Lord Roper
Main Page: Lord Roper (Liberal Democrat - Life peer)
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 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 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.