Andrea Leadsom
Main Page: Andrea Leadsom (Conservative - South Northamptonshire)Feed-in Tariffs (Amendment) (No. 3) Order 2015
Andrea Leadsom Excerpts
The Minister of State, Department of Energy and Climate Change (Andrea Leadsom)
The instrument before the Committee and the associated modifications to the standard licence conditions implement the changes set out in last year’s feed-in tariff review. The changes include, among other things, the introduction of a cost-control mechanism in the form of deployment caps, and a revised level of generation tariffs to be paid under the scheme. The changes are necessary to protect bill payers from unacceptable costs in the future and to ensure that support for renewables remains affordable.
In recent years, we have made enormous progress in encouraging the development and deployment of renewable energy and building a successful renewables industry. The feed-in tariff, or FIT, scheme has been a vital part of that achievement. The Government recognise the significant role FIT has played in engaging non-energy professionals in the electricity market and also the role small-scale generation can play in future on a path to subsidy-free deployment.
The scheme now supports more than 861,000 small-scale renewable installations. That figure is far in excess of what was expected to deploy when the scheme was set up in 2010. The Government at the time estimated it would cost £490 million per year by 2020. Those projections are no longer even slightly correct. Without the changes we have introduced, which are set out in the instrument that we are debating, we estimate that by 2020 the FIT scheme would cost more than three times that figure at £1,740 million per year.
The Government are committed to cost-effective decarbonisation of our electricity supply and to protecting consumer bills by controlling costs under the levy control framework, or LCF.
Graham Stuart
The Minister is right to highlight the Government’s record, which is tremendous. In 2010, only Malta and Luxembourg had fewer renewables than this country. The Government truly have been the greenest Government ever. To what extent is the Government’s approach to the LCF and capping informed by an understanding of the merit order effect? That subsidy is not all that it seems. In fact, the costs to the consumer are a great deal less than would be apparent purely looking at the LCF total.
Andrea Leadsom
My hon. Friend makes a good point. He will be aware that the analysis my Department does takes into account the merit order effect. Nevertheless, the levy control framework—the actual sum that gets added to consumer bills by our policy on support for the renewable sector—has to be taken into account. This was not a modest overspend; it was shooting the lights out. It beat all our own assessments over our targets in our electricity market reform analysis. Both the deployment and the cost associated with it have gone massively over what we anticipated. Therefore, it is not fair to consumers simply to say, “Never mind, we won’t even attempt to meet either the target that we set out for renewables or the cost associated with it.”
Graham Stuart
I am grateful to the Minister for giving way again. The wholesale price is so much lower than I think the Government predicted. Perhaps she can confirm that. Therefore, in a sense, the cost to the consumer and the merit order effect are such that the low cost of renewables has dragged down the wholesale price of energy. That is why no one at the moment will put any form of new generation into place, without some sort of support. That is because renewables have lowered the wholesale price. Therefore, one must offset that against the subsidy if one is to have a true picture of what the consumer is paying towards greening our energy supply.
Andrea Leadsom
I say again to my hon. Friend that I completely understand the point he makes. He, too, completely understands the point I am making, which is that in terms of deployment, the management of the system and the transition to a low-carbon energy future, we cannot simply throw all our own estimates, budgets and targets up in the air and suggest that it does not matter what we add to consumer bills. I totally understand the point he makes—please do not get me wrong there. Nevertheless, it is vital that when we set our targets for how we want to manage our transition to a low-carbon future we keep some kind of rein on the deployment levels and the cost that we put on consumer bills as a result.
The Government are committed to cost-effective decarbonisation of our electricity supply and to protecting consumer bills by controlling costs under the levy control framework. The LCF projections published last July showed a significant overspend due to, among other things, demand-led schemes such as the FIT providing unchecked support for the renewables industry, so urgent intervention to manage spend has been necessary. It is important to remember that the FIT scheme is funded by consumer electricity bills—bills that are paid by all regardless of whether they benefit from the scheme. Uncontrolled spending on FITs therefore has a direct impact on the energy bills of consumers, including families and businesses.
Hon. Members will recall that the Government announced a package of cost control measures, including a consultation on the future of the FIT scheme last summer. This proposed a number of measures to meet two core objectives: first, to comply with our EU state aid approval, a review of the support offered by the FIT scheme, which is required every three years; and, secondly, proposals aimed at controlling the cost of the scheme to limit the impact on consumer bills.
It is clear that the scheme in its original form was no longer affordable and needed to be amended to protect consumers. With the changes introduced by this instrument, spending will be more controlled and will be reduced from £1,740 million to £1,300 million a year by 2020. That still allows for very significant support, but it will be provided in a more controlled manner, balancing the interests of bill payers with those of the wider renewables industry. Overall, the changes we are making will save at least £7.6 billion from consumer bills over the next 20 years.
Tom Pursglove (Corby) (Con)
I draw the attention of the Committee to my declaration of interest as director of Together Against Wind. When reaching these policy decisions, do Ministers take into account the real challenges that our manufacturing industries are experiencing? Spiralling energy costs have made it difficult in recent years for them to compete on a global playing field. It is important that we control costs and we must not see them increase in what are already difficult circumstances.
Andrea Leadsom
My hon. Friend is exactly right to point that out. The balance we are seeking to achieve is to be fair to the industry and fair to those consumers, including businesses—we have seen this a lot of recent weeks and months—who are really struggling to meet their electricity costs and to be competitive. As I said, overall the changes will save at least £7.6 billion from energy bills over the next 20 years.
Members of the Committee will recognise that this Government were elected with a clear manifesto commitment to keep bills as low as possible, so controlling costs under the LCF is a key part of delivering that commitment. Urgent action was needed to bring projected FIT scheme spend down in order to manage LCF spend responsibly and to protect consumers. It is simply not acceptable to continue with an unconstrained scheme.
This amending instrument makes a number of changes to the FIT scheme, including, first, the introduction of deployment caps, limiting the aggregate total installed capacity of installations that can be applied for within any quarter. That will enable us to limit spend on the scheme to £100 million up to the end of 2018-19. Such caps are necessary if the scheme is to continue and if its impacts on consumer bills are to be properly controlled. I tell the hon. Member for Southampton, Test that currently, if the technology does not reach its quarterly cap, the underspend is rolled over to the next quarterly cap.
Secondly, the order reintroduces pre-accreditation. That would not have been appropriate without the security provided by the deployment caps. It will therefore also mitigate some of the uncertainty inherent in a system of capped deployment.
Thirdly, the order removes the right to receive a generation tariff for extensions to existing installations. That is intended to incentivise generators to install the maximum capacity achievable and to eliminate the potential for gaming of tariffs.
Fourthly, the order introduces a cap on the amount of green overseas electricity by which suppliers are exempted from paying FIT policy costs.
The rest of the measures from the review are implemented through amendments to licence conditions. First, there are changes to the generation tariffs. Tariffs have been revised following consultation to ensure a viable scheme while maximising value for money for bill payers. Secondly, there are modifications to both default and contingent degression tied to the quarterly system of budgetary caps. Thirdly, there are changes to energy efficiency criteria to require that an energy performance certificate—an EPC—is obtained prior to the commissioning date of solar PV installations under 50 kW. That change has been made to encourage improvements to the energy efficiency of properties more generally.
Prior to making the changes, my Department carried out an extensive stakeholder consultation. DECC officials met stakeholders across England, Scotland and Wales, and received and analysed just under 55,000 consultation responses. We listened carefully to the views of industry, in particular the £1 plan of the Solar Trade Association, and we took account of its responses in redesigning our scheme. I myself held a roundtable for all industry associations to hear their views. As a result of our stake- holder engagement, we revised tariffs upwards to reflect the findings of the evidence provided. We allocated more budget to solar under our £100 million cap and we implemented a cap system that will allow us to recycle underspend and to consider the balance of caps between years.
Our changes combine the visibility that industry asked for with the robust cost control that the Government need.
Dr Whitehead
The Minister has set out the various cost benefits of the changes, but has she set that against the possible loss of capacity after 2020 and the consequent expenditure, also a cost on bills, that will ensue from getting further capacity on the systems concerned? Has she looked at how that works in the round? Has she put those comparative figures to the Treasury in terms of how the levy control framework and the capacity market may work as a consequence?
Andrea Leadsom
I think the hon. Gentleman is suggesting that subsidy will continue to be necessary for ever for solar.
Andrea Leadsom
No? Okay. In which case, the hon. Gentleman will appreciate that, given the rate at which costs are coming down in various renewable technologies, it is our hope and expectation that as subsidies become less necessary, different renewable technologies will be able to stand on their own two feet. I am not entirely sure what he is asking me.
Dr Whitehead
Perhaps I can clarify. As the Minister is aware, we are about to spend £5.5 billion on procuring capacity through capacity markets. If we had greater renewable capacity in the system, and we were able to make that visible on the system, a good proportion of the expenditure to procure capacity from non-fossil fuel plant would not be necessary. Has she considered that, because the very large expenditure that is under way, which costs bill payers between £20 and £30 a year on their bill and dwarfs the figures she has cited, could at least in part be avoided by opting for that route?
Andrea Leadsom
Yes is the answer to that; we have absolutely considered that option, as we always do. Of course, the capacity market is an insurance policy for security of supply. In three or four years’ time, we hope and expect that energy storage will have been deployed to a greater extent. In those circumstances, the hon. Gentleman might be right that, for future years, we may be able to say that, owing to such storage, solar and wind are despatchable power. However, he will recognise that our energy trilemma is to keep the lights on, keep bills down and decarbonise.
The capacity market is an insurance policy and therefore it is despatchable power that bids into that market. At the moment, solar and wind are not utterly reliable technologies. It is not negotiable: we will keep the lights on. I hope that is a reasonable answer, but I can assure the hon. Gentleman that we look at this from both ends of the telescope, and in the past year, my Department has done a lot of work to look at precisely how different policy changes affect every aspect of our energy trilemma. We always consider the questions, “What does this do to energy security? What does it do to the cost of bills, and what does it do to our targets for decarbonisation?” We never look at just one aspect of our energy policy. I hope that response gives him some reassurance.
The changes will limit the subsidy available under the FIT scheme. That is necessary to prevent overcompensation and to protect bill payers. In our electricity market reform delivery plan, our best estimate of the solar deployment needed to hit our 2020 renewables target was that we should achieve between 10 GW and 12 GW. Without action on demand-led schemes, we would have exceeded that target, and even with those changes, we are still on track to exceed that range. We expect to hit around 12.8 GW by 2020, so even with the limit on subsidies, we still expect to exceed our own targets by 2020.
The aim of the continued support we are offering is to get us to the point where the calculation is not about what jobs are supported because of subsidy, but what the industry can sustain in a post-subsidy world. For example, we believe that the future FIT scheme will provide enough support for new solar installations to power more than 260,000 homes. That is still a significant increase from where we are today. Of course, 99% of all solar installations have taken place since 2010, so this is still a significant growth sector.
The order came into effect on 15 January, so it is still too early to determine the longer-term impact of the changes on deployment, but early data show that six of the 11 caps for Q1 of 2016 have been hit. We are encouraged by the way the industry is responding to the recent changes. For example, deployment of solar under the revised FIT scheme continues at rates that match those seen historically following previous revisions to the scheme. I assure hon. Members that my Department is closely monitoring applications and deployment, and will continue to review the effect of the changes.
I would like to make one final point. If the order were to be annulled, we would have to consider closing the FIT scheme altogether. At the very least, we would need to suspend the scheme while we considered alternative means of controlling costs. That would bring further uncertainty, which would be deeply unwelcome to the renewables industry. Hon. Members will recognise that the Government are consumer champions, and we simply cannot allow uncontrolled costs to impact on consumer energy bills.
I remind the Committee that the changes to the FIT scheme are part of a package of cost control measures to deliver our manifesto commitment to keep bills as low as possible. The Government want to protect bill payers, ensuring technologies can stand on their own two feet while also meeting our renewable energy commitment. To annul the order and remove the cost control measures—measures intended to protect bill payers—simply will not do. I commend the instrument to the Committee.