Renewable Heat Incentive Scheme Regulations 2011
Baroness Stowell of Beeston
That the Grand Committee do report to the House that it has considered the Renewable Heat Incentive Scheme Regulations 2011.
Relevant document: 31st Report from the Joint Committee on Statutory Instruments.
Baroness Stowell of Beeston
My Lords, climate change is one of the defining challenges of our generation. At a time when we are trying to reduce our energy consumption but still need to heat our homes, renewable energy must and will play a part in managing this situation. This is why we want to introduce the renewable heat incentive, or RHI, to support renewable heat generation and to complement the renewables obligation and feed-in tariff schemes which support the generation of renewable electricity.
Previous draft regulations for the renewable heat incentive were debated by both Houses. While both Houses passed those regulations at the time, they were subject to state aid approval being received from the European Commission for the scheme. In the event, the European Commission decided to approve the scheme, on the condition that the tariff for large biomass installations was reduced. The reason the Commission was concerned with the large-scale biomass tariff was because the tariff-setting methodology used for it differed from that applied to other technology bands. The Commission believed that this could result in overcompensation for some biomass installations.
The proposed large biomass tariff was set to incentivise 100 per cent of potential large biomass installations, allowing us to maximise the level of biomass take-up at this scale. This approach differed from that taken to other technologies supported under the scheme. We had decided on this approach because large-scale biomass represents the most cost-effective way of meeting our EU renewables targets. As the tariff levels were set out in the previously debated regulations, we have revised the draft regulations to include the new tariff level for large-scale biomass.
The new set of draft regulations is available to your Lordships today and sets out the details for the renewable heat incentive under which this scheme will operate. There are two changes to those previously debated in the Committee on 12 July. The tariff for large biomass installations—those of over 1 megawatt capacity—has been reduced from 2.7p per kilowatt hour to 1p per kilowatt hour, and the dates on which Ofgem is required to first report to the department on the administration of the scheme have been altered to reflect the delay in launching the scheme.
These regulations provide the basis for 20 years of financial support for a range of renewable heat technologies such as solar thermal, biomass boilers and ground source heat pumps. Support levels are intended to bridge the financial gap between the cost of conventional and renewable heat systems. Once in the scheme, the level of support for participants will be fixed and will change each year only with inflation. The Government have committed £864 million in funding for the scheme up to the end of 2014-15. This funding will come from general taxation rather than the proposed levy suggested by the previous Government, which was found to be unworkable. Support under these regulations will be available for renewable heat installations in England, Wales and Scotland. The Northern Ireland Executive, who are developing their own scheme under powers provided by the Energy Act 2011, have consulted on their proposals and are now analysing responses to that consultation.
The RHI will provide the right framework to enable a rapid transformation of the way heat is generated. We expect it to provide carbon savings between now and 2020 of 44 million tonnes—equivalent to all the carbon emitted by 19 typical new gas power stations operating at full load in one year. The RHI will be available to generators of renewable heat in the industrial, commercial, public, not-for-profit and community sectors in the first instance. We want to incentivise a wide range of businesses and organisations to realise the opportunity provided by the RHI and start generating heat from renewable sources.
The domestic sector is currently being supported by the renewable heat premium payment scheme, which provides a one-off payment to households that have installed an eligible renewable heat plant. We are working on proposals for an ongoing domestic scheme as part of phase 2 of that scheme. However, in the light of the later than expected launch of phase 1 as a result of the changes required by the European Commission, we are reviewing the timetable for the introduction of phase 2. We will be in a position to confirm the exact timing early in the new year.
The RHI will be delivered by Ofgem on behalf of DECC. I am pleased to confirm that the delay to the scheme has not impacted on its readiness to administer the RHI and, subject to parliamentary approval, it will be in a position to start accepting applications once these regulations have been approved and made. Ofgem has significant experience in delivering financial support schemes to renewable energy generators, and already delivers the renewables obligation and feed-in-tariff. Because Ofgem has experience in delivering similar schemes, it will be able to build on this experience and existing structures such as IT systems to ensure that the RHI operates as effectively as possible. Generators will need to apply to Ofgem to be accredited under the scheme, and the processes that they need to undertake are set out in guidance recently published on the Ofgem website.
In order to be able to participate in the scheme, applicants will need to meet a range of eligibility criteria intended to ensure the integrity of the scheme. This includes the requirement that, for small and medium plants, installers and equipment need to be certified under the microgeneration certification scheme or an equivalent scheme. Generators will also need to commit to undertake certain ongoing obligations to receive payments under the scheme—for example, providing meter readings so Ofgem can calculate their quarterly RHI payments, maintain their equipment and, in the case of biomass installations, provide information on a number of sustainability issues.
It is worth spending a little time considering bioenergy, which is a key element in allowing us to achieve our renewable energy targets. The amendments to Section 100 of the Energy Act 2008 that were approved in the summer went some way towards achieving this by enabling biogas to play a much more significant role in the RHI. We are still aware of the concerns surrounding the increased use of biomass as an energy source, particularly with regard to sustainability of the fuel sourced and air quality. Those concerns are addressed in the regulations by including sustainability reporting criteria from the outset. Air quality will be addressed through existing legislation for large-scale biomass, and we will introduce emission limits for all other biomass installations in phase 2 of the scheme.
Rising energy prices, an increased dependence on imported energy and the impact of climate change all mean that we need to change how we use and generate energy. Energy used to generate heat is a key aspect of this, as heat energy contributes half of the UK's carbon emissions. We are also no longer able to rely on cheap fossil fuel gas, which historically has supplied 70 per cent of our heat. It is time to address this situation. By introducing the RHI we are taking a first step towards a radically new approach to how we generate heat in this country. I beg to move.
Lord Grantchester
I thank the noble Baroness for her exposition and welcome her to her new role in the department. I apologise to the committee for my cold, and hope and trust that my splutterings will not make some of my remarks incoherent.
The Minister is correct that this is essentially a replay of the regulations debated in July, with two key alterations. While we will get to these in a moment, I also think it worth while to state at the outset that the Opposition continue in our broad support for the renewable heat incentive, continuing as it does the groundbreaking nature of the scheme set up in the previous Labour Administration. However, there have been delays of over a year, a dissipation of momentum and a reduction in ambition, with the two-tier introduction for businesses and households and changes to the technologies and tariffs eligible under the scheme. While adjustments must be made as there is a certain amount of learning on the job with such a new scheme, it is nevertheless important to provide continuity and schemes if investor confidence is to be maintained—a point sadly lacking regarding solar power and the feed-in tariff scheme, whereby the rate of return was cut from 12 per cent to 6 per cent at a stroke.
On that point, I shall ask the Minister the first of my queries today. Of the two changes made to the July regulations, the first involves a reduction in the tariff for large-scale biomass installations of more than 1 megawatt from 2.7 pence per kilowatt hour to 1.1 pence per kilowatt hour. This is a huge reduction, made in response to the European Commission, which judged that the tariff was too high and might lead to overcompensation for some installations in the technology band which would threaten the EU internal market level playing field. The Minister in the other place stated that this came as a considerable surprise to the department’s officials—as a bolt from the blue. Given that the subsidy has as one of its three main aims the payment of a rate of return of upfront investment of 12 per cent, where does that leave the return on a large biomass? Surely it is no longer 12 per cent. Is that 12 per cent return a level playing field across Europe, except of course solar, as stated earlier? How could the department have got it so wrong? Given that the department is in constant contact with stakeholders, can the Minister give the Committee an assessment from those conversations of the impact of this change? What effect will this have on our renewable targets?
That last question leads to some general remarks to which I hope that the Minister may be able to respond. At present, I understand that the current level of renewable heat is at 1.5 per cent; this instrument aims to increase it to 12 per cent by 2020. This is, indeed, some dramatic increase, more than has been experienced elsewhere in Europe. It demands leadership and commitment from the Government, not meddling and tinkering. Can the Minister confirm that the target will be met and that budgetary constraints do not overrule the 12 per cent rate of return policy?
In annex 1 to the memorandum, the department laid out the post-implementation review plan, which is scheduled to start in January 2014. The annex lists seven criteria to which the review will have regard when considering changes. My honourable colleague, Luciana Berger, MP for Liverpool, Wavertree, asked yesterday what criteria would trigger an early review. Is it satisfactory that the Minister in the other place responded that the answer would be provided in phase 2? Surely that needs to be stated with certainty upfront to investors if they are to have confidence that schemes will not be changed out of the blue. When affordability within the Government’s overall deficit reduction plans is stated in the annex as one of the criteria to which a review must have regard, is it not that the scheme will be under constant review? Could there be an addition of a further two criteria to this list—that the Government will have regard to, first, the employment impact and effect on growth of the industry impacted by any changes and, secondly, the effect on investors’ confidence when considering any changes brought about in consideration of other criteria? Does the Minister agree that good governance requires consistency of approach and responsible lead-in times to scheme changes?
The renewables sector is being challenged ever more critically in these times to have regard to value-for-money concerns, environmental impacts, sustainability, carbon emissions and so on. For example, there is no precondition that buildings or equipment be made energy-efficient first. Given that the Energy Bill has been enacted, could the Minister give the Committee any information on whether the review will be informed on the implementation from energy efficiency measures and what outcomes could be achieved?
It is applauded that the funding for this renewable heat-incentive scheme is to come through general taxation, which avoids the impact on consumers through increased prices, generally has regressive impacts on fuel policy and creates a better balance between energy use, climate change targets and emission reduction targets. It complements the commitment to promote the huge increase in the amount of energy that could be produced from food waste through anaerobic digestion. If this is to be the case regarding renewable heat, why could the same funding approach not also apply to feed-in tariffs, which were drastically curtailed because of the contribution that it required from consumers? Would general taxation not better match the big ambitions for the green sector?
While the concerns that I have outlined show that we wish to see improvements and an increase in momentum, I agree to the approval of the regulations.
Lord Teverson
My Lords, as a proud owner of two wood-burning stoves, what could I do but welcome this piece of administration to the legislation? I was going to congratulate the previous Government on having introduced this but of course it was neither them nor the present Government who did so; it was a rather anarchic band of Back-Benchers in both Houses who insisted that this was one of the ways forward. It was one of the few occasions on which Parliament overcame Government when feed-in tariffs and the renewable heat initiative came about. Maybe we all ought to pat our own backs when we look back at history, but the question here is what will happen in the future.
As we have been reminded, we have a big target here—to move from 1.5 per cent of renewable energy through heat to 12 per cent and, ultimately, to the 15 per cent target. We concentrate a lot on electricity generation and not so much on this other half of the sector. I welcome the fact that this will be paid for by general taxation. That £865 million is a big victory for DECC regarding the Treasury. Maybe we are not meant to talk about arguments between friends, but that seems to have been a good negotiation in these times of economic and budgetary stringency. That means that where we have fuel poverty, particularly around heat—that is not helped by electricity generation for heat—then the majority of people not getting their heat from electricity means that we are not adding to those bills.
The other exciting thing about this, although this is also why it is dangerous, is that this is something new and different and has not really been tried before. We have seen feed-in tariffs elsewhere in Europe and have, I hope, learnt from that experience. Here we are going to create the learning curve ourselves—we are the guinea pigs. That has dangers in its own right. We have to ensure that we do not have unexpected short-term tariff changes because we find it difficult to predict how these installations are going to take place, what the demand is and how much of that money is going to be used. That will be difficult but it is important that we get it right regarding investor incentives, particularly in the corporates and the small business sector that we are talking about.
I was interested in what the impact assessment said about perverse incentives. I can see the problem where the tariff rate is greater than the marginal cost of producing electricity. I went through all those arguments in the impact assessment, and would be interested to be clear that the Government are now certain that we will not be burning heat just for the incentives and that we have got around that problem. Perverse incentives are important in all legislation.
I very much regret that the European Commission got involved in terms of state aid. I would have thought that that was inappropriate in this sector, and I am with the Government in being surprised that the Commission made that intervention. One of the problems with that has been that, as so often in these cases, where there is subsidy of any kind, the industry stops while we wait for these schemes to start. There have already been a number of casualties in the heat pump industry and in this sector because people hold off from making investments until the subsidies are available.
We are now moving ahead on the business and industrial side, and I welcome that, but I should be very interested to hear when the Minister expects the domestic side of this to come in. I may have missed it in her opening remarks but I did not catch a specific date. It is very important for the industry, for social housing and for this other area where investment is taking place that that moves forward rather than people holding off until the renewable heat initiative comes into being.
I am very pleased to see these regulations come before us. This is an exciting scheme. There are all sorts of challenges surrounding it but let us go ahead and reach for that 12 per cent and beyond.
Baroness Worthington
I, too, am very pleased to be here. I am sorry that I missed the debate earlier in the year, as I was still on maternity leave. I want to open with some general remarks. It was possibly more than 10 years ago, while I was working at Friends of the Earth, that the suggestion of an incentive for renewable heat was first put forward by the NGOs. Part of the motivation for that was that it is much more efficient to take biomass energy and convert it directly into heat. If you use it to generate electricity, about two-thirds of the energy goes up cooling towers. Therefore, it is very welcome, if a little late, that this initiative is now being introduced.
I shall try to keep my comments brief as I do not want to delay approval of the regulations any further. It is very important that the initiative starts as quickly as possible. I echo the noble Lord’s comments about the need for clarity at the domestic level of the scheme. I hope that there will be great interest in the scheme from house owners, because we are all faced with high energy prices as a result of higher oil and gas prices. Therefore, I think that the update will be good and I hope that we will have clarity over the date of introduction.
One consequence of the delay is that the Government are now introducing this instrument in the eye of the storm around the solar FITs debate. I hope that we will take some lessons from that debate. Perhaps most pressing is that, if reviews are undertaken, a minimum notice period should be given to the industry before such changes are introduced. Six weeks’ notice is simply not acceptable for an industry that has to plan for the longer term. We expect there to be reviews of this instrument but the industry must be given fair notice of the changes, and I ask whether that is being considered.
I also echo my noble friend’s comments about the principle of how this is being paid for. It is significant that it is coming out of general taxation. I think that that helps to avoid the kind of furore that we are seeing over consumer bills. Let us be honest about the fact that general taxation is currently being boosted by various revenues from the European Emissions Trading Scheme. Therefore, this money is being generated from the climate change initiative and is being recycled on other work to further our aims on climate change. That is a very good principle and I should like to see more such measures being brought out of general taxation, given that we now have this big input of money from the ETS auctions.
Finally, I hope that this initiative will be very successful. I hope that we will have sufficient flexibility so as not to be hidebound by our modelling. All modelling is vulnerable—it is very hard to predict the future—but if this should turn out to be a very successful initiative and we end up getting through the budget more quickly, let us not pull the rug out from under an industry that is successful but look to spend more. We should have flexibility in how we reach our ultimate goals, which is to achieve 20 per cent of all energy from renewable sources. If renewable heat turns out to be a great success, let us have the flexibility to keep backing winners and not keep pulling the rug out from under an industry that starts to produce good results.
The Duke of Montrose
My Lords, I, too, thank the noble Baroness for her explanation of this measure, which takes up many pages, and congratulate her on taking up the cudgels for the Department of Energy and Climate Change. I have a mild interest since I have a farm, where there is obviously scope for generating various kinds of renewable energy. I was interested to hear the noble Baroness say that the plan was to reduce the periodic support payments for large biomass operations, which reminded me of something that I saw recently on a BBC web page. Perhaps the Minister can write to me if she does not have a ready answer for this. The Scottish Government have devolved powers for renewable energy, and seem to be holding a consultation on reducing the ROCs on large biomass generation because they want to devote them to marine energy. However, does large-scale biomass qualify for ROCs as well as periodic support payments? What power do the Scottish Executive have over renewables obligation certificates? Can they allocate them up and down at their own will, or is the allocation of ROCs still a UK power?
Baroness Stowell of Beeston
My Lords, I thank all noble Lords for contributing to this debate. Quite a few issues have been raised and I will do my best to cover most of them in as much detail as is sensible on such a complex matter. I welcome not only everybody’s contributions today but the support that this initiative has received from the Opposition and my noble friends in all parts of the Committee. As someone who is new to this brief, it was interesting for me to learn that the scheme was first mooted by NGOs 10 years ago and that the Back Benches, rather than previous Governments, were behind this move, although it obviously now benefits from the decision of this Government.
I will go through the issues that were raised, some of them by several noble Lords. A number of noble Lords sought to draw comparisons between this scheme and the feed-in tariffs scheme for solar panels. I understand why some people might be concerned that issues will arise from this scheme similar to those which arose from the feed-in tariff scheme. The key thing is that this Government are learning lessons from how the feed-in tariff scheme was set up by the previous Government. There has been a much higher level of collaboration with the industry and stakeholders in setting up this scheme. We have tried to build in the flexibility that is not there in the feed-in tariff scheme. I point out, as I did in the Chamber earlier today, that the changes that we are making to the feed-in tariff scheme are to ensure that the industry is sustainable in the future. It is an important industry and we want it to be part of the future.
The noble Lord, Lord Grantchester, my noble friend Lord Teverson and the noble Baroness, Lady Worthington, raised the issue of why the RHI is being funded by general taxation, whereas the feed-in tariff scheme is funded by a subsidy, or a levy on consumer bills. The difference is that feed-in tariffs are paid to consumers by electricity suppliers. That is, there is a tariff for the energy that is generated by people through the solar panels on their roofs. To fund feed-in tariffs from general taxation would require the scheme to be restructured or the Government having to pass money to the electricity suppliers to pay to the solar panel participants. It is a different scheme altogether; that is the main reason why it is funded differently.
Baroness Worthington
Could I ask specifically about the notice period, which has been such an issue with the solar feed-in tariffs? The Minister mentioned it but I am seeking an assurance that any changes are not introduced with too short a time period for the industry. A minimum of three to four months is necessary for the industry to adjust its order books and supply chain. Can the Minister assure me that there will not be changes posted that will be enacted within six weeks? That is a significant issue for investor confidence.
Baroness Stowell of Beeston
I understand the point that the noble Baroness makes. However, the way in which we have constructed the scheme means that I would not expect the sort of change that we have experienced with the feed-in tariffs for solar PVs to be repeated in this context. We would ensure, through our mechanisms for cost control within the department, that we are monitoring progress very transparently and that we would avoid that kind of emergency change that she refers to. It is unnecessary to give a specific commitment on a timetable as such because of what I have said, but I absolutely understand and appreciate her point.
Turning to the points raised by my noble friend the Duke of Montrose about large-scale biomass, the renewables obligation certificates and RHI, it is possible for new projects to receive the renewables obligation for the electricity generated in a CHP plant and the RHI for heat generated by that plant. A plant cannot claim the higher awards for CHP under the RO and the RHI. Does that make sense to my noble friend? I am glad if it does. My noble friend also asked whether the Scottish Government could award ROCs. The decisions regarding the details of renewables obligations, including the setting of banding levels, are for the Scottish Government. A separate consultation on their support of renewables obligation certificates was published on 21 October.
Lord Grantchester
Perhaps I might detain the Committee for one extra moment. Could the noble Baroness consider the question of affordability? While understanding the situation that we are in—especially in the wider European context at the moment—nevertheless, I am concerned that affordability is put up as a criterion that may overrule all other aspects. Could she comment on the relative importance of affordability and say whether her department is moving in any way at all to pick winners and losers? Winners such as PV might provide more affordable success stories than other technologies that might, in terms of their overall rate of return, be worthy of being equally treated. Nevertheless, because of the extra costs involved in their technologies, they are unlikely to be as affordable as others. Can she comment more widely on the affordability criteria in the memorandum?
Baroness Stowell of Beeston
One thing that I would like to make clearer—and remind the Committee about, as well as the noble Lord—is that the department and the Government have three clear strategic aims in this area. One is to ensure we have security of supply so that we keep the lights on. The next is to make sure that we play our part in safeguarding the future of the planet for future generations. The third is to make sure that we do both of those things in the most cost-effective way possible. By that, we want to make sure that, in all the things we are trying to do, we do them in a way that is at the lowest possible cost to those who pay. Obviously, people who pay are having to do so either through their bills or through public money via taxation. Affordability, therefore, is a key issue for us.
I cannot comment specifically on each emerging technology, but obviously there will be a situation where some things are more successful, some more attractive and some more likely to be taken up than others. These incentives are there to help industry get something off the ground which is very powerful in meeting those objectives. I hope, at some point, that they will not need incentives at all but will work in their own right.
In conclusion, the RHI is a departure from our conventional approach to generating heat. This is a new market for the UK and our introduction of long-term financial support for heat generators under the RHI, alongside existing renewable financial incentive schemes, the renewables obligation and the feed-in tariffs, sends a strong signal to the renewables sector that the Government are committed to supporting renewable energy in this country. I hope we can all agree that this is a sector that should be supported. I commend these regulations to the Committee.