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Renewables Obligation (Amendment) Order 2010

My Lords, like the noble Lord, Lord Jenkin, I shall comment on Drax and other users of biomass. As noble Lords know, there are two uses for biomass: co-firing and dedicated, 100 per cent, biomass units. In introducing this statutory instrument, the Minister mentioned guaranteeing grandfathering for 20 years from the point at which a plant is accredited, not the point at which it is constructed. This is important, of course, because construction takes a long time and involves a lot of money up front. It has an effect on the rate of return on the capital employed if plants take two, three or four years to construct. What are the Government’s intentions on grandfathering rights on the same basis for dedicated biomass plant? As with co-firing, that is the dog that does not bark. It is not in here. The Government must have considered it, but they have not included it in the order. Turning to the question of co-firing, I will not repeat the many points ably made by the noble Lord, Lord Jenkin, all of which I agree with; I shall just add one or two others. I very much hope that my noble friend will be able to give some reassurance about the Government's intentions—I do not expect them to change their mind about the order now, but it is important to know their intentions for the future. I should like to make the distinction between a cap, which limits the contribution towards electricity supply that can be made by co-firing, and the degree of support that is given. The degree of support given to co-firing is 0.5 ROCs per megawatt hour. Offshore wind already gets 1.5 ROCs per megawatt hour. In the order, that is increased to two. In other words, the degree of support given to wind will be four times that given to co-firing biomass. That indicates that offshore wind could not compete if it was not given such large support. Co-firing generation is economically a much better deal to get renewable generation. Whatever the question of the cap to be imposed, there can be no doubt that co-firing is not being given an unfair advantage in support; on the contrary, the support given to it will be a quarter of that given to offshore wind. I turn to the question of the cap—that is, the number of ROCs that suppliers can acquire under the order. As the noble Lord, Lord Jenkin, said, the Government intend to keep that at 8 per cent. In the supporting documentation to the order, under the heading "Summary: interventions and options" on pages 4 and 5, it is made clear that the consultation considered the question of retaining the co-fired cap at 12.5 per cent. In other words, as the noble Lord, Lord Jenkin, said, there was consultation on that. It has not been merely reaffirmed, it has been considered. As the noble Lord said, the department not only consulted Oxera, it commissioned it to produce an independent report on the issue of the cap. It did not simply consult it; it asked it independently to consider the issue. The report is not flimsy; it is substantial. The noble Lord fairly informed the Committee of the findings of that independent review. The explanation of the costs and benefits of the proposals under review is set out in the document, entitled "Summary: analysis and evidence". No evidence is given at all about the consultation on keeping the cap on co-firing at 12.5 per cent, as opposed to raising it to 15 or 17.5 per cent or removing it altogether. I find that strange because the other elements of the consultation—the options to be considered, including the benefits and costs—are all set out for those who want to study them carefully. My question to my noble friend is this: given that this was a policy option that was consulted on, why are the options not set out along with the costs and the benefits so that noble Lords could reasonably consider the virtue of keeping the cap at the current level? That seems extraordinary and indicates that the Government are either not sure that they have a good case or perhaps have overlooked it. Surely it cannot be right to ask us to approve an order that contains one element which is to remain unchanged but for which options were considered, but for us not to be told what those options were and what are their advantages and disadvantages. The question of the cap is important for two reasons. First, but not in order of logic, is that one of the effects of the cap is that it prevents the electricity consumer, whether business or household, paying for their electricity at a lower price than they might otherwise because co-firing, as demonstrated through the ROC system, is assumed to be significantly cheaper than offshore wind. I agree with the noble Lord, Lord Jenkin, that this is a critical issue. The second but less obvious effect of the lower cap we have at the moment is on the actual market for ROCs from the different types of co-fire producer. There are two types of these. There are independents like Drax, which produce only energy; they do not sell it because they are not suppliers. However, some integrated suppliers also own energy production units that produce electricity. The effect of a rather low cap is that, where the suppliers of electricity also own their own co-fired generation, they are inclined to buy their own in-house co-fired power generation rather than buy from the independents. This means that the independents are at the bottom of the food chain when it comes to selling their co-fired generation. If there is quite a bit of co-fired generation on the market but there is a low cap, it means that the co-fired generators are forced into accepting a lower price than they would get in a genuinely competitive market. This is well recognised. Does the Minister agree that this is a problem, and of course that it is one of the two issues that Oxera looked at? Do the Government agree that keeping the cap where it is means that there is a danger that it is likely to distort competition in the selling of co-fired generation which will count against independent co-fired generation producers? Also, does he accept that raising the limit for the amount of co-fired generation that can qualify for ROCs would in itself significantly remove the anti-competitive element in the market? That was recognised by Oxera. I hope that the Minister is able to give some comfort to the Committee that— while he is not in a position today to change the order, and although on this occasion it was not possible to change the cap—the matter is genuinely being reviewed again, that the Government’s mind is open to such a review and that the review can be done more speedily than by 2013-14, because that plant will be commissioned within a few months. If that is not done, the danger—and this has already happened in the past few months—is that they will pay co-fired generation coal power stations not to co-fire, because it will be cheaper to produce electricity with coal, buying emission allowances, than to sell their co-fired biomass generation off at an uneconomic price. Are the Government willing to look again at this issue in a timeframe that matches the commercial reality of investors, having invested tens or hundreds of millions of pounds, not having to wait for three or four years for a review, if any, to take effect?