My Lords, this draft instrument relates to the renewables obligation renewable electricity support scheme. The renewables obligation was introduced in 2002 to provide a subsidy for electricity generation from renewable sources. It covers onshore and offshore wind, solar, hydro, biomass et cetera. The scheme is now closed to new applications, although support for existing stations continues. The scheme closes finally in 2037.
The scheme was part of a programme of measures aimed at stimulating the renewables industry to enable ambitious climate change targets to be met. Without subsidy, the nascent renewables sector would have struggled to make headway in a market dominated by the established heavyweights of coal, gas and nuclear. The renewables obligation had an initial target of 10% renewable electricity by 2010, but today around 30% of the electricity supplied in the UK is supported under the scheme.
Of course, the scheme needs to be paid for, and this falls upon electricity suppliers. They currently provide almost £6.5 billion of subsidy per year to renewable generators. These costs are then passed on to their customers via their bills, adding about £70 per year to the average domestic electricity bill. Costs will fall from 2027 as generators start reaching the end of their period of support and then exit the scheme.
The draft SI deals with a technical matter, which relates to supplier payment default. More specifically, it aims to prevent electricity suppliers being unduly exposed to the unpaid bills of competitors who fail to meet their obligations. The renewables obligation actually comprises three separate but interlinked schemes: the renewables obligation covering England and Wales, the renewables obligation Scotland, and the Northern Ireland renewables obligation. The Scottish and Northern Irish Governments are responsible for their own schemes. The UK Government cover the England and Wales scheme; the matter under debate today therefore applies only to England and Wales.
The renewables obligation is a traded scheme. It places an obligation on electricity suppliers to obtain a certain number of green renewables obligation certificates in proportion to the amount of electricity they supply to their customers. Certificates are issued to renewable generators, for free, by Ofgem in relation to the amount of renewable electricity they generate. Suppliers typically buy these certificates, providing generators with an income stream over and above electricity sales revenues. Certificates are usually in short supply, so suppliers may make a cash payment, called a “buy-out” payment, in lieu of each certificate. The buy-out price is about £50 per certificate for the current renewables obligation year, and about 10% of the scheme is met this way. At the end of the scheme year, the cash fund is recycled back to those suppliers who met their obligation with certificates. This gives certificates additional value over and above the original buy-out price.
My Lords, I warmly welcome my noble friend Lord Kamall to his place on the occasion of his maiden speech. I look forward with interest to his contributions, not only to the proceedings today but in future. He has chosen a good subject because this order is welcome. As Minister for Energy when the Government introduced the first non-fossil fuel obligation, almost—I dare to say—30 years ago, it set the framework for welcome successor initiatives, one of which we are debating this afternoon. Today, the renewables obligation scheme is considerably, and understandably, more complex but nevertheless welcome. It comprises three elements, including the scheme under consideration this afternoon, namely that covering England and Wales.
I will concentrate my few remarks on the representations made by Citizens Advice in its response to the Government regarding proposed changes to the utilisation arrangements under the renewables obligation scheme. I agree with the proposals put forward in the Government’s consultation and call for evidence regarding the proposed changes to mutualisation arrangements under the scheme. However, I would appreciate the opportunity to hear from the Minister more about the thinking behind the Government’s response to the request to require more frequent renewables obligation payments by suppliers. This request was made to offer more protection to consumers and generators and to constrain bad debts from escalating more quickly.
We have all seen that the financial strain on suppliers has led to energy supply company failures, affecting over a million energy customers. Such failures result in financial detriment as well as stress for consumers whose energy supply company fails, and higher costs mutualised among all consumers. The largest unexpected costs come from renewable obligation mutualisation, placing additional financial strain on energy suppliers, and resulting in higher costs for consumers.
My Lords, thank you for the opportunity to give my maiden speech in this debate today. I start by thanking noble Lords on all sides of the House, as well as Black Rod and her staff, doorkeepers, police officers, advisers and all the other wonderful staff for their warm welcome and guidance, especially during these tough and challenging times. I am also grateful to my noble friends Lord Flight and Lord Callanan for introducing me to the House last month. Both have offered me friendship and advice over the years; I will not say it has always been good advice.
When my appointment to this House was announced, a friend said to me, “It’s an awful long way from Lower Edmonton to the upper House for the son of an immigrant bus driver.” I am sure some of you may be thinking, “Oh no, not another one”; after Sajid Javid and Sadiq Khan, in British politics it seems you wait ages for the son of an immigrant bus driver and then three come along at once.
My father, who sadly passed away a few months ago, would often tell us that there is no limit to what you can achieve if you believe in yourself, believe in God, and work hard. But he would also remind us that not everyone can be as fortunate, that we should not forget those who are left behind, and we should look for ways to help them. During my time as an MEP for London, I worked to highlight the work of local community non-state projects that were tackling poverty and social exclusion, and I hope to continue to do so in the future. I also hope that I can honour my father’s memory by making a difference and inspiring others to make a difference too.
If my father was the talker, my mother—like in many marriages, I suspect—was the doer. When I did not get into the local grammar school, despite getting good grades, my mother marched me down to the office of the local Member of Parliament, Ted Graham, later Lord Graham of Edmonton. His first question to me was, “Young man, what do you want to do when you grow up?”, to which I immediately replied, “I want your job.” Although he was pleased that I did get into the school thanks to his help, as a Labour MP I suspect that he was probably relieved that I did not get his job. But by following in his footsteps and adopting the title of Edmonton, I hope that in time, I will earn the same respect that he did during his time in this House.
My Lords, before I address the subject of this debate, I pay tribute to my noble friend Lord Kamall and congratulate him on his maiden speech, which, typically, was informative, knowledgeable and entertaining. I say “typically” because I had the pleasure and honour of working closely with my noble friend for many years as a fellow Member of the European Parliament. I see some other familiar faces around the Chamber today as well. We both had the privilege of high office there, but it is much to the credit of my noble friend that he continued almost to the end of the mandate for UK representation to uphold the positive principles of engagement with many other national representatives, especially in our parliamentary group, of which he was leader. In doing so, he ensured continuing and great respect for our country and for himself. I am sure that he will achieve much in our House.
We live in a changing world. On this day in particular, one year on from the start of the Covid crisis, many of us are reflecting on the future as we remember the past. So many things are changing and in need of change, no more so than in the field of the environment, with the UK hosting the COP 26 conference later this year, and as part of that policy area in the way our energy needs are met as we move towards a zero-emission outcome.
Some will say that everything was much simpler in the old days. My late father worked in the electricity supply industry. Coal-fired power stations were all over the place in my native north-east, and consumers obtained their power from local and regional monopolies. The thread from generator to consumer—or wire— was direct and understandable. The measure before us demonstrates how complicated we have become in the ways in which we compensate our generators for renewable energy initiatives, and how our free-market instincts, while they are generally of benefit to consumers, can go wrong.
My Lords, looking around I see lots of former Members of the European Parliament. I think there are half a dozen speaking in this debate, including my noble friend the Minister, and until a moment ago another was on the Woolsack or perched on the steps of the Throne as I started. It is a tribute to the popularity of our new colleague, my noble friend Lord Kamall, that there should be this support from different Benches. We former MEPs know what it is to deliberate unreported and unremarked; we have what the police might call “previous” in this department. However, I hope that in the circumstances your Lordships will indulge me if I add my voice to previous speakers in welcoming my noble friend Lord Kamall. He is a man of immense breadth of character, a handy cricketer, a brilliant footballer and a very talented bass guitarist, but also a man of extraordinary modesty.
Over the past month, there has been a lot of press coverage of the change of leadership in the Scottish Labour Party. People have been saying that the new Labour leader, Anas Sarwar, is the first Muslim leader of a British political party and the first ethnic minority leader. I wish Mr Sarwar every success: you do not have to be a Labour supporter to want the best for the Labour Party in Scotland. It is a party with a terrific tradition—the party of Keir Hardie, John Smith and, indeed, of that flinty patriot, the noble Lord, Lord Reid, who is sitting opposite now. Of course, anyone who first becomes a dentist and then a Labour MP in Scotland is plainly elevating the public weal above his personal popularity, so I wish Mr Sarwar the best. Yet it is not really the case that he is either the first non-white or first Muslim British party leader, because my noble friend Lord Kamall had led not only a British political party but a coalition of European political parties with extraordinary diplomacy and talent, remaining popular until the end. That is quite some achievement, as his predecessor in that role, my noble friend the Minister, can confirm.
My Lords, I am delighted to welcome my noble friend Lord Kamall and congratulate him on a witty and excellent maiden speech. I look forward to hearing further contributions and working with him in his new place of work. This is very much a family occasion because, of the nine noble Lords due to speak, six are former MEPs and three are former leaders of the UK’s Conservative delegation. I particularly welcome my noble friend Lady Hooper, with whom I had the pleasure of working in 1983 as a humble staffer when I started out in the European Parliament.
I approach the order before us in my capacity as president of National Energy Action, and very much from a consumer focus. I would like an assurance from my noble friend the Minister, another former leader of the UK Conservative delegation in his time. Can he assure us today that the shortfalls, astonishing in their extent, will no longer reach a level above the threshold being set today? We have to pause for a moment and consider that in three successive years, shortfalls have been reached of £53.4 million, £88.1 million and £31.4 million. Never was it envisaged when these ROCs were first created that we would reach anything like that level of shortfall.
I understand that a shortfall occurs when a company leaves the market—a rather euphemistic expression for market failure, when the company has actually gone bust. That is obviously regrettable, not just for its customers but for other electricity suppliers as well. Can my noble friend assure us today that this will be, as far as possible, avoided under the provisions of the order before us? I gather that there have been a record number of market failures in the last two to three years, leading to the extraordinary breaches of the threshold to which I just referred.
We are told that the suppliers of electricity will pass the increased costs flowing from the order on to consumers: my noble friend said that it would be, on average, a £70 increase to domestic consumer bills. Could he repeat that to clarify it for me? It would be helpful to know what the impact will be on business users. Could my noble friend also say what the impact will be on the Government’s green homes scheme and the warm homes strategy, which I follow very closely?
My Lords, I also welcome the noble Lord, Lord Kamall, to his place. It is not the first legislature in which he, the noble Lords, Lord Kirkhope and Lord Hannan, and I have sat, and indeed worked, together, albeit in our respective groups; I look forward to that happening again.
I turn to the order. It is good to see that renewable incentives have worked, as other noble Lords have said. It is also good to see that, in the wider scale of things, we can soon look forward to the tapering off of the schemes, as it becomes no longer necessary to keep on introducing incentives as renewable energy takes its place as a competitive source of energy.
This instrument will reset the balance of the cost of mutualisation so that it is shared between supplier and generator, broadly as it was when the scheme was introduced in 2005. I suppose I can also identify with the comments of the noble Lord, Lord Kirkhope, about how it was perhaps left a bit too long to rebalance and, therefore, it comes as a bigger shock when it happens. Since that time, costs have moved on and the balance is now falling more heavily on suppliers, so, if the cost balance is changed in the manner suggested in this order, suppliers are the winners and generators the losers.
The consultation was predictable, I suppose: the winners were in favour and the losers against. However, adding up the numbers, more seemed to agree with the Government: one supplier disagreed and five generators agreed, and, of the neutrals, three agreed and two disagreed, meaning that, by a net five, the ayes have it.
At the end of paragraph 7.6 of the Explanatory Memorandum, there is a suggestion that, by reducing cost to the suppliers, there will be less to pass through to customers. As the noble Baroness, Lady McIntosh, has indicated, what is passed through to customers is obviously of concern. This raises a question: where does the cost to the generators end up? Part of me cannot help but think that it somehow ends up with households, but could the Minister enlighten me about the effect of costs that now have to be absorbed by the generators?
I thank the Minister for his clear explanation of the order before the House today. I also thank all the other speakers who have come forward with views and congratulate the noble Lord, Lord Kamall, on his interesting maiden speech. I look forward to many more insights from him on the energy sector and wider issues in the UK economy.
The renewables obligation has been one of the Government’s mechanisms to bring forward investments in renewable power to reform the energy market away from reliance on fossil fuels. It has been tremendously successful, as the Minister said. At initiation in 2002, it aimed to bring about 10% renewable energy by 2010. It has exceeded all expectations and presently about 30% of electricity supplied in the UK is generated via the scheme. All that is to be encouraged, and the effect on modernising the UK’s power supplies has been considerable.
However, along the way there have been several mishaps and distortions. The most pressing has been the balance of risks and costs between generators and electricity suppliers, which the Government have ignored for far too long and is now the subject of this corrective, restorative amendment. The mutualisation scheme, with a trigger threshold of £15.4 million, resulted in excess payments, as the noble Baroness, Lady McIntosh, said, of £53.4 million, £88.1 million and £31.4 million over the last individual three years falling on suppliers and their customers. Paragraph 7.3 of the excellent Explanatory Memorandum says that with a “notional value” of “£54.43 per ROC”,
“The total value of this support … was estimated at £4.5bn.”
The next paragraph explains how these excess mutualisation debts have arisen—a set of circumstances I remember well in my business’s energy supplies, with chaotic management and incoherent billing by my supplier resulting ultimately in the supplier’s bankruptcy. This amendment order is urgently needed to return the supply market to stable conditions again. We support it today for that stable environment.
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In recent years, an increasing number of suppliers have defaulted on their obligations under the scheme. Payment default leaves a shortfall in the cash fund, meaning that recycle payments are lower than they would otherwise have been. This lowers the value of certificates, which ultimately impacts generators’ returns. The scheme therefore features a “mutualisation” mechanism, which offers protection against payment default. Under the mechanism, shortfalls in the cash fund are recovered from all other suppliers and recycled back to those suppliers who met their obligation with certificates. However, the mechanism is triggered only when the shortfall exceeds a £15.4 million threshold. Mutualisation has been triggered in each of the past three years. In total, £173 million has been mutualised across suppliers in England and Wales. Electricity suppliers and their customers are therefore unhappy about the situation.
In December 2020, the Government consulted on a proposal to amend the mutualisation threshold so that mutualisation would be less easily triggered. It was proposed that the £15.4 million threshold should be replaced with a new threshold, calculated annually as 1% of the cost of the scheme. This 1% is broadly equivalent to the arrangements that were in place when mutualisation was first introduced into the scheme in 2005. Since then, the threshold has been gradually eroded in relative terms; it is now equivalent to just 0.25% of the scheme costs. This means that mutualisation can now be more easily triggered. In other words, the risk associated with supplier payment default has become increasingly tilted away from generators and towards other suppliers.
Our proposal and draft SI seek to redress the balance of risk. In the first year, the threshold will rise to about £62 million. This will ensure that suppliers and their customers are not unduly exposed to the unmet renewables obligation bills of other suppliers. Generators will face an increased risk that unmet obligations will remain unrecovered. This will have a small impact on the value of certificates. However, the new level of risk is broadly equivalent to where it was originally in 2005. In this respect, the SI can be considered restorative.
This draft instrument makes minor technical changes to the Renewables Obligation Order 2015 so that a fixed £15.4 million threshold is replaced with a threshold calculated on an annual basis. As I said earlier, the new threshold is determined as 1% of the forecast scheme cost for the year ahead. It also places a new requirement on the scheme’s administrator—in this case, Ofgem—to calculate and publish the threshold ahead of each obligation year.
In conclusion, the emergence of payment default and cost mutualisation under the renewables obligation is of increasing concern to electricity suppliers. Through no fault of their own, electricity suppliers have become increasingly exposed to the unmet obligations of their competitors, whereas renewables generators have seen their returns increasingly protected. The draft instrument will restore the original balance of risk between generators and suppliers. It will make it harder for mutualisation to be triggered, so suppliers will be less likely to be exposed to the unmet obligations of other suppliers. This is, of course, good news for consumers; they should benefit because the likelihood of mutualisation costs being passed on to them will be lower.
These legislative changes need to be effective on 1 April to enable them to take effect in respect of the next renewables obligation year, which runs from April 2021 to March 2022. Consequently, and subject to the will of Parliament, this draft instrument will enter into force on 31 March 2021. With that, I commend this order to the House.
Does my noble friend the Minister take the view that his order restores the balance of risks between suppliers who set aside money to pay their renewables obligation and suppliers who do not? It is my view that a more regular supplier payments schedule, as is the case in other schemes, would be a constructive way of reducing overall risk rather than shifting risk from suppliers to generators. Requiring more frequent payments, in addition to Ofgem’s principles-based rules around financial responsibility and the Government’s proposed changes to the RO mutualisation threshold, remain approaches worthy of further review. So, in the interest of clarity, can my noble friend the Minister provide the House with further insight as to what happens if there is a shortfall in the buy-out fund and suppliers do not meet their obligation?
Finally, will the Minister take this opportunity to clarify the Government’s thinking as to how they balanced the responses to the consultation exercise, where there was clearly a significant discrepancy between views? Those in favour of the proposal to link the mutualisation threshold to the annual cost of the scheme were in stark contrast to the majority of respondents with an interest in electricity generation, who disagreed with the proposal, believing it would lower the value of ROCs, since lowering the value of ROCs by raising the threshold would make it harder to recoup the costs from suppliers when there was a shortfall in the fund.
Turning to the subject of today’s debate, given that we have this scheme of renewables obligation certificates with a mutualisation mechanism, it makes sense to review the threshold, especially since it was first introduced in 2005. But in the absence of market mechanisms, the challenge for any government central planner is to set a threshold that finds the right balance between the interests of renewables generators and those of electricity suppliers and consumers, especially if renewable energy is seen to mean higher prices for the poorest customers.
As someone who studied engineering as an under- graduate and then went on to work for an economic think tank, I am really excited by the innovations that we are seeing in renewable energy, especially the increased efficiency of renewable power generation—wind, solar and other forms of renewables. I hope that one day soon, renewable energy will be cheap enough to be competitive in a market environment and that we will no longer need state interventions, such as the renewables obligation certificate and the Government setting thresholds.
Once we see a breakthrough in battery storage capacity, this will open up huge new possibilities and could have huge implications for utilities, with local renewable energy regeneration and storage, both on and off grid. This decentralisation will present both opportunities and challenges for electricity suppliers. Furthermore, using renewable energy for electrolysis also offers the potential of green hydrogen providing a clean transport solution for the future.
Innovation, new technology and the fight against poverty are subjects that I hope to return to in future interventions, but for now, I thank your Lordships for listening, and look forward to working with noble Lords across the House for many years to come.
Noble Lords will be pleased to hear that I am not going to delve too far into the technical and administrative details of the renewables obligation scheme, except to comment that it should perhaps have been monitored better from the start and taken, as we are now doing with this measure, at a much earlier point. The key moment was in 2015, when the new licence arrangements to possible new entrants to the electricity supply sector were formulated. Encouraging new entrants, especially those offering an emphasis on green energy, was good news, and today we have a much wider choice of suppliers, tariffs and sources of power, but that change has also resulted in problems with the ROC scheme. Some of the new entrants have failed, some have not honoured their obligations to pay the sums agreed to in order to undercut rivals and, despite the intervention of Ofgem a year or so ago to tighten up the rules of entry into the market, the shortfall of moneys due has continued.
As I understand it, the impact on generators should be minimal with these provisions unless the value of certificates is reduced because of any shortfall in the cash fund caused by suppliers defaulting on their obligations. Could my noble friend explain how generators can be better protected from changes of this kind, bearing in mind the formula in place for these processes?
A growing proportion of our electricity comes from renewable resources. About one-third of the supply is now supported by the ROC scheme, and it is growing. Use of electricity is growing with our transport system in particular, including cars and buses being progressively electrified. It is therefore important that schemes such as this are kept under review as to their structure and outcomes. I believe that Ofgem wants to carry out an annual review on the efficacy of the rules in place. Can my noble friend confirm that?
At the end of the day, it is in all our interests to increase our green credentials. In doing so, we must always consider those involved—the generators, suppliers and, above all, the consumers, who will need ever-increasing supplies of electricity in the years to come.
The Motion on the renewables order is a tribute to two aspects of our current energy policy that deserve a little more acknowledgement. The first is the value of an intelligent use of market mechanisms to deliver environmental goals. Aristotle said that that which no one owns, no one cares for; the use of sensitive and carefully laid incentives so as to encourage the private sector to deliver goals which deal with externalities has been one of the great elements of the UK’s success in getting to a diversity of supply. Secondly, it illustrates that, very often, the things which make the biggest difference in environmental policy are quite technical issues of this kind, rather than sweeping and sometimes histrionic global statements of intent.
As my noble friend the Minister said, the measure effectively restores the mutualisation proportions to what they were when the Bill was brought forward and the change was first made in the previous decade. I share my noble friend Lord Kamall’s ambition that we should get to the point where renewables become competitive, and where technology delivers what state subsidies have, until now, been required to help with as the booster rocket. I support these temperate, judicious and targeted measures.
Finally, I press my noble friend the Minister by asking how these additional costs will be passed on to consumers in order to minimise the impact on vulnerable consumers as far as possible. Could he give us an assurance this afternoon that it would be best not to pass these on to those consumers as a fixed charge that hits everyone equally, disregarding their ability to pay? Could he also assure us that they will also not be recovered from those customers on pre-payment meters? With those few remarks, I welcome the order but, obviously, this is a source of concern, with implications for current and future consumers.
I have no further pearls of wisdom to dispense on this, and I will not spend any more of the more than adequate time limit to say that, all things being equal and in the absence of any other information, it seems reasonable to restore the cost balance to that which was originally struck. I have no objections to this instrument.
An early attempt, introduced by Ofgem, was to set tougher entry tests for energy suppliers before they are allowed to trade. Can the Minister give any figures on how many companies have been denied access through these more stringent tests? It may be too early to reflect how important this element will be in complementing the order to make effective increases to stability. Has the Minister any comments to add about how these tests will substantially ameliorate the problems that businesses like mine will have experienced? I understand that a further two companies have gone bust this year, in addition to the 25 in recent times, resulting in nearly 2 million customers suffering disruption and the mutualisation fund to be paid increasing.
This order seeks as a solution to return the mutualisation threshold to 1% of the cost of the scheme, the initial level it was academically set at in 2005. For the 2021-22 year, the threshold will increase to £62 million. We agree that it restores a balance of risk between generators and suppliers that was established then and to which the consultation did not demur, even if the readjustment will be painful for many generators.
If the percentage is maintained at 1%, will that automatically nullify any future problems? It was originally set at that percentage under the academic assessment that it was at a level where mutualisation arrangements would not arise or be at a level only of immateriality. Does the Minister agree with that assessment— that the mutualisation trigger will return to being immaterial? Will the situation now stabilise? What checks and assessments will be put in place to monitor the effectiveness?
The country remains in a precarious situation in the climate emergency. The initial RO market has been closed to new entrants since 2017. The ceiling on limiting levies on the consumer through the LCF has been replaced by a blanket ban on new levies through the control on low-carbon levies this year.
Companies will be running out of time in their 15-year window periods to recover technology costs, yet the country needs further decarbonisation investments urgently. There will be an explosion in levy requirements resulting from the recent announcements on offshore wind and Sizewell C. The Government have announced confidence in the regulated asset base of the future funding models for these huge investments. While these considerations take us some way beyond this order, nevertheless, is the Minister confident that the regulatory support mechanisms will set robust parameters on the costs for consumers; and that fleet-of-foot, small-scale renewables schemes—and the innovations they may contain—will continue to be able to help with progress towards the necessary decarbonisations? There is a long way to go.