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Fuel: Electricity Supply Licences

My Lords, one of the great fallacies of this debate about the changes that the Government intend to make to the feed-in tariff scheme is how it has been characterised as being between the Government, who say that they recognise that the scheme needed to be changed, and those who argued that no change was necessary whatever the financial implications. I lay that to rest at the very beginning of this debate. One of the reasons for my Motion today is that we consider the Government's projections to be flawed in that no one expects or is asking for the scheme to be left exactly as it is. The Solar Trade Association, Friends of the Earth, Low Carbon Group and others are all calling for cuts to be made in line with falling costs and a faster degression rate, so that the level of tariffs reduces faster over time. It has not been fully understood that feed-in tariffs are designed as a pump-primer for the industry, to get it going. They would not add significant capacity in the early years but are really a building block to get a much faster-growing industry, as we have for example seen in Germany. For the same reasons, feed-in tariffs should not be seen as a permanent subsidy. The speed, the scale and the way in which the changes have been made is hugely damaging to investor confidence across the renewables sector, as the noble Lord, Lord Lucas, also outlined. The purpose of the tariffs when they were brought in by the previous Labour Government was to encourage solar as part of the energy mix that is needed in this country to help achieve energy security, to help meet our renewables targets and to open up green energy generation to businesses, communities and householders. The consultation that the Government undertook on their proposed changes could have been a real opportunity for them to work with the industry to address its concerns. However, the consultation was only six weeks long, whereas the Government code of practice states that consultations should normally last 12 weeks or longer. Furthermore, 81 per cent of respondents opposed the Government’s plans and made alternative suggestions, but not a single change was made. The consultation divided the market as being above or below 50 kilowatts, thus not only making the large-scale solar farms to which the Minister will no doubt refer unviable, but also community schemes and business and industry projects. The scheme was originally designed to incentivise projects up to 5 megawatts. The Secretary of State, Chris Huhne, has expressed his view that we do not leave our energy future to the exclusive preserve of the big six energy companies. Given the recent price hikes, I am sure that many of your Lordships would agree with that assessment. However, is the Minister aware that capping the scheme at 50 kilowatts is exactly what the energy companies lobbied for in the first place? On the purpose of the Government’s changes, when the Government announced their consultation it was clear that this was a financial decision. The Government saw that there was increased interest in large-scale solar farms, particularly at the rate at which the tariff was set and with the significant fall of around 30 per cent in capital costs. That had not been anticipated by the department’s modelling, as undertaken prior to their introduction. Therefore, the Government consulted on proposals to reduce tariffs for solar developments of more than 50 kilowatts by 38 per cent to 42 per cent; for projects of more than 150 kilowatts by 50 per cent; and for projects of more than 250 kilowatts or any stand-alone installation of any size by nearly 70 per cent. That makes those larger developments and stand-alone developments unviable, which was clearly the Government’s intention. The Government’s argument is that these costs would have been too high if the industry had carried on growing at the same rate and, for the money involved, it would not have had enough capacity to make the investment cost-effective. I understand that the Government want to avoid oversubsidising solar power. Capital costs have fallen so that is not an unreasonable objective. It is one that the industry fully understands. However, it would be helpful if the Minister could tell us what other options were considered to address the issue. Did the noble Lord consider any other tariff rates that would have reduced the costs but not choked off investment? Given that the costs are met not by government tax and spend but by the consumer—we are mindful of the need to keep prices down for the consumer—what estimate has the Minister made of the costs to an individual household over the next 10 or 20 years? I do not mean an estimate of the costs as though there were no changes at all. Most of us agree that some change was required and any analysis must take that into account. I see him frowning at me at this point. It is quite a tall order, so I am happy for him to write to me about this. However, those answers may go some way towards understanding the Government’s approach to this issue. I have to tell the Minister that these cuts do not affect only solar farms, even by the Government’s definition. They go all the way down to projects such as installations on school roofs and community projects. The impact on community energy schemes must be addressed. The Government claim that they are supportive of community energy schemes. Is the Minister aware that the Government’s action, by setting the bar at 50 kilowatts, has also impacted on these schemes? For those who live in a development of flats, one where their roof is not appropriately placed, or one that is in a preservation area, the only option open to them is a community-scale solar scheme. These are much more cost-effective. I hope that this is an unintended—rather than intended—consequence, but the impact is the same. For a typical UK small street or hamlet of, say, 60 houses, a community installation scheme would need to be of at least 150 kilowatts in scale, meaning that it would accrue support of 15p for each kilowatt hour under the proposed new tariffs. A community installation for a village of more than 90 houses would receive even less—only 8.5p per kilowatt hour—under the proposed new tariff. Solar installations of this scale do not access lowest-cost equipment. They do not benefit from economies of scale because fixed costs—development costs, connection costs, operating costs and administration costs associated with community schemes—are spread over a limited capacity. I shall read to your Lordships’ House from a letter about the impact that these proposals would have had on a development that is, fortunately, already in place. The South Yorkshire Housing Association installed a 54 kilowatt photovoltaic array at a scheme providing temporary accommodation for homeless families. The letter says: "““However, under the proposed changes to the Feed-In Tariffs none of that work would have been possible … This type of installation is not the kind of ‘Solar Farm’ the changes are intended to be targeting””." There is also the issue of the impact on energy supply. Small-scale renewables covered by the feed-in tariff—that is, those under 5 megawatts, as defined in the 2008 Act, although the Minister and his colleagues argued at the time for that to be increased to 10 megawatts, as the noble Lord, Lord Lucas, indicated—have the potential to deliver one-third of our energy use. If the scheme had not been decimated, it could have generated roughly the same amount of electricity as a nuclear power plant by 2020. Now we plan to install less solar power this decade than Germany did last year. The impact on the industry has been massive. One issue is the impact on the growth of jobs. Before the feed-in tariffs, there were 3,000 jobs in the industry. By end of last year, there were 10,000 jobs, which was anticipated to increase to 20,000 by the end of this year. A fortnight ago, the Secretary of State, Chris Huhne, said to the corporate leaders group: "““The next time someone asks where the growth is coming from, you can tell them. Green energy””." However, this review has culled one of the few fast-growing green energy industries, and potentially thousands of much needed jobs and tax revenue with it. There is also—the noble Lord, Lord Lucas, made this point very clearly—the issue of investor confidence. The Government’s credibility on this issue has been severely damaged. As the Government’s energy White Paper highlighted this week, £200 billion of investment is needed in our energy system to make it fit for the 21st century. Will the Minister address the issue of such a dramatic change on such a tight timescale, with minimal consultation, having such a destructive impact on potential future investment? Ernst & Young has set out the effects, stating that the whole investor market has been ripped up by the feed-in tariff review. Ernst & Young goes on to say: "““Regulatory uncertainty will lead to an increased cost of finance over what would have been achievable under a stable FiT regime””." In other words, in a mad rush to save money on this scheme we may have made every other policy designed to reach a low-carbon future a more expensive instrument. I am sorry that the noble Lord is smiling at me quite so intensely; there are many people who do not find this subject particularly amusing and are very concerned. As regards the next steps and the lessons to be learnt from this, the full review of feed-in tariffs is an opportunity for the Government—I am trying to assist the noble Lord—to engage properly and fully with the industry as a partner and friend, not as an enemy. First, the Government need to show ambition. Instead of confining the solar industry to a cottage industry, there must be a vision of how local and decentralised energy can play a major role in creating a more open and competitive energy market and allowing these industries to grow. Both the comprehensive review of feed-in tariffs and the Government’s electricity market reform plans are opportunities to do this. Secondly, there is an opportunity to look at examples from other countries and learn from these. For example, Germany has a degression mechanism which controls volume as well as returns. These mechanisms are set to reduce the tariffs once capacity thresholds are met. This would work in the UK only if we were significantly more ambitious with our PV programme. Such engagement with the industry and a wider knowledge of practice in other countries could have helped avoid the present crisis by allowing the Government to bring forward more measured changes that were in the long-term interest and would have been widely understood and supported. Thirdly, as an interim measure there is an opportunity now to ensure that this industry is not brought to a halt. Will the Minister consider the very simple measure of taking advantage of the ROC budget being underspent at present by combining the two to assist the solar and renewables industries? This situation could be turned round and provide an opportunity for the Government to create jobs and transform towns. Communities across the country could generate their own green energy and discover the joy of their meters going backwards rather than constantly forwards.