Economy, Energy and Tourism Committee, 11 Mar 2009

Meeting date: Wednesday, March 11, 2009

Official Report 291KB pdf

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Subordinate Legislation

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Renewables Obligation (Scotland) Order 2009 (Draft)

I am conscious of the fact that we are running a little over schedule today, but we had a very interesting evidence session as part of our energy inquiry. I am sure that the minister will read the Official Report of that later.

Item 4 is evidence on the draft Renewables Obligation (Scotland) Order 2009. I ask the minister to make some opening remarks, after which we will ask questions. I remind the minister that he is not moving the motion at this stage; we are taking evidence before we move on to that.

I am happy to be here to speak about our proposed introduction of a new and revised renewables obligation (Scotland) order.

Members will be familiar with and will understand the importance of the obligation both to renewables in Scotland and to the ambitious targets that have been set, around which there is a material degree of consensus. The obligation mechanism has been in place since April 2002. Renewables generation in Scotland now accounts for more than 20 per cent of gross Scottish demand, up from 12 per cent in the obligation's first year. By any definition, the obligation has been a success, but it needs to evolve to help us to meet the new and more challenging targets that have been set by the European Union and welcomed by the Government.

The draft order rewrites important elements of the original mechanism. The changes, which are also being introduced to the obligations in England and Wales and in Northern Ireland, deliver the concept of banding. Put simply, banding dismantles the previous, technology-neutral approach. It enables the provision of higher levels of support to different renewables technologies depending on their cost and maturity. Until now, each unit of eligible renewables output has qualified for one renewables obligation certificate. Under the banded obligation, offshore wind, biomass and solar generation will receive more ROCs than onshore wind and hydro, which will, in turn, receive more than landfill or sewage gas. The model has strong echoes of the changes that were introduced to the Scottish obligation two years ago, which offered higher returns for wave and tidal generation.

I stress the Scottish Government's intention to maintain its higher level of support for wave and tidal power under a banded obligation relative to the rest of the United Kingdom. We notified the European Commission's state aid officials of our intention to do that—subject to the outcome of our consultation—before Christmas. Unfortunately, we did not receive the Commission's formal approval before the time came to lay the order before Parliament, but we expect to receive that permission shortly. Consequently, I intend to lodge a minor amendment to the order, at the earliest possible opportunity, to introduce the enhanced bands for wave and tidal generation in Scottish waters, which we have consulted on and agreed.

There are several other distinctive aspects of the new obligation. Central to those is the proposal that the obligation on energy suppliers will now be to submit a certain number of ROCs. That means changes to the way in which a supplier's obligation is to be calculated, which are set out in part two of the order. There are also important provisions in part 6 to protect the position of generators who invested on the basis of the previous obligation.

In addition, article 33 of the order gives the Scottish ministers the power to review the banding provisions at four-yearly intervals. The first review is due to commence in October 2010, but a review may occur at any other time if any of the circumstances that are set out in article 33(3) arise. The circumstances that could trigger such a review include significant changes to the grid charging regime and evidence of substantial reductions or increases in technology costs.

The order is an extremely important piece of legislation that consolidates the momentum that has built up around renewables generation in Scotland. It seeks to replicate that success with the emerging technologies in which Scotland has a huge potential for deployment, and I believe that it merits the committee's support and agreement. Before I formally move the motion to recommend the order, my officials and I will be happy to respond to any questions that the committee has.

Thank you for those opening remarks, minister. I will ask the first questions to get the ball rolling. What are the differences between the proposed Scottish scheme and the scheme that will operate in the rest of the UK? What are the financial implications of those differences, if any, for the Scottish Government and companies that operate in Scotland?

The differences are essentially to do with wave and tidal energy. We are talking about five ROCs for enhanced wave generation and three ROCs for enhanced tidal generation. That element is subject to approval by the European Commission, but the early signals are extremely positive, and I believe that that approval will come through.

The cost implications are spread throughout the UK because ROCs are patently tradeable. Our understanding is that, even if the level of 80MW is reached in the next cycle, the cost implications will be something like 40p per household. I think that I am correct in saying that the costs would be neutral for the Scottish Government.

Yes. That is the case for the wave and tidal measure, depending on its success. For the obligation as a whole, it has been forecast that banding will lead to higher costs of the order of around £1.7 billion across the UK, but more renewable generation will be delivered for that money.

The £1.7 billion is the sum to 2027. I have calculated that the cost will be £1.50 per person per annum.

For the record, what will the equivalent ROCs be for wave and tidal energy in England and Wales under their proposed scheme?

There will be two ROCs for wave and tidal energy in England and Wales.

It has been said that the cost implications are UK-wide or Great Britain-wide. Does that imply that the Department of Energy and Climate Change as the relevant UK ministry fully agrees with the enhancement?

That is my understanding. We are playing to Scotland's strengths, which can contribute to meeting the wider climate change and renewables targets.

Will the provision in article 33 to allow ministerial review change in any way the relationship between reviews by the Scottish ministers and those by UK ministers with reference to the rest of the UK?

We will do things in sync, as we have done all the way through. Essentially, we are playing to our strengths—the strengths are relatively different in the two jurisdictions—to work towards common UK as well as European goals. We have been very successful of late in drawing the attention of Commissioner Piebalgs and Georg Adamowitsch, who is the EU's North Sea grid co-ordinator, to Scotland's significance and potential, and we are committed to working in harmonious sync as well as we can.

It is clear that there is a distinction between playing to one's strengths to reach common, shared policy objectives and setting off on a different policy direction. From what you say, it seems that the first approach, and not the second, is being considered.

That is correct.

Article 3 proposes changes that relate to energy from waste. What difference will the new arrangements make to the Scottish Government's support for generating energy from waste?

I hope that I can clarify what those proposals are intended to do.

The proposals will apply across the UK, so we will be absolutely in step with what DECC proposes to do in England and Wales. The reason for the changes in article 3 is that, according to the energy-from-waste sector, it has been extremely difficult for it demonstrably and accurately to measure the renewable content of a mixed waste stream. The proposals will enable energy-from-waste generators to claim to the Office of Gas and Electricity Markets that 50 per cent of their fuel mix is from renewable sources. That is a very conservative estimate—the evidence base suggests that the figure will be higher than that.

Energy-from-waste generators will therefore be allowed to claim that up to 50 per cent of their fuel mix is from renewable sources by providing evidence short of waste mixture sampling. If they want to claim a higher percentage, they will have to provide much more accurate and painstaking evidence. The idea is to make the process a little more straightforward for people to manage and for Ofgem to administer.

That is helpful. Thank you.

The Scottish Government's Executive note says that the additional cost on domestic households' annual bills will be £11.41. What will be the annual cost of the order to businesses in Scotland?

I am not sure that we have drilled down to identify the specific impact on businesses.

We simply do not know. Suppliers are at liberty to pass on costs incurred through the obligation to their consumer base however they see fit. Ofgem has calculated that the obligation will add £11.41 to a domestic consumer's bill, but it is entirely up to suppliers how that load is shared among domestic consumers, small businesses and large consumers. As I say, we do not have a figure, but I do not think that it will be demonstrably different from the figure for domestic households. Indeed, it might even be less.

According to the regulatory review group that was set up on the minister's watch and which reported well over a year ago, business impact assessments are vital to any Government legislation. Am I right in thinking that such an assessment has not been carried out for the draft order?

It has not been carried out at this stage, but I can say that the regulatory review group and the business impact assessments that it has recommended are very much work in progress. Indeed, in order to get the debate on the practicalities properly under way, we held a session at Victoria Quay yesterday under the auspices of the regulatory review group not only with regulators such as the Scottish Environment Protection Agency, Scottish Water, Scottish Natural Heritage and the Scottish Commission for the Regulation of Care but with business organisations.

I accept that it is work in progress but, as I pointed out, the group reported a year ago and made what seems a fairly simple, intelligent and appropriate recommendation. Will the minister undertake to ensure that, when he appears before the committee with any piece of legislation, he has made every effort to carry out a business impact assessment on it?

Absolutely. That is certainly our direction of travel, and I am happy to report that yesterday's productive meeting between the regulatory review group and the regulators has led to a flurry of practical measures that everyone can engage with to take this work on to the next level. We had 60 of the various regulators and regulated in the room, and they all picked up on the business impact assessment as something that sends out the right signals and creates the right movement towards increased sustainable growth. We will do everything practical to achieve that end.

Returning to an earlier point, I presume that the Department for Business, Enterprise and Regulatory Reform has given you the go-ahead to enhance offshore energy development, given that such acceleration benefits the UK hugely in meeting its EU targets.

Absolutely. We are finding that there is a common purpose and are working well together on examining the potential of offshore wind power in the short to medium term.

We now move to the formal consideration of the motion to approve the draft order.

Motion moved,

That the Economy, Energy and Tourism Committee recommends that the draft Renewables Obligation (Scotland) Order (SSI 2009/draft) be approved.—[Jim Mather.]

Motion agreed to.

I thank the minister and his team for their evidence.

It remains for me to seek the committee's agreement to prepare for Parliament a short factual report on our discussion and decision.

Members indicated agreement.

Meeting continued in private until 12:55.