Renewables Obligation (Amendment) Order 2018

Lord Grantchester Excerpts

Monday 9th July 2018 Lords Chamber

[Lord Redesdale (LD)]

My Lords, I understand the purpose of this order; it covers one of the problems that many in the renewable industry have faced, especially the problems associated with a sudden rise in the number of people wanting to claim FITs. However, will the Minister say whether this is part of a longer-term strategy to deal with renewable heat, which is very difficult, and ROCs was one of the main planks for dealing with it, or whether this is just a way of making sure that the subsidy cap falls within the budgetary requirements set? I declare an interest as CEO of the Energy Managers Association—so I quite understand my members’ need for lower bills. However, if we are to diversify the energy systems, we need to look at biomass quite carefully. I quite understand that ROCs is an expensive way forward on this. One final question: does this have any effect on the anaerobic digestion industry?

[Lord Grantchester (Lab)]

I thank the Minister for his explanation of this order, which seeks to control the costs of supporting two forms of renewable energy generation under the renewables obligation scheme: in former fossil-fuel generating stations using as fuel biomass, or a mixture of biomass and fossil fuels—called co-firing. It also requires a declaration to be provided by certain stations when claiming support for combined heat and power generation, and clarifies the greenhouse gas emissions trajectories with which certain CHP stations must comply.

It must be said at the outset that although this RO scheme has not yet come to an end, it is now closed to new applicants and has been superseded with a contracts for difference scheme. It also needs to be said that, in 2011, the Government introduced the levy control framework to govern the budget for low-carbon electricity schemes, including the RO scheme, which are paid for through consumer bills.

The operation of the LCF has come in for considerable criticism for being opaque and disingenuous, such that in the Autumn Budget 2017, the Conservative Government announced the control of low-carbon levies to limit new levies until the LCF can be seen to be falling. The scheme here is set to achieve a further constraint on expenditure by setting a limit on the number of ROCs that can be applied for. It is fair to say that in the other place there was a long debate on whether this order would achieve the intention, as the amount of expenditure can vary according to the price of ROCs in the market.

The accompanying documentation to the order appears to confuse the process of creating a ROC, which is done by the generating station producing a certain amount of power and hence creating a ROC, and accounting for the value attached to that ROC, which is created and varies according to the demand for ROCs by suppliers which are obligated to purchase them from generators to meet their renewables obligation quotas. However, it does not follow that the reduction in the number of ROCs issued translates directly into savings in overall amounts paid for ROCs, and hence savings on customers’ bills—an amount set against the LCF—because ROC prices vary with supply and demand against the obligation level. The reduction in supply may send the value of a ROC up because more people are bidding for fewer ROCs to meet a fixed obligation level. The calculations attached to the SI do not appear to take this factor into account, but instead treat the estimated range of income as a fixed range determined by the number of ROCs.

As part of the consultation, several comments reflected that this could lead to discouraging biomass in a co-firing plant. This order could have a perverse effect and the proposals could potentially place more coal back on to the system, and do not properly account for the mechanisms behind ROCs. We therefore have great reluctance in passing the SI and suggest that the Government should take the measure away and recast it. It is a complex jigsaw that seeks to use the number of ROCs as a way of constraining expenditure, when the price of ROCs is not set but can vary. There are serious misgivings that the scheme will not do what it claims. However, as a scheme that is now replaced by the CfD scheme, the situation may be contained over time. With that, I can reluctantly approve the order.

[Lord Henley]

My Lords, I am grateful to the noble Lord, Lord Grantchester, for his comments. He started off by saying that he had some doubts about the order, as to whether it would lead to lower costs, but as I made clear, we have made this intervention because we wish to see lower costs for consumers. That is why I made it clear that, on average, without this order, we would see additional costs to the consumer of about £2 per household and higher figures for business users and considerably higher figures for some of the more energy-intensive users. I think it is right that we should make such an intervention in the way that we are to achieve those ends. I am therefore grateful that the noble Lord ended by at least agreeing to support the order in full today.

The noble Lord was also worried that there would be an impact on the ROC market. We believe that the mechanism is compatible with the operation of the renewables obligation and will not lead to the market shortage that he was worried about nor inflate the price. The annual obligation set by BEIS fixes the cost of the renewables obligation and provides for the demand of ROCs. The obligation level is calculated by estimating the number of ROCs likely to be issued during the obligation year and then inflated by a 10% headroom to ensure that there is still demand for ROCs, even if the actual number of ROCs issued turns out to be higher than estimated—for example, if it is windier or sunnier than forecast when we set the obligation. The impact of the caps on generation are factored into the annual obligation calculation, so it will be lower. All else being equal, demand will not outstrip supply. However, I am more than happy to write to the noble Lord in greater detail about how we feel that the market works.

As regards the questions from the noble Lord, Lord Redesdale, on how the long-term strategy will affect combined heat and power, the purpose of the instrument is to control the unexpected costs from biomass, biomass co-firing and conversions, and to protect consumers. It certainly does not affect support for renewable heat. Remembering both the noble Lord’s and my interest in anaerobic digestion from my time in Defra, I can also give an assurance that this affects only biomass co-firing and biomass conversion and has no effect on anaerobic digestion. I hope that, with those comments, noble Lords will agree to the order. I beg to move.