Renewables Obligation Order 2015

Lord Bourne of Aberystwyth Excerpts

Tuesday 24th November 2015 Grand Committee

Moved by

[Lord Bourne of Aberystwyth]

That the Grand Committee do consider the Renewables Obligation Order 2015.

Relevant document: 3rd Report from the Joint Committee on Statutory Instruments

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change and Wales Office (Lord Bourne of Aberystwyth) (Con)]

My Lords, the renewables obligation is a long-standing mechanism for supporting renewable electricity generation in the UK. It places an annual obligation on licensed UK electricity suppliers to source a specified proportion of the electricity that they provide to customers from eligible renewable sources. The scheme is administered by Ofgem, which issues renewables obligation certificates to electricity generators in relation to the amount of eligible renewable electricity that they generate. Generators sell their certificates to suppliers, who use them towards meeting their obligation. Since it was introduced in 2002, the renewables obligation has played a key part in increasing the level of renewable electricity from 2.9% of total UK generation in 2002 to over 25% in the second quarter of this year. It supports around 22 gigawatts of accredited capacity.

The renewables obligation scheme has been subject to a number of changes in recent years. The draft Renewables Obligation Order 2015, which I am putting before the Committee today, revokes, consolidates and re-enacts the Renewables Obligation Order 2009 and the orders that have amended it since it came into force on 1 April 2009. It also makes consequential amendments to the Renewables Obligation Closure Order—in other words, a significant part of this order is a consolidation measure. The consolidation simplifies and brings together in one document the main legislation underpinning the renewables obligation, making it more accessible to those who use it, including the Government and industry stakeholders.

The draft Renewables Obligation Order 2015 also implements outstanding policy decisions on the renewables obligation consulted on in 2013 and 2014. The changes focus on three areas: strengthening the sustainability of biomass electricity generation; providing for biomass conversion projects with an investment contract to regain eligibility for support under the renewables obligation in certain circumstances, which I will go into; and providing for the transfer of biomass co-firing and conversion projects to the capacity market mechanism.

An earlier draft of the order was published for a three-week technical consultation on 24 March 2015. Comments were received from 18 respondents, mainly representing the biomass sector. The majority of responses focused on the detail of how the biomass sustainability land criteria had been incorporated in the draft order. We have considered all of the points raised carefully and have taken them into account where appropriate.

I turn now to the detail of the new provisions in the draft order. The first set of new measures is aimed at strengthening biomass sustainability criteria. The Government are committed to achieving sustainable and cost-effective bioenergy deployment, which drives carbon savings, minimises the environmental risks and makes best use of the biomass resource available, both for energy and non-energy purposes. Currently, there are mandatory sustainability criteria in the renewables obligation for the use of bioliquids, which transpose certain requirements in the renewables energy directive. Since April 2014, generating stations of 1 megawatt and above capacity, using solid or gaseous biomass, have been required to report only on whether they meet greenhouse gas emissions and land use criteria. This draft order consolidates previous changes and makes compliance with the greenhouse gas emissions and land criteria mandatory for generating stations using solid or gaseous biomass, in order to receive support under the renewables obligation, as is the position for bioliquids.

These measures will ensure that renewable generation from home-grown or imported solid or gaseous biomass receives financial support only where that biomass delivers genuine greenhouse gas emissions savings compared with fossil fuel, and where it is sourced from land that is sustainably managed, not from land with a high biodiversity value or carbon stocks. This area of forestry and timber will be an important part of negotiations in the Paris climate change discussions on 1 December, the day after the conference opens.

On greenhouse gas criteria, biomass power generation is already required to meet a greenhouse gas savings target of at least 60% compared with the EU fossil fuel average, and this target becomes tighter in 2020 and 2025, increasing in 2025 to 75%. This draft order introduces a new methodology for calculating an annual average greenhouse gas emissions figure for all biomass used by a generating station, excluding certain types of waste. The purpose of this calculation is to ensure that generators are not penalised if an individual biomass consignment exceeds the greenhouse gas target due to circumstances beyond their control, such as bad weather increasing transport distances. This is subject to the provision that each individual consignment of biomass must not exceed an overall ceiling. This prevents mixing extremely high-emission consignments with lower-emission consignments as a means of ‘washing through’ fuel consignments with unacceptably high greenhouse gas values. I am sure that noble Lords will appreciate that the intention is to be fair in relation to acts of God, extreme weather and so forth, but without providing an opportunity to circumvent what is a sensible provision.

On land criteria, the draft order requires generators using wood fuel to comply with specific land criteria, derived from the Timber Standard for Heat & Electricity—a domestic regulation, not influenced by Europe—which draws on the principles set under the Government’s timber procurement policy. There are some exemptions introduced for certain low-risk categories of wood, such as arboricultural residues—basically hedges—and material removed from non-forest land for ecological reasons. These criteria have been developed following engagement with interest groups and were consulted on in August 2013 and in 2014. They take into account a range of social, economic and environmental issues, including protecting biodiversity, land-use rights, sustainable harvesting and regeneration rates.

The draft Renewables Obligation Order also makes minor technical adjustments to the sustainability criteria for non-woodfuel biomass which correspond to the land criteria for bioliquids, for example, to implement recent EU legislation. It amends the reporting requirements for wood fuel to enable government to monitor more effectively the use of different types of wood by the bio-energy sector, as well as making the reporting provisions more workable for industry. Ofgem will regulate compliance with the mandatory greenhouse gas and land criteria. Generating stations using biomass which have a capacity greater than or equal to 1 megawatt must prepare and submit an annual sustainability assurance report which is compiled by a third party auditor or verifier.

The second new measure relates to implementation of the final element of the renewables obligation to contracts for difference transition policy. The first competitive contract for difference auction for renewables support was completed earlier this year and has allowed us to support low-carbon electricity projects at a lower cost to the consumer. This draft order provides for a biomass conversion unit or station which has previously entered into an investment contract under the final investment decision enabling for renewables process to regain its eligibility for support under the renewables obligation, including conversion-level support, if the contract is terminated for a “permitted termination event”, such as failure to secure, or a delay in securing, state aid approval from the European Union. This specific transition measure is necessary because the investment contract process commenced in 2014, ahead of the rest of the electricity market reform, and contracts were awarded ahead of state aid clearance. It aims to provide the assurance and comfort needed to encourage ongoing investment, safeguard security of electricity supply and ensure value for money for consumers. It may well affect two ongoing projects.

The third new measure in the draft order provides for combustion units to bid into the capacity market and leave the renewables obligation if successful in that bid. As we know, the purpose of the capacity market is to ensure that there is sufficient investment in the overall level of reliable capacity—both supply and demand side—needed to ensure secure electricity supplies. It will bring forward investment at least cost to consumers by allowing the market to set a price for capacity competitively. The first capacity market auction was held at the end of last year for delivery of capacity in 2018-19.

Biomass co-firing or conversion stations or units which wish to transfer from the renewables obligation into the capacity market will be able to claim support under the renewables obligation until the last day prior to the first day of the delivery year under their capacity market agreement—so it will be seamless—as long as they have given a capacity market transfer notice to Ofgem. This will ensure that all stations which are primarily coal-firers but have at some point claimed low levels of biomass co-firing renewable obligation certificates, and remain accredited under the renewables obligation, have a chance to enter the capacity market.

In addition, a biomass co-firing unit or station can withdraw from its capacity market agreement to fully convert under the renewables obligation prior to the first day of the delivery year under its capacity agreement—so it applies in both directions—or before closure of the renewables obligation to new generating capacity from 1 April 2017, whichever is earlier. The aim of this order is therefore mainly consolidation but with some necessary amendments in relation to biomass which I have set out. With that, I beg to move.

[Lord Teverson (LD)]

My Lords, I declare an interest in that I was in front of a very warm wood-burning stove over the weekend in my house, and therefore am a great supporter of wood biomass at a domestic level. There is great pressure these days from various NGOs to take biomass out of the renewables mix. I think the approach of the last Government and this Government has been absolutely right in tightening the definition of sustainable biomass, as this SI does, rather than throwing the baby out with the bathwater and saying, “This is all wrong”. That is the right approach.

--- Later in debate ---

[Lord Grantchester (Lab)]

I thank the Minister for his explanation of the order. It is not particularly controversial. The Minister underlined that the RO scheme has been particularly successful in increasing the level of renewable electricity from the 3% generated in 2002 to 25% today. It is helpful that the order will consolidate into one document the Renewables Obligation Order 2009 and the orders that have since amended it, and that it will be the main instrument underpinning the RO, thus making it more accessible. We should perhaps note that the Renewables Obligation Closure Order 2014 remains valid pertaining to the closure of the RO to onshore wind in particular, something that the Government have been keen to amend through the Energy Bill that was recently in your Lordships’ House. The Renewables Obligation Closure (Amendment) Order 2015, regarding solar renewable electricity, also remains pertinent.

This order also implements outstanding policy decisions that were subject to consultation in 2013 and 2014, predominantly concerning biomass electricity generation—not only in consolidation, as I said, but also in regulations relating to its sustainability. We welcome the fact that the order should ensure the sustainability of biomass throughout the chain of biomass procurement, transport and production. Providers will now be eligible to enter the capacity market through giving advance notice to Ofgem that they have complied with the list of requirements concerning specific land criteria and other issues. This has been admirably developed from engagement with interest groups, taking account of social, economic and environmental aspects. Co-firing is also within the order, which is welcome.

I ask the Minister for further clarification concerning compliance with mandatory greenhouse gas emissions. To be able to receive financial support, biomass must deliver emissions savings in comparison with fossil fuels. In the submission of sustainability and emissions reductions, are the criteria likely to be accumulative throughout the chain? Will there be a total score to be complied with, in addition to providing evidence of sustainability at each stage? I ask this because it could be envisaged that further development of the methodology could be incorporated through amendments to the order at a later date, or even that greenhouse gas emissions relative to fossil fuels could be tightened further, beyond the level that the Minister stated. Perhaps the Minister could outline whether Ofgem will provide guidance on this issue, especially in relation to EU directives on biofuels. Is the Minister satisfied that there is no formal sanction for not meeting sustainability criteria beyond the so-called “acts of God” that he outlined?

[Lord Bourne of Aberystwyth]

My Lords, I thank noble Lords who have participated in the debate on the draft order. I seek to deal with the points raised by noble Lords in the order in which they were raised.

I turn first to the points raised by the noble Lord, Lord Teverson. I thank him for declaring his interest in his own coal-fired facility—I apologise: I meant to say “wood-fired facility”. We are indeed tightening the definitions of what is eligible. The audit process is significant. First, there are some de minimis exceptions for small suppliers; I shall write to noble Lords who participated in the debate to outline what those exceptions are. Secondly, I think that the noble Lord was making the point that enforcement overseas is more difficult. We require limited assurances in relation to what is happening overseas, and once again I will write with details of that process.

I move on to points raised by my noble friend Lady Byford in relation to the standard that we are setting. I think it fair to say that we are ahead of the game, but for a good reason: the European standard will almost certainly be the same. Work on that is going on at the same time as on our own domestic standards. It is just that we are there first, so we do not have to catch up; we are ahead of the game. My noble friend noted that she does not have a wood fire. The noble Lord, Lord Teverson, will have picked up that point and will no doubt want to ask her over to experience his. I am glad to be able to bring them together in this way.

I turn to points raised by my noble friend Lord Moynihan. I thank him for his early pioneering work in this area, which we continue to take forward. He made a fair point about the interconnections and the weather effect on the continent, which is likely to be the same as here. That is absolutely true. This is only one factor that influences the capacity issue, although it is a significant one. An interesting issue that we are researching arose recently in one of the Sunday newspapers: to switch to double British summer time. Not only would that reduce demand per se, it would put us out of line with peak demand on the continent. That is something worth looking at. It is an indication of the imaginative ways in which we can do fairly painlessly the things that we are looking at.

My noble friend Lord Moynihan also raised the issue of the range of woods required to be reported on in relation to the tightened requirements. It is true that some people suggested tightening that range while others wanted the requirements not to be so tight. All these things are a question of balance. One issue that was raised in the consultation on the tightening grip of requirements, and I will give more details on this in the letter, is that this reporting requirement is quite a burden for some businesses, so we are trying to get the balance right there.

I thank the noble Lord, Lord Grantchester, for his comments on the consolidation and in general on biofuels and the tightening of the conditions in relation to this area. I will write to him on specifically how we deal with the supply chain, because that was a fair question that demands a fuller answer. In relation to fuller answers, my officials were delighted with the question about the formula on page 75, so we will ensure that the noble Lord receives a fuller response on that if he really requires one.

Motion agreed.