Renewable Heat Incentive (Amendment to the Energy Act 2008) Regulations 2011
Lord Marland
That the Grand Committee do report to the House that it has considered the Renewable Heat Incentive (Amendment to the Energy Act 2008) Regulations 2011.
Relevant documents: 25th Report from the Joint Committee on Statutory Instruments.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)
My Lords, there are two sets of regulations before you. The first sets out the details of the renewable heat incentive, which will allow the scheme to start operating. The second enables an amendment to Section 100 of the Energy Act, the primary legislation which underpins the renewable heat incentive. This change relates to our treatment of bioenergy, which I will speak about in more detail later. As with similar financial support schemes the RHI is subject to state aid clearance, which we hope to receive in the next few weeks.
The RHI regulations set out our commitment to provide 20 years’ financial support to eligible renewable generators of heat. This means support for technologies such as solar thermal, biomass boilers, ground-source heat pumps and geothermal, to name a few. The full list of technologies supported and the levels of support are set out in the regulations. These are calculated 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, changing each year only with inflation. Support under the RHI will be available for renewable heat installations in England, Wales and Scotland through these regulations. However, I am pleased that provisions in the Energy Bill will now allow the Northern Ireland Executive to introduce their own RHI in future.
The RHI represents a serious investment in our future. It will provide financial support to a wide range of technologies and set us on a path towards rapid change. By the end of the decade, we will see 500,000 jobs created in the renewables industry with the RHI stimulating £7.5 billion of capital investment. Once introduced, the RHI will be available to renewable heat generators in the industrial, commercial, public, not-for-profit and community sectors. We want to see a broad range of businesses and organisations take the opportunity that the RHI offers to change the way they generate heat—for example, with businesses such as restaurants or supermarkets using food waste to generate biogas.
Ofgem will deliver the RHI on behalf of DECC. It has significant experience in delivering schemes which provide financial support to renewable energy generators already delivering the renewables obligation and feed-in tariffs. Generators will need to apply to Ofgem to be accredited under the scheme, and the processes they need to undertake are set out in guidance recently published for consultation on their website.
Because Ofgem has experience in delivering similar schemes, it will build on experience and existing structures, such as IT systems, to ensure that the RHI operates as effectively as possible. I am pleased that, subject to parliamentary approval of these regulations, Ofgem will be ready to receive applications for the scheme from 30 September this year.
To receive a payment under the scheme generators will need to commit to undertake certain ongoing obligations—for example, providing meter readings in order to receive their quarterly RHI payments, maintaining equipment and, in the case of biomass installations, providing information on a number of sustainability issues. This is part of a range of measures to ensure the integrity of the scheme. In addition, for small and medium-sized plants, both installers and the equipment to be installed will need to be certified under the microgeneration certification scheme or an equivalent.
I would now like to turn to bioenergy. The second set of regulations amends Section 100 of the Energy Act 2008. This amendment does three things. First, it amends the definition of biogas so that, as well as including anaerobic digestion, it will now also include advanced conversion technologies such as gasification and pyrolysis. The second change prevents the use of peat as biomass fuel. The third corrects a previous omission by adding biogas to the list of eligible sources of energy. These are important changes, as we believe that bioenergy is critical to meeting our renewable energy targets. We expect it to contribute over half of the over sevenfold predicted increase in renewable heat by 2020.
However, we are also aware of concerns that the increasing use of biomass raises, particularly with regard to issues around sustainability and air quality. In the RHI regulations we have addressed these concerns by including sustainability reporting criteria from the outset of the RHI, and will use existing legislation to cover restrictions on air quality for large-scale biomass. For installations below 20 MWth we will introduce emission limits in our RHI legislation when phase 2 of the scheme is implemented.
Finally, I would like to set out our position on the funding of this scheme. Last October, as part of the coalition Government’s spending review, we announced £860 million of funding for the RHI scheme to 2014. We have listened to feedback that previous proposals to fund the scheme through a levy on fossil-fuel suppliers would be unworkable, so instead the scheme will be funded through general taxation.
Therefore I commend these regulations to the Committee.
Lord Teverson
I naturally welcome these regulations. The renewable heat initiative is pretty unique worldwide. The concept was introduced by the previous Government and has been taken on wholeheartedly by the present Government. It is an excellent example of decarbonising the economy. We think that most carbon emissions are around electricity generation, but that only constitutes around half of emissions. That means that our targets for 2020, of 15 per cent of energy being renewable, are tough to meet. That is well illustrated in the Explanatory Memorandum by the fact that the proportion of renewable heat, currently estimated at 1.5 per cent, must rise to 12 per cent by 2020. Given the fact that part of the scheme will be implemented only next year, this is a tall order—but I am sure that it can be met.
I also congratulate DECC on its negotiations with the Treasury, in which it managed to get £860 million-worth of direct taxation at a time when the public accounts are very tight and difficult. I am sure that those of us who argue on green issues would wish for even more, but it is a large and realistic figure and I am very pleased to see it.
I was slightly disappointed by the fact that a domestic RHI scheme will not come in until 2012. I understand that a pilot scheme for domestic RHI starts this year. I would be interested to understand more about how it will help the successful introduction of the full domestic scheme next year.
Finally, my one area of slight regret, inevitably, is characteristic of a market intervention such as this, great though it is. The fact that we have not been able to implement it earlier—I see all the obstacles and why it has not been possible—means that we face the irony of a number of ground heat pump businesses, for example, going out of business while people put off decisions to invest in renewable energy until the incentives come through. Regrettably, there is a generic inevitability about these schemes when people realise that there will be a subsidy but not yet. I very much welcome the RHI and hope that it will have a very successful career not just up to 2020 but well beyond.
The Duke of Montrose
My Lords, after the description given by the Minister I almost think that I need to declare an interest, if for no other reason than that I have a livestock production business. I thought that the present measures were largely to do with commercial production. I also have a small restaurant which, as he said, is possibly in line for a renewable heat incentive grant.
I was reassured by what the Minister said about peat. When I saw that peat was mentioned in the second instrument, I thought that the Government were going to bring it into the definition of biomass. However, it is excluded, which fits in with the other measures that people have taken regarding peat.
Noble Lords will be aware that renewable energy was the subject of a statutory instrument early on in the sequence of devolution legislation for Scotland. The term at that point largely meant wind, solar and marine energy. The Minister described all the other forms of renewable energy that this measure covers. One can presume only that we are now into a further application of renewable energy. Taking the definition used of necessity, renewable heat is now part of the devolution arrangements. All the production systems benefit from financial subsidy. I hope that the Minister will confirm that renewable heat will also receive incentives from Her Majesty's Treasury, even when it is north of the border. This will be a great help to the Scottish Administration's ambition to replace all their atomic power generation with renewable energy sources.
Further to that, and in parallel with the regulation that brings the construction of plants and facilities for coal production within the powers of the planning regulations of the Scottish Government, even though coal is not a devolved matter, I presume that the construction and provision of plant for the production of renewable heat will be subject to Scottish control, even though the measures in the Bill are retained within the United Kingdom.
Baroness Smith of Basildon
My Lords, I was relieved when the Minister came into the Room. Noble Lords of my age may recall a private detective on television called Eddie Shoestring, played by Trevor Eve. Just before he retreated to his programme, he slunk into his chair just in time. I congratulate the Minister on slinking into his chair just in time, given that we have some interesting business for his department before us today. I see that nobody remembers Eddie Shoestring except me.
I was encouraged by the Minister’s enthusiasm for these regulations. We share that support. I will raise three issues of which I have already given him notice. I have some questions and queries on which he may be able to satisfy me. First, on cost control, the Minister mentioned the level of budget. That is subdivided over four years: namely, £56 million in 2011-12, the first year, of which £15 million is, I understand, through renewable premium payments; then £133 million; then £251 million, rising to £424 million in the fourth and final year of 2014-15. Given that the renewable heat incentive is the policy to deliver 12 per cent of heat in the UK being renewable by 2010, will the Minister give an assurance that he considers that this budget is adequate to meet the target?
My main point is the lack of flexibility between those years. Am I correct in thinking that any money unspent or unallocated in one year cannot be rolled over into the next year but will be lost to the programme? It is quite a tall order, particularly for a programme of this kind, for any department to hit the exact budget year on year. Do the Government intend to install some kind of capped grant scheme with all the stop-go inability that that brings with it to plan ahead for a growing industry which the RHI was trying to avoid in the first place?
My worry is that not allowing some flexibility between the years will increase the difficulty of implementing a cost-control mechanism for the programme. It also creates considerable pressures regarding the accuracy of DECC’s modelling of the programme. We have seen already how the modelling on feed-in tariffs was said not to be accurate, and the same could occur in relation to this order. My biggest worry is that it would undermine industry confidence in the scheme. I have two requests for the Minister. First, will he consider allowing full flexibility between the years, although I appreciate that he may not get Treasury support in that? Or perhaps he could allow flexibility in terms of a percentage by which the budget has been underspent or overspent in one year. The budget could vary from year to year while keeping to the overall four-year budget.
Secondly, will he look at amalgamating the budget for the first two years into a single spending period? There is a strong case for that. When the CSR was published in October 2010, the renewable heat incentive was intended to start in June 2011. That start date has already slipped three months. It would be helpful if, alongside the Treasury, DECC could look again at how that money has been allocated between the financial years. The renewable heat premium payments that I mentioned—the interim payments keeping things going until the RHI is in place—are also included in that year one budget. So we can take out £15 million from that £56 million.
An announcement on that was due in May, which we still have not had, so there is less time available to spend the money. In his opening comments the Minister confirmed that the scheme will not start until 30 September—so it will not be for 12 months, but for six. Payments are made quarterly in arrears, which means that only projects that have been accredited by Ofgem by Christmas 2011 will be paid out of the year one budget—so we are now down to three months of the year one budget.
In addition, on a point that might not be quite so serious, and given that it will be the first application, where an application for accreditation to Ofgem does not have all the required information and has to go back again, the start date for the project will be the day on which the further details, not the initial details, were submitted. Projects of any complexity may not complete the process in time even if their first application is made before the end of December. If there is any minor error or mistake or information is left out, it will have to go through again. I think that the Minister will appreciate the problem and agree that that is not an unreasonable request if the scheme is to succeed and achieve its objectives. I have given the Minister notice but, if he wants to consider it further, I would be more than happy for him to come back to me in writing, rather than to rule it out now.
On a further matter, if I understand this issue correctly, the restriction is that the eligible waste is municipal waste only. Page 35 of the March 2011 policy document refers to using municipal waste, but it does not explain why it does not include commercial or industrial waste. I am aware of the balances between higher biomass—I am talking about waste with a biomass content of between 50 per cent and 89 per cent—but can he give me a reason for that exclusion? It would be helpful because Regulation 28(9) states:
“The participant may not generate heat using solid biomass contained in any waste other than municipal waste”.
Lord Marland
As always with the excellent merry band that we have debating this subject of energy and climate change, we have had some very valuable comments. I am always grateful to my noble friend Lord Teverson for his representation of the landscape and for the compliments that he has made. It is a great boost to have him so supportive. He raised one specific issue in regard to the pilot scheme for domestic. That is happening this summer. If he will forgive me, I will not go into the details of it right now but, as always, I will make officials available to explain what is happening and to keep noble Lords in touch with the process as it goes on.
My noble friend the Duke of Montrose, as a true Scotsman, was very keen to check that, as a Scotsman, he was not having to pay the bill but that the English were, and, reluctantly, I have to tell him that HM Treasury is paying the bill.
The Duke of Montrose
I hope it is the United Kingdom that is paying the Bill. I cannot see why it should be England.
Lord Marland
That is a debate for later. I think that the noble Duke roughly knew the direction of travel that I was coming from. However, we were interested to hear about his great estates and restaurant business. When I am up in that part of Scotland, I may pop in to sample the fare. The restaurant probably serves his beef. That would be excellent. We know that he is not involved in the peat business because he was very pleased that peat was excluded. I confirm that and thank him, as always, for his contribution.
I say to the noble Baroness, Lady Smith of Basildon, who described me as slinky, that it takes one to know one. As I have admired her slinky movements round the House, I am delighted to see that she is no longer impeded by having a foot in plaster and has her dancing shoes well and truly on. I thank her for giving me advance warning of some of her questions and for the great support on this subject. That is not surprising as the renewal heat incentive was kick-started by the previous Government and we are happy to take action on it.
The noble Baroness makes a very good point about the budget. She knows as well as I do that dealing with the Treasury is not always the easiest thing on earth. I am grateful to the noble Lord, Lord Teverson, for congratulating us on getting the money from the Treasury. We cannot push our luck too far with the Treasury, but I totally understand where the noble Baroness is coming from. Despite the fact that each year is a cut-off point, people who started after 1 July 2009 will now be able to apply for RHI—we are going back further. There is effectively a six-month period when we can backdate RHI into another financial year, provided that the relevant person has completed his accreditation. It may well have taken five or six months to process but we can backdate the funding to the date of accreditation which, of course, may go back to a previous year. I hope that that gives the noble Baroness hope that there is an element of flexibility, although not perhaps as much as she would like. Reluctantly, I occasionally have to say no to her—I know that she is not used to it—but that is as far as we can go. I wipe the sweat off my brow in relief at not having to go back and challenge the Treasury again on this difficult subject.
Baroness Smith of Basildon
I am sorry to interrupt but I seek clarification. My understanding is that it is the point at which all the information is submitted and accepted—if there were mistakes, it would have had to be resubmitted—that is the date of acceptance. Is the noble Lord now telling me that that is not the case and that the provision would be backdated to when a person first applied?
Lord Marland
No, I am merely saying that it can be backdated. Obviously, it may take time to process a person’s accreditation, and that accreditation may go into a subsequent year. If you complete your accreditation, and then it takes a while to process it, the backdating could go back to the year when the accreditation was first accepted.
I am, as always, happy to pick up comments later but I wish to move on to the subject of waste. We are slightly in the hands of Defra as regards its definition of “waste”. I am glad to say that Defra has recently extended the definition of “waste” to include a number of other types of waste. As was said earlier, the RHI supports some commercial waste. There are doubtless one or two that it does not but we have instructed Ofgem to look at this and to provide a pragmatic solution as regards other waste. Ofgem will be the arbiter of that. I hope that through this process we will embrace as much as possible because, after all, that is our intention. It is not our intention to exclude waste, it is our intention to make it available to as many as possible, and this is a clear way of doing that.
The noble Baroness mentioned Regulation 3(2). I confirm that it is not our intention to exclude chemical plants. The intention is to show that we will not support RHI for open-sided warehouses and similar locations, where it is like trying to heat fresh air. Again, we have instructed Ofgem to clarify this issue through the process. We hope that as we proceed, with further advice from the noble Baroness and her team, in the spirit of co-operation we will come up with a good proposal for the RHI. It is an excellent endeavour started by the previous Government, which we have happily brought into legislation. I therefore commend these regulations to the Committee.
Motion agreed.