Renewables Obligation Closure Order 2014
Baroness Verma
That the Grand Committee do consider the Renewables Obligation Closure Order 2014.
Relevant document: 5th Report from the Joint Committee on Statutory Instruments
Baroness Verma (Con)
My Lords, the renewables obligation—which I shall now refer to as the RO—is currently the Government’s main mechanism for supporting renewables electricity generation in the UK. In July 2011, as part of the electricity market reform White Paper, we confirmed our intention to close the RO to new generating capacity in 2017 and to make the transition to contracts for difference, or CFDs, as the new support mechanism for large-scale, low-carbon electricity generation.
The order is consistent with our overarching policy of transition towards CFDs with an aim of avoiding an investment hiatus. It introduces change in two main areas: setting the date of closure of the RO to new generating capacity, and the implementation of grace periods with respect to that closure date. The order sets the closure date of the RO as 31 March 2017. The closure date will not affect capacity that has been accredited under the RO before the closure date, and generating capacity will continue to receive its 20-year period of support under the RO or until 31 March 2037, whichever is the sooner.
Following the Committee’s earlier approval of the six EMR instruments, the Government expect CFDs, the new support mechanism for large-scale, low-carbon electricity generation, to open for applications in the autumn. From that point until 31 March 2017, any new eligible renewable generating stations will have a choice of entering either of these supported schemes. Renewables projects are generally large infrastructure projects which take several years to develop and construct. Like any large infrastructure project, they can be subject to construction delays. Some renewables projects, such as those using new or emerging technologies or those constructed in difficult environments, could be at a much greater than average risk of delay. Others that are simply due to be completed close to the RO closure date may be deterred if factors beyond their control risk delaying them and stopping them getting support.
A two and a half year transition period may not be long enough to prevent a hiatus in investment in these kinds of projects. The order will therefore implement a number of exceptions to the closure date to cover projects against specified delay risks. These are clearly defined grace periods, and they will provide a set period of time after the closure date in which the projects benefiting from the grace period will be able to enter the RO.
The order provides the following grace periods: a 12-month grace period for projects of any technology delayed due to grid connection delays or due to delays to works on radar stations or radar equipment; a 12-month grace period for signatories of CFD investment contracts if the contract is later terminated due to reasons relating to state aid or due to changes made to the investment contract in the light of the standard CFD terms and conditions issued by the Secretary of State; and a 12-month grace period for advanced conversion technologies and offshore wind projects designed to give them sufficient assurance, in advance of full clarity on the CFD, to move forward towards final investment decisions on the basis of RO support. It also provides grace periods of 18 months for dedicated biomass projects, with or without combined heat and power; and an 18-month grace period for offshore wind generating stations in Scottish waters using test and demonstration wind turbines or floating wind turbines.
I hope that I have assured noble Lords that we appreciate the value and importance to industry of maintaining a clear and coherent RO scheme across the UK and the greater certainty it will bring to those looking to develop renewable projects in our overall transitional arrangements, and in a way that ensures value for consumers. The grace periods within the order are key to investor confidence and to the progress of renewable electricity projects due to complete construction in late 2016 and early 2017. I beg to move.
Lord Deben (Con)
I want to be sure about the relationship between this and the national Governments. In the Climate Change Committee, we are much impressed with the work that is done in Scotland, Wales and, increasingly, Northern Ireland. As this refers specifically to Scottish waters, I am concerned that the Scottish Government should be happy about it.
Baroness Verma
My Lords, I thank my noble friend for his intervention. We have consulted with all devolved Administrations.
Lord Whitty (Lab)
I have two points on which the noble Baroness may wish to write to me. I mentioned in the previous debate the apparent intention of the department to end ROs on larger solar projects over 5 megawatts from April next year, which is well before anything else happens. I wonder whether the department are proceeding with that—it is a uniquely early finish of RO cover—for projects which may come on, or be in the process of coming on, in the period between now and 2017.
Secondly—I may have to declare a past interest—there is an obscure footnote to this which relates to the need to consult the National Consumer Council, of which I was formerly chair. The National Consumer Council was abolished but its powers and interest in the energy dimension have transferred to Citizens Advice. I hope that the department can give a general assurance that Citizens Advice will be consulted in the same way as Consumer Focus, and before that Energywatch, was consulted on all matters of energy policy which relate to consumer outcomes.
Baroness Worthington (Lab)
My Lords, I am sad to see the end of the renewables obligation. It is tempting to say that everything was dysfunctional, that nothing was working and was not it awful. However, we should look at what we have achieved: at how much renewables capacity we now have in the UK and at how quickly and efficiently it has been deployed. This was largely achieved because of the RO, which replaced the NFFO scheme.
It was a highly innovative scheme which was introduced to allow the market to choose the projects it thought it should bring forward. It was obliged, of course, to meet targets set by Government but, by and large, it chose what to do. There were merits in that because it created an obligation. As we know, faced with having to do something or not do something, most people would choose the latter, stick with what they know and remain encumbered with technology that they understand and assets that they can continue to sweat. One of the benefits of the RO was that it did not allow that to happen. The ways in which penalties were repaid back to your competitors encouraged you to build new bits of kit, and to do so under a market-driven system. Over time, of course, it changed to ensure that we were not paying too much and that consumers were getting a good deal.
Over the years that we have been debating EMR, I can remember someone saying to me—I do not know whether or not it is true—that when EDF first approached government and said, “We want to build a new nuclear power station”, its first suggestion was, “Simply give us a ROC band. We can do it. We can build you Hinkley if you turn it into a low-carbon obligation and allow nuclear to be eligible”. Would it not have been a lot simpler if we had just said “Yes”? We did not, but we have come up with a new system, and we are where we are. However, I want to put on record that RO was successful; it brought forward a lot of capacity and brought diverse players into the market. We saw a great diversification of the number of companies that took part in the electricity market because of the RO. I, for one, am slightly nervous that we are abandoning what was a functioning system and embarking on a new, glorious path. I hope that the CFD will be as successful.
However, one suggestion is that it would be good for the department—perhaps this talks to my noble friend Lord Whitty’s point about communicating with the public in ways that it understands—if we could have an assessment of the RO, how much capacity was brought on, the diversity of that capacity and of the investors in that capacity. That would give us a good baseline from which to measure the success of the CFDs. We want CFDs to be more successful—we want them to bring on more capacity from a more diverse range of participants. Therefore, although it is not strictly speaking part of this regulation, and nothing in there requires it, it would be good for the department to undertake to provide us with a summary and a review of the effectiveness of the RO. From there it could move on to use those parameters of diversity and deployment against the CFDs, so that we can measure how successful they are.
My noble friend Lord Whitty raised an important point, that once the RO closes and the CFDs move on, there is a danger that we have mid-range technologies which fall into a sort of valley of death between FITs and the new CFD arrangements. I echo his question. We want to clarify that we will not see technologies that are currently receiving support either through FITs or the RO being lost in translation towards the CFDs. However, other than that, I thank the noble Baroness for her presentation.
Baroness Verma
My Lords, I am extremely grateful to all noble Lords for their contributions. This has been a very short but interesting debate. I will respond very quickly to one or two of the points that were raised. Again, if I do not respond fully, I undertake to read Hansard carefully and to respond in writing.
The noble Lord, Lord Whitty, asked whether Citizens Advice would be consulted on the use of powers relating to the RO; the answer is yes. He also asked about financial support for solar PV. We have consulted on the proposals to close RO across Great Britain to new solar PV capacity above 5 megawatts from 1 April 2015. Those proposals will apply to both new installations and to additional capacity added to existing ones. From the noble Lord’s expression, I am not sure whether that was the answer he expected.
Lord Whitty
My Lords, I appreciate that the Government have consulted. Is there a final outcome to that consultation? If it is in line with the original propositions, I will be worried.
Baroness Verma
My Lords, the only response I can give is the one I gave just now. However, if that is not useful, as I said, I will go back and read Hansard to see whether my answer can be tweaked to be a little better —although I think the answer will possibly be the same.
The noble Baroness, Lady Worthington, asked about the success of RO and asked for us to provide some detail of its success over the period it has been in place. Yes, it would be wrong to try to produce it now, so it may be useful to write to the Committee to allow it to look at it in fuller detail. However, I hope that the noble Baroness did not misunderstand me. In our earlier debate, I referred to the RO as being a useful tool to bring on the renewables that we so rightly need to reduce our carbon footprint, but also to ensure that we have a proper mix of energy sources. However, in future the CFDs provide a better mechanism for the longer-term necessity for investment confidence.
I know that the noble Baroness, like other noble Lords, is very supportive of a much more self-sufficient renewable sector in the country, particularly given what is happening across the globe. The CFD scheme provides longer-term certainty and better returns for investment, but also gives us an opportunity to try to bring the costs down so that the impact is much more beneficial to the consumer.
The order raises two important changes introduced to the RO scheme. The first sets a consistent closure date across Great Britain to new generating capacity, at which point CFDs will become the main support mechanism for large-scale, low-carbon electricity generation. The second introduces grace periods designed to target specific risks of delay with the intention of avoiding any investment hiatus. Both measures will ensure that investors continue to have confidence in the operation of the RO in its final years as we transition to a new support regime.
I thank all noble Lords for their contributions.