Energy Bill [Lords]
Debate between Jonathan Edwards and Alan Whitehead
Dr Whitehead
Again, the right hon. Gentleman misses the point I am making. This is not about the Opposition attempting to delay the imposition of the law. It is about the rush to close the renewables obligation on the part of the Government, not the Opposition, and the subsequent, rather dilatory way in which the Energy Bill was placed before this House—and, indeed, the way in which it has been scheduled in this House and the distinct possibility that further stages of the Bill may be scheduled. The net result of that dilatoriness in the legislative process is that the Government, not the Opposition, may put us in a position where retrospective legislation is apparently the case and the possibility of legal action is also apparently the case. It is important that we remember that today. One reason I am suggesting that the closure of the RO ought to be much later, albeit still early, is that it would avoid that potential legal action.
In reality, we know that the proposed closure of the renewables obligation a year early is not about implementing a manifesto pledge. The RO is not a new subsidy—that is what was in the Conservative manifesto. Indeed, we had discussions about that in Committee. The proposals before us are not only about putting an end to something that has been in place for a considerable period, that has worked well and that was about to change, in good time, to a new system that allows for degression in underwriting and a path towards effectively dissolving subsidies for a technology that has achieved close to market parity; they are about putting an end to something that industry investors were clear and confident about. Investors were confident not just because the renewables obligation had worked for a while; there was also a clear process whereby it would come to an end and a clear line of progression to contracts for difference—the new system, which we discussed at some length during the passage of the Energy Act 2013—and an orderly roll-out of renewable energy as something progressively more effective and cheaper.
Jonathan Edwards
In formulating his amendments, has the hon. Gentleman had time to consider the recent excellent report by the Select Committee on Energy and Climate Change, which said that the Government’s current policy would lead to bills increasing due to uncertainty?
Dr Whitehead
The hon. Gentleman is absolutely right to draw attention to that report and, indeed, to the issue that has arisen not just from these changes, but from a series of other abrupt lurches in policy from the Government in the field of renewable energy. The net result has been a dramatic drop in investor confidence and a dramatic fall from our advanced position as a country that was regarded as a safe, good place to invest in renewable energy. This policy lurch has led to a feeling among many investors that they are now living in a world of confusion, in which it may be recommended in the boardroom that—perhaps in light of the competitiveness of many other countries—they should invest elsewhere when it comes to renewables. It has thrown a great many programmes into confusion and affected a great deal of potential investment in this country, not just in onshore wind but in many other renewables. Policy lurches of this sort tend to creep and spread across confidence in other areas of investment. If things had been left well alone, it would have been possible to envisage the continued progression of a secure investment circumstance, along with a clear understanding of what investors were doing and of how investments would change over a period.
This is not about putting an end to new subsidies; it is about the removal of a well-understood, long-lived subsidy before the point at which investors, the market and everyone else had expected it to be replaced by another system. As late as the spring of last year—after, I imagine, the Conservative manifesto had been written—the Secretary of State announced that the renewables obligation would close in March 2017, and the changeover would then be undertaken. I think that that came as a particular surprise to investors and the market because the Government had previously seemed to be so confident that the procedure would be as it had been originally set out.
It has been claimed that the removal of the renewables obligation at an early date is okay because we are reaching one of our European targets relating to the proportion of renewable energy that should make up our overall energy mix by 2020. The claim is that because the component that is represented by wind, and particularly by onshore wind, is reaching its target, it is okay to throw the market into its current confusion. We must, however, bear it in mind that we are failing substantially on the two other components of our European 15% target, heat and transport. Incidentally, the United Kingdom can be fined for missing that target.
The target can be achieved through overachievement in some areas, even if there is underachievement in others. The 12% renewable heat target, on which we are failing fairly miserably at the moment, and the 10% renewable fuel target, on which we are also failing, could be supported by our continuing to deploy onshore wind in particular. It might be suggested that to cut onshore wind at this time, given the extent of the failure to keep up with the overall energy target, is irresponsible to say the least.
A further claim that we have heard during the Bill’s passage is that all this is being done to help the customers who will have to pay for the underwriting of onshore wind. Of course it is important for us to consider the bills that customers are paying when deciding how best to establish our energy mix for the future.
We will have to establish an energy mix that is the most affordable, the most secure and the least carbonising over the next period, but the claim that this change is being introduced to help customers is in reality paper thin.
If the Government were serious about renewables in general, as they claim, the hole left by onshore wind over the next period as a result of the early closure of the RO—estimates suggest that a loss of investment of £1 billion is on the cards, as the Select Committee has noted—would have to be filled by other renewable sources that are currently more expensive to underwrite than the onshore wind they would replace. The net outcome of this measure could well be that the cost to customers is considerably more than it would have been if the present arrangements had been allowed to continue to their conclusion.
Onshore wind is at the leading edge of market parity. As the Government will be aware, it was on a sustained glide path down to parity, with investor confidence high and costs coming down. I emphasise that the damage to investor confidence as a result of this essentially retroactive Bill will be enormous. If it goes through, it will effectively replace a steady path down to market parity in which competitive deployment could progress—a cliff over which investment will fall.
A further claim that the proposed change is necessary is connected to the levy control framework, the éminence grise in many of our discussions on energy, particularly renewable energy. It is a control framework formed in obscurity by the Government and continuing in background gloom as people attempt fruitlessly to find out about its calculations, its variations and its consequent prescriptions. The levy control framework was devised in 2011 by the Government to get us into a position where about £7.6 billion at 2012 prices of levy payers’ money—money derived not from Government sources but from levies on energy companies, which would pass those costs on to their customers—would provide a framework within which renewables could develop.
However, the levy control framework is based on a static endpoint—2020 in this instance—even though prices will be variable over the period. It is based on the idea of a strike price that renewable energy will receive and that has been agreed, certainly for onshore wind, at an auction process, set against a reference price, which is the median price for energy at a particular time. The strike price is considered in relation to what rewards will be undertaken for that renewable energy. When and if energy prices go down, the difference between the strike price and the reference price widens. Although a renewable energy developer will receive the same amount of money for their energy, the make-up of the amount paid to the developer will be different. The more prices go down, the less the developer will get in relation to the reference price and the more they will get in relation to the difference between the reference price and the strike price, which will come from the levy control framework. Therefore, over a period of time the levy control framework, as designed, increases the reward to those inside the system, even though they do not get a total additional reward. New entrants are squeezed out, because the money goes to rewarding those who are already in the system and less money is provided to new entrants outside the system. Indeed, many commentators consider the present form of the levy control framework to be, in essence, bust as far as new entrants are concerned. The relatively small amount of change that the levy control framework will undergo through the ending of the renewables obligation period a year early is all about how the framework balances itself, which is a pretty thin claim bearing in mind the range of theoretical headroom in the framework and the difficulties it has experienced.