Draft Renewables Obligation (Amendment) Order 2021

(Limited Text - Ministerial Extracts only)

Tuesday 9th March 2021 General Committees

[The Chair]

Before we begin, I remind Members about the social distancing regulations. Spaces available to Members are already clearly marked, and unmarked spaces must not be occupied. I see Members have taken their appropriate seats, but the usual convention of a Government side and an Opposition side is waived on this occasion, so Members may sit anywhere. Hansard colleagues would be very grateful if Members sent any speaking notes to [e-mail].

[The Minister for Business, Energy and Clean Growth (Anne-Marie Trevelyan)]

I beg to move,

That the Committee has considered the draft Renewables Obligation (Amendment) Order 2021.

The draft order, which was laid before the House on 3 February 2021, relates to the renewables obligation and the renewable electricity support scheme. The renewables obligation was introduced in 2002 to provide subsidy for electricity generation from renewable sources. It covers onshore and offshore wind, solar, hydro, biomass and so on. The scheme is closed to new applications, though support for existing stations continues. The scheme will finally close in 2037.

The scheme was part of a programme of measures aimed at stimulating the renewables industry to enable ambitious climate change targets to be met. Without subsidy, the nascent renewables sector would have struggled to make headway in a market dominated by the established heavyweights of coal, gas and nuclear. The renewables obligation had an initial target of 10% renewable electricity by 2010, but today about 30% of electricity supplied in the UK is supported under the scheme. Of course, the scheme needs to be paid for, and that falls on electricity suppliers, who currently provide almost £6.5 billion of subsidy a year to renewable generators. Those costs are passed on to customers via their bills, adding about £70 a year to the average domestic electricity bill. Costs will fall from 2027 as generators start reaching the end of their period of support and exit the scheme.

The draft statutory instrument deals with a technical matter that relates to supplier payment default. More specifically, it aims to prevent electricity suppliers from being unduly exposed to the unpaid bills of competitors who fail to meet their obligations. The renewables obligation comprises three separate but interlinked schemes: the renewables obligation, covering England and Wales; the renewables obligation Scotland; and the Northern Ireland renewables obligation. The Scottish and Northern Irish Governments are responsible for their own schemes; the UK Government cover the England and Wales scheme. The matter under debate relates to the England and Wales scheme only.

The renewables obligation is a traded scheme that places an obligation on electricity suppliers to obtain a number of green renewables obligation certificates in proportion to the amount of electricity they supply to their customers. Certificates are issued to renewable generators for free by Ofgem in relation to the amount of renewable electricity they generate. Suppliers typically buy those certificates, providing generators with an income stream over and above electricity sales revenues. Certificates are usually in short supply, so suppliers may make a cash payment, called a buy-out payment, in lieu of each certificate. The buy-out price is about £50 per certificate for the current renewables obligation year, and about 10% of the scheme is met in that way. At the end of the scheme year, the cash fund is recycled back to those suppliers who met their obligations with certificates, which gives certificates additional value over and above the buy-out price.

In recent years, an increasing number of suppliers have defaulted on their obligation under the scheme. Payment default leaves a shortfall in the cash fund, meaning recycle payments are lower than they would otherwise have been. That lowers the value of certificates, which ultimately impacts generators’ returns. The scheme therefore features a mutualisation mechanism that offers protection against payment default. Under the mechanism, shortfalls in the cash fund are recovered from all other suppliers and recycled back to those suppliers who met their obligation with certificates. The mechanism is triggered when the shortfall exceeds a £15.4 million threshold.

Mutualisation has been triggered in each of the past three years. In total, £173 million has been mutualised across suppliers in England and Wales. Electricity suppliers and their customers are understandably unhappy about the situation, so in December 2020 the Government consulted on a proposal to amend the mutualisation threshold so that it would be less easily triggered. It was proposed that the £15.4 million threshold should be replaced with a new threshold calculated annually as 1% of the cost of the scheme, which is broadly equivalent to the arrangements that were in place when mutualisation was first introduced into the scheme in 2005. Since then, the threshold has been gradually eroded in relative terms and is now equivalent to just 0.25% of scheme costs. Mutualisation can therefore now be more easily triggered. In other words, the risk associated with supplier payment default has become increasingly tilted away from generators and towards other suppliers.

Our proposal and the draft statutory instrument seek to redress the balance of risk. In the first year, the threshold will rise to about £62 million. That will ensure that suppliers and their customers are not unduly exposed to the unmet renewables obligation bills of other suppliers. Generators will face an increased risk that unmet obligations will remain uncovered. That will have a small impact on the value of certificates, but the new level of risk is broadly equivalent to what it was in 2005. In that respect the SI can be considered to be restorative.

The draft instrument makes minor technical changes to the Renewables Obligation Order 2015 so that a fixed £15.4 million threshold is replaced with a threshold that is calculated on an annual basis. The new threshold is determined as 1% of the forecast scheme cost for the year ahead. It also places a new requirement on the scheme’s administrator, Ofgem, to calculate and publish the threshold ahead of each obligation year.

The emergence of payment default and cost mutualisation under the renewables obligation has become of increasing concern to electricity suppliers. Through no fault of their own, those suppliers have become increasingly exposed to the unmet obligations of their competitors, whereas renewable generators have seen their returns increasingly protected.

The draft instrument will restore the original balance of risk between generators and suppliers. It will make it harder for mutualisation to be triggered, so suppliers will be less likely to be exposed to the unmet obligations of other suppliers. That is good news for consumers; they should benefit because the likelihood of mutualisation costs being passed on to them will be lower.

The legislative changes need to be effective on 1 April to enable them to take effect in respect of the next renewables obligation year, which runs from April 2021 to March 2022. Consequently, and subject to the will of Parliament, the draft instrument will enter into force on 31 March 2021. I commend the order to the Committee.

--- Later in debate ---

[Anne-Marie Trevelyan]

I thank the hon. Member for Southampton, Test for his valued contribution and for his depth of knowledge—this is an opportunity to put that on the record. It is always a pleasure to discuss such issues, albeit across the Floor, because he has an extraordinary depth of understanding and a commitment to the consumer and to those who are generating our electricity.

I welcome the support of Members, who recognise that the draft SI will ensure that electricity suppliers and, by association, their customers will no longer be unduly exposed to the onerous obligations of other suppliers. I hope that my responses have provided the necessary assurances for the Committee to approve this statutory instrument.

In reply to the hon. Gentleman, I am confident that the new Ofgem tests will rebalance and therefore reduce the risk of supplier failure. The SI, alongside those changes, will therefore strike the right balance between the needs of renewable generators on the one hand and of electricity suppliers and their customers on the other. I commend the draft order to the Committee.

Question put and agreed to.