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Renewables Obligation (Amendment) Order 2010

My Lords, the Minister has been good in outlining the scope of the wide-ranging order. I assure him that I will not seek to cover the whole field. The issue that interests me is not actually in the order; rather, it is the complaint that considerable effort has been made and discussions have been had with DECC on the suggestion that the cap on co-firing of biomass with coal of 12.5 per cent, set in the preceding 2009 order, is too restrictive, and that the figure should be raised to at least 17.5 per cent. That is what I am going to address today. I want to get one thing clear first, though. The Minister talked about the discussions with the European Commission on "state aids". I have long detected that, perhaps unintentionally, Ministers have sought to persuade the public that the subsidy for renewable is paid by the state. That is not so. I was surprised to read a short exchange in our debate on the national policy statements on 11 March when the noble Lord, Lord Willoughby de Broke, referring to the discussions that the Government had been having with the lady who is the chief executive of the Drax power company, said: ""I can guess how the conversation went. I expect that she wanted more taxpayers’ money to make biomass plants viable"." Obviously, the noble Lord had bought the "state aids" possibility. The noble Lord, Lord Hunt of Kings Heath, then responded: ""My Lords, it pains me to say it, but the noble Lord is absolutely right".—[Official Report, 11/3/10; col. 161.]" The noble Lord was absolutely wrong. The cost of the ROCs does not fall upon the taxpayer but upon the companies that have to buy their ROCs. It is then passed on to the customer in higher prices. A proper description of what the Government do is that they have put in place a system that makes consumers pay. I apologise to those who were here on Thursday because I am going to quote again the figures that were given to me by Ofgem at a briefing a couple of weeks ago, headed, "Estimated average cost impact per household customer (i.e. costs added to gas and electricity bills) of main environmental schemes in 2008, 2015 and 2020". The renewable obligation figure for 2008 is £10. I shall come to the other categories in a moment. By 2015 that figure will rise to between £38 and £47, and by 2020 it will rise to between £71 and £81—that is, between a sevenfold and an eightfold increase. That is the cost falling upon the consumer for the financing of the subsidy for renewable energy. The consumer is being asked to pay. Therefore, the noble Lord, Lord Hunt of Kings Heath, really surprised me when he said that the noble Lord, Lord Willoughby de Broke, was absolutely right. I suspect that he may have done so as a quick answer to an intervention. To complete the figures, by the time you have added the European Emissions Trading Scheme, the FITs, the renewable heat incentives, CERT, the new CCS levy that is provided for in the Energy Bill, and smart meters, you have a total, in 2008, of £79 per household bill; in 2015, of between £153 and £205; and, by 2020, of between £294—let us say, nearly £300—and £406-plus. I said last Thursday that I do not believe that any Government could possibly contemplate those additions to the average household energy bill, or indeed to the industrial energy bill. I return to biomass, which is what I am on about. The co-firing of biomass is the burning of renewable biomass materials with coal, and is recognised in this order and its predecessors as a renewable technology under the renewables obligation. The Drax power company, which I mentioned a little while ago, is constructing what will be the largest co-firing project in the world. It will have a capacity of 500 megawatts, and from mid-2010 it will have the capability to produce 12.5 per cent of the power station’s output from renewable biomass. To put that into context, that is the equivalent of around 600 wind turbines. By substituting biomass for coal, carbon dioxide emissions have been reduced by more than 2.5 million tonnes a year. Again, to put this into context, this is the equivalent to taking about 700,000 cars off the road. Very little biomass is currently available from energy crops. The order clearly refers to the distinction between energy crops that are specifically planted to provide fuel for power generation and what is sometimes called regular biomass: that is, waste products from other industries, notably from the forestry industry and from agriculture. The majority of biomass that is currently available for firing generation is therefore regular biomass. The price of regular biomass is typically about three times more expensive than coal, which is why a power station such as Drax has to have the incentive and support that are afforded by the renewables obligation system simply to make it economically viable. Suppliers of electricity can, of course, purchase and redeem ROCs to satisfy their obligation under the RO. However, the number of ROCs produced from co-firing regular biomass that suppliers of electricity can redeem is currently restricted to 10 per cent, although this will be increased to 12.5 per cent by April this year. That was the figure that I mentioned a moment ago. This cap applies only to power stations that co-fire with regular biomass; it does not apply to ROCs from power stations that co-fire with energy crops or with regular biomass from power stations with combined heat and power. I understand the logic of that, but you have to look at the effect on a company that invested millions of pounds in a new biomass plant. That is the problem. I asked the company questions about the impact of this, and I had an e-mail from it this morning. First, it was pretty cross with the noble Lord’s noble friend, who appeared to be saying that this was a call for more subsidy. It simply is not. As I explained, such subsidy as exists is paid for by the consumer and came about because the Government have stated that they want lower CO2 emissions. If anything, co-firing of biomass receives less ROC per megawatt hour than offshore wind. Because of that, it represents a cheaper transition to a low-carbon future. The Government have accepted that biomass is a renewable. There was some suggestion that it might not be. They are quite right to do that. Even importing it from Canada as waste forestry products is still far better than burning fossil fuels. In fact, Drax states that, across the whole life cycle, co-firing coal and biomass produces 87 per cent less greenhouse gas. It estimates that its current portfolio of greenhouse gas savings relative to burning coal will range from 88 per cent to 93 per cent. It states: ""Even if we imported all our biomass from the Western US (which we don't) the GHG saving across the whole life cycle from field to furnace is 75-80% relative to coal"." Those are the company's calculations. We are talking about large figures when it comes to the question of the cap. Another brief that I have received states that the Government have been considering this, and had a consultation with a firm of economic consultants, Oxera. I am sure that the Minister has been briefed about that. I make it clear that the Government, not Drax, consulted Oxera. The findings of the Oxera report were that the cap constrains the development of co-fired renewable generation, and increases the cost to consumers of CO2 abated through the renewables obligation. The report stated that the, ""removal of the cap would not destabilise the ROC market or serve as a material disincentive to new investments in renewable generation"." I have gained the impression that this has worried the Government. They are so keen on offshore wind power that they are not prepared to envisage anything that might compete with it for the money that will be available for ROCs. I will not read the whole report. It states that the, ""existence of the cap exacerbates ROC market competition issues for independent co-firing generators"." Most importantly, it states that, ""increasing the cap to 17.5% could ensure that technical constraints rather than policy constraints are binding, which would act to increase the ability of independent co-firing generation to compete"." This view was supported by the regulator, Ofgem. Its responses to the consultation were very similar. Ofgem states that the, ""cap potentially disadvantages independent co-firing generators if vertically integrated suppliers self-supply a considerable proportion of their demand for co-firing ROCs … the market for independent generators"—" including companies such as Drax— ""may be smaller than that implied by the cap … there is concern that the cap constrains the contribution to renewable energy targets from a relatively low-cost renewable technology"." I find it difficult to understand why, in the face of that advice both from the consultants and Ofgem, the Government still refuse to countenance the increase of the 12.5 per cent cap to the figure they were consulting on, that of 17.5 per cent. If I may put it this way, it seems to be simply perverse. More important, what the Government are doing is confusing the ends and the means. The ends surely have to be the reduction of carbon emissions by a whole range of the measures which were set out in their publication, The Transition to a Low Carbon Economy, and many other statements. One of the means is wind power, but to subordinate the increased contribution that burning biomass could make to the reduction of carbon by their refusal to increase the cap in order to be able to have more offshore wind is simply confusing the ends with the means. It is not the first time I have had to complain about this. Some years ago, we debated at length the contribution that coal mine methane might make. If the gas could be recovered and burnt, it would save very large quantities of carbon dioxide, because methane is 23 times more carbon intensive than CO2. Again, we were told that it could not be done because it would restrict investment in wind power. All that is in Hansard. I said that that was simply confusing the ends with the means, and they are doing it again here. I do not understand why the Government have got themselves into this extraordinary position. I want therefore to ask one or two questions, which I hope the Minister will be able to answer. Why did the Government reject the Oxera report? What were the reasons for refusing to accept its recommendation that this would not have any impact on the ROC market generally—that it would not destabilise the ROC market or serve as a material disincentive to new investments in renewable generation? The Government asked for advice, they got advice, and they are ignoring it. Another question is this. The Government have said that they will further consider the co-firing cap in October this year when the next banding review starts. What additional information do they think they are going to get between now and then that would lead them to a different decision, which is what they are holding out to the company? What discussions have taken place between the department and Ofgem on the effect of retaining the cap on the number of ROCs available for co-firing regular biomass? If there is to be a change—and what is the purpose of review if it is not to be open to the possibility of change—will it come into effect in 2011 or will the company have to wait until 2013, the date which the Minister mentioned in his opening speech? I find the way in which the Government have approached this whole process, and indeed the treatment of the Drax company itself, really quite inexplicable. One must bear in mind that Drax was one of the first major companies to tackle issues of pollution by putting in at considerable cost special plant to limit nitrogen oxide and sulphur dioxide emissions, but it is now being penalised by having this cap put on the amount of co-firing that it can use and for which it can claim ROCs. I hope the Minister understands that I am pretty indignant about this. I have no interest in Drax, but its argument is wholly compelling and I hope that the Government will perhaps be prepared to take it away. The problem is not what is in the order, but what is not the order. They have chosen not to use this order to increase the cap to 17.5 per cent.