My Lords I shall speak to Amendments 55AE, 55AFA and 55AFB, which are all in my name. Amendment 55AE, together with my subsidiary amendments in this group, covers the same ground as the amendment of the noble Lord, Lord Roper, and others but it is not as specific in what it calls for. The amendment was conceived before the government amendments in the name of the noble Baroness, Lady Verma, were tabled. I do not believe that the government amendments provide an adequate answer to the problems. My subsidiary Amendments 55AFA and 55AFB, which seek to amend one of the government amendments, are testimony to this.
Amendment 55AE calls on the secretary of State to make regulations that will ensure that the independent electricity generators that employ renewable technologies will find a route to market for their produce. We are aware that the Government are relying on those enterprises to provide a large proportion of the investment in renewable electricity generation: the figure is anything between 35% and 50% of the new investment. There is also a widely perceived danger that, in the absence of further provisions in the Bill, the independent generators will be squeezed out of the market. The reality is that the big six electricity firms, who supply more than 90% of the electricity that is sold to consumers and businesses, have been expanding their generating portfolios
to include an increasing proportion of renewable energy. In the process, they have been dispensing with the services of the independent generators. The renewables obligation, which for a while was effective in obliging the big six to purchase the output of the independent generators, is becoming ever less effective in sustaining them. The suspension of the renewables obligation in 2017 would surely spell the doom of the independents unless some effective measures are enacted to prevent that.
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For a long time, the Government have ignored the plight of the independent generators. Quite simply, they have failed to perceive the dangers that the Bill poses for them. Now it seems that, at last, they have begun to understand their circumstances. In the Commons on 4 June, the Minister, Greg Baker, was keen to assure Members that the Government now have the matter under active consideration. He undertook to respond more fully to the proposal for a green power auction market, GPAM, in the course of the Bill’s passage through Parliament. However, he also asserted that independent generators face only a short-term problem. He gave a bland assurance that the contracts for difference, which are the essential provision of the Bill, will undoubtedly improve their circumstances and that they will offer them “the best long-term solution”. I am bound to say, as JM Keynes once did, that in the long run, we shall all be dead. Clearly, the independent generators may not survive into the long term. They need assurances here and now that they have a viable future of a sort that will enable them to attract investment funds.
There have been some developments in the past few weeks. As recently as last Thursday, the noble Baroness, Lady Verma, tabled amendments to the Bill designed to improve access to the market for the independent renewables generators. The new so-called backstop powers granted by her amendment would allow DECC or some other agency to command electricity suppliers to buy power from the independent generators, if those generators are unable to establish a viable purchasing power agreement with one of the major suppliers.
The proposals for a backstop power purchasing agreement are contained in a document prepared for DECC by a consultancy called Redpoint Baringa. The document has existed in draft form since the end of February, or, it may be, for longer, but it appears to have been largely neglected by DECC until recently. The document appears to suggest that, in the main, the independent generators will find an easy route to market and that they will have little difficulty in raising capital. It is assumed that, in consequence, recourse to the backstop provisions will be an infrequent occurrence. The provisions are designed to make this a none too profitable recourse for an independent generator. The report states that,
“this option will be designed to be unattractive for equity under normal market conditions and should therefore only be triggered by the project as a last resort where it cannot secure a PPA or alternative route to market that leaves the project in a better position than under the backstop arrangements”.
It seems to me that the report’s proposals embody the same optimistic assumption regarding the proper
functioning of a competitive market that was the fallacy under which the draft Bill was labouring and which continues to be a feature of the fond imaginings of the Government. Therefore, the proposals do not address the problem of the independent generators in any meaningful way.
Whereas the amendments tabled by the noble Baroness, Lady Verma, accord very considerable additional powers to the Secretary of State, they do not spell out any of the details of the backstop provisions. The Renewable Energy Association has declared that although they might reassure lenders that they will not lose their money if they generator cannot find a buyer for the power, the provisions will not provide much encouragement to invest. Investors will need to see some secure long-term purchasing power contracts; they will need more than a mere assurance that someone will step in if all else fails. My subsidiary Amendment 55AFA is designed to ensure that any power purchase arrangement that might be established under the backstop provisions would be enduring and not just a temporary expedient.
The Independent Renewable Energy Generators Group, which represents a majority of independent generators, favours the alternative option of a fully fledged green power auction market modelled on the existing provisions of the Non-Fossil Purchasing Agency, the NFPA. Under such provisions, a generator’s output would be auctioned in six-month blocks on a rolling basis for the duration of its contract for difference. The auction prices would create a market reference price relative to which the payment under the contract for difference would be determined. I should say that the Bill proposes that payments in favour of the generators are to be made whenever the reference price is below a datum known as the strike price, and that charges are to be imposed upon them whenever the reference price exceeds the strike price.
It is notable that the amendments in the names of the noble Lord, Lord Roper, and others cover both the option of backstop powers on the one hand and the option of a green power auction market on the other. It clearly signals that something must be done and that it must be done urgently. However, it is uncertain that such provisions would be sufficient to overcome the problems of the independents.
It seems, as I have already observed, that the backstop powers will be invoked only when all else has failed. At such a stage, the market failures will have been sufficient to deter the investors on whom the Government are relying. On the other hand, the green power auction market presupposes the presence of a sufficient number of willing purchasers. In their absence, the auction price, which would become the reference price, could be driven to a very low level. As a result, the contracts for difference would imply a major flow of funds from the counterparty to the contract in favour of the underutilised independent generators.
That point seems to have been missed by the Government, particularly in the context of their Amendment 55AF, wherein proposed new subsection (6)(b) calls for the price at which electricity is to be purchased under the backstop arrangements to determined by auction. My amendment proposes that it should be determined in reference to the current market price.
Something more effective surely needs to be done. Here, the difficulty arises: any measures that are liable to be effective are unlikely to find favour with the present Government on account of their political and ideological predispositions. The only viable solution that I can envisage is a state-sponsored electricity marketing authority. This would purchase its supplies from the independent generators, and it would aggregate them and sell them in competition with the supplies of the big six electricity companies.
We have heard much talk of the virtues of competitive markets and of the tendency of private enterprise to engender competition. The reality of the energy market, if one is prepared to recognise it, is that free enterprise has engendered a dysfunctional oligopoly. The participation of the state in the energy market would, in my opinion, be the most effective way of introducing genuine competition into the market. It would provide a countervailing force that could redress the power of the big six oligopolists.