Feed-in Tariffs (Amendment) (No. 3) Order 2015

Debate between Alan Whitehead and Graham Stuart

Monday 13th June 2016 General Committees

[Dr Alan Whitehead (Southampton, Test) (Lab)]

I beg to move,

That the Committee has considered the Feed-in Tariffs (Amendment) (No. 3) Order 2015 (S.I. 2015, No. 2045).

It is a pleasure to serve under your chairmanship, Sir Edward. Normally, I run in the door three minutes after a debate has started, so it is a pleasure that I was actually here just before things started and someone else was running through the door just behind me.

I am opening the debate on the statutory instrument because the Opposition have prayed against the original negative SI, which introduced the changes. As a result of the way that SI was introduced to the House, those changes have come into effect, so our debate is more about the principle of what is being done rather than about looking prospectively at those changes. That is what I want to address my remarks to today.

The effect of the SI is, first, that changed rates of payment for feed-in tariffs, or FITs, for several technologies have come into place. More importantly, for all technologies, from now on, deployment will be limited by a new first come, first served measure, whereby agreement to provide FITs payments for projects will be based on an overall envelope of spending. We should be clear that that is not spending as we might plainly understand it, but putative tax and spend, because it is financed by a levy on supply that is eventually passed on to customers in the shape of their electricity bills.

It has always been the position of Labour Members that we do not object to degression being part of the FITs regime. Our concerns in the past have been about the rate and effect of degressions that are too precipitous or, as we have discussed on similar occasions, replacing a degression slope with a cut-off on payments. Degression is combined in the order with an absolute limit on the amount of levy that can be spent on FITs overall from now on. The control will be £100 million a year for all small renewable installations, be they wind, solar, hydro or anaerobic digestion, and there will be assumed subtotals in place governing how much of each technology can receive FITs each quarter before the limit is deemed to have been reached—reaching the limit will be the end of a FIT application, except that the applicant might get a FIT in the next quarter, and so on.

We are essentially returning to the original low-carbon building programme from before FITs were conceived. The programme rationed grants to installers to, I think, a quarterly limit, with schemes shut to new entrants as soon as the totals had been exceeded. The FIT arrangements were partly introduced to ensure that if an installer had put in the effort to install a device, with all the up-front investment involved, they would know that they had a tariff waiting for them once the installation had been completed. The pre-accreditation arrangements that the Government unwisely scrapped a little while ago are to come back under the new regulations, but, even so, we have to be clear that that way of doing things is a straightforward and basic breach of the principle of how FITs were supposed to work and from now on will clearly be a considerable barrier to new entrants at a smaller scale.

I note that the Government intend to recycle underspend in any category under the new arrangements by adding one quarter’s underspend to the total available for the next quarter, but they may change caps between priorities according to their own policy priorities. Will the Minister clarify for me during the debate what those priorities might be and at what point underspends on each technology at the end of each quarter, if they occur, will be announced? Will there be a delay in allocating, or reallocating, sums while the Government decide on their priorities, or will the sums go on to the next quarter’s limit pro rata unless the Government say otherwise?

Reallocation or no reallocation, the effect of the proposals will be radically to reduce to deployment of renewables under FITs over the period up to 2020-21. Such limitation in deployment appears to be startlingly large. The impact assessment suggests that, in the central scenario, some 5.7 GW of low-carbon generation that otherwise would have come into the system will be lost by 2021.

The Minister will undoubtedly say that there is a levy control mechanism—here is the shibboleth that must not be breached—and that the order will help substantially to keep levy control spending at levy control figures, regardless of the damage it would cause to the deployment of smaller-scale renewables and regardless of the measure’s adverse carbon impact. It is interesting that that carbon impact is not recorded in the impact assessment, as it is supposed to be.

The impact assessment states that the changes on degression and on capping will save about £1 on domestic customers’ bills per year over the next five years. It is an interesting side proposition, not considered in the accompanying documents, whether the deployment of renewables through FITs itself has a depressing effect on prices as deployment increases, mainly because of solar affecting the daytime merit order of generation and pulling prices down as a result. It is therefore quite possible that the savings set out will be dribbled away against higher prices as a result of the lower levels of deployment that I have outlined. I will not dwell on that because there are rather more important issues to consider on capacity.

[Graham Stuart (Beverley and Holderness) (Con)]

I had hoped that the hon. Gentleman would not pass over the merit order effects quite so quickly, and I encourage the Minister not to do so, because understanding the trade-off between the subsidy and the effect of taking the merit order out of the equation at any one time for the more expensive sources of production is an important component of understanding the real costs involved in subsidising something such as solar.

[Dr Whitehead]

I am delighted that the hon. Gentleman is a member of the Committee, because he will no doubt be as happy as I am to talk at great length about merit order. I suggested that we do not dwell on it partly because of issues about how one looks at the dislodging of merit order by low-carbon energy coming on to the grid, particularly during daytime hours, which is a fairly complicated process. Nevertheless, as he said, that is important in terms of higher-carbon generation potentially coming on to system when lower-carbon generation is available and how that affects the relative prices coming forward, with the heights in the morning and the evening and the dips during the day, and pushes the merit order out along the line. That is a pretty important thing to consider, but other members of the Committee may not wish to be detained at length to discuss the intricacies of such arrangements.

I put that on the table as a potentially important point as far as the arguments for price reduction in energy generation in general are concerned. Actually, the very deployment of a larger amount of renewables may countermand some of the supposed reductions and, in fact, the net effect may be that prices would go up to a greater extent than would have been the case were those renewables in the system and affecting the merit order in the way I suggested.

The important additional point is that the deployment of renewables through FITs is, as I mentioned, adding to the nation’s installed energy generating capacity and the loss as projected in the central scenario in the impact assessment to the order of 5.7 GW by carrying out the cap option is a real loss to installed generation capacity over the medium period. FITs-eligible installations do not get any sort of reward for being there to generate because they already have some assistance through the FIT, but other, non-renewable generation now does through the mechanism of the capacity market—auctioning assistance, essentially, for agreeing to be there to generate if generation is required, although not actually generating, as renewable energy would do if it were installed.

The Minister and her Department have not been slow to ensure that such capacity availability is to be well rewarded—about £18 per kWh at the first two auctions for existing generation. Through those two auctions and the additional early auction, about £5.5 billion will probably have been spent on securing existing capacity and supposedly procuring new capacity under the capacity market, which will explicitly not result in any new capacity coming on the system by the time the first round of capacity auctions is through. Indeed, we now know the results of the first two capacity auctions, which have procured precisely no new large gas capacity, but they have procured the establishment of some heavily polluting diesel sets as small-scale marginal generators to the tune of about 1.5 GW.

By the way, that 1.5 GW of new generation achieved though the capacity market system impacts on customers’ bills in just the same way as FITs payments because that will be financed by a levy on producers, which will be passed on to customers’ bills. That is for £5.5 billion, and 5.7 GW of new capacity will be lost to the system after 2020 because of the levy control cap and the way the Department is lying down and rolling over in front of the levy control framework demands. The purpose of the feed-in tariff—to generate low-carbon energy and incentivise the establishment of new technologies to do it—is being thrown out of the window in the process. If we were to ask the Minister what the impact of that £5.5 billion spend on procuring capacity in the capacity market would be on customers’ bills by 2020, the answer would be, “About £20 to £30”, which massively counteracts the so-called saving achieved on eviscerating the feed-in tariff in the way proposed.

A valid riposte to my figures on capacity, as represented by the proposals before us, would be that the capacity margins of the renewables do not remotely add up to the level of power supply because the sun does not always shine, the wind does not always blow and so on, which is, of course, true. However, certainly as far as small-scale hydro and AD are concerned, the capacity margins look similar to those of gas plant. Even so, according to the impact assessment, some 7,000 GWh of generation will be lost if the cap goes ahead, against present projections. However, if we are making a comparison with the equivalent new generation through the capacity market, that new generation—the diesel sets—is predicted to run for even fewer hours than solar photovoltaics will as a proportion of its installed capacity. Indeed, the Government have made a virtue of the tiny hours that diesel sets will run in the capacity market, as an argument for discounting their extremely polluting nature.

The other, one might say valid-ish, riposte, is, “Yes, but we do not know when smaller generators are coming on to the system, so we cannot count that as capacity.” It is, however, clearly capacity. It is coming on to the system and can increasingly be modelled as such. It is only because there is no visibility of power inputs below 15 MW that National Grid does not know when the capacity is coming on stream; it is merely recorded as a loss of load. With different arrangements on visibility, however, a different picture of what capacity is around could, and would, emerge.

That leads on to the next question for the Minister: has she ever looked, or is she now going to look, at processes whereby the capacity represented by small-scale generation can properly be accounted for in capacity margin calculations—calculations that tell us what capacity gaps there are and impel us towards decisions to build plant to bridge those gaps in the first place? If she did that, the 4.4 GW already installed under FITs and the 13 GW possible as cumulative installation under the present programme—if it continues under the current arrangements—might be seen by the Government in a different light, as a capacity asset and not a funding drain.

The Minister and hon. Members will, I think, have gathered by now that Labour Members do not like the proposals. We do not like them because they represent a fundamental missed opportunity to start to reshape policy so that there is a more real definition of how the system is working, what capacity is coming on to it and how it can be properly rewarded, in bringing the assets forward. I suggest that we have a completely unbalanced system at the moment, but, among the capacity that is coming on stream, penalising the renewable and rewarding the non-renewable is to the detriment of what I believe are overall carbon goals that we share, as far as renewable and low-carbon generation is concerned, for the future shape of our energy policies.

Instead of that, the measures represent a capitulation to limits that dismantle policy in favour of a sterile nightwatchman view of deployment, which cannot be acceptable with the low-carbon energy emergency that we face. We must have a better way of dealing with the deployment of renewable energy—with the capacity and the future asset that it represents—than to cap its deployment in the way described in the statutory instrument.