Renewables Obligation Closure Etc. (Amendment) Order 2016

Lord Bourne of Aberystwyth Excerpts

Wednesday 16th March 2016 Lords Chamber

Moved by

[Lord Bourne of Aberystwyth]

That the draft Order laid before the House on 25 January be approved.

Relevant document: 24th Report from the Secondary Legislation Scrutiny Committee

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

My Lords, the draft instrument closes the renewables obligation 12 months early to solar PV generating stations at 5 megawatts and below from 1 April 2016. It would apply both to new generating stations and to existing stations that wish to add additional capacity up to the 5 megawatts threshold.

Solar PV is an important part of the low-carbon energy portfolio. It has seen very strong growth in recent years, due in no small part to support from the renewables obligation and the feed-in tariff schemes. Almost 40% of the UK’s solar PV capacity over 3 gigawatts was installed during 2015 alone. Hand in hand, the costs of installing solar PV have reduced dramatically. According to data from Bloomberg, the capital cost of a ground-mounted PV system fell by about 60% between 2010 and 2015.

In many ways, this progress is good news, making a valuable contribution to our renewable electricity generation, but the amount of deployment has also raised concerns about its impact on the levy control framework—the budget which caps the amount of support paid for through consumers’ energy bills. I am sure that noble Lords will agree that there is a need for government to act responsibly when there is a risk of exceeding such a budget. That is why we have introduced a number of measures to deal with the projected over-allocation of renewable energy subsidies. In these measures, we have aimed to strike the right balance between the interests of consumers and those of developers.

This time last year, under the coalition Government, we were considering a similar order relating to the early closure of the renewables obligation scheme to large solar farms—those over 5 megawatts. Solar farms at this large scale were deploying much faster than previously expected, and we were rightly concerned about the impact this speed of deployment could have on the levy control framework. At the time, it was decided not to extend the closure to projects at 5 megawatts or below because the evidence suggested that these smaller schemes posed less of a risk to the costs of the levy control framework.

Noble Lords will recall, however, that in the debate last year—under the coalition Government—it was made clear that the deployment of smaller-scale projects would be closely monitored. If deployment was shown to be growing more rapidly than could be afforded, measures would be considered to protect the integrity of the levy control framework. That monitoring revealed that, if we did not act, up to four times more new solar capacity would be eligible for support this year and next under the renewables obligation than we previously estimated—within a range of 2.4 to 3.8 gigawatts, compared to the 600 megawatts to 1 gigawatt that had been estimated. I am sure that noble Lords will agree that in such circumstances, the need for further action is essential.

In taking this action to complete the early closure of the renewables obligation to solar, we have aimed to strike the right balance between protecting bill payers and protecting developers who have made significant investments, while being conscious of the need to decarbonise our energy infrastructure. That is why the order makes provision for a number of grace periods, which mirror those offered last year as part of the large-scale closure. Stakeholders have welcomed this consistency. One respondent to our consultation said:

“Technologies must be treated equally as far as possible and the requirements outlined are in line with those proposed for early closure of the RO to solar above 5 megawatts”.

One of the grace periods was designed to protect developers who could show that a significant financial commitment had been made on or before the date on which the proposals were announced. This required evidence that a planning application had been made, among other things, as a proxy for the financial commitment.

Following the consultation, we are changing the criteria to clarify that we intended to protect projects that had made a valid planning application, in line with planning legislation across Great Britain. This is because we received evidence during the consultation from many planning authorities that some developers were submitting incomplete planning applications just to meet the cut-off for eligibility for the grace period.

[Lord Wallace of Tankerness (LD)]

I am interested in what the noble Lord is saying. He seems to be saying that if there is clear evidence of a significant financial investment being made before a planning decision was made, developers will qualify for the grace period. Why is he not currently doing the same for onshore wind, where the cut-off seems to be far more arbitrary?

[Lord Bourne of Aberystwyth]

The parallel here is with the schemes above 5 megawatts and the undertakings then given to look at this in the same way in the light of increased deployment, which has certainly happened. I appreciate the point—it is different, there is no doubting that—but this is a continuation of what happened with schemes above 5 megawatts. That is the reason for the treatment we are going for.

When we closed the renewables obligation early to large-scale solar farms last year, we saw a rush of projects accrediting to beat the closure date. More than 1.5 gigawatts of solar were accredited in March 2015 alone. That is equivalent to around 5,000 football pitches. This time round, we had evidence to suggest that costs of solar PV had fallen further and faster than previously anticipated. I have already mentioned the steep fall that there has been. We have therefore proposed excluding new solar projects at 5 megawatts and below from our grandfathering policy if they do not meet the significant financial commitment criteria. This has been necessary to avoid locking in possible overcompensation in the event of a similar rush of projects accrediting before 31 March 2016. This change in policy would mean that projects which are not grandfathered would not maintain their support level if a banding review determined a lower level of support. This proposal was necessary as a cost control measure. We confirmed this change in policy last December, and at the same time started to consult on the results of the banding review. We are currently considering the consultation responses; the consultation finished at the end of January. Subject to the outcome of that process, changes would be implemented through a separate amendment to the renewables obligation order 2015 later this year.

On the impact of the order, our analysis indicates that the early closure proposed in it will save between £60 million and £100 million per year from consumer bills: over the 20-year period of the obligation, that is £1.2 billion to £2 billion in real terms over the lifetime of the projects. Over 8 gigawatts of solar is already deployed and we estimate total solar deployment under the levy control framework subsidy regimes will reach 12.8 gigawatts by 2020, following this closure, taking account of what we are doing today and the action taken in the recent feed-in tariff review. Without this intervention, we estimate that it would be very close to 20 gigawatts, or some 8 gigawatts above what we projected. The electricity market reform delivery plan is our best estimate of what we need to hit the renewables 2020 target, which set out an intention to deploy between 10 and 12 gigawatts at the upper end. In fact, even with these changes, we are on track to exceed that range. This further underlines the need to take action now to prevent further solar deployment under this scheme.

Before I close, I should mention that we have taken the opportunity in this order to remove an inconsistency between the renewables obligation closure order 2014 and Article 91 of the renewables obligation order 2015. This had been drawn to our attention by stakeholders. This technical amendment makes it clear that an operator of an offshore wind station benefiting from a closure grace period can apply to Ofgem for registration of offshore wind turbines until 31 March 2018. I do not think that that is controversial.

This Government are committed to combating climate change, but in the most cost-effective way for bill payers. In tackling climate change at home, British families and businesses are better off inside the European Union. It provides a more stable and long-term framework to attract investment in UK clean energy projects, helping to keep bills down, create new jobs and boosting our energy security. Accordingly, the costs of solar are continuing to fall, and we expect solar to be delivered without subsidy over the coming years. However, since solar PV has been such a success in the United Kingdom, by summer 2015 the costs imposed on bill payers associated with support for renewable and low carbon electricity generation were forecast to reach £9.1 billion in 2020-21, significantly above the target of £7.6 billion. These costs, if they reached that level, would lead to increases in consumer bills. It is therefore only right that we have looked at ways to protect value for money and affordability under the levy control framework.

I hope that noble Lords will agree with me that on balance, the approach we have taken is the right one, closing a demand-led scheme and taking action on overcompensation while still allowing solar to deploy under the revised feed-in tariff scheme. This will ensure that solar PV is supported in a way that offers better value for money for consumers. I commend this draft instrument to the House.

Amendment to the Motion

Moved by

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[The Lord Bishop of Salisbury]

My Lords, it is curious to rehearse the same arguments so soon after the recent debate on feed-in tariffs. It is very disappointing in the wake of the success in Paris of COP 21, and the enthusiasm engendered from that about a new level of ambition in response to human-caused climate change. I feel as though the Minister is in a position of defending the indefensible. The noble Baroness, Lady Byford, made a very good point about the place of subsidies and pump-priming. Therefore, it is disappointing that the Government are not working more effectively with the renewable energy sector to build on the considerable success of that industry.

In its analysis of the impact of the changes to feed-in tariffs, DECC estimated that there could be a loss of 18,700 jobs. There is no equivalent analysis in relation to the impact of the withdrawal of renewable obligations, but going towards no subsidy will undermine a sector that is moving rapidly to a position of needing less subsidy. The House’s Secondary Legislation Scrutiny Committee has been critical of the analysis of this in the EM by not highlighting the level of opposition to, or the paucity of support for, the proposed changes, or acknowledging the concerns expressed by a large number of respondents about the methodology used by DECC to justify its proposals. The desire for increasingly competitive pricing would be a good deal more compelling if this were a feature of the whole electricity market, but last week the Government’s Competition and Markets Authority drew attention to the highly uncompetitive features of the market, dominated as it is by the big six companies.

The desire to cap the levy control framework has introduced two thought errors into the Government’s proposals. The first is that, if the costs of decarbonisation are not to fall on already hard-pressed consumers, further support will be needed in addition to the LCF. However, as has already been pointed out in this debate, the additional cost to the consumer is estimated to be less than £1 per annum. This does not feel like the right way to address this issue. The second point is something that I have referred to before. The desire not to exceed the LCF cap means that we are content with hitting mid-range targets, whereas we ought to be seeking to exceed them on renewable energy in order to escalate the process towards decarbonisation. Many Members of the House want the Government to go back and think about this again. The issue is one of creating a strategy for energy that addresses the need, which was identified in Paris, to move rapidly towards a low-carbon economy.

[Lord Bourne of Aberystwyth]

My Lords, I thank noble Lords for their participation in this debate. I will of course address some of the points that have been raised but, before doing so, perhaps I may just clarify one or two issues.

First, the Government are of course committed to combating climate change, as the right reverend Prelate kindly acknowledged, through our participation in Paris and the marvellous result achieved there. However, we want to do so in the most cost-effective way for bill payers.

The solar industry in the United Kingdom has been a success story and has seen significant cost reductions. The noble Baroness, in opening, did not talk about the Liberal Democrat position on subsidies. The noble Lord, Lord Teverson, sought to clarify that, but I think the opponents of what we are seeking to do need to set out what level of subsidy they regard as acceptable at this stage, because, crucially, the costs have come down: so much so that the largest solar developer in the United Kingdom, Lightsource Renewable Energy, has said publicly—it is on its website—that it will be building subsidy-free sites this year. This order does not end solar and, if we can get solar deployment without the subsidy, that raises the question of why we are subsidising it. This Government believe that when the costs of deploying come down—as they have—so should support. This statutory instrument is a necessary step to protect bill payers and to end subsidies where they are not needed.

Before looking at some of the specifics raised in the debate, I want to set out what the costs of the renewables obligation and indeed other renewable policies, such as feed-in tariffs and CFDs, will be over the lifetime of this Government. There seems to be a feeling that we are cutting off all renewable subsidies. That is not the case. The cost on the levy control framework goes up every single year in this Government, and that is after the action we are hoping will be taken today. The total cost in 2015-16 is £5.23 billion. Next year it will be more than £6 billion. In the succeeding year it will be more than £7 billion. In 2018-19 it will be over £8 billion. In 2019-20 it will be £10 billion, and in 2020-21 it will be nearly £11 billion. So to those who suggest that somehow we are turning our face against renewables and ending subsidies, I can say that that is not remotely the case.

I shall address some of the specific points that were raised. As I said, the noble Baroness, Lady Featherstone, did not talk about the position of the Liberal Democrats in relation to subsidy, but I remind the Liberal Democrats that the coalition Government—after all, it was a department led by a Liberal Democrat Minister—recognised the need to revisit the 5 megawatt and below solar subsidies if we had overdeployment, or if overdeployment were projected. Overdeployment is projected by a ratio of 1:4, so it really needs to be addressed, and this is quite consistent with what the Liberal Democrats said when they were in government. We are taking this action for two reasons. It is not just about the levy control framework; it is also about the subsidy. We do not believe that we should be paying subsidies where they are not needed. The evidence is— I quoted the largest developer—that they are not needed.

The noble Baroness raised the issue of roof-top solar. We do not accept that the feed-in tariffs have been set too low to support commercial roof-top solar. Almost 8 megawatts of installations over 50 kilowatts have secured a feed-in tariff since the scheme reopened in February. That is significant and demonstrates that there is ample opportunity under the existing FIT scheme to do just that.

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[Lord Wallace of Tankerness]

My noble friend Lady Featherstone mentioned investor confidence. My noble friend Lord Teverson and the noble Lord, Lord Grantchester, referred to the Energy and Climate Change Committee in the other place and its deep concerns about the cumulative effect of government policy on investor confidence, not just in solar or onshore wind but generally. Will the Minister please address the points that were very effectively made about investor confidence?

[Lord Bourne of Aberystwyth]

My Lords, of course investor confidence is an issue. In the department we meet the industry on a frequent basis—I met representatives of the solar industry just this week. Some of the concerns that are being expressed tonight were not expressed to me on that occasion. Of course there is a healthy dialogue, but I do not recognise some of the wilder statements being made about the lack of investor confidence. Industry will always take a particular view, and there will be some in industry who will not want to see an end to subsidies—I understand that; why would they? However, as a Government, we have to see how money can be well spent.

It has been a good debate, but I urge noble Lords to reject the amendment and support the order, which is a necessary part of ensuring that we get value for money, do not overdeploy in this area and end subsidies that are not needed.

[Baroness Featherstone]

I thank all noble Lords for their contributions; I thought that serious and considered points were made on all sides. The Minister said that I did not address the issue of subsidy. I took it as read that we all want to see the end of subsidies, but the issue is the methodology for delivering that. As I explained that at great length during the debate on the fatal Motion that I tabled to annul the feed-in tariff, I did not want to rehearse all those arguments. However, again, as the levy control framework calculations are still not before us, we cannot examine the evidence of the case.

Arguments were made about the costs to consumers. We are all concerned about the cost to consumers, but I laid out the price range involved in the cost of risk. The £1 per annum that would be saved feels a very poor argument in terms of reducing costs when, at the same time, the Government are so willing to invest in those energy sources that are so much more expensive, such as nuclear and diesel.

Lastly, on the overdeployment of solar, until the Government come forward with a plan illustrating how they are going to reach their renewable targets, we may be reliant on extra electricity because renewable heat and renewable transport are in so much trouble. Therefore, although I appreciate the arguments and agree with the noble Baroness and the noble Lord, we are not going to see eye to eye on this issue. I am very grateful for the support of the Labour Benches on this, and for the arguments of the noble Lord, Lord Grantchester, which were well made. I seek to test the will of the House.