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EE/S3/08/R7

7th Report, 2008 (Session 3)

Report on the legislative consent memorandum on the Energy Bill (UK Parliament Legislation)

Remit and membership

Remit:

To consider and report on the Scottish economy, enterprise, energy, tourism and all other matters falling within the responsibility of the Cabinet Secretary for Finance and Sustainable Growth apart from those covered by the remits of the Transport, Infrastructure and Climate Change and the Local Government and Communities Committees.

Membership:

Ms Wendy Alexander
Gavin Brown
Rob Gibson (Deputy Convener)
Christopher Harvie
Marilyn Livingstone
Lewis Macdonald
Iain Smith (Convener)
Dave Thompson

Committee Clerking Team:

Clerk to the Committee
Stephen Imrie

Senior Assistant Clerk
Katy Orr

Assistant Clerk
Gail Grant

Report on the legislative consent memorandum on the Energy Bill (UK Parliament Legislation)

The Committee reports to the Parliament as follows—

Introduction

1. The Energy Bill (the Bill)1, introduced in the House of Commons on 10 January 2008, is currently under consideration in the UK Parliament. As the Bill makes provisions applying to Scotland for purposes that lie within the competence of the Scottish Parliament and which alter the executive competence of the Scottish Ministers, a supplementary legislative consent memorandum (LCM) (LCM (S3) 12.2) has been lodged by the Scottish Government; attached as annexe A.

2. The consent of the Scottish Parliament is sought in relation to the following: the Renewables Obligation – (Part 2) and the relevant amendments to the Renewable Heat Incentive (RHI) – (Part 5) of the Bill.

Renewable Obligation – (Part 2)

  • Competence for the Renewables Obligation (RO) under the Electricity Act 1989 has been executively devolved to Scottish Ministers by the Scotland Act 1998 (Transfer of Functions to the Scottish Ministers etc.) (No. 3) Order 2006 (SI 2006/3258). The Bill amends the existing Renewables Obligation regime under the Electricity Act 1989, to introduce new banding arrangements to provide different levels of support for different renewable technologies based on their cost and other considerations specified in the Bill.

  • The Bill will alter the executive competence of Scottish Ministers, by altering the provisions in the original Act. When the Bill was first introduced on 10 January 2008, it had been the intention of the UK Government to transfer the revised functions to Scottish Ministers by a s.63 (of the Scotland Act) order. However, because of the significant delays to the Energy Bill completing its progress in Westminster, it will now not be possible to lay a s.63 order to transfer the functions to the Scottish Ministers in sufficient time to allow them to lay the necessary Renewables Obligation (Scotland) order to allow the new banding arrangements as promised by 01 April 2009.

  • The UK Government has, therefore, now agreed to make the provisions transferring powers to Scottish Ministers which will enable them to introduce a banded RO in Scotland, directly on the face of the Energy Bill. The provisions remain the same as originally intended when they were to be transferred via the s.63 route and so the LCM route enables the Scottish Parliament to give its consent at this earlier stage, thereby allowing the new banding provisions to come into force as agreed on 1 April 2009.

Renewable Heat Incentive – (Part 5)

  • The encouragement of the generation of heat from renewable sources is a devolved purpose under the Scotland Act. However, as drafted, the new amendments will give a power to the Secretary of State to make regulations for this devolved purpose, but particular aspects of those regulations would relate to reserved matters (such as imposing a levy on fossil fuel producers or giving instructions to the Gas & Electricity Markets Authority (Ofgem)). In practice, were these powers to be exercised by the Scottish Ministers, they would be unworkable, as Scottish Ministers would be unable to make regulations that cut across any reserved areas.

  • Scottish Ministers have, therefore, reached agreement with the Secretary of State for Energy & Climate Change that where powers under the RHI fall within the legislative competence of the Scottish Parliament, the Secretary of State would only exercise these in Scotland with the agreement of Scottish Ministers; and that where the regulations make provision on reserved matters, the Secretary of State would only exercise these in Scotland after consultation with Scottish Ministers. The provisions on RHI will be made on the face of the Bill.

The Committee’s consideration of the Bill

3. At its meeting on 5 November 2008, the Committee considered the legislative consent memorandum and took evidence from Jim Mather MSP, Minister for Enterprise, Energy and Tourism.

4. The Committee raised the following issues. Firstly, whether as a result of these proposed changes, the banding within the RO and the RHI scheme will be identical across the UK. The Minister and his officials clarified that the mechanisms would be the same across the UK but that the details of specific bands for different renewable technologies might differ. However, the RHI scheme would be the same as this was a UK-wide initiative.

5. Secondly, members discussed the details of how any feed-in tariff would work, what the limitations on the size of eligible projects might be set, whether a particular limit of 3MW was too high or too low and/or could be detrimental to the uptake of micro-generation projects and, whether the current proposals undermine the renewables obligation.

6. The Minister initially indicated some preference for a lower target but did not state a final position on whether he favoured the UK Government reviewing the limit up or down from the 3MW currently proposed. He indicated he wanted to see some balance and that he was listening to views.

7. Furthermore, the Economy, Energy and Tourism Committee noted that the Subordinate Legislation Committee raised no issues of concern in relation to the LCM in its report2.

Recommendation to the Parliament

8. Finally, during the meeting, the Committee considered whether it wished to recommend that consent be granted to the UK Parliament to consider the relevant provisions in Part 2 (Electricity from Renewable Sources – the Renewable Obligation) and the amendments to Part 5 (Miscellaneous Provisions – Renewable Heat Incentives) of the UK Energy Bill as set out in the draft Legislative Consent Motion.

9. Accordingly, the Economy, Energy and Tourism Committee recommends that the draft motion set out in the legislative consent memorandum (LCM (S3) 12.2) be agreed to by Parliament.

SUPPLEMENTARY LEGISLATIVE CONSENT MEMORANDUM

UK ENERGY BILL 2008

Legislative Consent Motion

1. The draft motion, which will be lodged by the Cabinet Secretary for Finance & Sustainable Growth, is:

“That the Parliament agrees that the relevant provisions of the UK Energy Bill in Part 2 (Electricity from Renewable Sources – the Renewables Obligation), introduced in the House of Commons on 10 January 2008 and that the relevant amendments to Part 5 (Miscellaneous Provisions – Renewable Heat Incentives), tabled by Her Majesty’s Government on 29 October 2008, should, insofar as they relate to matters within the legislative competence of the Scottish Parliament or alter the executive competence of the Scottish Ministers, be considered by the UK Parliament”.

Background

2. This memorandum has been lodged by John Swinney MSP, Cabinet Secretary for Finance & Sustainable Growth, under rule 9B.3.1(a) of the Parliament’s standing orders. The UK Energy Bill was introduced in the UK Parliament on 10 January. The Bill can be found at:

http://services.parliament.uk/bills/2007-08/energy.html

3. The main purpose of the Energy Bill is to implement the legislative aspects of the Energy White Paper, Meeting the Energy Challenge (Cm. 7124, May 2007). The Energy White Paper can be found at:

http://www.berr.gov.uk/energy/whitepaper/page39534.html

4. The principal objective of the Bill is to update the legislative framework to meet the needs of the current energy market and to ensure that it is fit for the future energy challenges that the UK faces. The key elements of the Bill are:

  • Part 1: Gas Importation & Storage and Carbon Storage – This covers provisions relating to the storage of natural gas and unloading of Liquefied Natural Gas (LNG) from 12 to 200 nautical miles (nm) adjacent to the UK, as well as the storage of carbon dioxide under the seabed from 0 to 200nm;

  • Part 2: Electricity from Renewable Sources – This modifies the existing Renewables Obligation to make it more efficient and increase the use of renewables. It also amends the powers of Ofgem to run tender exercises to establish offshore transmission network operators to manage conveyance of high voltage electricity from offshore generating stations.

  • Part 3: Decommissioning of Energy Installations – This covers provisions to ensure the taxpayer is protected from meeting the costs of decommissioning energy installations in the following sectors: nuclear; offshore renewables; oil & gas.

  • Part 4: Provisions relating to Oil & Gas – The Bill makes some changes to existing legislation covering petroleum licensing and third party access dispute resolution procedures, by extending their scope to cover upstream oil and gas infrastructure.

  • Part 5: Miscellaneous – This contains various provisions covering reporting on energy requirements; giving legislative effect to earlier administrative transfer of certain aspects of energy regulation; and nuclear security.

  • Part 6: General – Consequential provisions and amendments relating to offences, subordinate legislation, transitional provision, extent and commencement.

5. Since the time of introduction of the Bill in January, the UK Government has been considering how it might meet the new renewable energy targets being introduced under EU legislation as part of the Climate & Energy package currently being finalised in the European Parliament and Council. The UK has been set a target of 15% of energy coming from renewable sources by 2020. This target applies to heat, transport and electricity and the UK has concluded that to increase the amount of heat generated from renewable sources in the UK, it will need to introduce a Renewable Heat Incentive to encourage and promote renewable heat. The clauses covering the Renewable Heat Incentive are being introduced under Part 5 – Miscellaneous Provisions.

The UK Energy Bill has already been the subject of a Legislative Consent Memorandum in the Scottish Parliament, where the Scottish Parliament gave its consent that the Bill’s carbon storage provisions in Part 1 should extend to Scotland:

http://www.scottish.parliament.uk/business/legConMem/LCM-2007-2008/energybill.htm

Provisions which relate to Scotland

6. The following paragraphs describe the further additional elements of the UK Bill for which the consent of the Scottish Parliament is now sought. Further background information in relation to the Renewable Heat Incentive and Renewables Obligation is attached at Annex A.

Devolved provisions which require the consent of the Scottish Parliament:

  • Renewable Heat Incentive (RHI) – (Part 5) – the encouragement of the generation of heat from renewable sources is a devolved purpose under the Scotland Act. However, as drafted, the amendments will give a power to the Secretary of State to make regulations for this devolved purpose, but particular aspects of those regulations would relate to reserved matters (such as imposing a levy on fossil fuel producers or giving instructions to the Gas & Electricity Markets Authority (Ofgem)). In practice, were these powers to be exercised by the Scottish Ministers, they would be unworkable, as Scottish Ministers would be unable to make regulations that cut across any reserved areas.

  • Scottish Ministers have therefore reached agreement with the Secretary of State for Energy & Climate Change that where powers under the RHI fall within the legislative competence of the Scottish Parliament, the Secretary of State would only exercise these in Scotland with the agreement of Scottish Ministers; and that where the regulations make provision on reserved matters, the Secretary of State would only exercise these in Scotland after consultation with Scottish Ministers. The provisions on RHI will be made on the face of the Bill.

  • Renewables Obligation – (Part 2) – competence for the Renewables Obligation under the Electricity Act 1989 has been executively devolved to Scottish Ministers by the Scotland Act 1998 (Transfer of Functions to the Scottish Ministers etc.) (No. 3) Order 2006 (SI 2006/3258). The Bill amends the existing Renewables Obligation regime under the Electricity Act 1989, to introduce new banding arrangements to provide different levels of support for different renewable technologies based on their cost and other considerations specified in the Bill.

  • The Bill will alter the executive competence of Scottish Ministers, by altering the provisions in the original Act. When the Bill was first introduced on 10 January, it had been the intention of the UK Government to transfer the revised functions to Scottish Ministers by s.63 order. However, because of the significant delays to the Energy Bill completing its progress in Westminster, it will now not be possible to lay a s.63 order to transfer the functions to Scottish Ministers in sufficient time to allow them to lay the necessary Renewables Obligation (Scotland) order to allow the new banding arrangements as promised by 01 April 2009.

  • The UK Government has therefore now agreed to make the provisions transferring powers to Scottish Ministers which will enable them to introduce a banded RO in Scotland, directly on the face of the Energy Bill. The provisions remain the same as originally intended when they were to be transferred via the s.63 route and so the LCM route enables the Scottish Parliament to give its consent at this earlier stage, thereby allowing the new banding provisions to come into force as agreed on 01 April 2009.

Consultation

7. The proposals to band the Renewables Obligation in Scotland are already the subject of consultation which can be accessed here:

http://www.scotland.gov.uk/Topics/Business-Industry/Energy/19185/ROSCons08BS

8. Both the UK Government and the Scottish Government are consulting on renewable heat as part of the UK Government’s Renewable Energy Strategy and the Scottish Government’s Renewable Energy Framework. Whilst it may seem premature to introduce the RHI before these consultations have been completed, the Secretary of State took the view that using the legislative opportunity of the Energy Bill was necessary to create the enabling powers to design a future mechanism to encourage renewable heat. Given that these are enabling powers, rather than the specific details of a scheme, the design of the RHI will continue to be informed by the outcome of both the UK and Scottish renewable energy consultation exercises. The agreement of the UK to put the Scottish Ministers’ functions in the RHI scheme on a statutory basis, by including them in the Bill will ensure Scottish Ministers are given a proper opportunity to consider the detail of the RHI scheme when it is finalised in future.

Financial Implications

9. There are no direct financial consequences for the Scottish bloc of the creation of the RHI. This will be administered by the UK Government and levies will come to the Treasury. However, when the regulations are being agreed in future, the Scottish Parliament will have the opportunity to consider how the receipts from the levy should be spent in Scotland in future.

The mechanism for administering the finances associated with the Renewables Obligation in Scotland is already established and the introduction of the banding provisions will not alter this administrative mechanism.

SCOTTISH GOVERNMENT
October 2008

UK ENERGY BILL: LEGISLATIVE CONSENT MEMORANDUM – DETAILS OF RENEWABLE HEAT INCENTIVE AND RENEWABLES OBLIGATION PROVISIONS

TEXTS OF EXPLANATORY MEMORANDA FROM UK GOVERNMENT

RENEWABLE HEAT INCENTIVE

“After Clause 80, clause 94, schedule 4

1. The purpose of the clause is to give the Secretary of State power to make Regulations to establish a financial support mechanism for renewable heat, a ‘Renewable Heat Incentive’. Such a mechanism would allow for the payment of revenue to generators of renewable heat on the basis of the quantity of heat generated. In this way, the mechanism that could be created under the powers contained in this amendment is akin-to a “feed-in tariff” for electricity.

2. Subsection (1) of the amendment gives the Secretary of State power to make Regulations establishing the scheme and to appoint an administrative authority for the Renewable Heat Incentive.

3. Subsection (2) sets out what may be provided for in those Regulations. Under subsection (2)(a), the Secretary of State or the Authority may make, or require fossil fuel suppliers to make, payments to parties generating renewable heat for the heat energy they produce. The rate of payment made would be differentiated, or banded, according to the technology used for generating the heat. In some defined cases, for example biogas and biomethane, the payments will reward the production of renewable fuels itself, rather than the generation of renewable heat.

4. Subsection (2)(e) enables the Secretary of State to require the payment of a levy by suppliers of fossil fuels used for generating heat (for example natural gas, heating oil, solid fuels such as coal and LPG). It is intended that this levy will fund the Renewable Heat Incentive and any payments enabled under subsection (2)(a).

5. Subsection (3) sets out the meaning of certain terms as referred to in the clause, in particular, making clear that the administrative authority for the Renewable Heat Incentive will be the Gas and Electricity Markets Authority. It also provides a definition for biomethane, to help clarify the circumstances under which producers of biomethane can benefit from support under the Renewable Heat Incentive.

6. Subsection (4) sets out the sources of energy and technologies eligible for payments under the Renewable Heat Incentive. The list of technologies includes heat produced from renewable energy sources such as the sun (for example through the use of solar thermal water heaters), the heat in the ground and air (for example, via heat pumps), sustainable biomass, and heat from biogenic waste (for example via injection of biomethane to the gas grid). Subsection (4)(h) specifies that only renewable combined heat and power technologies can be supported under the Renewable Heat Incentive. Subsection (5) allows for this list to be modified by Regulation.

7. Subsection (6) allows for Regulations to specify those activities which constitute the generation of heat from biofuels.

8. Subsection (7) provides that before making RHI regulations which extend to Scotland, the Secretary of State must obtain the consent of the Scottish Ministers where the provisions would be within the legislative competence of the Scottish Parliament, or in any other case, must consult the Scottish Ministers.

9. Amendments specify that the Regulations made to introduce a Renewable Heat Incentive will be subject to the affirmative resolution procedure.”

RENEWABLES OBLIGATION

1. “This Part of the Bill deals with the changes proposed to the Renewables Obligation. The Renewables Obligation (RO) was introduced in 2002 to stimulate growth of electricity generation from renewable sources. The support currently provided under the RO does not differentiate between renewable technologies. It is the main policy measure for supporting the development of renewable electricity across Great Britain and Northern Ireland. In Great Britain the RO operates under the Electricity Act 1989 (c.29) with separate orders in England and Wales (the Renewables Obligation Order 2006 (SI No 2006/1004), as amended by the Renewables Obligation (Amendment) Order 2007 (SI No 2007/1078)), and in Scotland (the Renewables Obligation (Scotland) Order 2007 (Scottish SI No 2007/267)). These, together with a parallel measure in Northern Ireland (the Renewables Obligation Order (Northern Ireland) 2007 (S.R.2007/104), made under Articles 52 to 56 of the Energy (Northern Ireland) Order 2003 (S.I. 2003/419 (N.I.6))) provide for consistent Obligations in all three jurisdictions.

2. Under the existing regime, licensed electricity suppliers in the relevant part of Great Britain have a “renewables obligation” to produce to the Gas and Electricity Markets Authority (“the Authority”), before a specified day, certain evidence regarding the supply to customers in Great Britain of electricity generated by using renewable sources. The evidence required is in the form of renewables obligation certificates (“ROCs”) currently issued by the Authority to renewable electricity generators on the basis of 1ROC/MWh of renewable electricity. The generator can then sell these ROCs to suppliers with the electricity or separately. The Renewables Obligation Order in England and Wales and the one in Scotland set out the proportion of the electricity supplied by an electricity supplier that must be sourced from renewable sources.

3. As an alternative to providing ROCs, electricity suppliers may discharge their renewables obligations (either fully or partially) by making buy-out payments to the Authority. Payments made into the buy-out fund are redistributed at the end of the obligation period to suppliers who have produced ROCs, on a pro-rata basis. The obligation level has been deliberately set higher than the expected amount of renewables generation to be deployed in order to ensure there is a market for ROCs. This will mean some suppliers pay the buyout price for at least some of their obligation. The redistribution of the buyout fund in this way is intended further to promote competition between suppliers in supplying more electricity from renewables sources, and therefore to promote further investment in renewables generation.

4. The existing legislation also provides for suppliers who do not comply with the RO by the specified day to be treated as having subsequently discharged the RO if they make late buyout payments, together with escalating interest into a late payments fund.

5. It also makes provision for requiring suppliers to make payments to the Authority to cover some or all of an un-recovered shortfall in the buy-out fund caused, for example, by the insolvency of a supplier with an obligation who cannot make payments into the buyout fund. Where this occurs, additional sums are then required from the remaining electricity suppliers to cover the amounts that would have been paid by the insolvent supplier. This process is known as mutualisation.

6. As already mentioned, Northern Ireland has enacted legislation which is analogous to the provisions of the Electricity Act 1989 creating the RO. That legislation requires Northern Ireland suppliers to produce, as evidence, Northern Ireland Renewables Obligation Certificates (“NIROCs”) issued by the Northern Ireland equivalent of the Authority, the Northern Ireland Authority for Utility Regulation. ROCs issued in Northern Ireland are also recognised in Great Britain and can be used by GB suppliers to discharge their obligations. Similarly ROCs issued under the two GB orders can be used by suppliers to fulfil the Northern Ireland RO.

7. The Government’s proposed reform of the RO in Great Britain in the Bill is designed to bring forward more renewables generation by increasing the effectiveness of the RO. The proposals enable the Secretary of State to increase support to some forms of renewable generation, while reducing subsidy to others.

The proposals will:

  • Allow the Renewables Obligation to be banded to provide different levels of support for different technologies based on their cost and other considerations specified in the Bill.

  • Change the obligation to one in which suppliers must present a specified number of renewables obligation certificates (ROC), rather than supply a specified percentage of their electricity from renewable sources.

  • Maintain the rights of most existing generating stations to claim 1ROC/1MWh once banding is introduced.

  • Provide for the bands to be reviewed periodically or where a specified condition triggers a review.

  • Provide for a mechanism to prevent a price crash in the event of an anticipated oversupply of ROCs.

  • Require biomass operators to provide information to the Authority on the source of biomass fuels and what steps they have taken to ensure its sustainability.

  • Allow generating stations using both fossil fuel and renewable sources (i.e. energy from waste plants) to claim ROCs only for the proportion of electricity generated by the renewable source.

  • Enable the Authority to recover the costs of administering the RO from the buyout fund.

8. The detail of all these changes will be covered in secondary legislation made under the Electricity Act 1989. The orders will be subject to a statutory consultation process.

9. Since the RO was first introduced in 2002, there have been a number of subsequent changes to the primary legislation (made by the Energy Act 2004 and the Climate Change and Sustainable Energy Act 2006) intended to improve the way that the RO works. However as has been indicated by the Committee of Public Accounts and by the Government Review of the RO there is scope for further increases in efficiency of the RO as a mechanism.

10. The reforms proposed in this Bill are intended to restructure the way the RO works while maintaining its overall aims. In practice there will continue to be an obligation on suppliers to present certificates to the Authority or to pay a penalty. The buy-out fund will continue to be recycled in order to promote competition in the renewables market. As there have been a number of previous changes to the primary legislation, the Government has also taken the opportunity through the Bill to recast the existing legislation so that it is easier for the reader to follow.”


Footnotes:

1 Energy Bill, HL Bill 52

2 Subordinate Legislation Committee, 39th Report 2008 (Session 3). Report on the legislative consent memorandum on the Energy Bill (SP 165).