Renewables Obligation Order 2009

I beg to move the Renewables Obligation Order 2009, which is part of our attempt to drive further the significant advances we have already made towards delivering our renewables energy targets. Renewable energy is of vital importance to our strategy for tackling the two major challenges we face; that is, combating climate change and ensuring a supply of secure energy for the United Kingdom. That is why the Government support the European Union’s target for 20 per cent of energy to come from renewable sources by 2020. The order under discussion is a significant step forward towards delivering the additional generation necessary to meet our share of that target. The order has been rightly drawn to the attention of the Committee by the Merits of Statutory Instruments Committee on the grounds that it gives rise to issues of public policy likely to be of interest to the House. I do not need to be convinced of the interest that is always generated by these issues in the House, and certainly not of the interest of Members present on this Committee. During its progress before this House, noble Lords worked with us to ensure that the Energy Act 2008 delivered real benefits for the renewables industry. I am sure it will be appreciated that this order is an extension of that work. There is of course a great deal more to do, including bringing forward a feed-in tariff for small-scale generation, which was the subject of an important amendment. But we are here to debate the changes we will make to the renewables obligation. We are confident that these changes will drive significant investment in new renewables generation, building on our success to date, and set the stage for the delivery of further new build. Since its introduction in 2002, the renewables obligation has increased eligible renewable electricity generation from less than 1.8 per cent of total UK supply to 4.9 per cent, almost three times as much, in 2007. The RO was originally designed to be technology-neutral and has been particularly effective at encouraging the cheaper forms of renewables generation, bringing forward large amounts of co-firing, landfill gas and onshore wind. If we are to meet our targets we will need to do more. In particular, we will need to encourage deployment of other technologies—technologies which are some way off commercial deployment at present—which have the potential to deliver large amounts of new generation, such as offshore wind and biomass. It is these technologies that our proposals to band the RO aim to encourage. It is already working—our proposals to provide additional support for technologies have encouraged significant investment in new generation. DONG Energy, E.ON and Fred Olsen Renewables have formed a consortium to bid for thousands of megawatts of offshore wind capacity in UK offshore waters. Drax has announced its intention to develop three new biomass plants of about 300 megawatts each by 2016, as well as upgrading its co-firing facilities. The PDM Group is proceeding with its plan to develop a 2 megawatt anaerobic digestion plant in Doncaster, as well as looking at other opportunities around the country. We have done this by working closely with industry to develop a mechanism that provides the necessary support for those technologies that are further from commercial development to come forward alongside the more developed technologies. Whereas currently each megawatt hour of eligible generation is awarded one renewables obligation certificate, a banded RO will mean that different technologies will get different numbers of ROCs. As well as supporting new technologies, this will allow us to ensure that the most economic renewables, such as the co-firing of biomass alongside coal, are not overrewarded in future. The level of support offered to different technologies by the different bands is based on research carried out for us by Ernst & Young into the costs and market potential of different technologies. This includes providing microgeneration with a greater amount of support, recognising that it does not benefit from economies of scale. We will continue to monitor the renewables market, and we have set out a timetable of banding reviews allowing us to respond to market developments so that banding levels continue to provide the right level of incentive for project developers. The order allows us to take important steps to ensure a more stable and predictable price for renewables obligation certificates. We have done this by introducing a mechanism to ensure that the level of the obligation remains above the level of actual generation. We refer to this as a headroom mechanism, as it aims to ensure that on average the level of the obligation will always have an 8 per cent headroom over the expected level of the obligation. Headroom will allow investors greater certainty by making the ROC price more stable and predictable. It will also ensure that in future years the consumer is not paying more than required to bring on this renewable generation. Given the current economic climate, I am sure that the Committee will agree that these considerations are of the highest importance. We have taken steps to maintain investor confidence by protecting previous investments. This is the principle of grandfathering. Subject to certain exceptions, those stations which were operational prior to our announcement on 11 July 2006 will continue to receive one ROC per megawatt hour. This is a principle which we also intend to follow at the next banding review, ensuring that existing investments are protected, should technologies be banded down in future as costs fall. The order includes a number of changes aimed at developing the biomass and waste markets. Provisions in the order allow us to better utilise the renewable fractions of municipal and commercial wastes, which are currently underused. Our aim is to encourage the development of more efficient technologies, such as combined heat and power, anaerobic digestion or gasification. In order to achieve this, we have simplified the fuel measurement requirements, making the RO more accessible to these technologies. Recognising that any move to increase biomass and waste usage raises concerns about the sustainability of their sources, we are introducing a sustainability reporting requirement on generators with a declared net capacity of over 50 kilowatts. While the evidence is that the great majority of biomass fuels used for electricity generation in the UK are sustainable, we seek to better understand where these fuels come from and the effect of using them. The order also makes a number of small technical and administrative changes to make the RO more accessible to microgenerators, removing some administrative requirements that disproportionately weigh on smaller businesses. It introduces provisions ensuring that the costs of administering the renewables obligation are met by those who benefit from it. Currently, the costs for Ofgem’s administration of the scheme are met by the network operators. We believe that this is unfair, and we have taken steps to provide that, henceforth, the costs for Ofgem’s administration are met from the buyout fund. Ofgem’s costs will be removed from the buyout fund prior to it being recycled. In the event of a shortfall, the additional costs will be met by the Government. The changes before the Committee today are the culmination of an extensive consultation process, working closely with industry and others, to develop the policy which was given shape by the Energy Act 2008. These changes have been well received by the renewables industry, which is keen to see them introduced. Accordingly, I commend the order to the House.