Lord Whitty
Main Page: Lord Whitty (Labour - Life peer)
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.
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 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.