Baroness Verma
Main Page: Baroness Verma (Conservative - Life peer)
Baroness Worthington
I do not think it will be too late. The reason I say that is independent generators, as we have just discussed, are already quite substantial players; they are receiving revenue as we speak. This is about their forward plans and the investment in the future. They will not go bankrupt because we are not doing anything to affect their current investment base. We can overegg the problem. I have stated myself how important I think they are, but I do not think that they are going to disappear or go bankrupt, because they all own projects today.
I was slightly thrown by that intervention. If we find that there is a problem: that the liquidity is not there and the PPAs are not forthcoming, that signals that we have a further market reform to bring forward, which must look seriously at the pooling of power and the creation of a genuinely competitive market. That would be the real solution for giving everybody a fair market within which to operate.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, the issue of competition and, in particular, the route to market for independent renewable generators has been referred to throughout the Bill’s passage in this House and in the other place, and the debate has been equally eloquent and balanced today. There is good reason for that. I agree with noble Lords: independent renewable generators have a significant pipeline of projects across the UK and bring essential competition, innovation and diversity to the energy market.
The Government recognise that in recent years it has become harder for independent renewable generators to secure power purchase agreements on bankable terms. We judge that several of the factors currently constraining the market will be resolved by the introduction of CFDs, but some issues may continue to limit competition for long-term PPAs after CFDs have been introduced.
My officials have worked very closely with industry to prepare the market for the CFDs. We have already established industry working groups to develop PPA structures that will be fit for purpose for the new market arrangements and a code of practice for those participating in the PPA market. Those will help new entrants and smaller generators to navigate the process of negotiating and securing PPAs. However, the Government have decided that it is necessary to provide further confidence for developers and investors by tabling amendments to the existing powers in the Bill.
I am very pleased to hear a welcome from noble Lords from across the Committee for the amendments. They will enable the establishment of a power purchase agreement scheme which could provide generators with access to an off-taker of last resort. This mechanism would be similar to that outlined in my noble friend’s Amendment 55AB. In the light of the Government’s amendments, I hope to reassure my noble friend and other noble Lords that these issues are being addressed.
Lord Kerr of Kinlochard
Before the noble Baroness sits down, will she explain again why she rejected Amendment 55AFB in the name of the noble Viscount, Lord Hanworth, which would have inserted in government Amendment 55AF a reference to current market prices? I find my entry in the Register of Interests extremely misleading because it should imply competence to deal with this Bill, whereas I find it extremely hard to penetrate. However, I would have thought that over time the PPA must bear some relation to market prices. It cannot be set for all time, surely. The Minister seemed to be saying that it was important to give the certainty of a fixed price. That would mean a variable degree of subsidy, depending on what was happening to the actual price in the market.
I also have some difficulty with Amendment 55AB, introduced so impressively by the noble Lord, Lord Roper. I find it difficult to get away completely from the idea of efficiency being a criterion as well as independence. All the emphasis on the ability to borrow in the markets or from the banks and thus to have the certainty of a demonstrably viable price seems to take us far away from the market and questions of efficiency, although I am all for encouraging independent generators. However, the Minister’s rejection of Amendment 55AFB really puzzles me. Surely there must be some relationship with current prices in the market.
Baroness Verma
My Lords, I will respond to the noble Lord, Lord Kerr, on Amendment 55AFB in a moment but, first, I will reply to some of the other questions that have been posed.
I reassure noble Lords that we have had a reasonably positive response to our amendment from stakeholders, including RUK, RES and the Renewable Energy Association, although I recognise that there is a lot more work to be done. We will be working very hard with the industry and other stakeholders to make sure that we have a bankable solution. The noble Baroness, Lady Liddell, asked what I would be doing during the summer, and this will be one of my tasks.
My noble friend Lord Deben was absolutely right when he said that we need to be absolutely sure that we are able to explain our intent clearly. I hope that I will be able to reassure him that I will continue to work before Report to ensure that our proposals are understandable and available to the market. Like all noble Lords, I feel that this is an incredibly complex and complicated area, so it is absolutely right that we are able to explain ourselves very clearly.
All noble Lords said that it has taken us a long time to get to where we are. However, it is a complex issue. We launched a call for evidence last July regarding the introduction of backstop powers in the Bill in November, and we have brought forward amendments. We want to work very closely with the industry to develop further proposals and we will be consulting in the autumn. However, in all this we need to make sure that the independent operators feel that they have a large stakeholding and that they are being responded to.
The noble Lord, Lord Cameron, asked why we do not keep GPAM in reserve as the NFPA already exists and has proven to work. The NFPA is not suitable for GPAM. The nature and scale of projects under GPAM are very different and would need a very different type of action, so there would not be a natural transfer across.
In response to the intervention of the noble Lord, Lord Kerr, concerning Amendment 55AFB, the PPA price would be set at a fixed discount to the market price, but the discount itself would not be set by reference to the current market. Does that make sense?
Baroness Verma
Did it not make sense? Perhaps I will get a little more inspiration while I finish reading my notes.
The noble Baroness asked whether Ofgem or some other body would keep the market under review. Yes, Ofgem will use existing powers to review it so as to make sure that it is working.
Finally, the noble Baroness, Lady Worthington, referred to the green growth figures. We are really pleased to see that they are growing, given the drop-off in the economy. I know that she and I and other noble Lords agree that we need to trumpet it at every opportunity. I hope that I do, because I think it is absolutely excellent news and one of the core strands of the department is the green growth agenda, which we are trying to build on. There are 1 million plus jobs supported by the green economy. That is on a par with financial services, and we have enormous scope to develop that. I very much agree with the noble Baroness, Lady Worthington, on that.
Baroness Worthington
It is probably a question of our understanding more clearly how the price setting might be derived. Under government Amendment 55AF, two processes are set out in subsection (6). One is a process involving a determination and the other is by an auction or competitive process. I think that the noble Viscount was simply asking to insert a reference to current market prices. Perhaps a letter clarifying new subsection (6) would be helpful to everyone.
The government amendment removes some of the flexibility currently in the Bill by providing under Clause 44 that the backstop PPA is the only policy, whereas before it was broader. I reiterate the comment that, given that this is a moving piece, it might be sensible to retain a little flexibility.
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 Cameron of Dillington
I am sorry to add to the worries. I had not intended to intervene but it seems to me that, in spite of what the noble Lord, Lord Deben says, there is the possibility of unfair competition arising, particularly as regards timber used for building, and a subsequent increase in the cost of building houses, which is something I do not want to see. There is also the possibility of a higher carbon footprint arising from timber being sourced from the wrong place and in the wrong way, as several noble Lords have mentioned. The Government need to keep an eye on this. Therefore, there should be a mechanism to enable them to do so.
Baroness Verma
My Lords, I am extremely grateful to my noble friends Lord Jenkin and Lord Roper for tabling this amendment. It would give the Secretary of State further powers to require operators of electricity generating stations that use wood as a form of renewable energy to provide fuel strategies to the Secretary of State for review and approval, covering, for example, the quantity and country of origin of wood to be used.
I am grateful to noble Lords who have raised serious concerns. I appreciate the intention behind my noble friends’ amendment, which is to increase the control the Government have over the amount and kind of woody biomass which is used for electricity generation, and thus to minimise the potential impacts on non-energy sectors which use wood such as the wood processing and wood panel sectors. Indeed, it is a stated aim of the Government’s bioenergy strategy that support for bioenergy, including support for power generation from woody biomass, should consider the consequences of policy interventions on the wider energy system and economy, including non-energy industries. It is the Government’s view that where this and the other aims listed in the bioenergy strategy are met, bioenergy can make a significant contribution to meeting our renewable energy, energy security and emissions reduction needs at low cost. Bioenergy also has the benefit of being dispatchable, so can operate when required.
However, we are aware of concerns raised by several UK industries regarding the impact of biomass electricity on UK wood prices and have taken a number of measures to address this. Last year we took the decision to ask all large-scale electricity generators using woody biomass to disclose to us, on a voluntary basis, the amount of UK wood that they estimate they will procure and use over the next five years. We require this information to be signed off by the company’s board. We are pleased to say that all the operators responded to our request and provided this information, which the department has aggregated and will publish shortly. We will write to the electricity companies again this year with the intention to make the fuel disclosure a yearly practice.
Generating stations operating under the renewables obligation are also required to provide annual sustainability reports on biomass use. This includes the information held by the operator on the tonnages and types of biomass used—for example, whether that be woodchip, sawdust or energy crops—and whether the fuel came from a source which complied with an environmental standard. Ofgem publishes this data each year, and DECC will publish aggregated data.
Lord Deben
I assure my noble friend that the industry realises how strong the powers are. That was the reason for the visit of those Americans, who did not like those powers. Also, the Committee would want her to know that we have all experienced businesses who claim that they are in trouble from some government action when in fact there is an entirely different reason. I remember the oleochemical industry made a great deal of fuss about government environmental standards when in fact it had every intention of moving abroad in any case and just wanted somebody to blame.
Baroness Verma
Of course, my noble friend is far more experienced in these matters than I and I am always open to learning from him.
These sources of data have confirmed the forecasts for UK wood use made in the renewables obligation banding review last year, which did not conclude that demand for UK wood for electricity generation would have significant detrimental impacts on other wood-using sectors. That was mainly because we estimate the vast majority of biomass for power to come from imports from countries such as the United States—to which my noble friend Lord Deben referred—which have larger forestry industries and whose companies are able to give power companies the long-term fuel contracts they need. Given the analysis undertaken for the bioenergy strategy and the renewables obligation banding review, and given the latest data we have on demand for wood for electricity, currently we do not see sufficient need to add the new regulatory burden proposed in this amendment on the electricity industry.
The amendment would introduce a new layer of complexity and potential for delay and uncertainty in developing both potential new generating stations and existing plants. It would also be likely to reduce investor certainty in the sector, introducing questions around disqualification from support under CFDs, should the Secretary of State not like a plant’s proposed fuel strategy. Establishing the basis on which a plan is judged satisfactory would be complex and open to legal challenge. Furthermore, the voluntary approach that we have taken is a light-touch regulatory approach that has delivered to us the information we need. We have used this industry-wide data to help develop the sustainability criteria framework on which we have made the proposals. This includes strengthening further some of the reporting requirements.
With these actions, I hope noble Lords will see that the Government are taking this issue seriously and are keen to continue to work with the wood processing and other sectors to give them further confidence that non-energy sectors should not be significantly detrimentally impacted by energy policy.
The noble Baroness, Lady Maddock, asked about Blyth power station. Perhaps I may write to her and the Committee with the details.
I hope that my noble friend Lord Roper finds my explanation at least partly reassuring and on that basis will withdraw his amendment.
Baroness Worthington
My Lords, today the Committee started with a discussion around transitional arrangements for renewables because of the grouping of the amendments, but the part of the Bill we are still debating includes reference to the contracts for difference and the detailed ways in which they will work. Clause 17 is interesting in that it gives the Secretary of State a power to set by order both a maximum amount of money that can be spent on contracts for difference and also, under subsection (4), a provision to include targets.
I have spoken both at Second Reading and in Committee about my concern that we are potentially entering into a great politicisation of energy policy with this Bill. We are, for good reason, proposing to move towards a much more administratively complex and centrally controlled system for allocating funds to low-carbon projects. There are reasons for that and we support the broad principle. However, the Government have been quite clear that this is a temporary transitional arrangement and supporting documents have referred to the fact that this will ultimately transition to a competitive system where, through technology and blind auctions, CFDs will be allocated in an administrative way with far less central control. Given that that is where we are trying to get to, I am concerned that we should not unnecessarily constrain this transitional period by a system of micromanagement which we are unlikely to get right.
The deletion of subsection (4) would remove the power to make targets for the means by which electricity is to be generated—that means the type of electricity generation—and remove the risk of the scale of generating capacity being unduly split up. The definition of “eligible generators” will be set by order. I think that that is correct. I do not see why you would want to have specific targets by scale.
Thirdly—and this is potentially the most worrying aspect—the Secretary of State may wish to make targets by geographical location. I am not saying that this is what would happen, but it is obvious that that holds the potential for a huge degree of politicisation of energy. If a Government are strong or weak in a particular region and wish to direct generating capacity into that area, for whatever reason, this would enable that to happen. We do not want to go back to the bad old days, whereby, to win a seat, you might want to boost a few jobs and put a power station there. That seems to be retrogressive. You could also lose your seat by doing that, it is true to say. It works both ways. However, I should be interested to hear the rationale from the Minister as to why geographic targets would be necessary. I am also nervous about undue micromanagement in terms of targets, sub-targets and sub-targets of sub-targets. We have had some experience of that already, with both the RHI and the FIT schemes having very targeted small allocations of pots of money to be spent on different types and scales of technology. Everyone with whom I speak in the industry is heartily sick of that, partly because it is almost inevitable that those targets will be wrong. The market finds the solutions according to its internal logic, and it is very difficult for civil servants to guess at that.
I am very nervous about the sub-division of the levy control framework into small, tight pockets of money where, if it is anything like the RHI and the FIT schemes, digressions will be introduced. If a certain type or scale of technology delivers, those digressions will hit and the market can be pulled away quite rapidly. We are seeing that with the solar feed-in tariffs at the moment. There is a great fear that, if the mid-size solar projects took off, they would immediately hit a digression and the market would disappear. Therefore, there is a very good reason to be nervous about micromanagement in this context.
Nor do I think that this measure can work in practice. The levy control framework is a seemingly fixed amount of money, but the levels of spend that will come through the CFD is not fixed, so you cannot estimate how much money will go to different projects until you know the difference between the reference price and the strike price, and that will come only with time. I am nervous about the levy control framework anyway, but I am even more nervous of one that is divided and sub-divided down into ever smaller pockets, because that will create a great deal of uncertainty in the market and has the potential to disadvantage rather than reward winners. Let us be honest—we want the market to uncover the most successful projects—the ones with the best chance of delivery. If, every time a sector or sub-division shows that it is being successful, it has its funding taken away or cut, that is not really a way to build an industry. That is why we have tabled the amendment. I admit that it is a probing amendment but this is a serious issue in relation to how CFDs will operate. I look forward to hearing the Minister’s comments.
Baroness Verma
My Lords, I thank the noble Baroness for her amendment. It seeks to remove Clause 17(4), which sets out a list of those things for which the Secretary of State might wish to set targets and which National Grid should take into account when allocating CFDs.
The Government intend to use CFD strike prices as the principal mechanism for bringing forward sufficient quantities of low-carbon generation under their electricity market reforms. Draft strike prices have now been published in the draft EMR delivery plan. The Government have also taken powers within Clause 17 to help to give effect to our wider objectives in meeting our 2020 renewables target, delivering a diversified generation mix and bringing forward new and innovative technologies.
The intention of including this subsection was to reassure industry and others about the aims of this clause and to provide some examples of how they might be used through the provision of a non-exhaustive list. Any such targets would be outlined in the final EMR delivery plan later this year, or in subsequent annual updates. As part of that, the Government might wish to set the targets in relation to the means by which electricity is generated to facilitate the development of marine and tidal or carbon capture and storage technologies—technologies with the potential to play a significant part in the UK’s generation mix in the longer term but which might otherwise be unable to compete on price with more mature technologies.
The Government have no current plans to set targets relating to the generating capacity of electricity generating stations. However, we might wish to do so in future if we believe that that is necessary to send a clear message to the supply chain to encourage investment in infrastructure supporting the delivery of a particular technology. The Government may wish to set geographic targets for a number of reasons. For example, we are considering whether renewables trading may be used to help to achieve our renewable and decarbonisation objectives, and setting geographical targets may support that.
It is important to make it clear that the Government do not intend to use that power to interfere with local planning decisions, and we have no current intention to use the power to restrict or require the allocation of CFDs in particular locations within or outside of the UK. We believe that the inclusion of the list within the clause promotes clarity and transparency, providing market participants and investors with additional information which helps them to make their investment decisions. Removal of the subsection may increase industry’s perception of risk, as it would appear to widen the scope of the clause. Industry feedback has been positive about the fact that we have sought to give strong indications of how we might use the power in the Bill, although it recognises that this is a non-exhaustive list. The users we have described are understood by industry.
I recognise the concerns of the noble Baroness, Lady Worthington, but I hope that the reassurances that I have given her will persuade her to withdraw her amendment.
Baroness Worthington
My Lords, I thank the noble Baroness for her response, which gives a degree of reassurance, certainly on the geographical location. I wonder whether a tighter wording might have allayed fears. If it is indeed to do with whether locations are outside or inside the UK, that is very different from a broad definition of geographical location.
I still have concerns about the need for the targets. Will they be legally enshrined in secondary legislation? If so, that seems slightly too restrictive. Perhaps people in the industry at the moment are reassured, but in a year or two, when parts of the levy control framework have already been used up and certain subsectors are feeling that their targets are too low, that sentiment could quickly change. I am just thinking of the bids that we have already had for the investment contracts. We already have a number of biomass conversions and a large number of offshore and onshore wind projects. What happens if more projects come later down the track when those bits of the targets have been used up?
I am just trying to think through how this will work in practice. I know that it is only a power that is being taken and that the Government may not necessarily use it, but I urge against too much micromanagement and too much setting of targets in secondary legislation. We may come to regret that; it may well push up the cost to consumers. The noble Baroness has spoken eloquently in favour of keeping costs low. The market will seek out the least-cost solution. I would be wary of too much intervention or of trying, as the noble Baroness mentioned, to support a particular supply chain or a particular technology. The more this comes naturally from the market, the more sustainable it will be. On that basis, I am happy to withdraw the amendment.
Baroness Verma
(3) For the purposes of this section and section (Power purchase agreement scheme: regulations)—
(a) a power purchase agreement scheme is a scheme established by supply licence conditions and regulations under section (Power purchase agreement scheme: regulations) for promoting the availability to electricity generators of power purchase agreements, and(b) “power purchase agreement” means an arrangement under which a licensed supplier agrees to purchase electricity generated by an electricity generator. For this purpose, “supply licence condition” means any condition, document or agreement of a kind mentioned in subsection (1).(4) Provision that may be made under subsection (1) in relation to a power purchase agreement scheme includes provision—
(a) as to the eligibility of an electricity generator to enter into a power purchase agreement under the scheme;(b) as to the terms of any power purchase agreement to be entered into under the scheme, including provision—(i) for determining the price at which electricity is to be purchased under the agreement;(ii) as to the duration of any such agreement;(c) as to the circumstances in which a licensed supplier is or may be required or permitted to enter, or offer to enter, into a power purchase agreement under the scheme;(d) for the provision of information in connection with the scheme.(5) Provision within subsection (4)(c) includes provision for determining which licensed supplier or suppliers is or are to be required or permitted to enter, or offer to enter, into a power purchase agreement with an electricity generator in any particular case.
(6) Such provision may in particular include provision for the licensed supplier or suppliers in question to be determined—
(a) by a process involving a determination or determinations by one or more of the following—(i) the Secretary of State;(ii) the Authority;(iii) the electricity generator;(b) by auction or other competitive process;and provision that may be made by virtue of paragraph includes provision as to the circumstances in which a licensed supplier is or may be required or permitted to participate in an auction or other process.(7) For the purposes of this section and section (Power purchase agreement scheme: regulations), “licensed supplier” means the holder of a licence under section 6(1)(d) of EA 1989.”
Baroness Verma
“Power purchase agreement scheme: regulations
(1) The Secretary of State may by regulations make provision, in connection with any modifications made under section 44, for or in connection with a power purchase agreement scheme.
(2) Any such regulations may in particular—
(a) make provision for apportioning amongst licensed suppliers, or any of them, all or any part of the value of any or all of the costs or benefits of any licensed supplier in connection with the scheme;(b) confer functions on the Secretary of State or the Authority (which may include provision for directions to be given to the Authority by the Secretary of State);(c) make provision for the delegation of functions conferred on the Secretary of State or the Authority by the regulations or by virtue of section 44;(d) include provision for obligations imposed by the regulations on licensed suppliers to be enforceable by the Authority as if they were relevant requirements on a regulated person for the purposes of section 25 of EA 1989; (e) make provision about the provision of information in connection with the scheme.(3) Provision that may be included in regulations under this section by virtue of subsection (2)(a) includes, in particular, provision—
(a) for requiring licensed suppliers to pay a levy to the Authority at specified times;(b) specifying how such a levy is to be calculated;(c) conferring an entitlement on a licensed supplier to receive a payment from the Authority.(4) Provision which may be included in regulations by virtue of subsection (3)includes provision for the Secretary of State or the Authority to determine what is to be taken into account as a cost or benefit of any licensed supplier in connection with the scheme and its value.
“(5) Regulations under this section may—
(a) include incidental, supplementary and consequential provision;(b) make transitory or transitional provision or savings;(c) make different provision for different cases or circumstances or for different purposes;(d) make provision subject to exceptions.(6) Before making any regulations under this section, the Secretary of State must consult—
(a) licensed suppliers,(b) the Authority, and(c) such other persons as the Secretary of State considers it appropriate to consult.(7) Subsection (6) may be satisfied by consultation before, as well as by consultation after, the passing of this Act.
(8) Regulations under this section must be made by statutory instrument.
(9) An instrument containing regulations under this section is subject to annulment in pursuance of a resolution of either House of Parliament.”
Baroness Verma
“Power purchase agreement scheme: disclosure of information
In section 105 of the Utilities Act 2000 (general restrictions on disclosure of information)—(a) in subsection (1)(a), after “2010” insert “or section 44 or (Power purchase agreement scheme: regulations) of the Energy Act 2013”;(b) in subsection (3)(a), after “2010” insert “, sections 44 to (Power purchase agreement scheme: regulations) of the Energy Act 2013”.”
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
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.