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Renewables Obligation (Amendment) Order 2010

My Lords, we have had a fascinating debate and, like the noble Baroness, I have learnt a huge amount from contributions made in all parts of the Committee. I thank everybody most sincerely for taking part in it. I shall do my very best to answer the points that have been made. If I leave any matters unanswered, I will of course write to noble Lords and make sure that copies are available to all Members who have taken part. A number of Members of the Committee dealt with the issue of co-firing biomass. This was the main point made by the noble Lord, Lord Jenkin of Roding, and by my noble friend Lord Woolmer. We are aware of the concerns expressed by the Drax company, and it has clearly been very effective in getting its point of view across to Members of this Committee. I am sure that it will have been gratified by that. Perhaps I should explain as background that the co-firing cap was originally introduced for stations that co-fired regular biomass because of concerns that, if it was not restrained, the co-firing ROCs could flood the ROC market and this could significantly decrease the value of ROCs for other technologies and result in investors placing a higher risk premium on their investment decisions. The Drax concern was that the cap on the co-firing ROC market restricts competition and disproportionately penalises independent co-firers, as vertically integrated suppliers purchase their own ROCs. Drax considers that the cap forces independent co-firers effectively to participate in a partitioned marketplace, which means that it has to accept significant discounts in price for its ROCs. I think that that is a fair summary of Drax’s point of view. To help provide additional evidence on this, we instructed Oxera, to which a number of noble Lords referred, to look at these arguments and provide us with a report on the effect of the cap on the co-firing market. There were other points of view. Other respondents indicated that uncapped co-firing could lead to unpredictable fluctuations in the ROC price, so we asked Oxera to look at the effect on the wider ROC market of changes to the size of the cap, including its removal. The Oxera report was published on 22 September. It did indeed say that increasing the cap would probably remove technical constraints in the short term, but it also said that in the long run the cap was unlikely significantly to affect the ROC market for co-firing. This is due in part to the banding allocated to co-firing in April 2009, which in effect doubled the amount of co-firing generation with regular biomass needed to receive one ROC: 2 megawatts as opposed to 1 megawatt. However, there is a suggestion that in the shorter term the cap may restrict independent generators’ ability to sell ROCs, as plants affected by emissions control legislation, under the large combustion plant directive, may now run at a higher capacity in the short term than originally envisaged. In the consultation, we asked respondents whether the cap should be retained at 12.5 per cent or to provide evidence if they thought that it should be changed. Some respondents called for the co-firing cap to be tightened and for co-firing to be removed from the RO by 2016, as originally planned. However, the majority of respondents felt that the cap should continue at 12.5 per cent. The report also indicated that there would be a decrease in price and that biomass new generation would be delayed. The cost of raising the cap to 17.5 per cent was likely to be a decrease in the ROC value and a delay in new biomass generation that would come on stream, but we have decided to look at this in the banding review where we can assess the effect across the whole renewables market. My noble friend Lord Hunt of Kings Heath has already had a number of discussions with Drax on how the department can help. I can announce today that officials will arrange further discussion and we have agreed to reconsider the matter as part of the banding review that begins in October. The noble Lords, Lord Jenkin and Lord Teverson, raised the issue of state aids, and the noble Lord, Lord Jenkin, made the very fair point that this is not government money; it is money that is ultimately paid by electricity consumers. Of course we agree. I say to the noble Lord, Lord Teverson, that we are confident that clearance from the Commission will be received in time for us to start the new scheme on 1 April, but the RO is regarded as a state aid because it is administered by Ofgem, which administers money in the buyout fund. That is why the EU Commission’s state-aid rules require us to get approval for it.