England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/11/2010

Lord Justice Moses :

1. This is an application for permission, and if granted, for judicial review of the Renewables Obligation Order 2009 and of a further decision made following an "Early Review" under the 2009 Order. Tate & Lyle Industries Limited and the new owner of its sugar business, T & L, (Tate & Lyle) contend that both in the Order and in the further decision following "Early Review" the Secretary of State has unlawfully allocated to Tate & Lyle only 1.0 Renewables Obligation Certificate per Megawatt hour (1 ROC/MWh) in relation to the category of Co-firing of biomass with CHP (combined heat and power).
2. The proceedings originally challenged the allocation in the Renewables Obligation Order 2009, after it had come into force on 1 April 2009, in proceedings commenced in June 2009. Following the Secretary of State's decision to undertake an Early Review, these proceedings were treated as stayed and subsequently amended to challenge the decision following the Early Review. None of this makes sense until the statutory scheme designed to stimulate the growth of electricity generation from renewable sources is understood.

The Renewables Obligation and Renewables Obligation Certificates

3. The United Kingdom is under an obligation to take appropriate steps to encourage greater consumption of electricity from renewable energy sources (see Article 3(1) Directive 2001/77/EC of 27 September 2001, this will eventually be replaced by Directive 2009/28/EC of 23 April 2009).
4. The Renewables Obligation was introduced into domestic statutes in 2002 as a means of stimulating the growth of electricity generation from renewable sources. It is a statutory obligation requiring designated electricity suppliers supplying electricity to customers to produce to Ofgem (the statutory Authority) a required number of Renewables Obligations Certificates (ROCs) in respect of the amount of electricity supplied by it during a specified period to customers in the relevant part of Great Britain (see s.32 Electricity Act 1989 as amended by the Energy Act 2008 with full effect from 1 April 2009). If electricity suppliers fail to present the required number of certificates, they may pay a "buy-out" price, which caps the cost of the system to suppliers and thus to electricity consumers, but which is set at a level which provides an incentive to acquire ROCs. The supplier may present some ROCs and make up the difference by paying the buyout price for each remaining ROC.
5. Certificates are provided to generators in respect of their generation of electricity in the wholesale market. The certificates are then sold to electricity suppliers to meet the suppliers' obligations. It is through the system of certificates that the Government provides financial support to generators using renewable sources. Generators using renewable sources face difficulties in the wholesale electricity market due to the relatively undeveloped state of their technologies compared to fossil fuel and nuclear alternatives, and to the high capital costs and long lifetime to reach maturity.
6. The subsidy, through ROCs, represents assistance from the Government to enable renewable technologies to compete in the market with unabated fossil fuel stations and in the longer term replace them with low carbon technologies to reduce the United Kingdom's carbon dioxide emissions. The Renewables Obligation Order 2002, (the first order made pursuant to s.32A of the 1989 Act) permitted electricity generated only from specified renewable sources to count towards discharging the renewal obligation (see s.32A(1)(b)). Thus certain types of technology such as simple combustion energy from waste and those using peat as fuel were excluded from the 2002 Order. It is important, however, to note that in contrast with the current regime under the 2009 Order, its predecessor, the 2002 Order, did not differentiate in the subsidy provided for each megawatt hour of electricity generated from the specified renewable sources. Each technology falling within the 2002 Order received a flat rate of 1 ROC per MWh regardless of the type of renewable technology employed.
7. As part of the Energy Review 2006, the Government decided to promote the development of the more expensive renewable technologies. It determined to provide levels of support differentiated according to different renewable technologies, a system known as "banding". Different technologies were allocated different rates of ROC per MWh. It is that process of distinguishing between different renewable technologies for the purposes of allocating different rates of ROC per MWh which lies at the heart of these proceedings.

Essential Facts

8. After a period of consultation following the 2006 Energy Review, the Renewables Obligation Order 2009 came into force on 1 April 2009. Tate & Lyle was allocated 1 ROC per MWh in respect of the technology it used, co-firing of biomass with CHP ("CoCHP"). Following discovery of an error in the Government's prediction of the costs of such technology, the Secretary of State ordered an Early Review pursuant to the 2009 Order. On 31 March 2009, the Government maintained its decision to allocate, in respect of CoCHP, 1 ROC/MWh. That allocation is the source of this dispute.
9. Tate & Lyle produces 1.1m tonnes of sugar per year at its Thames refinery at Silvertown. It has installed four dedicated biomass boiler houses supplying 70% of the refinery's energy requirements. These boilers, from about October 2010, will use regular biomass, currently wheat husks, purchased for the purpose and stored in biomass fuel storage silos. The decision to invest £81.1m in a CoCHP plant was made in December 2006. Tate & Lyle's dedicated boilers using regular biomass feed its steam turbine in parallel with existing fossil fuel (gas) boilers. Thus the generation process falls within the definition of "Co-firing of biomass" (within the meaning of Part I Schedule 2 of the 2009 Order). The generator also produces combined heat and power, making use of the heat given off in generation of the electricity (CHP). Thus the whole process of generation falls within the description "Co-firing of biomass with CHP" (called CoCHP, and defined in Part I of Schedule 2 of the 2009 Order). It is not required to produce ROCs to Ofgem because it supplies the electricity on site to itself, or single consumers (Class C (2) Schedule 4, Electricity (Class Exemptions from the Requirement for a Licence) Order 2001).
10. Tate & Lyle contends that the Secretary of State, having erred in his original allocation under the 2009 Order, has maintained and aggravated that error following his Early Review. It estimates a loss of £1.5 m per year, attributable to a failure to allocate 1.5 ROC/MWh.

The Process Leading to Banding in the 2009 Order

11. The first stage in the process leading to banding started with an Energy White paper dated July 2006 and a consultation document from the DTI called "Renewable Energy" dated October 2006. This was followed by a consultation paper entitled "Reform of the Renewables Obligation", dated May 2007. That consultation paper was accompanied by a report commissioned from Ernst and Young and a report on the impact of those proposals by Oxera Consulting Limited.
12. The 2007 report commissioned from Ernst & Young, produced an estimate of "levelised costs" per MWh for each technology at four key periods, 2006, 2010, 2015 and 2020. The levelised costs were presented as a range to illustrate variation in costs due to a number of factors, varying according to each technology and reflecting uncertainty in relation to emerging technologies (3.2). They reflected the amount of electricity revenue per MWh needed throughout the life of the technology to make the respective technologies commercially viable (see Executive Summary). The report predicted levelised costs by reference to specific technologies. For example, onshore wind was divided into four sub-sets (large and small high-wind and large and small low-wind). It noted that in relation to immature technologies without commercially operational projects, the range of costs represented a view of what was anticipated as well as a level of uncertainty. It stated that the majority of the projects were expected to be around the "medium level as opposed to the extremes" (see page 4 of Executive Summary). A 15% pre-tax real cost of capital was adopted for dedicated biomass (page 22). The report arrived at a list of twenty technologies using renewable sources.
13. The report from Oxera Consulting Limited considered the likely impact of changes on the basis of Ernst & Young's report. In particular it reviewed the different banding options. It considered the rate of ROCs per MWh in respect of each individual technology (see s.5, page 18). That breakdown demonstrates that in respect of some technologies the number of ROCs needed in order to break even was substantially greater than the number of ROCs per MWh subsequently allocated.
14. The Government's Consultation paper, which produced the Ernst and Young and Oxera reports, proposed key principles:-

"Transparency – the process for setting the bands – should be open and clear and involve consultation with industry and other key interested parties; and

Reliability: the market should have confidence that the bands will be set on the basis of an independent and objective assessment of the commercial position and prospects of different renewable technologies." (2.11)

In deciding how many bands it should the Government proposed:-

"to assess the expected current and forward costs over the next few years for each of the technologies set out in our previous consultation document. We have found that these costs seem to fall into loose groupings which reflect at least in general terms the market and technological development that the technologies have reached to date." (2.27)

It rejected an approach which would make fine distinctions between the levels of support given to different technologies and proposed to take groups of technologies and set support levels "which reflect the general position of that group" (2.27). It identified two principal sources of costs, capital costs and fuel costs (2.28).

15. The consultation proposed four bands. The lowest allocation was to what was described as the "Established Band" for which a level of support of 0.25 ROC/MWh was proposed and the highest allocation was to "emerging technologies" which, it was proposed, should receive 2 ROC/MWh. In the middle was a reference band which included projects which had applied for accreditation and future technologies which had not been allocated a particular band (see 3.7). The paper continued:-

"It is not the Government's intention through banding to provide all projects with exactly the support level they need. This would not incentivise developers to site and build economic projects or reflect some of the natural constraints on the limits of future resource…The RO was developed as a market mechanism to pull forward the most economic and efficient projects and this remains our aim within the bands set out below."

16. The Consultation Paper set out the factors the independent advisory committee and ministers would be required to consider. These factors are important since they were subsequently reflected in s.32D introduced into the Electricity Act 1989 by s.37 of the Energy Act 2008 with full effect from 1 April 2009.

"a) the bands should take account of the full project costs (including the costs of scoping, planning, construction, grid connection, transmission charges etc.) and incomes (for example, due to the wholesale price of electricity, the avoided cost of schemes such as the EU ETS, Landfill Tax and the Climate Change Levy etc.);

b) the bands should aim to deliver the maximum deployment for a given level of support of renewable generation over the following 5-10 years and sustainable beyond that, recognising the risks in predicting costs and technologies over that time and that retaining the confidence of investors will be key to delivering that outcome;

c) the bands should be set taking into account the impact on the number of ROCs likely to be in the market, and aim to maintain investor confidence and ensure that consumers get value for money;

d) bands should take into account the cost effectiveness and long-term potential of different renewable technologies in delivering the Government's renewable energy targets. It is not the Government's intention that banding should restrict development of the most economic forms of renewables, or to provide permanently high levels of support for very expensive forms of renewable energy;

e) wider strategic issues, such as sustainability, carbon emission reduction, cost effectiveness and the Government strategies for waste management, and biomass." [4.4]

17. Tate & Lyle first responded in October 2007. It is important to appreciate that at that stage Ernst & Young had not considered the category of technology, CoCHP, which Tate & Lyle proposed to adopt. There being no clear cost analysis, it would have been, on the proposal advanced at that time, allocated 1 ROC/MWh as being "other not specified" within the reference band (see 3.5 of Consultation Paper).
18. In its response of January 2008, the Government maintained its approach that it would "group technologies with similar costs" (see Executive Summary) but it proposed a new level of support for Co-firing of regular biomass. It amended its proposal for four bands and reiterated that it was not the Government's intention through banding to provide all projects with exactly the support level they need (see 2.2). It then set out five bands with the proposed level of support expressed as ROCs/MWh. It then considered other groups of technologies with these introductory words:-

"2.8 We asked whether there were any other technologies which should be included in the RO. In light of the responses, we have looked at costs for four groups of technologies."

It proposed that co-firing of regular biomass should receive 0.5 ROCs/MWh (2.21).

19. The response also noted that it intended to proceed by allocating technologies to a band including other technologies with similar costs (2.18).
20. Following the Government's response of January 2008, Tate & Lyle obtained its own report from Ernst & Young dated February 2008. They estimated the levelised costs of Tate & Lyle's biomass plant as meriting an allocation of 2 ROC/MWh.
21. At the same time the Department (then BERR) commissioned a report from AEA Technology which considered co-firing with CHP. The Department rejected Tate & Lyle's case. The reasons for its rejection are set out in the statement of Mr Duggan, former Head of the Governance and Corporate Performance Team in the Department of Energy and Climate Change, as it now is (paragraphs 38-43).
22. In June 2008, once the Department had received the AEA report, the Government published its response as the start of the process of statutory consultation. The response defined Co-firing (4.5). It proposed an allocation of 1 ROC/MWh for CoCHP on the basis that to do so established a differential of 0.5ROC/MWh between co-firing of regular biomass without CHP (for which 0.5 ROC/MWh was proposed) and CoCHP. This was consistent with the differential of 0.5 ROC/MWh between dedicated biomass without CHP (allocated 1.5 ROC/MWh) and dedicated biomass with CHP (which was allocated 2.0 ROC/MWh) (4.15).
23. The process by which that conclusion was reached is explained in Mr Duggan's statement (paragraphs 61-67). The Department took the view that there had not been time to commission a new independent study on the costs of Co-firing with CHP. It considered the savings of converting existing plant for the purpose of Co-firing with biomass and the existing fossil fuel plant. It took the view that savings, in comparison with a newly-built dedicated biomass CHP generator, would be between 35-40% and 50-55%. However, as this statement acknowledges and as is confirmed by Stephen de Souza, Head of Renewables Financial Incentives, the savings in fact identified related only to capital costs. There was no consideration of any savings to fuel and operating costs. However, this was not appreciated when the calculation was performed and a percentage of savings in capital costs was erroneously applied to the total levelised costs (paragraph 66). It was on the basis of those erroneous figures that the allocation (in 4.15) of 1 ROC/MWh was made. In proposing an allocation of 1 ROC/MWh, the Department said it would be grateful for views on whether its approach is justified "by projects on the ground" (4.15).
24. Tate & Lyle responded to that invitation on 30 September 2008 enclosing a further report from Ernst & Young, dated 29 September 2008. This sought to provide a "clear cost analysis" (1.1). It excluded the costs of the existing infrastructure (see 1.2.1 and 3.1). It assumed, as before, a 15% real pre-tax project discount factor over a 15 year period. It set out a range of levelised costs for CoCHP in comparison with biomass regular and offshore wind showing a high of 125, a medium of 90 and a low of 69 (£/MWh). It observed it was not clear that the capital costs at the low range were complete and it expected that the majority of installations would fall between the medium and high range. It proposed an allocation of 1.5 ROC/MWh (see Conclusion at 1.3 and 3.5).
25. Prior to receipt of the 2 September 2008 report from Ernst & Young, the Government had notified the EU Commission of its decision to award ROC support for renewable technologies. On 25 August 2008 it submitted its State Aid notification to the Commission for the purposes of showing that it was not over-compensating particular technologies. It said that it had been careful to ensure that it did not over-compensate particular technologies (D1 s.2) and added:-

"The Banding regimes attempted to match the predicted costs at 2010 for realistically deployable capacity for each technology against the revenues that could be expected."

It explained that it had grouped the technology in five bands for the purposes of simplicity and gave its view that it was not appropriate to try to match the level of support "too closely to a predicted technology". It added that it had limited the maximum level of support, to 2 ROC/MWh, and had not sought to match the needs of all the technologies. It gave an example of solar photovoltaic stations which, to become financially viable, would have required some 15 ROC/MWh.

26. In October 2008 the Commission's Directorate General for Competition responded with specific questions so that the Commission could be satisfied there was no over-compensation. These responses are important because they form the basis of Tate & Lyle's submissions that the allocation was based on matching predicted revenue to the mid-point of the predicted costs. The Government's response to the Commission coincided with the process by which it reached a conclusion as to the appropriate allocation within the 2009 Order.
27. In its questions, sent on 23 October 2008, the Competition DG asked for an explanation as to how the buy-out price and the value of the ROC (i.e., part of the total revenue) matched the production costs for each renewable source, taking into account the grey electricity price (the wholesale price) and other matters. It also queried whether the support to onshore and offshore wind mirrored the differences in levelised costs as presented in the Ernst & Young report (see page 4 of the DG Competition letter). The Government's response in relation to costs, sent in November 2008, observes:-

"Costs

The costs that were set to use the banding regime were for the most part those in the Ernst & Young report. These reflected the range of costs that is/was (sic) believed would need to be covered if the UK was to hit its declared aspiration to achieve 20% of electricity from renewable sources. However we have taken account of additional inputs from our consultation process and from other sources which have become available. In order to be certain of achieving this target we would have needed to set bands which delivered revenues that topped the quoted cost range for each technology. In practice we decided that to avoid over-subsidy, and given the uncertainties in costs, we would set the revenue closer to the mid-point of the range."

The response continued:-

"In proposing a banding regime we aimed for a level of support towards the middle of the range of costs (for projects beginning in 2010) for those key technologies which we expected to deliver substantial volumes up to 2015. We did not attempt to sub-divide the technologies or to try and match the level of support very closely to arbitrary points on a supply curve as we believe that the uncertainties of future technology costs and electricity prices are such that this degree of precision would be unlikely to be met in practice." (my emphasis)

28. The response then set out the detailed tables in respect of various technologies. It is important for the purposes of the arguments in this application to observe certain features of the tables produced by the Government to the Commission. First, the ROCs allocated in respect of a particular technology are valued and forms part of the revenue. Thus, for 2010 1 ROC is valued at £41.65 (see the table relating to hydro electric (intermittent)). For offshore wind (intermittent) 1.5 ROC/MWh are allocated at 1.5 and the revenue value of these 1.5 ROC is £62.45. Thus the loss of 0.5 ROC/MWh of which Tate & Lyle complains represents a loss of just under £21 per MWh. The second feature of importance is that the wholesale electricity price is based on the Department's UEP projections and, depending on the technology, is either £35.84 - £50.16 (e.g., hydro electric (intermittent) or £40.32 - £56.43 per MWh (e.g., geothermal (baseload)). For Co-firing with biomass with CHP the prediction is a wholesale price of £40.32 - £56.43 for 2010.
29. Third, in most of the cases, once the proposed allocation was valued the Government's aim was achieved; the level of support, taken with other revenue, covers the middle of the range of costs for projects beginning in 2010.
30. This can be demonstrated by the table provided to the Commission comparing total revenues with total production costs in respect of Co-firing of biomass with CHP: the total revenue for 2010, given an allocation of 1 ROC/MWh (valued at £41.65) and a grey electricity price of between £40.32 and £46.43, did match what the Government described as the middle of the range of costs. The table showed, save in respect of technologies where in order to match the mid-point of the costs an allocation of more than 2 would have been necessary, that the allocation of ROCs had the effect that the revenue would match the mid-point of the costs range.
31. In December 2008 the Government responded to the statutory consultation. It identified its objective:-

"To increase the support provided by the RO to less established, higher risk technologies whose costs are greater by awarding them more than 1 ROC/MWh of generation ('banding up'). In order to maintain value for money for the consumer and to prevent cheaper renewables generation technologies being over-compensated we are correspondingly reducing the support ('banding down') for those renewable technologies which are relatively mature or low risk…"

The Government noted that, despite controversy, it intended to retain a distinction between regular Co-firing and Co-firing in good quality CHP stations (see 2.22 and 2.23). The response explained that some Co-firing, for example Co-firing of small amounts of biomass, required higher levels of investment. The Government decided that the electricity generated by Co-firing of gaseous fuels should not be included in the Co-firing band (4.13). It concluded that Co-firing of biomass with CHP should be allocated 1 ROC/MWh (see page 8 of the response).

32. Where the high cost of comparatively small amounts of additional electricity generated was not regarded as cost effective, that conclusion was reflected in the allocation. Anaerobic digestion of sewage sludge (sewage gas) affords an example of a distinction drawn between technologies regarded as cost effective and those which were not. Installation of new anaerobic digesters capable of taking mixed feeds was allocated 2 ROC/MWh whereas those depending on sewage gas were allocated 0.5 ROC/MWh (2.19-2.20).
33. The consultation response was followed, as a matter of chronology, by a further response to the Director General dated 30 January 2009. The Government informed the Commission of the proposed amendments to the Electricity Act, setting out the considerations (which became s.32D(4)) to which the Minister had to have regard before making a banding provision. Having set out those provisions, the Government stated:-

"Our banding regime is set to match the costs within the range for which we have evidence."

It noted that if operators were able to reduce their costs below those expected they would be able to capture the rewards for their first stations by being allowed to retain higher margins. It also referred to the possibility of an Early Review which would afford:-

"flexibility to adjust the level of support, for example, to take into account any unforeseen changes in market conditions or changes affecting specific technologies."

It referred, by way of example, to a significant change in costs charged or charges imposed.

34. Prior to the coming into force of the 2009 Order, the European Commission, by letter dated 11 February 2009, raised no objections to the introduction of the banding mechanism. The document is of importance in that it expressed the Commission's understanding of the information it had been given by the Government. It noted the updated cost calculations undertaken by Ernst & Young (paragraph 16). It accepted that the renewable obligation ensured that investments and operating costs were covered for each technology over its lifetime (paragraph 21). The Commission's appreciation showed that it accepted that differences in production costs between the technologies eligible under the scheme justified different levels of support (paragraph 65). It is of importance to note that the Commission recognised:-

"the choice of the UK Authorities to set bands which delivered revenues close to the mid-point of the ranges for each technology in order to avoid over-subsidy."

35. On 1 April 2009 the 2009 Order came into effect with the banding which had been suggested by the Government's consultation in December 2008 and notified to the Commission. At the same time the substitution of s.32A-s.32M for ss.32-32C by s.37 of the Energy Act 2008 came into effect. S.32D gave statutory force to the considerations which the Government had previously sought to apply in setting the bands. S.32D(4) provides:-

"Before making any banding provision, the Minister must have regard to the following matters:

(a) the costs (including capital costs) associated with generating electricity from each of the renewable sources or with transmitting or distributing electricity so generated;

(b) the income of operators of generating stations in respect of electricity generated from each of those sources or associated with the generation of such electricity;

(c) the effect of paragraph 19 of Schedule 6 to the Finance Act 2000 (c. 17) (supplies of electricity from renewable source exempted from climate change levy) in relation to electricity generated from each of those sources;

(d) the desirability of securing the long term growth, and economic viability, of the industries associated with the generation of electricity from renewable sources;

(e) the likely effect of the proposed banding provision on the number of renewable obligation certificates issued by the Authority, and the impact this will have on the market for such certificates and on consumers;

(f) the potential contribution of electricity generated from each renewable source to the attainment of any target which relates to the generation of electricity or the production of energy and is imposed by, or results from or arises out of, a Community obligation."

36. At this stage there remained a dispute between Tate & Lyle and the Department as to the Department's approach. As I have observed, Tate & Lyle contended that the Government ought to have made its own enquiries from Ernst & Young as to the production costs between Co-firing of regular biomass with CHP. The Government persisted in its contention that it was appropriate to take as a starting point the costs of a new station for dedicated biomass and dedicated biomass with CHP and then discount capital expenditure. It led to a conclusion that capital expenditure for Co-firing CHP was roughly half that for biomass CHP (see the letter from the Minister, Mr O'Brien, dated 26 January 2009).
37. The justification for the approach adopted by the Government remains a matter of contention. But Tate & Lyle's protest and its launch of judicial review proceedings to make good that protest were overtaken by the discovery that the figures which had been deployed by the Government in reaching the allocation of 1 ROC/MWh were erroneous.
38. In justifying its allocation to the Commission, the Government had referred to costs of £90-£130 for Co-firing of regular biomass with CHP (and £113-£132 for Co-firing of energy crops with CHP). By letter dated 3 July 2009, the Department informed the Commission that the figures for costs were not the figures on which it had actually relied. They should have been £48-£121 for CoCHP with biomass. For 2010 the figures given were £90-£130, whereas they should have been £55-£117. It should be noted that the total revenue figures remained the same. Tate & Lyle draw attention to the fact that the corrected figures given to the Commission show that in 2010 the figures actually relied upon by the Government demonstrate that the total revenue, on an allocation of 1 ROC (valued at £41.65), does meet the mid-point of the costs, namely, £86.

The Early Review

39. It is important to appreciate, however, that the erroneous information given to the Commission is not the error which led to an Early Review. That error was, so it is contended, of greater substance. During the course of preparing its resistance to the unamended judicial review proceedings, the Department discovered that the percentage of savings in capital costs had been applied in a way which reduced all of the levelised costs (see paragraph 6 and paragraph 7, information sent 10 March 2010). The Secretary of State therefore decided to carry out an Early Review pursuant to Article 33 of the 2009 Order.
40. Article 33 provides:-

"Review of banding provisions

(1) In this Order, 'banding provision' means a provision of articles 27 to 31.

(2) The Secretary of State may commence a review of the banding provisions in October 2010 and at subsequent four yearly intervals.

(3) The Secretary of State may review all or any of the banding provisions at any time if satisfied that one or more of the following conditions is satisfied -

(a) the charges imposed by network operators on persons, or a class of persons, making a request for connection to and use of a transmission or distribution system have changed significantly since the Secretary of State made the banding provisions;

(b) the charges imposed by network operators on persons, or a class of persons, who generate electricity have changed significantly since the Secretary of State made the banding provisions;

(c) a way of generating electricity is being or has been developed that-

(i) is likely to be used to generate from renewable sources electricity which is supplied to customers in Great Britain, and

(ii) is not listed in the first column of Part 2 of Schedule 2;

(d) there has been a change, since the Secretary of State made the banding provisions, in any support, whether financial or otherwise, provided under any enactment other than sections 32 to 32M of the Act to persons generating electricity from renewable sources and that change is likely to have a significant impact on the generation of electricity from renewable sources;

(e) the costs of generating electricity in any of the ways listed in the first column of Part 2 of Schedule 2 are significantly different from the costs of generating electricity in that way to which the Secretary of State had regard when making the banding provisions;

(f) there is evidence over a significant period that the provisions of article 13(3) to (5) are having a material effect on trade in ROCs referred to in article 13(3) and (4);

(g) in an obligation period the number of ROCs issued by, produced to or likely to be produced to the Authority exceeds or is likely to exceed the total number of ROCs required to be produced to the Authority in respect of that obligation period by designated electricity suppliers;

(h) an event has occurred which –

(i) is relevant to the matters set out in section 32D(4) of the Act,

(ii) was not foreseen by the Secretary of State when making the banding provisions, and

(iii) has had or is likely to have a material effect on the operation of this Order."

41. There is an important conflict as to the lawfulness of the Secretary of State's approach adopted in the Early Review which I must resolve in these proceedings. The Secretary of State was due to start a review of "the" banding provisions in October 2010. He chose to review the banding provisions relating to Tate & Lyle pursuant to Article 33(3). He commissioned consultants Mott Macdonald to report on the levelised costs for CoCHP (and for Co-firing of energy crops with CHP). As part of that review he also required data on biomass fuel prices from E4Tech. Importantly, he used updated electricity price data published in July 2009 (see De Souza, paragraph 29). Data from Mott Macdonald and E4Tech was fed into a discounted cash flow model to determine the level of ROC support required to enable the technology to meet certain internal rates of return (paragraph 31). The results were published in a consultation document.
42. For the purposes of these proceedings the important feature of the tables is demonstrated in table 4. The medium point of the costs had risen from the figure of £90 given by Ernst & Young in its report dated 2008 to £99. More significant was the fact that the price of wholesale electricity had substantially increased from a predicted figure of £40.32 - £56.43 (£/MWh) to £70/MWh. It is plain that the review adopted updated costs of generation and revenue (see paragraph 34, De Souza). On the basis of those figures the consultation document recorded that a required ROC level would be between 0.6 and 0.7 ROC/MWh, i.e., below 1 ROC/MWh (see paragraph 7, Conclusions). This was because, on the updated figures, revenue had increased to a greater extent than costs. The consultation document noted that it was a purely financial analysis and continued by saying that:-

"The Government's decisions on ROC banding levels consider not only the generation costs (the subject of this analysis) but also the other matters set out in s.32D(4) of the 1989 Act" (see final paragraph).

43. The results were reviewed independently by the Renewables Advisory Board, a group of industry representatives and what are described as "stakeholders". On 31 March the Government response announced the decision that the level of support should be 1 ROC/MWh. Tate & Lyle followed with a pre-action letter and amendment of its grounds of claim on 25 May 2010.

Arguments

44. The underlying legal principles were not in dispute. The Government has accepted that the rules of the Renewables Obligation should be applied "in a non-discriminatory way to all participants in the Renewables industry and electricity sector" (see paragraph 6.1 of the Regulatory Impact Assessment accompanying the initial consultation in May 2007 and the acknowledgement of the duty to treat CoCHP consistently with other technologies in the Secretary of State's detailed grounds of defence (paragraph 56(2)(f))). It is therefore unnecessary to dwell upon the familiar principles identified in cases such as Middlebrook Mushrooms Ltd v the Agricultural Wages Board of England and Wales [2004] EWHC 1447 and R (Kelsal)l v Secretary of State for the Environment, Food and Rural Affairs [2003] EWHC 459. In Kelsall, the distinction drawn between breeding stock for the purpose of compensating mink farmers, could not be justified (paragraph 63). In Middlebrook the distinction between workers involved with seasonal crops as against those involved with non-seasonal crops (such as mushrooms) could not be justified (see paragraph 74). Similarly, the principle of equality in community jurisprudence applies: it requires similar situations not to be treated differently unless differentiation is objectively justified (see Ruckdeschel v Hauptzollamt Hamburg-St.Annen [1977] ECR 1753 at 1769).
45. The thrust of Tate & Lyle's submissions depends upon an analysis of the process by which the bands were set prior to the Early Review. That analysis demonstrates, so Tate & Lyle contends, that ROCs/MWh, were allocated so that the revenue, including the value of the allocated ROCs/MWh, matched the mid-range of costs. Tate & Lyle identifies the mid-range of cost from the tables at Annex A in the Department's response sent 24 November 2008 to the Commission in answer to the Commission's letter of 23 October 2008. The allocation of ROCs/MWh of between 0.25 and 2 achieves a result in respect of all save the most costly technologies which matches the mid-point of the predicted cost range. The only exceptions are those five technologies (advanced gasification/pyrolosis, tidal stream, dedicated energy crop CHP, wave and solar photovoltaic) where to match the cost range an allocation of more than 2 ROCs/MWh would be required. Thus, a consistent approach was provided in relation to each band of technologies.
46. On the basis of the costs actually relied upon by the Department (£55-£117 for 2010 notified to the Commission by way of correction on 3 July 2009), an allocation of 1 ROC/MWh (i.e. of a value of £41.65/MWh), would have achieved a match between total revenue and the mid-point of the costs as the Department assumed them to be.
47. Once it was appreciated that the discount in respect of capital costs had been erroneously applied, not merely to capital costs, but to the whole of the levelised costs, the Department recognised that on 2010 figures the range of costs should have been £83-£142/MWh (see paragraph 17 of the information sent by Treasury Solicitors in a letter dated 10 March 2010). That would have given a mid-point of £112. Retaining an allocation of merely 1 ROC/MWh means that the total revenue would not match the mid-point of total expected production costs. For 2010 if only 1 ROC/MWh is allocated the maximum revenue is £101.24, whereas the mid-point of the range of total production costs (£112) exceeds that figure by just under £12. To meet the mid-point, that is £112, it would be necessary to allocate 1.5 ROC/MWh or, to put it in terms of ROC value, to award another £21. The effect of maintaining the allocation is to deprive Tate & Lyle of £21/MWh. An approach consistent with that which was applied prior to the Early Review demands an allocation of 1.5 ROC/MWh.
48. But for the Department's erroneous application of the discount to all levelised costs, the allocation of 1 ROC/MWh would have resulted in revenue matching the mid-point of Co-CHP costs. There was no warrant for adopting a different approach, unique to CoCHP, in justifying the retention of 1 ROC/MWh on Early Review.
49. There is no dispute but that the Secretary of State, in allocating 1 ROC/MWh to Tate & Lyle, applied an updated figure in respect of wholesale electricity which it had not applied to other technologies. The question therefore resolves into whether the Early Review justified such a difference in approach.
50. The crux of Tate & Lyle's complaint, now that the Early Review has taken place, is that it was unfair and discriminatory to allocate 1 ROC/MWh on the basis of updated and increased wholesale electricity prices without applying that increase to each and every other technology falling within the bands, and re-allocating ROCs/MWh on that basis. Since the trigger for the Early Review was the Department's own error in applying a percentage of savings to all levelised costs and not to capital costs, the Early Review should have been confined to correcting that error.
51. Further, it was an error which could and should have been corrected by adopting the Ernst & Young 2008 report which avoided error and recommended an allocation firstly of 2 ROCs and subsequently 1.5. If Ernst & Young 2007 was an appropriate basis for allocation at a time when it was not possible to predict total production costs in respect of CoCHP, there was no rational or fair basis for not applying Ernst & Young 2008 once the information became available. To apply a different approach solely to the technology, CoCHP, developed by Tate & Lyle, was unfair and unlawfully discriminated between Tate & Lyle as a generator and all other generators from renewable sources.
52. Once the range of costs for 2010 was corrected to £83 - £142, the revenue figure in respect of wholesale electricity should have been maintained at the rate applied to every other technology. The result should, on that basis, have been an allocation of 1.5 ROC/MWh with a revenue value of £62.45 and not £41.65.
53. The Secretary of State's response is, firstly, to dispute the premise which underlies Tate & Lyle's argument. He disputes its description of the process he adopted in reaching a decision as to the allocation of ROCs/MWh. Both before and after the Early Review, he has taken into account all those factors set out as general principles in the October 2006 Consultation (4.4) and later identified in s.32D(4)(a)-(e). He asserts that he has not sought to set bands merely by allocating ROCs so that revenue matches the mid-point of costs.
54. In the Government's response after consultation on the Early Review it referred to the lack of CoCHP projects coming forward and took the view that it would not make a significant contribution to attaining Government targets in relation to renewable energy:-

"Because few projects have come forward to date, we expect long-term growth of this technology to be low. Correspondingly, the effect on the ROC market and on consumers will be low, but the question of value for money to consumers remains. A balance has to be struck between encouraging deployment and ensuring cost effectiveness."

Accordingly, the Secretary of State can justify maintaining 1 ROC/MWh on a basis which distinguishes CoCHP from other technologies. That basis, he asserts, was applied both before and after the Early Review.

55. Secondly, he contends that once the error had been identified it would have been wrong not to take into account the increased wholesale electricity price of which Tate & Lyle would have the benefit. He was under no obligation not to apply that increased price, notwithstanding that he had not undertaken a similar analysis in relation to the other technologies.

Conclusion

56. It may not be necessary to resolve the dispute between the parties as to the approach adopted by the Department before it undertook the Early Review. The essential question is whether, having undertaken an Early Review, the Secretary of State was entitled to have regard to updated figures at a time when he had not applied such an update to other generators from different renewable sources. Tate & Lyle has sought to demonstrate the Secretary of State's unfair and discriminatory approach to its own technology in order to underline the unfairness of the Secretary of State's approach on Early Review. But if on Early Review of CoCHP, as a matter of law, the Secretary of State was entitled to adopt a different approach to that which he had previously adopted then whether or not Tate & Lyle is correct in its description of the previous process will be of no avail.
57. It is important to recall the context of the Early Review. There was no dispute but that the statutory scheme of the 2009 Order contemplates a review of the banding provisions in October 2010 and at subsequent four-yearly intervals. But it also contemplates a review of all or any of the banding provisions at any time if the Secretary of State is satisfied that the costs of generating electricity are significantly different from those costs to which he had regard when making the banding provisions (Article 33(3)(e)) or an event has occurred relevant to the matters set out in s32D(4) Article 33)(3)(h)(i)). The Secretary of State, on discovering the error in the forecast of costs caused by an application of the discount to all levelised costs, took the opportunity to conduct an Early Review in relation to one particular banding provision, namely that relating to Co-firing of biomass with CHP. It was not suggested that he had no power to do so. The real question was how he exercised that power.
58. Mr Chamberlain, on behalf of the Secretary of State, sought to draw an analogy with the position if a quashing order had been made by the court. In such circumstances it would be beyond argument that the decision-maker would be free to reconsider the decision in the light of the material circumstances then prevailing (see R v Secretary of State for the Home Department ex-parte Zeqiri [2002] UKHL 3 at 42-43).
59. It seems to me the answer is to be found not in drawing an analogy with the powers of the court but rather to look at the powers conferred by the statutory scheme. Although power is conferred on the Secretary of State to review a banding provision in circumstances where he does not conduct a review of all of the banding provisions, nevertheless that power must be exercised consistently with his overall obligation to treat all technologies fairly and without unjustified discrimination.
60. In the instant case, the Secretary of State adopted an increased wholesale electricity price different from that deployed in relation to the other technologies. The essence of Tate & Lyle's case on this point was expressed by Ernst & Young in its report on the Early Review Consultation Paper. It pointed out that the key difference in assumptions was the wholesale electricity price and that that assumption had had a material impact on the ROC banding (5.2). If the same electricity revenue assumption had been deployed then 1.5 ROC/MWh would have been allocated.
61. The difficulty with that approach is that it requires, in the interests of consistency, the Secretary of State to ignore the updated figures. To do so, in the light of the up-to-date figures, would amount to an over-subsidy. An allocation of 1.5 ROC/MWh would be too generous. Because the increase in wholesale electricity prices will increase the revenue, an allocation of 1.5 ROC/MWh would result in revenue exceeding the mid-point of costs. That excessive subsidy would be extracted from suppliers and thus consumers. It amounts to over-compensation which would be contrary to the prohibition against competitive distortion attributable to State Aid (Art.107 TFEU ex Art. 87).
62. The only basis upon which an allocation of 1.5 ROC/MWh after the Early Review could be justified would be that envisaged by Ernst & Young in 2010. The justification for awarding 1.5 would be that, pending a concluded review of all the other technologies, a consistent, even if outdated, figure for wholesale electricity must be maintained.
63. The review under Article 33(2) has started in October 2010. It is expected to last three years. Until it is completed, in 2013, the Secretary of State is in no position to know whether, as a result of the increase in wholesale electricity prices, other technologies are being over-subsidised under the present continuing allocation or not. It is not possible to know whether those technologies are in the same position as Tate & Lyle until such a review takes place. In respect of some, their costs may have been increased at a greater rate than revenue. In respect of others, their costs may have been reduced. But the statutory scheme cannot work at all if such features are to be constantly updated. The only occasion for updating is either a lengthy review lasting a number of years in respect of all technologies or the review contemplated by Article 33(3) in respect of one or more technologies once Article 33(3) is triggered.
64. It seems to me that if the Secretary of State concludes, on updated figures, that a particular technology would be over-compensated if the allocation of ROCs was increased, he is not compelled to ignore that conclusion in the interests of consistency. He is not compelled to over-subsidise CoCHP.
65. The basis of the allocation of subsidy will inevitably become outdated in the period between reviews. After all, that is the whole point of a review. But it does not seem to me possible to justify allocating to Tate & Lyle an increase in ROCs/MWh merely because others may also, pending a review, be in receipt of an excess of subsidy. Avoiding State Aid which leads to distortion in the market is as much a cardinal principle as consistency of treatment. Pending a complete review, there are bound to be some technologies which benefit from changes in the predicted costs and revenues and others which suffer.
66. For that reason I take the view that the Secretary of State was justified in maintaining an allocation of 1 ROC/MWh.
67. That conclusion is sufficient to dispose of this application. There remains, however, the question whether prior to the Early Review the Secretary of State had adopted a different approach, and whether, in seeking to justify his conclusion after the Early Review by reference to the Government's views as to the limited advantage to be gained from CoCHP, the Secretary of State has unfairly adopted an approach which discriminates against CoCHP. If, as I have concluded, the Secretary of State was entitled to have regard to the updated wholesale electricity price, this point does not require resolution.
68. I merely record that there is ample evidence that, prior to the Early Review, ROCs/MWh were allocated in a way which, but for the five most costly technologies, not only aimed at but achieved a level of support towards the middle of the range of costs (see response November 2008 and 30 January 2009 and the Commission's understanding expressed in its response,11 February 2009, Paragraphs 65-66).
69. Moreover, the Secretary of State's reliance on all the factors identified in the original principles (4.4 of the Consultation Document, May 2007) and now in s.32D(4) may well have created a false dichotomy between his description of the process by which the bands were set and that which Tate & Lyle contends was adopted. The process which allocated ROCs/MWh in a way which matched revenue to the mid-point of the range of predicted costs was itself a process which took into account the factors identified in the original principles and s.32D(4).
70. A decision as to how to describe different technologies itself involves a judgement by reference to all the factors identified in the key principles in s.32D(4). The Government had rejected an approach which sub-divided the technologies, for example, into four different types of onshore wind. Onshore wind - low wind - for example, was subsumed into a band of onshore wind. That resulted in an allocation of less than that particular technology needed to meet the mid-point of its costs because it was not a technology which the Government sought to encourage. Further, the making of an allocation which aimed at a result whereby projected revenue matched the mid-point of projected costs itself represented a judgement as how best to incentivise those technologies which the Government sought to encourage. Those with higher costs above the middle of the range would suffer.
71. The Secretary of State has never suggested that his conclusion prior to the Early Review was inconsistent with the approach he was required to take under the key principles identified in the Consultation Document or, had they been in force, s.32D(4).
72. However, even accepting Tate & Lyle's submission that allocating ROCs in a way which resulted in projected revenue matching the mid-point of projected costs was not only a permissible approach but the approach the Secretary of State had adopted, for the reasons I have given, it did not dictate that the Secretary of State, on Early Review, was required to ignore updated figures which showed that Tate & Lyle would be over-compensated.
73. I grant permission, but for the reasons I have given, I refuse Tate & Lyle's application.