Lords cast their minds back, it was interesting to hear what the noble Lord, Lord Deighton, said at the Dispatch Box during Question Time on Tuesday about infrastructure development. He referred to how important renewable energy, particularly offshore renewable energy, would be in helping our investment in infrastructure to move ahead. Yet these independent generators are the very people who are coming along and saying, “Hold on a minute; we don’t have the certainty to invest”. I get the impression that some people, when they are looking at the scale of these investments, think that we are talking about something that will cost £200,000 or even £2 million. There is a project in Edinburgh that could supply sufficient energy for all of Edinburgh and Fife. Its cost is somewhere in the region of £1.3 billion—not small fry. You could buy a very big part of an aircraft carrier for that; you might even be able to buy some planes to fly on it. That project, Neart Na Gaoithe—I am glad that the noble Earl, Lord Caithness, is not here, because I suspect that he is a native Gaelic speaker, which I am not—is in the market at present. This is not a model that we are looking at here; this is men and women out knocking on investors’ doors now and having difficulty in raising money. I ask the Minister, during the summer, when she has had the opportunity to have a good break, to take the chance to jump over the lobbyists and talk to the companies that are investing and experiencing considerable difficulties.
Amendment 55AC refers to the green power auction market. Like the noble Lord, Lord Cameron, I am more attracted to that than I am to the idea of the backstop. It is strange for someone sitting on this side of the Committee to be saying, “I am in favour of a fully operating marketplace”, as distinct from those on the other side, where they are talking about market manipulation. I think GPAM would be a clearer way in which to operate but, frankly, I would settle for anything that gives us the certainty in the marketplace that those involved in these investments very much desire.
There is no doubt that we will come back to this. I very much look forward to hearing the Minister say, on returning to us in the coolness of the autumn, “We’ve worked out how this is going to work—this is how we’re going to change it”. The downside is that we have about three months to go and there are investors out there having difficulty raising money. That is the thin end of the wedge and that is what we should be thinking about.
Lord Deben
My Lords, we may have noticed that there is a good deal of support on both sides for what the Government are trying to do. I hope that my noble friend the Minister has noticed the tone in which these discussions have been carried through. We would like to be convinced, and we are unconvinced only because these measures are quite difficult to understand. The document that I have here is not for bedtime reading, unless you wish to give up on the Mogadon, because it is very complex.
One thing in the Climate Change Act that the climate change committee is supposed to do is to ensure that the public understands what it is doing. I do not think that that is a bad thing to have at the back of one’s mind. I just hope that I do not have to stand on a platform at this moment and explain in simple terms what is in here. I suspect that my noble friend the Minister would agree that that is not the most comfortable place in government just at this moment. It is not because there are things that are necessarily wrong with it, but there are extremely complicated things in it, and we want to make sure that it is as good as it can be. That is my first point.
On the amendments, I remind noble Lords that this is no small matter. Electricity from renewables increased last year by 19%, which is pretty remarkable; it is 11.3% of the total. We are not talking about some tiny little thing, which is what the climate change dismissers are always saying. This is no longer a gleam in the eye of Greenpeace; it is a central part of what we are seeking to do. Therefore, we have to recognise that enabling the elbow room for the renewables sector is very important. The Government have recognised that and, on all sides, people have said that the government amendments do extremely well.
I want to put three simple propositions to my noble friend. First, it is instinctively difficult for free marketeers such as me to be entirely keen on a system where the Government are fixing almost every element of the process. I recognise that it may be necessary—and, indeed, if it is necessary, I shall be the first to defend it. But I think that she understands why one starts by being a little concerned about that.
Secondly, we need a convincing explanation of why some kind of auction is not part of the set up. It has been shown around the world that the one way in which you get lower prices is through a descending auction. There is no doubt about that. The advantage of that is that it does have that effect. From what happened in Brazil it is clear—it is not that it has not been tried and found wanting; it has been tried and it works—that you can bring prices down if you operate in that way.
It gives huge confidence to the public because, instead of the Government having to explain in the context of a document such as this why they have delivered this, that or the other, they are able to say to the market, “Look, the price has been fixed at the lowest figure we can see working”. There is a real issue of communication here and a need to explain why—apart from the unconvincing pushing aside in the other place when Ministers said it would be very expensive and complicated. I was a Minister for 16 years and I knew that any civil servant who said we could not do something because it was expensive and complicated had not worked it out. That mechanism is always used; it is the technique. I look with care at those behind my noble friend. An issue may be complicated but you might be able to make it simple, but the idea that it is expensive I have never seen proved in any independent area. I would like to be 100% on the side of the Government on this but the whole concept of a competitive system based upon some kind of auction is so valuable that we should not lose it.
Thirdly, the worst kind of debates in the other place, and even more so in your Lordships’ House, are about what it means rather than about what should be done. My worry in this area is that if we get to the Floor of the House and spend our time trying to work out what it means, we will probably get it entirely wrong. It would be valuable if the Government could clear that bit out.
The noble Baroness, Lady Liddell, and I have not always agreed on matters over the years but at least on this we can be at one. We want to arrive in October with a clear view of what is being proposed and what its ramifications are so that if we do not agree with it at least we are talking about the same thing. I fear that if we argued about it now we would be arguing about something that was different in the mind of every Member of the Committee. After all, we have chosen to try to understand these things rather more than the generality. I hope my noble friend will treat the amendment with that kind of approach, rather than saying, “It does not quite work in this way or that way”.
Viscount Hanworth
My Lords I shall speak to Amendments 55AE, 55AFA and 55AFB, which are all in my name. Amendment 55AE, together with my subsidiary amendments in this group, covers the same ground as the amendment of the noble Lord, Lord Roper, and others but it is not as specific in what it calls for. The amendment was conceived before the government amendments in the name of the noble Baroness, Lady Verma, were tabled. I do not believe that the government amendments provide an adequate answer to the problems. My subsidiary Amendments 55AFA and 55AFB, which seek to amend one of the government amendments, are testimony to this.
Amendment 55AE calls on the secretary of State to make regulations that will ensure that the independent electricity generators that employ renewable technologies will find a route to market for their produce. We are aware that the Government are relying on those enterprises to provide a large proportion of the investment in renewable electricity generation: the figure is anything between 35% and 50% of the new investment. There is also a widely perceived danger that, in the absence of further provisions in the Bill, the independent generators will be squeezed out of the market. The reality is that the big six electricity firms, who supply more than 90% of the electricity that is sold to consumers and businesses, have been expanding their generating portfolios to include an increasing proportion of renewable energy. In the process, they have been dispensing with the services of the independent generators. The renewables obligation, which for a while was effective in obliging the big six to purchase the output of the independent generators, is becoming ever less effective in sustaining them. The suspension of the renewables obligation in 2017 would surely spell the doom of the independents unless some effective measures are enacted to prevent that.
Lord Teverson
My Lords, if there has one been theme since the Bill started its long route over the past couple of years to where it is now, it is that it is not decarbonisation that has been the subject of the big debate—although it is a bigger debate now, I admit—but access to the market and competition by a vibrant independent generating sector. I would not be as pessimistic as the noble Viscount when he says that this sector would be squeezed out altogether. However, we want to see not just a surviving independent sector—and I believe it would survive under the conditions that we have at the moment—but a vibrant and expanding sector where we see future competition growing. I do not think we have got there yet. Whether it was the Select Committee in the House of Commons that went through the draft Bill or our own committee under the noble Lord, Lord Oxburgh, the whole area of independent generator competition was a theme that was common to us both and a very strong one.
What concerns me is not that the Government do not understand that this is an issue. I think that they do and that they have done for some time. They have done a lot of work on this, and I am sure that the Minister will go through it. The Government are aware that this is an issue and have been working on it very hard. What concerns me is that, as far as this Bill and the amendments are concerned, we still seem to be in a position of “may” rather than “must”. Although we talk about this in all sorts of other areas and sometimes use it as a political ploy—sometimes trying to strengthen something that is legitimate as a “may”—in this area it prolongs the uncertainty of the market.
When the Bill started its long process back in 1910—I mean in 2010-11; it might seem like the last century but it clearly was not—we said we saw this as important. I thank the Minister for keeping us very much in touch with the Government’s thinking via her letters. In her letter of 22 July she quite rightly said:
“This is a key issue as independent renewable generators currently hold a significant pipeline of projects”.
We understand that but the point is that over this period it has always been that the ROCs would finish in 2017. That system gave a fair degree of certainty. We are now two or three years on in that process and it is only some three and a half years until that April 2017 deadline. By the time this Bill becomes an Act, as it surely will in whatever state, that will be down to three years. As the noble Baroness, Lady Liddell, said, these major investment projects take time, whether it is in planning permission, judicial review or all the other areas. By then we will be well into the post-2017 period. That is why it is important that the Bill firms up on that and why I am slightly concerned that it is still a “may” situation in these amendments.
Also, the Minister’s letter says:
“Whilst I believe that the introduction of the Contracts for Difference … will greatly improve conditions in this market, I appreciate that [we] may need to go further to support independent developers. This is why I have tabled amendments to allow the Government to further support independent developers if necessary”.
I understand that entirely and welcome the great clarity that the Minister has given in her correspondence to all our debates through this Bill—that has been exceedingly good. What concerns me is that the point has come where, as a Government—I point out to the noble Lord, Lord Cameron, that they are Liberal Democrat as well as Conservative—we need to come off the fence. We need to say, “Yes, this is not just a problem but one we understand needs to be fixed—and it will be in the legislation”. I am sure the Minister will assure us that by Report there will be a very strong indication of exactly how this is to be played out.
One unfortunate thing in this long process is the feeling that the auction system has partly been disregarded because of the pressure of the big six. That may be completely fallacious and wrong but that perception is there. That means that the perception remains that this market is not fully open to full competition for a generation into the future. We absolutely need to make sure that it is.
Baroness Worthington
My Lords, I am very grateful to the noble Lords who tabled amendments and spoke so eloquently to them this afternoon. Obviously, in this group we also have the Government’s own amendments, which share many aspects with the others.
The question of independent generators is crucial. As noble Lords have already said, this is an important sector and deserves to be treated with all due seriousness. The group of independent generators, which I am sure has been in contact with many noble Lords present, already represents 20% of the onshore wind capacity in the UK. According to Ofgem’s projections, independent generators are already responsible for 12% of renewable capacity and are expected to be responsible for between 35% and 50% going forward—something to which my noble friend Lord Hanworth alluded. This is not a small part of the market but a considerable part of it, and my noble friend Lady Liddell pointed to the reasons for this. The group represents the entrepreneurial energy developers in this country and it is that burgeoning sector that is providing jobs and investment for a green economy. I am not saying that the big six and other energy companies are not also participating but the entrepreneurs have shown great tenacity and appetite for engaging in a complicated market, but yet can succeed.
I should like to bring the Committee’s attention to the fact that last week economic statistics were produced that showed that the green sector in the UK grew in 2011-12 by 5% at a time when the rest of the economy was in a double-dip recession. The green sector is an important engine of growth for the country and we hope that that will continue.
Lord Deben
Did the noble Baroness also notice that the sector much outpaced every other part of the economy and was particularly strong in the United Kingdom, when compared with comparable economies? When the naysayers, who are not represented today—as they rarely have been in this Committee—talk about these matters, it would be good just to remind them that nowhere else in the economy is there development going on like this.
Baroness Worthington
I thank the noble Lord for his timely intervention. I could not agree more. It is a shame that those statistics were not trumpeted more. We would all feel very proud that that happened at a time when the rest of the economy was not doing so well. It was not just that there was good growth in that sector but it positively affected our balance of trade. There are very few sectors in which we can say we have a positive balance of trade with China, but in this sector we can. As the noble Lord alluded to, the global average rate of growth in this sector was only 4%, while we were at 4.8%. Tiny nation though we are, our growth in this sector is outstripping much larger nations. We are up in the top six countries in this sector. I am sorry that I am waxing lyrical slightly here but it is important. We are a nation of innovation and entrepreneurial spirit. We were the country that brought the Industrial Revolution to the world; let us not forget that. Let us hope that we will remain at the forefront of this industrial revolution. I know that that sounds like a grand introduction but it is pertinent to this part of the Bill. We really need to make sure that this sector is protected and that no unintended consequences are meted out to it as a result of the Bill.
Why is there an issue? It is probably fair to say that it was already emerging. The renewables obligation has been a good policy that has driven a lot of investment, but we were already hearing that independent generators were finding it difficult to secure power purchase agreements. At the heart of this issue is the problem, alluded to many times throughout our deliberations in Committee, of the vertical integration of the big six. There is no liquid, open competition in generation. We have an oligopolistic system of six vertically integrated companies that dominate. It will come as no surprise that on this side of the House we believe that the time has come to address that. We would have preferred to see genuine market reforms that required the selling of power into a competitive pool, which would be good for competition, liquidity, the independent generators and the consumer. We know that the Government are not yet there but we hope they will join us soon.
It is true that the Bill helps to make the case even stronger for splitting apart that vertical integration because we are moving into a system of contracts for difference. We are moving away from the arguments in favour of vertical integration, which are that you need it to secure finance and build new capacity, but when you have a CFD the argument is, by and large, weakened. There is also a big intervention in the capacity mechanism. The time is therefore coming, if not now then very soon, for the issue to be properly addressed.
I want to say a word about Amendment 55AGA, to which the noble Lord, Lord Roper, has spoken. These proposals, though welcome, come quite late in the day. As has been mentioned, we have known about this problem for two years and yet here we are addressing the issue on the eighth day in Committee and on the final stretch. I think it was the noble Lord, Lord Jenkin, who said that it feels as though we are making things up as we go along. I would not say that it was as bad as that but it does feel as though these measures have been considered quite hastily. Making this a negative resolution risks the ire of the Delegated Powers Committee, which has not yet had a chance to consider it, and we strongly urge acceptance of Amendment 55AGA in order that we may properly scrutinise this complex and rather late addition to the Bill.
I should have said at the start that I want to pay tribute to my colleague, Alan Whitehead, in the Commons, who helped raise this issue. I apologise on behalf of my noble friend Lord Grantchester, who was going to speak to the amendment. He cannot be in his place today but he wishes us every speed.
I have explained why there is an issue and, in the spirit of collaboration and seeking to make the Bill as strong as possible, I should perhaps now explain what I think the solutions are. First, we know that the industry wants to find a resolution to this issue. It is very keen to work with the Government and would like to have proper consultation with the department. It has been mentioned to us that the organised consultation process was slightly opaque. I know that five of the renewables trade associations, as a group, have written to the department requesting more clarity in the consultation process around the detail of these provisions. They are worried about communications not being consistent and they are worried about the timelines. They need reassurances from the department and a clearer process of involvement.
Further to the point made by the noble Baroness, Lady Liddell, this should also include investors, who are absolutely at the heart of the issue. Clause 44 is about facilitating investment and not about liquidity, which is dealt with in Clause 43. It is very important that the consultation process fully involves the investors who will be necessary to get these projects under way.
I have not spoken about the GPAM alternative. I am not sufficiently across the details to know whether the GPAM is a better option than the backstop power but the wording of the government amendment limits the options. At the moment, Clause 44 gives a broad power to do what is necessary. The government amendments would remove that flexibility and narrow it down to the PPA. The PPA may be the right answer but I am not certain that that narrowing down is a good idea. I have been critical of the breadth of some of the powers but in this case, given that it is still in development and that consultation is necessary, I urge the Government to keep open the option of making a different type of intervention if necessary. That would tweak the government amendment. It is important that we do not put all our eggs in a basket that is still being made when we are not quite sure whether it will work.
The industry itself can find solutions. The big six are obviously dominant but there are other players such as independent suppliers who can give PPAs. Unfortunately, the creditworthiness of those suppliers is an issue.
Baroness Liddell of Coatdyke
My noble friend is right to draw attention to the fact that there are a range of different institutions that one can talk to. For some of us, one of the easiest things to do would be to have a cup of tea with the noble Baroness, Lady Armstrong, who until two weeks ago was the chairman of a community energy company that has just fallen off the cliff because of the attitude of a major generator. She, of all people, can tell us the view of the independent generators about this period of uncertainty, which is having an impact on people even as we speak. It is a small pro bono operation that has been jeopardised by the attitude of a major generator.
Baroness Worthington
I thank the noble Baroness for alerting us to that. As I was saying, there is clearly an issue and a need for intervention. There are existing alternatives for the independent generators. Perhaps one thing that we need to explore is how we can strengthen those independent suppliers. Ecotricity was a very good example. It was set up to build wind farms but found that the way that it could build its business best was to have a supply arm creating its own form of vertical integration. It is a way of creating more liquidity and plurality in the market to help those independent suppliers to buy from the independent generators. That seems logical, so perhaps we can explore how those can be better balanced.
There are also aggregators in the market. One problem that independent generators face is that individually they do not have the capacity to employ traders. The big six all routinely employ traders for all sorts of reasons, and that gives them a massive market advantage from being able to enter the various markets themselves. Aggregation and the provision of grouped trading services is necessary to help to support suppliers. That is another area that we could look at in more detail to see whether something needs to be done to make it more effective.
Finally, if we find, once the Bill is passed and we are on the road towards a low-carbon economy, that independent generators are simply not getting PPAs, we must make sure that we are monitoring the situation closely. I hope that the authority will be given a clear direction to be listening and asking what is happening in the market following the Bill's enactment. I shall end on a hopeful note. If it then transpires that that there is insufficient liquidity and PPAs are not being granted, perhaps the authority will accept that it has not done enough to generate competition in generation.
Baroness Worthington
I do not think it will be too late. The reason I say that is independent generators, as we have just discussed, are already quite substantial players; they are receiving revenue as we speak. This is about their forward plans and the investment in the future. They will not go bankrupt because we are not doing anything to affect their current investment base. We can overegg the problem. I have stated myself how important I think they are, but I do not think that they are going to disappear or go bankrupt, because they all own projects today.
I was slightly thrown by that intervention. If we find that there is a problem: that the liquidity is not there and the PPAs are not forthcoming, that signals that we have a further market reform to bring forward, which must look seriously at the pooling of power and the creation of a genuinely competitive market. That would be the real solution for giving everybody a fair market within which to operate.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, the issue of competition and, in particular, the route to market for independent renewable generators has been referred to throughout the Bill’s passage in this House and in the other place, and the debate has been equally eloquent and balanced today. There is good reason for that. I agree with noble Lords: independent renewable generators have a significant pipeline of projects across the UK and bring essential competition, innovation and diversity to the energy market.
The Government recognise that in recent years it has become harder for independent renewable generators to secure power purchase agreements on bankable terms. We judge that several of the factors currently constraining the market will be resolved by the introduction of CFDs, but some issues may continue to limit competition for long-term PPAs after CFDs have been introduced.
My officials have worked very closely with industry to prepare the market for the CFDs. We have already established industry working groups to develop PPA structures that will be fit for purpose for the new market arrangements and a code of practice for those participating in the PPA market. Those will help new entrants and smaller generators to navigate the process of negotiating and securing PPAs. However, the Government have decided that it is necessary to provide further confidence for developers and investors by tabling amendments to the existing powers in the Bill.
I am very pleased to hear a welcome from noble Lords from across the Committee for the amendments. They will enable the establishment of a power purchase agreement scheme which could provide generators with access to an off-taker of last resort. This mechanism would be similar to that outlined in my noble friend’s Amendment 55AB. In the light of the Government’s amendments, I hope to reassure my noble friend and other noble Lords that these issues are being addressed.
Lord Kerr of Kinlochard
Before the noble Baroness sits down, will she explain again why she rejected Amendment 55AFB in the name of the noble Viscount, Lord Hanworth, which would have inserted in government Amendment 55AF a reference to current market prices? I find my entry in the Register of Interests extremely misleading because it should imply competence to deal with this Bill, whereas I find it extremely hard to penetrate. However, I would have thought that over time the PPA must bear some relation to market prices. It cannot be set for all time, surely. The Minister seemed to be saying that it was important to give the certainty of a fixed price. That would mean a variable degree of subsidy, depending on what was happening to the actual price in the market.
I also have some difficulty with Amendment 55AB, introduced so impressively by the noble Lord, Lord Roper. I find it difficult to get away completely from the idea of efficiency being a criterion as well as independence. All the emphasis on the ability to borrow in the markets or from the banks and thus to have the certainty of a demonstrably viable price seems to take us far away from the market and questions of efficiency, although I am all for encouraging independent generators. However, the Minister’s rejection of Amendment 55AFB really puzzles me. Surely there must be some relationship with current prices in the market.
Baroness Verma
My Lords, I will respond to the noble Lord, Lord Kerr, on Amendment 55AFB in a moment but, first, I will reply to some of the other questions that have been posed.
I reassure noble Lords that we have had a reasonably positive response to our amendment from stakeholders, including RUK, RES and the Renewable Energy Association, although I recognise that there is a lot more work to be done. We will be working very hard with the industry and other stakeholders to make sure that we have a bankable solution. The noble Baroness, Lady Liddell, asked what I would be doing during the summer, and this will be one of my tasks.
My noble friend Lord Deben was absolutely right when he said that we need to be absolutely sure that we are able to explain our intent clearly. I hope that I will be able to reassure him that I will continue to work before Report to ensure that our proposals are understandable and available to the market. Like all noble Lords, I feel that this is an incredibly complex and complicated area, so it is absolutely right that we are able to explain ourselves very clearly.
All noble Lords said that it has taken us a long time to get to where we are. However, it is a complex issue. We launched a call for evidence last July regarding the introduction of backstop powers in the Bill in November, and we have brought forward amendments. We want to work very closely with the industry to develop further proposals and we will be consulting in the autumn. However, in all this we need to make sure that the independent operators feel that they have a large stakeholding and that they are being responded to.
The noble Lord, Lord Cameron, asked why we do not keep GPAM in reserve as the NFPA already exists and has proven to work. The NFPA is not suitable for GPAM. The nature and scale of projects under GPAM are very different and would need a very different type of action, so there would not be a natural transfer across.
In response to the intervention of the noble Lord, Lord Kerr, concerning Amendment 55AFB, the PPA price would be set at a fixed discount to the market price, but the discount itself would not be set by reference to the current market. Does that make sense?
Baroness Verma
Did it not make sense? Perhaps I will get a little more inspiration while I finish reading my notes.
The noble Baroness asked whether Ofgem or some other body would keep the market under review. Yes, Ofgem will use existing powers to review it so as to make sure that it is working.
Finally, the noble Baroness, Lady Worthington, referred to the green growth figures. We are really pleased to see that they are growing, given the drop-off in the economy. I know that she and I and other noble Lords agree that we need to trumpet it at every opportunity. I hope that I do, because I think it is absolutely excellent news and one of the core strands of the department is the green growth agenda, which we are trying to build on. There are 1 million plus jobs supported by the green economy. That is on a par with financial services, and we have enormous scope to develop that. I very much agree with the noble Baroness, Lady Worthington, on that.
Baroness Worthington
It is probably a question of our understanding more clearly how the price setting might be derived. Under government Amendment 55AF, two processes are set out in subsection (6). One is a process involving a determination and the other is by an auction or competitive process. I think that the noble Viscount was simply asking to insert a reference to current market prices. Perhaps a letter clarifying new subsection (6) would be helpful to everyone.
The government amendment removes some of the flexibility currently in the Bill by providing under Clause 44 that the backstop PPA is the only policy, whereas before it was broader. I reiterate the comment that, given that this is a moving piece, it might be sensible to retain a little flexibility.
Baroness Verma
I thank the noble Baroness for that. I recognise the concerns that noble Lords have rightly shown. We are keen to see greater competition and choice in the market. As I said, through the summer we will be looking at those issues in much more detail and working with stakeholders.
Further to that, I hope that my explanations have been persuasive enough for noble Lords not to press their amendments and to support the government amendments.
Lord Roper
My Lords, I am very grateful to all those who have taken part in what I believe has been a useful and constructive debate. There are three things on which we all agree. First, we all agree that it is difficult to find an effective system to achieve something which we believe should be achieved. Secondly, we are grateful that the Government have moved and produced the set of amendments which they tabled last week on the backstop PPAs, even if we find them somewhat difficult to understand in their detail. Thirdly, we agree that there is still much to be done to get a workable and straightforward system.
Although the noble Baroness, Lady Liddell, is, alas, not with us at the moment, I reinforce what she said about the importance of having a clear position on the road to market set out to reassure the independent generators and enable them to get access to the capital which is clearly essential if we are to have continued growth. We will probably continue to disagree about “duty” or “power”, but we have already considered that in other places. The point that the noble Baroness and others have made is that whereas it may be necessary for it to be here now, there may be a time when it will not be necessary and that duty may be a somewhat unsatisfactory constraint on the Secretary of State.
My own preference, if it can be worked out satisfactorily, is that the backstop PPA probably has advantages over the GPAM. However, because we are not certain that one will be able to develop a satisfactory backstop PPA, the proposal in the amendment in my name and that of my noble friend and others is probably advantageous because it gives us a reserve power.
On two of the other points raised by the Minister as to whether GPAM would require a backstop, there are obviously different views. The independent generators’ bankers tell them that it is necessary for the GPAM to be in existence for the whole period of the CFD rather than having a backstop. However, that is a matter on which there is more than one view and it will need to be considered.
I will need to be sure—we do not have time today—that the example given by the noble Lord, Lord Cameron, of the existing role of the NFPA and the possibility of it being developed into a GPAM did not have rather more to it than was suggested by my noble friend the Minister in her reply.
I am grateful for what the Minister said about Amendment 55AGA and I am glad that the Government will look at it with care between now and Report.
I hope that by the time we come to Report we will have a clearer picture of what is likely to be on offer. It is therefore my pleasure to withdraw my amendment at this stage but I fear that we may find ourselves debating this matter at some length later in the year.
Lord Roper
“(d) conferring on the Secretary of State further powers to require operators of generating stations which use woody biomass fuel to provide a fuel supply strategy for approval by Ministers.”
Lord Roper
My Lords, in the absence of my noble friend Lord Jenkin, I shall move the amendment on his behalf.
My noble friend tabled this amendment earlier this month after discussions with the Wood Panel Industries Federation about the impact of the purchase of biomass upon the supplies of UK-grown softwoods and the viability of the UK-based wood processing companies which make materials such as MDF, chipboard and oriented strand board. Their worry arises because the current subsidies to wood-burning power plants make it increasingly difficult for member firms to compete for supplies. There are no subsidies available for them. They cannot afford to import supplies as it is uneconomic to transport saw wood because of its high water content and they are finding it increasingly difficult to compete. If this industry is driven out of business by the competition from biomass power stations it will be, in their view, difficult to ever revive. They see themselves as having far less influence than the major energy firms in their representations to government.
Interestingly, in Scotland the devolved Government have introduced a cap on support for dedicated biomass plans above 15 megawatts and have used planning restraints to restrict domestic wood use. If energy generators in England were required to provide a domestic fuel sourcing plan for approval by Ministers, this would give a far stronger reassurance than is conferred by any voluntary statement of sourcing intent. That is what the amendment of my noble friend Lord Jenkin is intended to secure. I beg to move.
Lord Deben
My Lords, I think it is valuable that my noble friends Lord Jenkin and Lord Roper have put this amendment forward. Although I do not support its content, it is an important subject to have raised briefly in this Committee. One difficulty that we have to face is that the way that renewable materials are considered alters very quickly. There was a time when people talked about biomass as though it was the solution to everything. They hardly ever spoke about biomass without saying how wonderful it was. Then we saw the pendulum swing to the other end and no sort of biomass was acceptable to anyone. There was always some good reason why it was not acceptable. In rather a long life, I have usually found that neither of those two positions is a good place for the pendulum, although somewhere in the middle is.
However, there is a central issue which goes beyond biomass. It is illustrated by a circumstance in my own county of Suffolk, where the local council has just turned down a request to build a waste-to-energy installation using straw. The argument against it was not an environmental one. It was a genuine argument about whether it and other straw-burning waste-to-energy installations would have such an appetite for straw locally that the price for straw would increase because of the subsidy structure. The other uses of straw in the area, which were very significant and led to opposition to the installation from pig farmers and others, meant that the planning committee had to say that it did not see that this was the right answer. I am not at all sure that that was the planning reason that it gave, because planning is a rather complex matter, but that was certainly what the argument was about.
I hope that this Committee, the Standing Committee and our future discussions in your Lordships’ House can lead the charge for having sensible discussions about environmental matters and not arguments between those who believe in things and those who do not. Very often, the decision and the choice come somewhere between the two, and this issue illustrates that very well. It is perfectly possible to be an enthusiastic environmentalist determined to combat climate change but to say that a particular straw-burning installation in a particular place is not the answer. The same applies to biomass. However, that does not mean that you are taking a nimby attitude. I am not talking about people objecting to something because it is near to them; I am talking about having more serious discussions about individual issues than is often allowed simply because the two sides clash and the space in between is not available for intelligent debate.
On this matter, it is important that two things are taken into account. First, how does the subsidy—that is what it is—affect other industries; and are there circumstances in which we should look at that carefully? Secondly, how do we make sure that the subsidy is in support of biomass which is properly sourced? I do not want this particular solution although there is a bit that appeals to me: we should make sure that people do not use biomass that has a bigger carbon footprint than what it is replacing.
As chairman of the Committee on Climate Change, I recently received a delegation from America, which is exporting a lot of pellets into this country. I found the discussion rather embarrassing because, when I said to the people concerned, “Tell me, is this certified?”, they said, “Yes”. I asked, “By whom?”, and they replied “By us”. I said that I thought that certification ought to be a little more arm’s length than that. They claimed that all this stuff came from certified forests but I think that there is now some pretty good international measurement that enables one to decide whether “certified” means “certified” or whether it means, “This is a label that we like putting on it because, if we don’t, nobody will buy it”, which seemed to me closer to what they were actually saying.
It is important that we should raise this issue, both for the specifics of the amendment and to say to my noble friend that this is an area—I know that she understands this—where we are all concerned not to restrict biomass in such a way as to lose the real advantages, but not to extend it so that it becomes a front for a worse attitude towards the environment than that represented by the fuels it replaces.
Lord Whitty
My Lords, the noble Lords, Lord Jenkin and Lord Roper, have raised an interesting point. I was going to support the amendment, at least in principle, but for rather wider reasons than those that the noble Lord, Lord Roper, advanced or, indeed, some of the points that the noble Lord, Lord Deben, made. The arguments are sometimes between one group of environmentalists and another and they are sometimes between one vested interest and another. We have been through the same cycle or swing on liquid biofuels. I am not sure where the pendulum will end up on that—there has been a significant intervention, which I was partly involved with in my previous capacity in government.
This is a difficult issue. The amendment asks the Secretary of State, first, to look at it carefully and, secondly, to ensure that the users of biomass as a feedstock have obligations to consider the nature of the supply chain and how far it saves carbon. Even in the best of circumstances, biomass in the broadest sense—it covers a multitude of very different forms of feedstock, from food and farm waste to bespoke forestries that are grown for this purpose on the other side of the world—is, even conceptually, a rather long form of sustainability. You chop down one tree and another one grows, so that in 50 years’ time you have replaced the first one. That is not necessarily the same as some forms of feedstock where the carbon content is low or nil immediately. With biomass, there is a carbon emission. It is therefore important that, in this whole approach, we look at what form of biomass we are using, where it has been sourced from and what it displaces—I had not thought of the softwood argument or the straw argument, although I seem vaguely to remember a similar case not so long ago.
As for displacement on a global scale, I was also thinking about growing bespoke crops in ground that would otherwise be for food, whether in the third world or whether sugar beet, for example, in the UK. It is a big question. At the moment, there is no requirement either on the Government or the regulators and counterparties to look at that aspect. There is also no obligation on the generator proposing a biomass project to look at these issues. The amendment at least gets us into that important discussion.
On some of the figures that the Government have produced—I am not quite sure in which context—we have looked at the early, phase 1 proposals for green energy, of which there is in total 18 gigawatts. Some 5.3 gigawatts comes from six projects for biomass conversions—from fossil fuels to biomass in part or in whole—and another 0.6 gigawatts comes from biomass CHP projects. Therefore, a third of what is currently being proposed upfront regarding all the technologies is biomass. It is much larger than onshore wind in this context, so this will be an important issue. Money is being invested in it and expectations are being raised as to how it will perform. Therefore, what appears to be a simple and modest amendment in the names of the noble Lords, Lord Jenkin and Lord Roper, opens up a wide field. We will not resolve this issue today and we may not even resolve it in the course of the Bill. However, the department, those who enforce the regulations and those who propose biomass projects will have to explain in rather more detail how they are sourcing this, what the effects of sourcing it will be and what the effect on carbon emissions will be. If something like this amendment were accepted by the Government, we would at least get into that discussion. I do not suppose that the Minister will accept the amendment, but it would be helpful if she would at least indicate that the department needs to take another look at this.
The Earl of Caithness
The more we look into this subject, the more complicated it gets. We should take seriously the points raised by the noble Lord, Lord Whitty. He mentioned converting land that is suitable for food crops to other uses. We know that in Brazil maize and corn are being used as fuel for cars. I wrote to Drax when I noted that it was converting three of its stations to biofuel production. Sub-Committee D was looking at energy at the time . The staff at Drax were very bullish and said, “This is a wonderful thing. It is all being grown overseas. It is all reputable and is being monitored very carefully. It will all come over in ships and everybody is going to be very happy”. Another point which has not been mentioned is that the amendment refers to “woody biomass” and if you take land out of agricultural production and convert it to timber production, that is a long-term and expensive operation. My noble friend Lord Deben mentioned straw, which is an annual crop but, as regards the sort of material that we are talking about, you are talking of a crop that could well be harvested in 40 to 60 years’ time. Intervening in such a market leads to complications. I am very glad that I am not the Minister who has to deal with this issue as it would cause me all sorts of nightmares, which just shows how very difficult this whole area is.
Baroness Maddock
My Lords, my arrival here was opportune, I think. Every day I look at the headlines in newspapers in the north-east. Today, one of them informs me that the Government have given the green light to a £250 million biomass power station at Blyth. I would be interested to know what criteria were used to decide whether this should go ahead, although I do not expect my noble friend to be able to tell me that now.
Lord Cameron of Dillington
I am sorry to add to the worries. I had not intended to intervene but it seems to me that, in spite of what the noble Lord, Lord Deben says, there is the possibility of unfair competition arising, particularly as regards timber used for building, and a subsequent increase in the cost of building houses, which is something I do not want to see. There is also the possibility of a higher carbon footprint arising from timber being sourced from the wrong place and in the wrong way, as several noble Lords have mentioned. The Government need to keep an eye on this. Therefore, there should be a mechanism to enable them to do so.
Baroness Verma
My Lords, I am extremely grateful to my noble friends Lord Jenkin and Lord Roper for tabling this amendment. It would give the Secretary of State further powers to require operators of electricity generating stations that use wood as a form of renewable energy to provide fuel strategies to the Secretary of State for review and approval, covering, for example, the quantity and country of origin of wood to be used.
I am grateful to noble Lords who have raised serious concerns. I appreciate the intention behind my noble friends’ amendment, which is to increase the control the Government have over the amount and kind of woody biomass which is used for electricity generation, and thus to minimise the potential impacts on non-energy sectors which use wood such as the wood processing and wood panel sectors. Indeed, it is a stated aim of the Government’s bioenergy strategy that support for bioenergy, including support for power generation from woody biomass, should consider the consequences of policy interventions on the wider energy system and economy, including non-energy industries. It is the Government’s view that where this and the other aims listed in the bioenergy strategy are met, bioenergy can make a significant contribution to meeting our renewable energy, energy security and emissions reduction needs at low cost. Bioenergy also has the benefit of being dispatchable, so can operate when required.
However, we are aware of concerns raised by several UK industries regarding the impact of biomass electricity on UK wood prices and have taken a number of measures to address this. Last year we took the decision to ask all large-scale electricity generators using woody biomass to disclose to us, on a voluntary basis, the amount of UK wood that they estimate they will procure and use over the next five years. We require this information to be signed off by the company’s board. We are pleased to say that all the operators responded to our request and provided this information, which the department has aggregated and will publish shortly. We will write to the electricity companies again this year with the intention to make the fuel disclosure a yearly practice.
Generating stations operating under the renewables obligation are also required to provide annual sustainability reports on biomass use. This includes the information held by the operator on the tonnages and types of biomass used—for example, whether that be woodchip, sawdust or energy crops—and whether the fuel came from a source which complied with an environmental standard. Ofgem publishes this data each year, and DECC will publish aggregated data.
Lord Deben
I assure my noble friend that the industry realises how strong the powers are. That was the reason for the visit of those Americans, who did not like those powers. Also, the Committee would want her to know that we have all experienced businesses who claim that they are in trouble from some government action when in fact there is an entirely different reason. I remember the oleochemical industry made a great deal of fuss about government environmental standards when in fact it had every intention of moving abroad in any case and just wanted somebody to blame.
Baroness Verma
Of course, my noble friend is far more experienced in these matters than I and I am always open to learning from him.
These sources of data have confirmed the forecasts for UK wood use made in the renewables obligation banding review last year, which did not conclude that demand for UK wood for electricity generation would have significant detrimental impacts on other wood-using sectors. That was mainly because we estimate the vast majority of biomass for power to come from imports from countries such as the United States—to which my noble friend Lord Deben referred—which have larger forestry industries and whose companies are able to give power companies the long-term fuel contracts they need. Given the analysis undertaken for the bioenergy strategy and the renewables obligation banding review, and given the latest data we have on demand for wood for electricity, currently we do not see sufficient need to add the new regulatory burden proposed in this amendment on the electricity industry.
The amendment would introduce a new layer of complexity and potential for delay and uncertainty in developing both potential new generating stations and existing plants. It would also be likely to reduce investor certainty in the sector, introducing questions around disqualification from support under CFDs, should the Secretary of State not like a plant’s proposed fuel strategy. Establishing the basis on which a plan is judged satisfactory would be complex and open to legal challenge. Furthermore, the voluntary approach that we have taken is a light-touch regulatory approach that has delivered to us the information we need. We have used this industry-wide data to help develop the sustainability criteria framework on which we have made the proposals. This includes strengthening further some of the reporting requirements.
With these actions, I hope noble Lords will see that the Government are taking this issue seriously and are keen to continue to work with the wood processing and other sectors to give them further confidence that non-energy sectors should not be significantly detrimentally impacted by energy policy.
The noble Baroness, Lady Maddock, asked about Blyth power station. Perhaps I may write to her and the Committee with the details.
I hope that my noble friend Lord Roper finds my explanation at least partly reassuring and on that basis will withdraw his amendment.
Lord Roper
My Lords, I am grateful to all those who have taken part in this useful debate and to those who widened it from the relatively limited topic in the amendment I moved on behalf of my noble friend Lord Jenkin.
I find a certain degree of reassurance in the Minister’s remarks about the returns which are made on a voluntary basis and the publications on sustainability which are made on a regular basis by Ofgem. My noble friend Lord Jenkin will read the report of this debate in Hansard and will have to consider whether or not he wishes to return to this subject on Report. He may well be reassured by the Minister’s remarks. Meanwhile, I beg leave to withdraw the amendment.
Baroness Worthington
Baroness Worthington
My Lords, today the Committee started with a discussion around transitional arrangements for renewables because of the grouping of the amendments, but the part of the Bill we are still debating includes reference to the contracts for difference and the detailed ways in which they will work. Clause 17 is interesting in that it gives the Secretary of State a power to set by order both a maximum amount of money that can be spent on contracts for difference and also, under subsection (4), a provision to include targets.
I have spoken both at Second Reading and in Committee about my concern that we are potentially entering into a great politicisation of energy policy with this Bill. We are, for good reason, proposing to move towards a much more administratively complex and centrally controlled system for allocating funds to low-carbon projects. There are reasons for that and we support the broad principle. However, the Government have been quite clear that this is a temporary transitional arrangement and supporting documents have referred to the fact that this will ultimately transition to a competitive system where, through technology and blind auctions, CFDs will be allocated in an administrative way with far less central control. Given that that is where we are trying to get to, I am concerned that we should not unnecessarily constrain this transitional period by a system of micromanagement which we are unlikely to get right.
The deletion of subsection (4) would remove the power to make targets for the means by which electricity is to be generated—that means the type of electricity generation—and remove the risk of the scale of generating capacity being unduly split up. The definition of “eligible generators” will be set by order. I think that that is correct. I do not see why you would want to have specific targets by scale.
Thirdly—and this is potentially the most worrying aspect—the Secretary of State may wish to make targets by geographical location. I am not saying that this is what would happen, but it is obvious that that holds the potential for a huge degree of politicisation of energy. If a Government are strong or weak in a particular region and wish to direct generating capacity into that area, for whatever reason, this would enable that to happen. We do not want to go back to the bad old days, whereby, to win a seat, you might want to boost a few jobs and put a power station there. That seems to be retrogressive. You could also lose your seat by doing that, it is true to say. It works both ways. However, I should be interested to hear the rationale from the Minister as to why geographic targets would be necessary. I am also nervous about undue micromanagement in terms of targets, sub-targets and sub-targets of sub-targets. We have had some experience of that already, with both the RHI and the FIT schemes having very targeted small allocations of pots of money to be spent on different types and scales of technology. Everyone with whom I speak in the industry is heartily sick of that, partly because it is almost inevitable that those targets will be wrong. The market finds the solutions according to its internal logic, and it is very difficult for civil servants to guess at that.
I am very nervous about the sub-division of the levy control framework into small, tight pockets of money where, if it is anything like the RHI and the FIT schemes, digressions will be introduced. If a certain type or scale of technology delivers, those digressions will hit and the market can be pulled away quite rapidly. We are seeing that with the solar feed-in tariffs at the moment. There is a great fear that, if the mid-size solar projects took off, they would immediately hit a digression and the market would disappear. Therefore, there is a very good reason to be nervous about micromanagement in this context.
Nor do I think that this measure can work in practice. The levy control framework is a seemingly fixed amount of money, but the levels of spend that will come through the CFD is not fixed, so you cannot estimate how much money will go to different projects until you know the difference between the reference price and the strike price, and that will come only with time. I am nervous about the levy control framework anyway, but I am even more nervous of one that is divided and sub-divided down into ever smaller pockets, because that will create a great deal of uncertainty in the market and has the potential to disadvantage rather than reward winners. Let us be honest—we want the market to uncover the most successful projects—the ones with the best chance of delivery. If, every time a sector or sub-division shows that it is being successful, it has its funding taken away or cut, that is not really a way to build an industry. That is why we have tabled the amendment. I admit that it is a probing amendment but this is a serious issue in relation to how CFDs will operate. I look forward to hearing the Minister’s comments.
Baroness Verma
My Lords, I thank the noble Baroness for her amendment. It seeks to remove Clause 17(4), which sets out a list of those things for which the Secretary of State might wish to set targets and which National Grid should take into account when allocating CFDs.
The Government intend to use CFD strike prices as the principal mechanism for bringing forward sufficient quantities of low-carbon generation under their electricity market reforms. Draft strike prices have now been published in the draft EMR delivery plan. The Government have also taken powers within Clause 17 to help to give effect to our wider objectives in meeting our 2020 renewables target, delivering a diversified generation mix and bringing forward new and innovative technologies.
The intention of including this subsection was to reassure industry and others about the aims of this clause and to provide some examples of how they might be used through the provision of a non-exhaustive list. Any such targets would be outlined in the final EMR delivery plan later this year, or in subsequent annual updates. As part of that, the Government might wish to set the targets in relation to the means by which electricity is generated to facilitate the development of marine and tidal or carbon capture and storage technologies—technologies with the potential to play a significant part in the UK’s generation mix in the longer term but which might otherwise be unable to compete on price with more mature technologies.
The Government have no current plans to set targets relating to the generating capacity of electricity generating stations. However, we might wish to do so in future if we believe that that is necessary to send a clear message to the supply chain to encourage investment in infrastructure supporting the delivery of a particular technology. The Government may wish to set geographic targets for a number of reasons. For example, we are considering whether renewables trading may be used to help to achieve our renewable and decarbonisation objectives, and setting geographical targets may support that.
It is important to make it clear that the Government do not intend to use that power to interfere with local planning decisions, and we have no current intention to use the power to restrict or require the allocation of CFDs in particular locations within or outside of the UK. We believe that the inclusion of the list within the clause promotes clarity and transparency, providing market participants and investors with additional information which helps them to make their investment decisions. Removal of the subsection may increase industry’s perception of risk, as it would appear to widen the scope of the clause. Industry feedback has been positive about the fact that we have sought to give strong indications of how we might use the power in the Bill, although it recognises that this is a non-exhaustive list. The users we have described are understood by industry.
I recognise the concerns of the noble Baroness, Lady Worthington, but I hope that the reassurances that I have given her will persuade her to withdraw her amendment.
Baroness Worthington
My Lords, I thank the noble Baroness for her response, which gives a degree of reassurance, certainly on the geographical location. I wonder whether a tighter wording might have allayed fears. If it is indeed to do with whether locations are outside or inside the UK, that is very different from a broad definition of geographical location.
I still have concerns about the need for the targets. Will they be legally enshrined in secondary legislation? If so, that seems slightly too restrictive. Perhaps people in the industry at the moment are reassured, but in a year or two, when parts of the levy control framework have already been used up and certain subsectors are feeling that their targets are too low, that sentiment could quickly change. I am just thinking of the bids that we have already had for the investment contracts. We already have a number of biomass conversions and a large number of offshore and onshore wind projects. What happens if more projects come later down the track when those bits of the targets have been used up?
I am just trying to think through how this will work in practice. I know that it is only a power that is being taken and that the Government may not necessarily use it, but I urge against too much micromanagement and too much setting of targets in secondary legislation. We may come to regret that; it may well push up the cost to consumers. The noble Baroness has spoken eloquently in favour of keeping costs low. The market will seek out the least-cost solution. I would be wary of too much intervention or of trying, as the noble Baroness mentioned, to support a particular supply chain or a particular technology. The more this comes naturally from the market, the more sustainable it will be. On that basis, I am happy to withdraw the amendment.
Baroness Verma
(3) For the purposes of this section and section (Power purchase agreement scheme: regulations)—
(a) a power purchase agreement scheme is a scheme established by supply licence conditions and regulations under section (Power purchase agreement scheme: regulations) for promoting the availability to electricity generators of power purchase agreements, and(b) “power purchase agreement” means an arrangement under which a licensed supplier agrees to purchase electricity generated by an electricity generator. For this purpose, “supply licence condition” means any condition, document or agreement of a kind mentioned in subsection (1).(4) Provision that may be made under subsection (1) in relation to a power purchase agreement scheme includes provision—
(a) as to the eligibility of an electricity generator to enter into a power purchase agreement under the scheme;(b) as to the terms of any power purchase agreement to be entered into under the scheme, including provision—(i) for determining the price at which electricity is to be purchased under the agreement;(ii) as to the duration of any such agreement;(c) as to the circumstances in which a licensed supplier is or may be required or permitted to enter, or offer to enter, into a power purchase agreement under the scheme;(d) for the provision of information in connection with the scheme.(5) Provision within subsection (4)(c) includes provision for determining which licensed supplier or suppliers is or are to be required or permitted to enter, or offer to enter, into a power purchase agreement with an electricity generator in any particular case.
(6) Such provision may in particular include provision for the licensed supplier or suppliers in question to be determined—
(a) by a process involving a determination or determinations by one or more of the following—(i) the Secretary of State;(ii) the Authority;(iii) the electricity generator;(b) by auction or other competitive process;and provision that may be made by virtue of paragraph includes provision as to the circumstances in which a licensed supplier is or may be required or permitted to participate in an auction or other process.(7) For the purposes of this section and section (Power purchase agreement scheme: regulations), “licensed supplier” means the holder of a licence under section 6(1)(d) of EA 1989.”
Baroness Verma
“Power purchase agreement scheme: regulations
(1) The Secretary of State may by regulations make provision, in connection with any modifications made under section 44, for or in connection with a power purchase agreement scheme.
(2) Any such regulations may in particular—
(a) make provision for apportioning amongst licensed suppliers, or any of them, all or any part of the value of any or all of the costs or benefits of any licensed supplier in connection with the scheme;(b) confer functions on the Secretary of State or the Authority (which may include provision for directions to be given to the Authority by the Secretary of State);(c) make provision for the delegation of functions conferred on the Secretary of State or the Authority by the regulations or by virtue of section 44;(d) include provision for obligations imposed by the regulations on licensed suppliers to be enforceable by the Authority as if they were relevant requirements on a regulated person for the purposes of section 25 of EA 1989; (e) make provision about the provision of information in connection with the scheme.(3) Provision that may be included in regulations under this section by virtue of subsection (2)(a) includes, in particular, provision—
(a) for requiring licensed suppliers to pay a levy to the Authority at specified times;(b) specifying how such a levy is to be calculated;(c) conferring an entitlement on a licensed supplier to receive a payment from the Authority.(4) Provision which may be included in regulations by virtue of subsection (3)includes provision for the Secretary of State or the Authority to determine what is to be taken into account as a cost or benefit of any licensed supplier in connection with the scheme and its value.
“(5) Regulations under this section may—
(a) include incidental, supplementary and consequential provision;(b) make transitory or transitional provision or savings;(c) make different provision for different cases or circumstances or for different purposes;(d) make provision subject to exceptions.(6) Before making any regulations under this section, the Secretary of State must consult—
(a) licensed suppliers,(b) the Authority, and(c) such other persons as the Secretary of State considers it appropriate to consult.(7) Subsection (6) may be satisfied by consultation before, as well as by consultation after, the passing of this Act.
(8) Regulations under this section must be made by statutory instrument.
(9) An instrument containing regulations under this section is subject to annulment in pursuance of a resolution of either House of Parliament.”
Baroness Verma
“Power purchase agreement scheme: disclosure of information
In section 105 of the Utilities Act 2000 (general restrictions on disclosure of information)—(a) in subsection (1)(a), after “2010” insert “or section 44 or (Power purchase agreement scheme: regulations) of the Energy Act 2013”;(b) in subsection (3)(a), after “2010” insert “, sections 44 to (Power purchase agreement scheme: regulations) of the Energy Act 2013”.”
“Principal objective and general duties: power purchase agreement scheme
Sections 3A to 3D of EA 1989 (principal objective and general duties) apply in relation to functions of the Secretary of State or the Authority conferred by or by virtue of section or (Power purchase agreement scheme: regulations), or section so far as it relates to a power purchase agreement scheme, as they apply in relation to functions under Part 1 of that Act.”
Lord Whitty
“( ) Renewable Obligation Certificates (ROCs) will continue to be available to new and existing developments for 36 months following the introduction of regulations under section 6 of this Act.”
Lord Whitty
My Lords, we have jumped to the transitional arrangements for the move from ROCs to CFD. This is an incredibly complex clause about how that will happen. I have refrained from trying to alter the main parts of the clause because a lot of work has obviously been put into it. Effectively, those who have ROCs will at some point have them exchanged for fixed-price contracts, which may run until 2027. At that point, they will have to be sold back to the purchasing authority, which, in principle I suppose, is Ofgem, but could be the counterparty or the Secretary of State. Alternatively, they could be sold in the market and then sold back to the system. ROCs or their like-for-like replacements will be around for some time, but only those that apply to existing projects.
We spent some time discussing the dynamics of much of the renewables industry and how we have achieved growth rates and advancements; we were all complimentary about the dynamism of the sector. It is also true in many cases that the dynamism of the planning system, and of getting the supply chain and sometimes investors in place is not quite as nimble as that of the entrepreneurial skill being shown in the renewables sector itself. In the pipeline, therefore, are lots of projects whose economics and financing started by being based on the expectation for ROCs and whose investors have invested on the expectation of a ROCs system applying to them.
At some point, the Government have indicated that no new ROCs-based projects will operate beyond 2017. That, however, does not appear to be reflected in the legislation, as far as I can see—certainly not in the rather lengthy Clause 46. However, some projects whose calculations and return on investment will have been based on ROCs provisions will come on stream between now and 2017.
This amendment attempts to put into legislation the fact that there will be three years of overlap, with a ROCs system running in parallel with the new CFD system—or probably the investment contracts system and then the CFD system. I know that there is a horror in DECC about running different subsidy systems in parallel. I have never quite understood why the department has such an absolute objection to that, as some schemes are more appropriate under, say, feed-in tariffs than they are under ROCs and some will be more appropriate under the new regime.
The amendment simply attempts to say that there will have to be a period when projects that have been in the pipeline for some time on the basis of ROCs are still allowed to start on ROCs and to get into the system. That is all the amendment suggests and I think that it reflects what the Government have, in one sense, already said—that when the Bill comes into effect some time next year, there will be a three-year overlap period. However, we would like to see that in legislation. Some of these projects are now causing anxiety and hesitation because people do not know what will happen, and some investors are getting nervous and projects are being stalled as a result. Therefore, we would like to see that written in and we would like confirmation that that is indeed the Government’s intention. I beg to move.
Baroness Verma
My Lords, I am most grateful to the noble Lord, Lord Whitty, for his amendment but I hope that in a few moments I will have convinced him sufficiently to withdraw it.
Amendment 55AJA would require the transition period, when new renewable generators will have a choice of scheme between the renewables obligation and the CFD, to last for a minimum of three years. Our long-standing intention is that the RO will be closed to new generation from 31 March 2017 and that the new support mechanism, CFDs, will be introduced next year. This will deliver the new mechanism well in advance of the closure date of the RO and provide a suitable transition period when investors can choose between either mechanism.
Our priority in providing this transition period and the choice between support schemes is to promote investor confidence and certainty, and to ensure that there is a smooth shift from the renewables obligation to contracts for difference. The amendment would require the RO to be kept open beyond the intended closure date of 31 March 2017. The design of the RO is based on the setting of an annual obligation, which determines RO expenditure for each financial year. This means that closing the RO at a random or uncertain point during a financial year is inadvisable. A minimum transition period, such as the noble Lord proposes, would in practice be likely to mean keeping the RO open to new entrants until 31 March 2018.
Such an extension would increase costs to consumers. More generators would be able to make use of the less efficient support that the RO provides for an additional year, rather than seek support under CFDs. This would undermine the overall transition to EMR and could have an impact on the UK’s ability to meet our 2020 renewables target. Because the RO is a less efficient mechanism than CFDs, we would be able to afford less new renewable capacity in total, which I know is not the outcome that the noble Lord intends.
In addition, investors accredited after 31 March 2017 would get less than 20 years’ support, as the RO final end date is 31 March 2037. Keeping the RO open after 31 March 2017 would mean that we would need to hold a further review of RO support levels for the period beyond that date. That would also have an impact on investor certainty, as it would take time before they knew what the RO support levels were after 31 March 2017.
However, I appreciate that the closure of the RO to new generation has been of concern to some investors. The Government have listened to those concerns and, as part of the RO transition consultation launched on 17 July, we confirmed that we will offer grace periods for those generators aiming to accredit under the RO before the closure date. Generators eligible for grace periods will be able to get RO support even if they do not commission before 31 March 2017. We are consulting on the length of grace periods and on the eligibility criteria. The principles proposed in the consultation are that the eligibility criteria must be straightforward to prove and assess, and must be consistent with the intention to transition to CFDs. That will ensure that grace periods are available as needed to ensure investor confidence but do not involve an outright extension of the RO. To help investors we announced CFD strike prices ahead of schedule and published the draft delivery plan for consultation last week.
We remain committed to implementing EMR next year and providing a suitable transition period—currently over two and a half years. There has been six years’ advance sight of the timing of the RO closure to new generation. We are consulting on grace periods to address any remaining concerns about the timing of closure. In contrast, setting a minimum term for the transition period within the Bill might have adverse effects that greatly damage investor confidence. I have listened carefully to the noble Lord and will read Hansard line by line to make sure that my explanation satisfies him. At this point, I hope he will withdraw his amendment.
Lord Whitty
My Lords, I thank the noble Baroness for that reply. It gives me some comfort but there are a number of uncertainties on both sides here in the sense that those behind some of these schemes thought that they would be commissioned at an earlier date than they will be, so their calculations are based on that earlier date. The Minister is clearly right to say that we had six years’ sight of ROCs ending but we have not had six years’ sight of what will replace them. Therefore, decisions were made on the ROCs system or something very like it operating until that point. I would not like to see a delay because of a planning appeal, or some other reason why the commissioning date slips, which might have a detrimental effect on some very good schemes in the pipeline that we would wish to encourage.
I am heartened by the noble Baroness’s reference to grace periods. I will look at the consultation document more carefully. Although I knew it was issued last week or the week before, I was not clear that it would affect this so directly. That would give some comfort. I hesitate to mention it, but there is a possibility on the other side, namely that the introduction of CFDs, or the clarity of what the choice might be between ROCs and CFDs, might be delayed. An issue I have not mentioned since Second Reading must still slightly worry the Government: we have not cleared any of this through state aid. Were there to be a delay on that, a lot of the dates would have to slip whatever was written in legislation. While I was mainly concerned about delays in projects based on ROCs, there is the possibility of delay on the government side, which none of us wants to see. That would also have consequences for the way we deal with those projects in the pipeline.
I got sufficient comfort from the Minister to withdraw the amendment at this stage but I put that slight warning light in our minds. We may well have to return to the more general subject on Report, by which time I hope the Government have something positive to say on it.
Lord Stephen
Lord Stephen
My Lords, in moving Amendment 55AK, I wish to speak also to Amendment 55AL, both of which stand in my name and that of the noble Baroness, Lady Worthington. In doing so, I refer to my entry in the Register of Interests.
This matter follows on from the discussion we have just had involving the noble Lord, Lord Whitty, who raised important issues to do with the transition from the renewables obligation to contracts for difference. It is not an understatement to say that there is huge concern in certain sections of the renewables industry about this issue. Those sections of the renewables industry are important as they will be relied on to deliver the very major increase in renewables generation that the Government are hoping to see by 2020, given the £110 billion of new investment and the huge increase in renewables capacity. For example, the latest renewables statistics talk about offshore renewables generation rising from 3 gigawatts today to 18 gigawatts in 2020. That is 15 gigawatts more in a difficult offshore environment. Taking early final investment decisions will be crucial to the construction and commissioning of that generation. The onshore figure of 6 gigawatts today, which is double that of offshore, rises to 13 gigawatts by 2020, which, again, is a very major increase.
One of the purposes of tabling these amendments is to help the Government to deliver their policy in this area given that they are clear that they want to deliver this increase in generation and want to provide certainty. Indeed, they have made helpful and supportive statements on these issues. Timing is very important here as regards secondary legislation. It was encouraging to hear the Minister talk about the consultation document that has just been published. However, that consultation will take time and then further time will be taken in making decisions. It is intended that these decisions will be implemented not through primary legislation but through secondary legislation. Because of that, and the uncertainty over the state aid issue, it will take some significant and powerful signals from the Government to ensure that the final investment decisions which are so crucial to achieving these targets are kept on track. That is the background to the matter. We must ensure that this transition from the renewables obligation to contracts for difference is as smooth as possible. I think many of us here would rather that it had all happened two, three or even more years ago so that it did not happen at exactly the same time as this huge growth in offshore renewables. However, we must make the best of the situation and do everything in our power to achieve these targets.
For projects accredited under the outgoing renewables obligation, there is uncertainty as to what will happen after 2027, when Ofgem will stop issuing ROCs. The Government have said that projects will see a “grandfathered transition” to a fixed price regime through to 2037, when all ROCs will finish. However, it is uncertain from the Bill whether all projects will be eligible for the new fixed price instrument, and whether the value will be equivalent to standard ROC payments. This leaves uncertainty regarding the value of existing RO projects and threatens the investment decisions being made presently. It is critical to the investors to whom I have referred, who are making decisions now or soon, that the policy intention to provide grandfathering is reflected in the Bill rather than in secondary legislation. It would be interesting to hear the Minister’s views on this point, but it may be as long as two years before there is clarity and certainty if the secondary legislation route is adopted.
My amendments to Clause 46 therefore aim to create the certainty required in regard to the entitlement and the value of certificates. My first amendment would set within the Bill the Government’s policy aim to give generators certainty over the incentive they receive. It aims to ensure that when making a certificate purchase order, the Secretary of State is guided by the principle of equivalence between the regimes, thereby providing continuity and certainty to generators by replicating the accreditation status and the banding arrangements of the RO.
My second amendment would remove subsection (8) from proposed new Section 32V. You have to turn quite a few pages from the beginning of Clause 46, but you only need to start reading that subsection on page 40 to see why it might start to strike fear into the hearts of investors because it authorises the Secretary of State to,
“review the banding provision at such intervals as are specified in or determined in accordance with the order, and … may authorise the Secretary of State to review the whole or any part of the banding provision at any time when the Secretary of State is satisfied that one or more of the specified conditions is satisfied”.
In other words, it gives wide discretion to the Secretary of State to change bandings and rates in a way which would make investors think of Spain rather than the United Kingdom. We want to remove that wording and find a way—the Government may have another way than the one I am suggesting today—of allowing investors to have confidence to do their internal rate of return calculations and to get clarity on the value they are creating by investing in projects over the next couple of years. That is it. It is as simple as that. It would risk current investment in technologies if developers were unable to have confidence that the rate of return and the rate of support they would get during the lifetime of the scheme could be relied upon.
These changes will ensure that we can continue to drive investment in renewables through the transition scheme to 2020, minimising any hiatus in investment before the contracts for difference regime is fully up and running. I beg to move.
Baroness Worthington
My Lords, I am grateful to the noble Lord, Lord Stephen, for tabling the amendments, to which I have added my name. We fully support them. As we have said previously, this Bill is a significant intervention and we need to ensure, where we can, a smooth transition from existing policies which have served us relatively well as we make the move into an unknown system. The amendments of the noble Lord, Lord Stephen, are designed to achieve that.
In this context, it is imperative that we do not breach the trust of the industry and the investors who put their money into projects by misinterpreting the term “grandfathering”, which is a clearly understood phrase. It means that if you invest in good faith, there will not be regulatory interventions to change the fundamental tenets of that investment. Unfortunately, the provisions in this section stretch the definition of grandfathering to breaking point.
We particularly support Amendment 55AL. As has been eloquently expressed, the words in the subsection will certainly strike terror into the hearts of investors. They are far too broad and enable changes to the fundamental facts on which an investment was based. It will damage investor confidence not only in relation to that one narrow aspect but more globally. We are asking many investors, entrepreneurial companies and the existing market players to work with this new system. I think that it can work, but if we start on the basis of regulatory uncertainty and not recognising and respecting grandfathering, we will start off on a very poor foot indeed. I think that I am right to say, although it may not have been directly in this context, that I have heard arguments played back by Ministers that have said that we cannot introduce emissions performance standards on to existing coal plant, because that would damage investor confidence. It would mean that people saw us as an unreliable place to invest. This aspect is actually far riskier than that, and I hope that the Minister can give us words of encouragement in relation to these two amendments, which are essential to get us off on the right foot with the Bill.
Lord Gardiner of Kimble
My Lords, I thank my noble friend and the noble Baroness for tabling these amendments, and for an illuminating, positive and helpful debate. In Committee, we can help to fine tune a Bill. My noble friend mentioned helping the Government; our duty is to help the nation to get this right. Certainty, trust and the smooth passage of transitional arrangements are certainly key.
Amendment 55AK inserts a requirement for the fixed-price certificate scheme to replicate the arrangements under the renewables obligation. The amendment aims to ensure that the fixed-price certificate scheme will be based upon and replace the RO, which is indeed our intention. I can confirm for my noble friend Lord Stephen that those generators that would otherwise qualify to receive renewables obligation certificates in 2027 and beyond will instead qualify for fixed-price certificates.
Clause 46 already mirrors much of the primary legislation for the RO to ensure that we are able to replicate the effect of the RO, so far as is appropriate. The differences from the RO are a result of the different ways in which the schemes operate; for example, the fact that the price of certificates will be fixed means that this will no longer be a market-based scheme. Amendment 55AL removes the provisions for both regular and ad hoc reviews of support levels under the fixed-price certificate scheme. The Government do not expect to make regular support-level changes under the fixed-price certificate scheme. However, I hope that noble Lords would accept that the Government must be able to respond to significant unexpected changes, such as major cost reductions or increases within a particular technology, so that we can deliver the generation we need for our renewables targets at value for money for consumers.
My noble friend mentioned secondary legislation. In the autumn of 2014, we intend to consult on the secondary legislation for the transition of the renewables obligation to a fixed-price certificate regime. We propose to bring forward this legislation in early 2015.
Lord Teverson
My noble friend said rightly that, clearly, any Government need to be able to reduce intervention rates, if technology costs go down—and that needs to happen in terms of consumer value and government expenditure. But in this situation, we are talking only about those projects that have already had investment. The technology is fixed at the time when the investment took place, so I do not completely follow that argument.
Lord Gardiner of Kimble
I wanted to put the caveat of the Government seeking to respond having the ability, potentially, to respond. I agree with my noble friend that we may not expect it to happen, but we need to have that ability. My noble friend also mentioned uncertainty about state aid. We are working with the European Commission to ensure that our policies are compliant with state aid rules; we are confident of delivering EMR in 2014, and are helping industry to make early investment decisions. That might have been useful to the noble Lord, Lord Whitty, in an earlier exchange.
These amendments deserve careful and further consideration, and I would certainly look with my noble friend the Minister to provide further information on these matters as the Bill progresses. I would also want to consider with my noble friend ways in which the purpose of Clause 46 could best be clarified and examine proportionate measures for reviewing support levels. It is on that basis that I very much hope my noble friend will be sufficiently encouraged. He and the noble Baroness are hitting some targets because this is an area on which the Government would like to reflect and consider further. On that basis, perhaps my noble friend will withdraw the amendment.
Lord Stephen
I very much welcome the words of my noble friend at the end of his remarks. They were most encouraging and I am sure will be welcomed by the industry. I hope that what he said about retaining the discretion to make changes can be further clarified in due course because the way that he explained it, as my noble friend Lord Teverson pointed out, could continue the fear in the hearts of the industry.
Surely the discretion to change must be about new schemes or future projects—for example, changes to the feed-in tariff related to new schemes; changes to the renewables obligation going from one ROC to 0.9 ROC were about new projects that would be commissioned after a particular date. Just to be clear, we are talking here about projects that will have been invested in, commissioned and generating before 2017. It must all happen before March 2017, unless such projects at the margin are eligible for the discretionary arrangements to which the noble Baroness referred.
That is the strong clarification that I would like to receive in terms of why this discretion is necessary. If I do not get that changed, I will continue to make the analogy with Spain, which was where the panic was created—and not just there but globally throughout the renewables sector. If any Government said, “We are committed to renewables but, by the way, this project that you invested in last year, where you committed funding and had bank commitments in place, is now going to be subject to a change in government support”, that is very bad news. If that were a possibility in terms of the grandfathering rights, they would not be grandfathering rights at all. It is as simple as that. However, on the basis of the strong reassurances that I received from the Minister at the end of his remarks, which I very much welcome, I am prepared to beg leave to withdraw the amendment.
Lord Whitty
Lord Whitty
My Lords, this is probably the most straightforward amendment that I have ever produced; however, it has vast repercussions for the whole Bill. For those noble Lords who have not read it, it seeks to replace “a” with “the”, in reference to the counterparty, certainly in the section that deals with CFDs.
I have made reference to this at various points in our proceedings; we have not really smoked out from the Government how they see the counterparty operating and what sort of counterparty they have in mind. They have said that there will be a single counterparty private organisation backed by the Government. That is not what is stated in the legislation. The amendment would be a bit late in the sense that there is still provision in Clauses 8 and 9 for the Secretary of State contemporaneously to designate more than one counterparty. I understand the Government’s position in relation to CFDs—there is a separate provision that we will consider on Monday in relation to investment contracts—to be that at any given time only one counterparty should be designated by the Secretary of State.
It is hoped that that counterparty would last some considerable time and that even redesignation, or taking designation away, would be rare, but you need those reserve powers. However, you do not need the reserve powers to have more than one counterparty running at the same time. Indeed, I never quite understood why anybody thought that that would be sensible. The structure is difficult enough already. There is a regulator, a counterparty and a systems operator, and then there is the Secretary of State and all the regulations that are directly down to the department. To crowd it out with several counterparties engaged in different contractual relationships, probably with the same company, always seemed to me fairly daft. Therefore, I hope that before we finish with the Bill the Government themselves will delete those provisions that allow more than one counterparty to be designated.
Because there is constant reference to counterparties all through this clause and the reference is always to “a counterparty”, that keeps open the possibility of there being more than one. If we said “the counterparty”, I would be much happier, although it would require quite a lot of reprinting of the Bill. I started to try to change it in several different places but I gave up at three o’clock in the morning, so I have tried it out in two places here.
There is a serious point behind this. Clarity and simplicity is needed here. It occurred to me earlier that there could be a very specific reason for this wording, in that there would need to be a separate counterparty in Northern Ireland. There will be a separate counterparty for investment contracts but, as I said, that is dealt with in the next section. However, if there were a general expectation that the possibility of having more than one counterparty in this field at any given time was what the Government wanted to keep open, I would be very alarmed, and I do not think that I would be alone in that.
These amendments are intended to give the Government the opportunity—either now or when producing a more detailed document on the nature of the counterparty as now envisaged, which we can study in detail over the summer—to set out what their intentions really are. I beg to move.
Baroness Verma
My Lords, I thank the noble Lord, Lord Whitty, for these amendments and I hope that I shall be able to allay his concerns. I am aware that the ability to have more than one counterparty previously caused concern in the other place. The ability to have more than one counterparty is only to facilitate a transfer from one counterparty to another in the unlikely event that this is necessary. We sought to provide reassurance on this with amendments at Report in the other place and I hope to further reassure the noble Lord today.
There can be only one counterparty to a CFD contract. A generator will always know who is on the other end of its contract. Under this Bill, there cannot be a return to the original multiparty model that raised significant concerns among the industry and in the Energy and Climate Change Select Committee in pre-legislative scrutiny. The CFD counterparty was introduced specifically to address those concerns.
However, in the unlikely event that the CFD counterparty fails or withdraws its consent, we must ensure a smooth transition from one counterparty to another to make sure that generators can continue to get paid under their contracts and that the contracts can continue to be allocated. To meet any concerns that the policy intention here is unclear, the Bill was amended in the other place so that the ability to designate more than one counterparty can be used only where it is necessary, broadly speaking, for the purposes of ensuring that payments continue to flow or that contracts continue to be allocated. These limited circumstances are set out in Clause 7(5).
I hope that the noble Lord understands the reasoning—that is, of there being a counterparty in case one fails—and that he feels able to withdraw his amendment.
Lord Whitty
My Lords, I thank the Minister for that explanation. I had sidelined Clause 7—I think I referred to Clause 8 just now, but it is Clause 7. That does not seem sufficiently to cover the case of a counterparty body having failed but still having obligations and commitments which need to continue. There are many situations in administration where a designation ceases and is given to somebody else. It is a fairly narrow requirement to say that the counterparty, or whatever body is involved, shall continue to meet all its obligations. There will be a contractual obligation for it to do so anyway. I ask the Government to look again at whether Clause 7(5) is indeed tight enough to avoid the implication that there might be more than one counterparty.
I am happy to leave it at that. I will probably return to this issue in relation to the potentially different counterparty for the period when we have investment contracts, but we can discuss that later. Subject to that, I beg leave to withdraw the amendment.