Energy: Feed-in Tariffs

Baroness Stowell of Beeston Excerpts

Thursday 9th February 2012 Lords Chamber

[Baroness Stowell of Beeston]

My Lords, with the leave of the House I shall now repeat as a Statement a response to an Urgent Question made in the other place by my honourable friend the Minister of State for Climate Change.

“I am responding to this question as the new Secretary of State for Energy and Climate Change had a longstanding engagement that prevented him from being here. He is currently opening the world’s largest industrial offshore wind farm in Cumbria.

The Government have today announced plans to ensure the future of the feed-in tariffs scheme and make it more predictable. These reforms will lead to a bigger scheme, providing better value. The scheme provides a subsidy, paid for by all consumers through their energy bills, enabling small-scale renewable and low-carbon technologies to compete against higher-carbon forms of electricity generation.

The unprecedented surge of solar PV installations in the latter part of last year, due to a 45 per cent reduction in estimated installation costs since 2009, has placed a huge strain on the feed-in tariffs budget. This threatened the Government’s ability to roll out these small-scale low-carbon technologies in the numbers we wanted over the next few years. We acted as swiftly as possible to respond to that threat through the changes that we are now making to the tariffs for solar PV.

Today is a turning point for the feed-in tariffs scheme. We are taking the opportunity of the review to put right the many limitations of the scheme that we inherited. We have looked hard at the feed-in tariffs budget and made the most of the flexibility available under the levy control framework to ensure that we keep the scheme going, but we want to do much more than that.

The reforms that I am announcing today are designed to make that budget go as far as possible to maximise the number of people able to benefit from feed-in tariffs. With this new reform package we aim to give plenty of TLC—transparency, longevity and certainty, which were absent from the scheme that we inherited. The reforms will provide greater confidence to consumers and industry investing in exciting renewable technologies such as solar power, anaerobic digestion, micro-CHP, wind and hydro power.

Instead of a scheme for the few, the new improved scheme will deliver for far more. Our new plans will see almost two and a half times more installations than were planned under Labour. This is good news for consumers and good news for the sustainable growth of the industry. We are proposing a more predictable and transparent scheme as the costs of technologies fall. This will ensure a long-term, predictable rate of return that will closely track changes in prices and deployment.

Make no mistake, this will be a challenging package. The tariff degression mechanism we will be proposing will not allow for fat profits or for excessive rents. However, it will also show a serious ambition. We believe that, under our new plans, by 2020 we could see over 20 gigawatts of solar PV in the UK.

The coalition wishes to see a bright and vibrant future for small-scale renewables in the UK, in which each of the technologies is able to reach its potential and get to a point where it can stand on its own two feet without the need for subsidy, sooner rather than later. In opposition we promised a decentralised energy revolution—power to the people. Today we are making a huge stride towards achieving that ambition.”

That concludes the Statement.

--- Later in debate ---

[Baroness Stowell of Beeston]

I am grateful to the noble Baroness for her comments. It is unfortunate that my noble friend Lord Marland is not here today. He is overseas and working hard to create new export opportunities for the industry. I know he would be disappointed to miss the opportunity to respond to the points raised by the noble Baroness.

On her first point about his comments in the Chamber the other day in response to an Oral Question, my noble friend is very clear in the way he speaks. He certainly does not require me to interpret anything for him. What he said was certainly striking but there was no mistaking that his point was that the level of subsidy that was available to an industry that has become so successful was ridiculous. That is something that we should certainly welcome.

I will respond to some of the other points that the noble Baroness raised. She questioned the impact of the change in tariff on the industry. As I said in the Statement made by my honourable friend, which I repeated, we are very clear that we see a long-term future for the solar power industry. It is important. We want to put in place arrangements that safeguard the future of jobs in a sustainable way. In preparing for today, it was interesting to learn that, in the six weeks between launching the fixed consultation and its closure, more small-scale PV capacity was installed than in the whole year before. Indeed, the rate of installation continues to grow. This is an industry that is growing; it continues to be successful and we want it to be successful. Today we are announcing changes that will ensure that it has the certainty and the longevity that are important to its success. As I think my noble friend made clear in answering the noble Baroness a couple of weeks ago, as of now no job losses have been incurred. The changes that we are making are to ensure that those jobs are sustainable in the future.

The noble Baroness raised a detailed point about the cost of the analysis that was undertaken by the department after the consultation closed in the small window at the start of this year. The analysis received 80 quotes for PV installation from 10 companies and used a range of intelligence from the industry. However, on something as specific as this, I should like to write to the noble Baroness after today’s debate.

The noble Baroness also asked about community schemes. For the benefit of other noble Lords, it is worth pointing out that there are two issues to do with community schemes in what we have announced today. One part of our announcement deals with some decisions that the Government have taken in light of the first consultation, which took place last autumn. We are starting another consultation today. From the consultation outcomes that we are announcing today, it is clear that we listened very carefully to the responses that we received.

On community schemes, in the context of solar PV, we have announced that those who are installing more than 25 units, rather than one, should benefit from the higher tariffs. Previously, it was proposed that once someone had installed more than just one solar panel, they would start to receive a reduced level of tariff. We have increased that to more than 25 to make sure that we do not inappropriately cut off any of the small community projects that have been mentioned in previous debates on this subject. At the same time, we are consulting today on what the definition of “community” should be in the future. As the noble Baroness pointed out, this is a very important issue and we want to get it right. We are consulting and have already talked to organisations such as the National Housing Federation and local authorities about this. The point of that consultation is to make sure that we have a proper scheme so that communities—whether they are local authorities that want to introduce solar panels for a group of schools or community-based projects—receive the kind of tariff that they rightfully should.

I am reminding myself of other points that the noble Baroness raised in her remarks. On the EPC, the definition of environmental change is something else that we took account of in considering the responses to the consultation. As I said earlier—and as the noble Baroness has acknowledged—we have changed the level of environmental grade for those eligible for the tariffs from C to D. I think the noble Baroness was asking whether this would mean that 50 per cent of people would still not be able to benefit from this tariff change without making some changes to their houses. She is right: they will still need to make some changes to their properties. However, whereas under the previous arrangement only 9 per cent of houses had a grade C energy environmental rating, at level D the sort of changes which we would expect those 50 per cent of people who are not covered by the provision to make are measures such as insulating a loft, making changes to the control mechanism of a central heating system rather than the actual boiler and perhaps lagging a cylinder. A householder would need to take account of these small changes, which can be made at reasonable cost, to reach level D. I stress that we carefully considered and have taken on board the responses on that point.

The final point that the noble Baroness raised concerned the answer that my noble friend gave to her a couple of weeks ago when she was asking about the legal costs that the department has incurred in appealing the legal judgment at the end of last year. My noble friend was careful to make clear at that time that the department had incurred costs of £66,400 so far. That was an accurate figure of the costs that had been incurred. As regards any further costs that might be incurred in light of the appeal that the department is pursuing, it is impossible for me to give the noble Baroness an estimate of what they might be. She will know that decisions on the costs that the appellant might have incurred, and how much of those costs the department may have to pay, will be decided at the end of the process. We are appealing the judgment. It is important that I make clear why we are appealing. That is to the benefit of everybody. We are appealing because the judgment that was arrived at could add £100 million in costs each year to the public purse. In appealing that judgment, we are looking to safeguard around £1.5 billion of public expenditure over the 25-year tariff lifetime. We think it is right and in the interests of the public that we appeal that ruling. Obviously, in doing so, we will incur further legal costs. If the noble Baroness wishes to ask again what costs have been incurred when the process is completed, no doubt we will be able to provide her with an accurate answer which will reflect all the issues that have been taken into account along the way.

[Lord Teverson]

My Lords, I very much welcome the Statement. I also very much welcome the fact that my right honourable friend the Secretary of State concentrated on the renewables sector in the first few days of his taking office. I am pleased that the Statement shows that the Government are trying to get stability back into the investment market as I am sure that is something we all want to achieve. I also welcome the emphasis on communities that my noble friend has just mentioned as community schemes are very important.

As regards solar PV, a planning consultation is taking place today in Cornwall on a large-scale solar PV scheme and close to where I live another large-scale solar PV scheme is being rolled out. Therefore, I do not think that we need to worry too much about that industry once we have stability. I have read a DECC Written Ministerial Statement by Edward Davey on the internet. That was perhaps rather naïve of me, but it seems to be slightly different from the one we have heard today. I was pleased to read in that Statement that the department has looked hard at the FITs budget and made the most of the flexibility available under the levy control framework to ensure that it can keep the scheme going.

I very much welcome flexibility and know that it is welcomed by many people in the industry. If my noble friend cannot answer my next point fully, I would welcome a written response. How much flexibility is available as regards different types of technology within the FITs budget? Can that flexibility be increased as regards the FITs budget and the amount that the ROC system is expected to cost? I welcome this greater flexibility but would like to understand how far it might extend into the future. I appreciate that my noble friend might not have all the detail with her at this moment.

[Baroness Stowell of Beeston]

I thank my noble friend for his comments. I think it would be better if I wrote to him on his specific question. I am aware that there is definitely flexibility within the department. To put it another way, one of the advantages of the new arrangements that we are putting in place is that we do not have to introduce significant shifts in the way in which we change the tariff as the solar PV industry becomes more successful. In terms of flexibility that is an important thing to be able to do. We have a budget for that but it is proving difficult to predict specifically how the tariffs will change in light of the success of the industry, and it is increasingly successful. I think it is probably safer for me to write to the noble Lord on whether that budget can be used for ROCs rather than feed-in tariffs.

I am grateful to the noble Lord for referring to community projects as it gives me the opportunity to correct something that I said in response to the noble Baroness, Lady Smith. I think that I became a little confused between my “highers” and my “lowers” when I was talking about the number of people who might benefit from the new multi-installation tariffs. Projects of fewer than 25 units will enjoy the higher tariffs. Those above 25 units will not because once you get above 25 you start getting into a different category of people, and clearly they should not be subsidised by the public purse.

[Lord Redesdale]

My Lords, I declare an interest as the chairman of the Anaerobic Digestion and Biogas Association. That always gets a smile but I feel that I am a lone voice. I add a note of slight criticism: FITs are not just for solar PV. It seems to me that unless I raise AD, it never seems to get mentioned in this House, but FITs are incredibly important for small-scale AD. We are going to be very much more reliant on the renewable energy coming from AD than we are from PV. Although PV is important, the amount of generating capacity is a fraction of that coming from AD.

I seek clarification on two points in relation to the Statement. However, I realise that this is a consultation process. First, DECC has come forward with a 500 kilowatt band. The problem we always have with setting such arbitrary targets is that we then have to build the kit to meet the artificial target. Until recently no technology has stopped at 500 kilowatts, so you end up building new kit to meet the artificial boundary. There is a problem here. With regard to the digressions that have been talked about on small-scale FIT, after you go over the 500 kilowatt point, the amount of money you will get under FIT goes down markedly. The stated aim in the consultation is that farm-based AD should take in food waste. If it is taking in food waste, it will then start producing more power because there are more kilojoules in the food waste, which will take it over the band. However, the very boundary itself, and the digression that is set in there, could bring about a major problem in that people will not take that extra step because they cannot get the funding.

Secondly, the expression “TLC” was used. “Tender loving care” is probably a better expression. The same financiers who have had certain problems with solar PV are the ones who are financing AD. It is extremely difficult to get any debt financing or equity financing for AD at the moment. This is of particular concern regarding the statement that if certain trigger points are met, there would be a retroactive reduction in the feed-in tariff for anything coming on-stream at that point. If we were nearing those targets, that would have a major implication for financiers financing schemes because they would not know which band tariff they would be under. I realise that that is a point for consultation and that the Minister might not be briefed on the minutiae of these individual issues, but the major problem at the moment with anaerobic digestion is that it is a high-risk operation and we need to make sure that the financiers are in a position to fund it. We therefore need regulatory clarity over the regime. I very much hope that my noble friend will take these points back to DECC.

[Baroness Stowell of Beeston]

I am grateful to my noble friend for his comments and for widening the debate beyond solar. It is worth pointing out that feed-in tariffs are not just about solar PV but, as I mentioned in my Statement, they are also about micro-CHP, wind and hydro power, and anaerobic digestion, as my noble friend said. As to his specific question about bands for AD, they are the same as in the original scheme, so we are not proposing a change. However, we have announced today two things: one is an outcome from the first phase of the consultation, and the other is the start of a second consultation. I therefore hope that my noble friend will take the opportunity of the new consultation and make his contribution along the lines he mentioned.

[Lord Empey]

My Lords, I broadly welcome the Statement. As someone who spent three years as an energy Minister in Northern Ireland, I have some grasp of the problems we face. While the announcement today is one step, we must remember that there is no silver bullet for resolving our energy problems. Much of the enthusiasm from various groups conceals the fact that we do not really have sufficient non-fossil fuel and nuclear capacity in this country to make the sort of impact that we hope for in the long term. One of the reasons why we have to approach this matter from a different angle is that we need to do more by way of making what we have more efficient. Can the noble Baroness ask her right honourable friend the Chancellor of the Exchequer to encourage the retrofitting of buildings to reduce energy demand? One of the levers at his disposal is VAT. We charge full VAT on the refurbishment of buildings and no VAT on the construction of new buildings. We need a twin-track approach—one to develop other energy sources, and another to increase insulation and thereby make buildings more efficient. Would the noble Baroness be kind enough to draw that matter to the attention of her right honourable friend in the other place because the combination of those two directions that we should travel in is absolutely essential? Otherwise we are simply running to follow rising demand when in fact we must make better use of the energy that we are already producing.

[Baroness Stowell of Beeston]

I am grateful to the noble Lord for those points and for making the clear remark that there is not a silver bullet. It is important to keep that in mind when we look at the range of different sources of energy that we are using and introducing into our wider energy strategy in the UK. We need a range of different sources and that is precisely what we are doing.

As to the noble Lord’s specific point about VAT exemption on new builds, and whether that can be introduced for retrofitting of older buildings in order to make them more energy efficient, which is another important part of our strategy, I will certainly pass that point on to my right honourable friend the Chancellor as I am sure the noble Lord will understand that it is not possible for me to respond today.