Draft Renewables Obligation Order 2002

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Mr. Key: And for chickens.

Mr. Wilson: For chickens and farmers. It will be good news for farmers, because plant over a wide range of East Anglia will buy as much of the commodity as they—or their chickens—can produce.

I also visited what is now the world's largest straw-fired plant—again, most of the equipment is imported. That kind of engineering could be done in the United Kingdom.

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I have digressed a bit from hydro-electricity because I thought that it was important to emphasise the broad span of sources that can feed into the process—everything from straw to wind. The threshold of 20 MW was set on the basis that hydro stations above that capacity are economically viable to refurbish and to operate. To support stations above that size would impose an unnecessary burden on consumers and could lead to windfall profits for the station operators. We can look at that in the light of experience, but there has already been a disputed case. I do not want to delay the implementation of the obligation in order to revisit that issue; let us look to the future. However, I do not accept that including hydro stations of between 10 MW and 20 MW would crowd out other renewable projects. We are in a sellers' market and we are looking for contributions from all sources. I do not want only refurbished hydro below 20 MW, I am absolutely delighted by the prospect of new hydro, which was raised at Monday's event by Scottish and Southern Energy plc which, for the first time in 40 years, is looking at big hydro—50 to 60 MW. I shall be interested to see those proposals.

Mr. Key: If the price of electricity rises significantly, which it will, what will be the threshold above which it will become more interesting to build barrages, using hydro procedures, of course? I suspect that there is a lot of capacity for that around the UK—there are several sites in Scotland. However, it is price critical. At the moment, there is no question that barrages are uneconomic. When will they become economic?

Mr. Wilson: I would not make a forecast of that. Barrages, like many such things, have been talked about for donkeys' years. However, nothing much has happened. I understand that the problem with barrages is not so much the cost as the technology and making them work. A lot of things can be put in the water—the problem is that the conditions that generate electricity also tend to be the conditions that render those things subject to damage. That is why, where tidal and barrage is concerned, we are looking at more and smaller units, rather than large ones. I also understand that there are environmental problems about barrages—as with all such technologies, there are those who object to them.

I am very enthusiastic about hydro. I think that we shall hear a lot about new projects. However, I know from past experience that the main reason why there has not been a new hydro scheme worth talking about in the past 30-odd years is that there is a sort of unholy alliance between landowners and environmentalists, who object to every one. Without a consistent approach, those, too, will run into objections.

I move on to ROCs. The hon. Gentleman asked about the removal of the provision for borrowing. That was done after consultation and in light of comments from the industry, which expressed two key concerns. The first was that borrowing might lead to market distortions and could give scope for manipulation and speculation in the marketplace. Secondly, borrowing would have the overall effect of reducing the obligation by the amount of borrowing allowed, removing that provision from the draft order. He also mentioned reciprocity. In the longer term, we

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might be able to trade ROCs with other member states, once arrangements equivalent to our obligation become more widespread. However, that would require primary legislation. If physical imports. If physical imports were traded, there might be infrastructural implications, but if ROCs were traded there would not.

I should say something about domestic infrastructure. The hon. Gentleman is right about the figures that he cited. I regarded that report as important to kick-start the consideration of the west coast cable concept. He is right that some of the figures that emerged from it were pretty alarming and unexpectedly high, but it did kick-start discussion.

There is considerable dispute, and some people have examined the figures and said that they are much higher than they need be and that the cost of the project depends on what kind of cable is used and other factors. I am less interested in the means than in the end, which should be the ability to transport the power from one end of the country to the other in order to support renewables and get the energy to the markets where it is needed.

We are now considering, and the companies are very keen to consider, a range of options, which include whether the project should be done entirely with sub-sea cable or by some combination of cable and reinforcement of the land-based transmission system, and, if the latter course is adopted, where the appropriate landfall is. The one stipulation that I have made about the project is that it must be a full north to south solution. It should not start in the middle of Scotland and ignore the points further north that are richest in renewables potential. The project must cover the whole country, including the islands.

There is now a good atmosphere and a pragmatism among the companies involved, and they are talking to one another as well as to the Government about how to proceed. It is also the driving force of the proposal to extend NETA to become a British market, in which case the Scottish companies will have a strong interest in selling into the UK market and potentially the European market. They want the transmission system to be strengthened for that reason as well. The two forces—the renewables potential and the imperatives created by a British electricity market—both point in the same direction. I will be pleased to keep the hon. Gentleman informed of developments in that area.

As I said, the Northern Ireland Executive are being consulted on a support scheme. They are considering introducing something similar to the obligation shortly. We are discussing the introduction of a UK-wide certificate system, but that would require amendments to the Electricity Act 1989, to remove the need for supply to consumers on the British mainland. However, I agree with the hon. Gentleman that the quicker we can bring in Northern Ireland, the better.

The hon. Gentleman asked how we intend to measure progress on the obligation. Under the draft order, Ofgem will make an annual report on the

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compliance of each supplier, the amount of buy-out recycling to each supplier and the number of ROCs issued. We will also consider the overall deployment of renewables and progress towards our 10 per cent. target. There will be annual reporting.

On the question of costs, particularly to industrial users, we have estimated that reaching the 10 per cent. target by 2010 will cost an extra 4.4 per cent. over the 1999 average electricity price. That increase will be spread over the next nine years—it will not be sudden or dramatic, but will occur in small stages. It will be equivalent to less than 0.1 per cent. on the retail prices index. Our hope is that it will go unnoticed, because NETA is creating pressures to reduce the cost of electricity and the two things should more or less square one another off.

Heavy industrial users of electricity can usually negotiate special terms with their electricity supplier and energy-intensive users in industry will continue to shop around for the best deal. They may find a good deal by considering a range of suppliers and they will also be able to take advantage of the exemption of renewable electricity from the climate change levy. The impact on price must be closely watched, but I believe that it will be sufficiently modest and gradual to avoid the hon. Gentleman's concerns.

Combined heat and power is a vital part of climate change strategy. As I have frequently acknowledged, it has been adversely hit by fuel price movements—gas getting more expensive and electricity getting cheaper. The Department for Environment, Food and Rural Affairs, the lead Department on combined heat and power, will shortly publish the Government's draft strategy for that industry, which will set out options for supporting CHP in light of the Government's target. Advice suggests that CHP cannot be included in our renewables obligation because it is not renewable, and it would require primary legislation to create a separate CHP obligation.

Only biodegradable waste is eligible as a renewable under the EU directive on promoting renewables. That is in line with UK waste policy. We do not want to subsidise waste incineration through the renewables obligation. As the hon. Gentleman said, there was a change as a result of consultation. In our preliminary consultation, we proposed that energy from mixed waste should not be eligible under the obligation but should count towards a 10 per cent. target. In response to comments made during the consultation process, we have now adopted a domestic target of 10 per cent. from eligible sources by 2010.

We will keep a close watch on the progress of biomass co-firing. I believe that we have struck the right balance with the dates of 2006 and 2011, but we will keep a close watch on how that works out. I am conscious of the need for stability if we are to maintain market confidence.

The hon. Gentleman asked, ''Why not a carbon tax?'' The answer is that we want to develop a renewables industry, which would not necessarily have been achieved through a carbon tax. We specifically need to encourage renewables at this

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relatively infant stage of their development, and a uniform carbon tax would not have achieved that.

I hope that I have dealt with most of the points raised by the hon. Gentleman.

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