Domestic Renewable Heat Incentive Scheme Regulations 2014

Wednesday 26th March 2014 Grand Committee

Motion to Consider

15:45

Moved by

[Baroness Verma]

That the Grand Committee do consider the Domestic Renewable Heat Incentive Scheme Regulations 2014.

Relevant document: 23rd Report from the Joint Committee on Statutory Instruments

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma) (Con)]

My Lords, I am pleased to open the debate on the Domestic Renewable Heat Incentive Scheme Regulations 2014. Before focusing on the details of these regulations, I will take time to provide some background to the scheme, which I shall now refer to as the RHI.

In November 2011, we introduced the world’s first long-term financial support programme for renewable heat—the non-domestic RHI. Today, I am very pleased to introduce the regulations to extend this innovative and ambitious scheme to householders.

This decade, the RHI will help to contribute to meeting the country’s 2020 renewables target. The RHI also has a longer-term ambition. By encouraging people to switch to renewable heating now, the RHI is preparing the country for the widespread rollout of low-carbon heating from 2020 onwards, helping us to achieve our 2050 aim of near-zero carbon emissions from household heating. The RHI and, in particular, the domestic scheme also have an immediate aim—to help householders to reduce their heating bills. Heating is the single biggest energy use for householders. For people living off the gas grid whose costs are greatest, this represents a significant burden. Off-gas grid consumers could see between 10% and 40% savings in their heating bills, as well as saving carbon by moving away from fossil fuels. Moreover, renewable heating systems function better within properly insulated homes. The domestic RHI, working with the Green Deal, can therefore offer a whole-house solution to high energy bills.

The RHI covers the whole of Great Britain, with Northern Ireland running its own scheme. Our non-domestic scheme, launched in 2011, supports the installation of renewable systems that heat commercial, public or not-for-profit properties and systems that heat multiple homes. The latest published figures show that we already have in excess of 4,700 applications, more than £38 million paid in RHI support and more than 978 gigawatt hours of heat generated from renewable sources under that scheme.

It has always been our intention that the RHI will be extended to cover the domestic sector. The innovative nature of the domestic RHI as a world first means that it has been a challenging and time-intensive policy to develop. We have consulted extensively. In September 2012, a public consultation was launched to seek views on proposals for the domestic scheme. This provided us with a huge amount of valuable evidence from stakeholders and a wide range of views, all of which we have to consider.

Given the current economic climate and the need to deliver value for money through government expenditure, it was particularly important to get the scheme right. Following this period of extensive analysis, the finalised scheme outline was published in July 2013. Providing support until the launch of the domestic RHI, the renewable heat premium payment grant scheme has, to date, supported the installation of more than 17,000 renewable heating systems by homeowners and social landlords. The budget for the domestic RHI allows for more than 35,000 installations in the first year of the scheme before a reduction in tariffs is triggered.

The domestic RHI scheme which these regulations will implement will extend RHI support to renewable heating systems that heat individual homes, provided they were installed on or after 15 July 2009. The scheme will be open to everyone, whether they are connected to the gas grid or not. Those who live off the gas grid with high heating costs will benefit the most from switching to renewable heating. Homeowners, social and private landlords, their tenants, and self-builders can all benefit.

The domestic RHI will support biomass-only boilers and pellet-only stoves with integrated boilers. It will also support air-to-water, ground-to-water and water-to-water heat pumps, provided that they run on electricity. Both biomass and heat-pump systems will be eligible only if they deliver heat via a liquid—for example, through radiators—and provide space heating only or both space heating and hot water. Evacuated tube and flat plate solar thermal panels will be eligible too, although only if they provide just hot water. Panels that generate electricity as well as heat will not be eligible. The list of technologies that will be eligible at the launch of the scheme is fixed. That said, however, we recognise the importance of innovation and we will consider including other technologies in the future.

To provide consumer protection, the regulations require that all products meet specified, recognised European technology standards. Furthermore, an installation must be certified by the Microgeneration Certification Scheme or an equivalent scheme. MCS is a quality mark that demonstrates compliance with industry standards. It has a framework in place to deal with any potential disputes between homeowners and installers. We also want to protect air quality from any potential impacts of increased uptake of biomass; the domestic RHI therefore follows the non-domestic scheme by setting emissions limits in relation to the two main pollutants for new biomass installations: particulate matter and oxides of nitrogen. Heat pumps need to meet an additional requirement: they must have a minimum efficiency rating—known as a seasonal performance factor—of 2.5 in order to ensure that they are genuinely renewable. Apart from self-builders who will already be meeting the requirements of current building regulations, we are also tackling the energy efficiency of homes by requiring loft and cavity wall insulation to be installed, where appropriate, and by requiring that a Green Deal assessment be undertaken.

Renewable heating technologies work best in an energy-efficient home and reducing the size of the heating demand from each house means that each home saves money on its fuel bills and that we can support more households through the RHI. The domestic RHI will provide ongoing support in the form of tariff payments based on a set rate per unit of renewable heat produced; the rate depends on the technology installed. Tariff rates compensate for the additional costs of installing a renewable heating system compared with a conventional off-gas grid system, such as an oil boiler. Ofgem will administer the domestic scheme and will make the payments over seven years. They will be calculated quarterly and adjusted to reflect inflation each year. The basis for the payments will be the amount of renewable heat produced by the technology. In most cases, it will be based on an estimate of the amount of heat that the home needs in a year, known as deeming. For biomass and heat-pump systems, this estimate will be taken from the property’s latest energy performance certificate. For heat pumps, the figure will be adjusted to take into account the estimated efficiency of the heat pump in order to ascertain the renewable proportion of the heat produced. For solar thermal systems, payments will be based on the estimate of system performance produced as part of the installation.

In certain circumstances, applicants will need to install meters and will be paid based on their meter readings—for example, where the installation is in a second home or where there is an additional system in place that also provides space heating. Any payments based on metering will be capped at the amount set by the deeming approach. On top of their RHI tariff payments, a householder could receive additional payments if they take up the metering and monitoring service package. These packages are similar to a service contract and will allow the householder and the installer to view detailed information about the heating system in order to improve its performance. Only heat pumps and pellet-only biomass boilers will be eligible for these additional payments. The payment for heat pumps will be £230 per year and for pellet boilers it will be £200 per year. A mechanism for managing the budget for the domestic scheme will be in place using degression to control costs. Degression works by gradually decreasing tariffs as quarterly thresholds of spend are reached. Any reductions will be announced with one month’s notice and the reduced tariffs will apply only to new applications. DECC will also publish monthly updates of spend and progress towards triggers which will allow applicants and installers to determine the likelihood of a future decrease to their tariff.

RHI participants will need to provide annual declarations and, in certain circumstances, further information about their ongoing compliance. Ofgem will also have the power to investigate further and to withhold or claim back payments of non-compliance.

Finally, a random selection of applicants will be chosen to have meters installed which collect data on performance of technologies for evaluation. The cost of the installation will be covered by DECC.

These regulations will have effect in England, Scotland and Wales. RHI policy in Northern Ireland is devolved. Scottish Ministers have given their consent to regulations as required by the Energy Act 2008. Northern Irish Ministers administer a separate but equivalent scheme and have been notified of these regulations, as have Welsh Ministers.

These regulations represent a significant and exciting step towards the goal of reshaping our heating market. The domestic RHI scheme will sit alongside its non-domestic counterpart in a world-first approach to incentivising the uptake of renewable heat. Its short-term aim will be to help households save on fuel bills and contribute towards helping the country meet its 2020 renewables target.

However, the ambition goes beyond that. It will also set the country on the path towards the wider rollout of renewable heating everywhere from the 2020s and onwards. Driven by RHI, we hope to see the industry expand, costs to reduce and consumer awareness and familiarity to increase. The result will be renewable heating becoming a viable and competitive alternative for all households. I commend these regulations to the Committee.

[Baroness Worthington (Lab)]

My Lords, I am grateful to the Minister for introducing these exciting regulations. This is a real step forward; we have been waiting for it and we are pleased that it has finally arrived.

Perhaps I may first ask some general questions on how we are doing on the RHI. We have had previous debates on other orders and I am always keen to know how we are doing in relation to our target. This is a world first and things may not be going as fast as we would like. That is understandable—it is a complex policy area—but it would be good to have an update on where we are in relation to the terawatt hour target for 2015-16, which I believe was set at five to seven terawatt hours. It is not that long away now and I would be interested to know how we are doing.

I have raised the issue of underspend before. There is a budget surplus under the RHI and I hope that we will increase the speed at which we get through this budget and that measures will be installed. The regulations refer to the earlier scheme, the renewable heating premium payments. It was a sensible move to introduce an early scheme in order to assess take-up and it would be interesting to know what the take-up was and how many people came forward to receive payments under that scheme. My questions are related to getting a sense of how we are doing and the background against which this policy should be judged.

On integration with the Green Deal, it is sensible that we should try to join up policies, particularly policies that involve interaction with householders. The Green Deal and the RHI should complement each other well.

How are we going to make sure that Green Deal assessors are fully cognisant of all RHI technologies? Perhaps the Minister could say a few words about how we make sure when training Green Deal assessors that they are fully aware of all of the RHI technologies, how they can be applied and the properties and situations which would be beneficial for consumer take-up. If they are not joined up, they could otherwise become a barrier. If we are not integrating this, people may not be aware of RHI and its availability; equally, there might be a barrier the other way in requiring a consumer to have a Green Deal assessment—if an assessor comes in and perhaps is not aware or does not give information about the RHI, that could be an unnecessary impediment towards the take-up of this technology. I want to make sure that we really are joining up the policy at a delivery level.

16:00

I have a question about enforcement, which I know is a tricky matter. We have gone for a deemed contribution rather than a fully metered contribution, for good reasons as it is about a balance between the effectiveness of the policy and the costs involved in monitoring. However, I wonder about the potential perverse incentives. It is true that if you fit a biomass installation, you have a fuel cost. If you are able to avoid that fuel cost but still get the payments, that creates a perverse incentive. I know that the authority will be able to inspect properties but there is a particular problem if a property, which may be rented accommodation, remains empty or unlet for a period or if it is simply empty for other reasons. How are we to spot these properties and is there a sufficient stick—a penalty—for people who are perhaps trying to game the system?

I looked through the regulations but in the section on enforcement and inspection there did not seem to be a sanction. There did not seem to be a fine or any kind of disincentive. It may be that I am missing something and that the noble Baroness can put my mind at rest. Obviously, we want this scheme to go forward but it would be terrible if it were to get mired in Daily Mail headlines about people using climate change policies to an ill end, so enforcement sanctions are an important part of making this a success. People have to have confidence in the scheme and we do not want to leave any loopholes open for negative publicity, which would set the scheme back.

We have just had a Question in the Chamber on the Green Deal. Clearly, that scheme has not had as much take-up as we would have wanted. I really hope that we can learn the lessons from that and that this policy will be much more successful in meeting the targets set for it. Can the Minister say a little more about promotion plans and how we are going to get it taken up? It is probably fair to say that this is a fairly complex and technical policy. Nevertheless, at the moment we have a population who are focused on their energy bills. They are concerned about being able to pay their gas bills, so it would be a good time to talk to people about how they can move forward quite considerably to take themselves out of the fossil fuel market and insulate themselves against future price volatility. That would make a real difference to their energy bills. I suppose the question is: will the low take-up of the Green Deal have an impact on the corresponding take-up of the RHI? I would hope not; instead, in an ideal world, the RHI could help the Green Deal’s take-up. However, it would be nice to know a little more about how we are going to promote and encourage the take-up of this scheme.

I am sorry if this question is a little detailed but it is mentioned in the regulations that new build will not be eligible. I can see why, as people do not want to pay for something that is already happening. However, it made me think: if these microgeneration technologies are being installed into new build and they are renewable heat, how are we capturing them and making sure that they count towards our targets? It would be a great shame if, for example, new build were to integrate renewable heat—and that would make sense, as it is the cheapest point at which to do it—if that does not then contribute to the targets. How are we making sure that those 7,000 to 8,000 microgenerating technologies are counting towards our targets, so that we can capture an important point in this policy? The point is that if you can put it into a new build, it will be cheaper and have far fewer barriers to uptake. It will also help to normalise the technologies.

I have one final question—perhaps this is for a subsequent debate, but perhaps I could meet officials to talk about it. I am very interested in the use of bio-oils in the renewable heat market. I know that currently they do not qualify, but I have heard—perhaps I am wrong—that if you have an oil-based heating system, with a few not very expensive changes, you can switch that to run on biodiesel. That seems to me an effective way to get more renewables into the system. If you can keep the existing infrastructure but simply switch the fuel, surely that must be more cost-effective than ripping everything out and putting something new in. We get a lot of representations from bio-oil producers, who are very uncertain about their market in future. It is definitely more efficient to use bio-oil in a heating system than it would be, say, for transport. Can we not do more to promote it? Perhaps when we have the next review of the policy, we can consider how we can encourage fuel switching from oil to bio-oil, which I think has potential.

In summary, despite the number of my questions, we support the policy. It is very exciting. I hope that we will see strong up-take and that with all the measures for degressions, caps on spending and careful management we have not overcomplicated it and lost sight of the biggest picture, which is that we really want people to take this up for it to be a success. We hope that as much emphasis will be placed on promoting, encouraging and publicising it as we have had on trying to ensure that the budgets are not overspent because, in reality, those budgets are often underspent. That is not a sign of success, it is a failure. Let us hope that with this great, exciting step forward, we can look forward to future reports of lots of activity in this policy area, and we wish it all the best and accept the regulations.

[Baroness Verma]

I thank the noble Baroness for her support. I shall try to answer her questions, but if I miss any, I will go back, read Hansard and write to her. She asked whether we would meet our renewables targets. We have managed to achieve 4% of total energy from renewables in 2011-12, compared to our interim target of 4.04%, so it is within the margin of error. We remain resolute that we will work towards even more ambitious renewables targets—I think that both the noble Baroness and I are sighted on achieving that ambition.

The noble Baroness also raised a point about underspend. In order to meet our targets, we will require growth in a broad range of renewable heating technologies, and we recognise that some technologies will need appropriate financial support through the non-domestic RHI and some technologies have lower than expected deployment. That is why we had to review the tariffs last year. In December, we published plans to increase tariff levels and introduce new technologies to the scheme. We will shortly lay regulations to bring those into force. I hope that, eventually, it will balance itself out. Like the noble Baroness, we do not want unnecessary underspend, but we want to ensure that it is being spent to achieve a more tangible outcome.

The noble Baroness also asked about the take-up. At the end of February 2014, 19,640 vouchers had been issued under the RHPP, of which 13,325 have been redeemed.

I absolutely agree with the noble Baroness that we do not want perverse incentives, so the scheme has robust enforcement mechanisms, including when a property is rented. Sanctions will include suspending payments and recovering RHI payments if a participant does not meet their obligations under the scheme. I thought that I had covered that in my opening remarks, but I hope that I have now clarified the position. Before responding to what more we can do to incentivise biofuels, I am more than happy for the noble Baroness to meet officials to go at it in a more detailed way than the brief explanation that I am about to give. They are not eligible for the domestic RHI partially because we do not believe that these renewable solutions have a sufficient role in the transformation of the domestic heating sector to subsidise them through the RHI. We are keen to see the replacement of fossil fuel systems with wholly renewable domestic heating solutions to maximise both our renewable heat generation and carbon savings. That is a debate and discussion for another time, and perhaps looking at the expression of the noble Baroness, it is better that we take this away.

The noble Baroness also asked about the gaming of the system. Participants will be required to declare annually that they are complying with the eligibility criteria of the scheme. If their circumstances have changed and they are living in the property for less than 183 days per year they will be required to install meters to measure their heat use. The noble Baroness touched on the training for Green Deal assessors. MCS installers are training to be Green Deal assessors and creating partnerships to ensure a joined-up service. I agree with the noble Baroness that we have a lot of very good programmes in place, and it would be far better if they were much more integrated. While the noble Baroness may see the Green Deal as not being as successful as it should be, I reiterate that it is a 20-year programme. People have taken out green deals not using the Green Deal finance plan; they have used other means. On those we cannot go back and measure, but we know that half a million have been undertaken. Of the people surveyed, more than 80% said that they were very happy to have had that measurement done in their homes.

We have to take it in context; we do not want short, quick fixes for what is a deeply embedded problem in our property market. I agree with the noble Baroness that the process may have been too complicated, and the Government have tried to simplify it by listening to the installers, assessors and consumers. The regime has been simplified by making sure that there is certainty in the system for both industry and consumers by being able to signpost consumers for a more informed journey. We have taken all those things on board and introduced them, but it is far too early to say that the Green Deal is not working. We have to look at the measures that are working alongside others, so the narrative needs to be much more integrated, with the smart meter programme, RHI and the Green Deal. We need to congratulate ourselves as a country on being a global leader on energy efficiency measures. We should never underrate the perception out there. By talking down programmes because they have not achieved their aims as quickly as anticipated, we undermine the very committed, dedicated small businesses that are involved in the Green Deal.

16:14

[Baroness Worthington]

I thank the noble Baroness for her comprehensive answers. However, if she would write to me on a couple of matters, I would be grateful.

I was specifically interested in how we are doing on the terawatt hour target for the RHI and not only renewables targets overall. A short note on that would be very helpful. On the new build installations, how will the microgeneration be counted towards the target? We do not want to miss things out of our targets, so that would be helpful. I would like to take the opportunity of having a meeting on biofuels because I do not quite follow the logic.

[Baroness Verma]

The noble Baroness asked two questions. On the second question, while new build installations are not supported through the domestic RHI, other than self-build, they will still be counted towards our renewables target through the use of market intelligence from the renewable energy sector based on sales figures.

I am extremely grateful to the noble Baroness and the Opposition for their support for these regulations.

Motion agreed.