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Energy Bill

I am grateful to all noble Lords who have spoken to the amendment. As the noble Lord, Lord De Mauley, was explicit in saying in moving it, this issue has concerned the Government for some time. There was after all an amendment in the other place for the express purpose of raising this issue, so I respect very much the arguments that the noble Lord put forward in moving his amendment. However, he will have anticipated that the Government have thought deeply about these issues and I hope that in my reply I shall be able to convince him deeply enough for him to withdraw his amendment. This is quite a significant amendment. It would take away from the Secretary of State the provision that allows a limit to be set on the proportion of certificates generated from a specific technology that a supply can present when complying with the obligation. The debate is largely centred on Drax because of its size and significance. The noble Lord, Lord Redesdale, was helpful in saying that there are others beside Drax involved in that form of generation, but Drax is of the greatest importance. Certainly I want to give the assurance that when the Government receive representations from such sources we have to strike a balance; the noble Lord is absolutely right that in terms of the sheer numerical load of representations that come in, they will not be on the co-firing side. But the Government look at these matters more in terms of the judicious needs of our energy provision for the future and, of course, the question of increasing the use of renewables. The noble Lord in a few moments will be able to appreciate just how balanced our response was to what he indicated might have been unbalanced representations. I emphasise that the renewables obligation works by setting limits on the financial incentive available in any one year and therefore encourages competition between suppliers and generators for that fixed sum. Co-firing is a renewable technology, one that can quickly take up more or less biomass without significant additional capital investment, investment that we seek to and are obliged to encourage if we are to hit the target for renewables and control of carbon emissions in the periods that we have identified. That requires investors to expect a return on their investment over a much longer period than Drax and those who use co-firing techniques. The use of biomass can be altered in a very short period in a way that just is not possible for onshore and offshore wind investment, for instance. The ROC system has to strike the balance between guaranteeing the supplies that the economy needs in any one year and the range of investment strategies, which vary enormously according to the technology that is likely to be employed. ROCs therefore have a long-term element to them. Typically, for example, financial plans for onshore wind projects look for payback over a period of 15 years. The potential volatility that exists in co-firing from year to year and over the lifetime of a renewables obligation can have a marked impact on the effectiveness of the obligation as an incentive to bring forward the longer term, high-capital investments that we assuredly need. I have not the slightest doubt that the noble Lord, Lord Redesdale, will be deploying that argument as we proceed through the Bill. I emphasise that I am not talking about the volatility of biomass as a theoretical concept; we have clear illustrations of how it works. From the statistics that Ofgem has gathered during the past few years, it is clear that some stations have been doubling or trebling the amount of biomass that they co-fire between years. An individual power station recently went from burning about 60,000 tonnes of biomass in one year to nearly 200,000 the next, more than a 300 per cent increase. A single power station therefore increased by weight the total amount of biomass co-fired in 2007 by 13 to 14 per cent. Such changes may be a result of a change in a company business plan or could be driven by changes in the price of biomass—often by-products of agricultural processes. We all recognise the significance in the past 18 months to two years of the change in agricultural processes. Those have nothing to do with planning for the energy market; they are an offshoot of changes in world prices for agricultural products. But, anyway, it does not matter what the reasons for the volatility might be; what is clear is that this type of volatility raises very real issues with regard to long-term planning and its impact on investment certainty for renewables projects which are crucial to the successful operation of the RO. In our consultation last year—and I assure the Committee that of course we carried out a full consultation on these issues—we proposed that, in view of the low fuel costs associated with regular biomass, co-firing of non-energy crops should be banded down to 0.25 ROCs per MWh. We moved from 0.25 to 0.5. I know that my noble friend Lord Woolmer would have tested the company that he visited, as would his colleagues on the committee, as well as listening to their representation. I have no doubt that they were forthright enough to indicate that the Government had moved from 0.25 to 0.5 with regard to the value of the ROC on biomass, as a result of consultation. I assure the noble Lord, Lord De Mauley, in that respect at least, that while I am not going to accept his amendment—and I am not sure that he expected me to do so—I am trying to reassure him that in his representations on behalf of Drax, which he concentrated on mainly, for obvious reasons, the Government have already made significant adjustments with regard to ROCs. On our proposal to reduce the incentive for co-fired non-energy biomass from 1 ROC to 0.25 ROCs per MWh, a number of the power stations responding, including Drax and other co-fired stations, presented compelling evidence that capacity for burning particular cheap fuels is limited. So we made the adjustment. I hope that the Committee will therefore recognise that the Government have been listening to the representations from that section of the industry. Of course, our decision to move to a higher band for co-firing presents us with the obvious point that the potential volatility in the volume of co-firing will have an impact on the stability of the ROC price. Of course, that is crucial to forward investment. Therefore, based on the responses and evidence we received, and the potentially heightened risk to investment certainty of having a higher incentive for biomass co-firing than originally proposed, the Government said that it would retain the cap on the total amount non-energy co-fired biomass eligible under the RO. That decision was set out in our response to the consultation, in January this year. Despite this decision, and because we will see the renewable obligation level growing year on year, it is estimated that the likely overall capacity for co-fired ROCs in 2009-10 will be nearly three times the level it was in 2006-07. So although I am not going to accept the amendment and seek to resist some of the demands from Members of the Committee, I hope that it will be recognised that the Government took on board with the greatest seriousness the issues that Drax and the others have raised and have proved flexible in our response to them. We should remember that discussions on the cap on co-firing are nothing new. It already exists under the current scheme; this provision simply allows for the cap to be retained. I hope that the noble Lord, Lord De Mauley, will think that I have given sufficient evidence why it should be. The cap will be set out in secondary legislation and, therefore, will be subject to consultation. We are preserving flexibility but we are not doing this to give arbitrary powers to the Secretary of State—far from it. Parliament will still play a crucial role in its evaluation of any changes in the future, with that necessary flexibility. The noble Lord, Lord De Mauley, also suggested that the problem with banding is that it might lead the Government into the position of picking winners. Banding decisions will be based on independent advice and will be subject to statutory consultation. They will be introduced through a renewables obligation order subject to parliamentary scrutiny. I do not think that there will be any arbitrariness on the part of the Government in selecting winners against that scenario, one in which judgments will be adequately attested in this House and in the other place. I want to reassure my noble friend Lord Woolmer, who made the important point that hidden pricing in integrated companies could lead to distortions in the market and might be difficult to discern. While we accept entirely what he says—that the operation of the cap and the ROCs has to be against explicit criteria—if there was any suggestion that anti-competitive practices were being carried out, the Government would regard that as an issue to be challenged urgently. In a typically constructive speech my noble friend also asked why we could not remove the cap and downsize our support. That was our original proposal, but the consultations we carried out made it clear that investors still perceive co-firing to be a risk to the stability of the ROC, so we made the adjustments I have indicated in favour of the co-firers. However, as I said in my opening remarks, we are concerned to encourage necessary investment in the non-renewables which have a somewhat longer timespan than co-firing. As ever, my noble friend Lord O’Neill also made a constructive contribution, and I welcome what he had to say. He was worried whether the cap was directed at Drax with the intention of penalising it. I have said how we have moved on that issue, and I should add that a month ago Drax announced the signing of a £50 million contract to build a fuel handling plant that will be able to deal with 1.5 million tonnes of biomass a year. That sounds like a vote of confidence in the future of the station’s position in relation to the operation of the ROC. I hope that that will help to allay any concerns. I was asked whether there is any scope to refine the cap. Within the Bill we have the power both to impose and to remove a cap, and the issue can be reviewed at any time and put into effect through secondary legislation. Of course the Government are concerned to get as much as possible right in primary legislation, and in anticipating what might be said by other Members of the Committee, I know the limitations of scrutiny in secondary legislation. Nevertheless, in circumstances where adjustment might be necessary, secondary legislation plays an important part in our work. The noble Lord, Lord Redesdale, said that there were three power stations available for co-firing. We think that there are 20, so I shall consult with him after our deliberations on the other 17. There are others apart from Drax, but I do not think that any Member of the Committee can be criticised for using its name rather regularly. We all know how significant Drax is, and those of us who were in the other place years ago will remember how important was the building of that power station and what a great deal of heat rather than light it generated in political debate at the time. I am not at all surprised by how significant Drax is to this debate. In summary, we believe that we should retain the co-firing cap as it supports our intention in reforming the RO to bring forward technologies which are currently a good deal further from full commercial deployment than we would want and ensures that the RO continues to be a credible and effective mechanism to drive deployment of renewable electricity generation. Drax has its interests. As I have indicated, we have made some response of those very real interests and Drax has made significant investment in biomass. But the renewable obligation has a much wider brief than just co-firing. I know that the noble Lord will recognise that and will feel able to withdraw his amendment.