Renewable Heat Incentive Scheme (Amendment) Regulations 2014
Baroness Verma
That the Grand Committee do consider the Renewable Heat Incentive Scheme (Amendment) Regulations 2014.
Relevant documents: 26th 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 Renewable Heat Incentive Scheme (Amendment) Regulations 2014.
Heat makes up 45% of the UK’s overall energy use and therefore represents a key part of our energy industry. Renewable heat will help businesses and community groups to manage their energy bills and will also continue to play a key role in delivering on our renewable energy targets and long-term carbon plan in an increasingly affordable way. The renewable heat incentive, the world’s first scheme of its kind, is the Government’s primary mechanism for delivering our ambition of a step change in how we produce our heat through the deployment of renewable heating technologies.
Recently—in March—we debated the regulations introducing the domestic RHI for households, and I am pleased to update the Committee that on 9 April this year the domestic RHI scheme was launched, delivering on our promise to support householders with the switch to renewable heating systems.
Initial feedback from both industry and consumers on the launch of the domestic RHI has been overwhelmingly positive. We have already seen the first owners of renewable heating technologies enter the domestic scheme, with 480 up to 4 May. The domestic scheme, unlike its non-domestic counterpart, is coupled with the Green Deal. We have now seen the first customers who have taken advantage of both schemes claiming the domestic RHI.
Today, the Government are introducing a series of improvements to the non-domestic RHI for businesses, delivering tailored, appropriate support to a greater range of renewable technologies in the scheme. These improvements go a long way to achieving the ambitious levels of deployment that we want and need in the renewable heating sector.
These regulations bring in changes to the non-domestic RHI in three broad areas: they improve and expand upon the range of technologies available in the scheme; they introduce improvements to the budget management mechanism, delivering greater value for money; and they bring refinements to the rules of eligibility and operation of the scheme.
We have come a long way since the RHI was first announced in 2011. With the launch of the domestic scheme and, now, the expansion and improvement of the non-domestic scheme, this is undoubtedly an exciting time for the renewable heating sector, reaffirming this Government’s commitment to renewables and to helping businesses and community groups to manage their bills.
Before I move on to the detail, it may be useful if I provide some brief background to what these amendments will achieve. The RHI is designed both to deliver the ambitious levels of renewable heat to meet our 2020 renewable energy targets and to set the foundations for the mass deployment of renewables in the 2020s and 2030s. Since the RHI’s launch in November 2011, we have seen good progress in the deployment of renewable heating technologies. We have received more than 5,000 applications, more than 4,000 have been accredited and over a terawatt-hour of heat has been generated and paid for.
However, we want to do more. We want to see more technologies supported, to provide more tailored support and to deliver more with the available budget. The non-domestic scheme in particular is intended to offer a range of renewable heating options. There are varying requirements across the non-domestic sector and we want to create viable renewable heating options across the breadth of the commercial, industrial, public and not-for-profit sectors. These amendments will widen the options available and offer more appropriate and bespoke tariffs for the full range of technologies.
I will talk further about the specific expansions and updates to the tariffs that we are introducing to the scheme following consultation on those expansions back in September 2012 and the confirmation of the policy in December of last year. The first technology that I will focus on is air-to-water heat pumps. Heat pumps have an important role to play in our long-term carbon budgets and in helping to manage energy bills. Support is needed now not only to incentivise renewable heating over fossil fuel alternatives in the short term but also to stimulate innovation and performance improvements in the longer term. We are proposing to introduce a tariff of 2.5p per kilowatt hour for air-to-water heat pumps.
I turn to the second of our new technologies: large-scale biogas combustion. Biogas and anaerobic digestion, in addition to being a source of renewable energy, is a sustainable solution to waste management and a key plank of our waste strategy. These regulations introduce new support for plants with capacity of 200 kilowatts and above. Support will be introduced through two new tariff bands: 5.9p per kilowatt hour for medium-sized installations and 2.2p per kilowatt hour for large installations—that is, those over 600 kilowatts.
In addition to new support, the regulations also introduce bespoke, improved support in the form of new tariffs for some technologies. The first of these is biomass combined heat and power. A key plank of the Government’s bioenergy strategy is that combined heat and power generation offers more efficient use of the biomass resources and should be promoted where possible. Biomass CHP systems are already eligible for the RHI under the tariffs available for biomass heat-only installations. CHP projects, however, have their own particular risks and costs associated with them, so a bespoke tariff is needed to bring forward the significant investment required for this important technology. The regulations introduce a tariff, based on detailed cost and performance data, of 4.1p per kilowatt hour. In order to ensure that only good-quality CHP receives the higher tariff, support will be contingent on obtaining certification under the combined heat and power quality assurance scheme.
We are also proposing improved support for deep geothermal heat, which is extracted from depths of below 500 metres underground. Deep geothermal has the potential to provide cost-effective, affordable, renewable low-carbon and non-intermittent heat to the UK. Its small service footprint and its ability to supply continuous heat on demand makes it an ideal fit for urban environments and it has been identified as a key technology for heat networks. These regulations introduce a new bespoke tariff for deep geothermal of 5p per kilowatt hour.
Baroness Worthington (Lab)
My Lords, I am very grateful to the Minister for her introduction to the regulations to be considered today. As we have spoken on the subject in the past, I reiterate our strong support for mechanisms to incentivise the uptake of renewable heat. Indeed, my Question in the House last week touched on that. We said that we would have a debate and here we are, so I am very grateful for this opportunity.
I have made these points in the past, so I will not spend too much time on them. We are very interested in the rates of deployment under the scheme and would like to see as much emphasis as possible from the Government on progress to date, an analysis of what could be done differently and how things can be improved to increase the rate of uptake. The time between now and 2020, when we face our renewables energy targets under the European renewables directive, will elapse quickly so it is important that we make good progress. As the noble Baroness pointed out, heat emissions account for 45% of our total energy system, so it is a hugely important area.
These regulations are welcome. There are many aspects of them which show that the Government are listening, having taken proper and due account of what stakeholders are feeding back, and have made appropriate changes. That is very welcome. Having said that, I still have a fundamental worry about the scheme being complex. Many elements are quite prescriptive. The schedules setting out all the budget elements per fuel type or per scale are complex. These sums of money are now being put into ever smaller parts, with digressions and various rules which are complex to understand. My fear is that if you are a small business or a company out there trying to build a business on the back of the regulations, they look very complex. My gut instinct is that markets thrive on simplicity, with the Government dictating outcomes and allowing the market to find the best solution. I recognise that in the renewable heat industry, we are dealing with a nascent market and it might need this kind of administratively controlled system to start it off, but I hope that we will hear from the Minister about the future support for renewable heat. Can we get to a slightly less administrated, inflexible system of budget management than we have and towards a broader, more market-based system, which it would benefit from? That is my first point.
The second general point is that in terms of value for money for the consumer, renewable heat provides some of the best and least costly options we have for decarbonising and diversifying our fuel mix. You can see that by looking at some of the pence per kilowatt hour tariff levels that have been set. Some of those technologies are very cost competitive with some of the renewables technologies that we are funding in the electricity sector.
In particular, that is true if we look at biomass. Not only do you find relatively cost-competitive rates at which you can deploy biomass—mainly commercially; I think that the domestic sector is slightly separate—you also save on fuel imports, because for every tonne of biomass that goes into an energy system, a large proportion of it can be converted into heat, whereas only roughly one-third of it can be converted into electricity. For biomass in particular, where there are some associated sustainability issues, it makes an awful lot of sense to ensure that your biomass goes into the heat network ahead and above of it going into the electricity network.
To what extent does DECC monitor the incentives that are in place and compare them against each other? What does the RHI biomass subsidy tell us compared to the subsidies being paid under the RO, the FITs and the CFDs that apply to electricity? Can we discuss whether those incentives are pointing in the right direction and whether we have the right incentives to deploy biomass in the most efficient way in both carbon and cost terms?
My other question is on the solar thermal element. The Minister mentioned that the cap of 10p per kilowatt hour has been maxed out for that technology but it is still less than the industry says it needs. I wonder about the rationale for setting the cap at 10p per kilowatt hour; it is probably somewhere in the literature and I apologise if I have not absorbed it. I would be interested to know whether some of the CFDs or feed-in tariffs that we are offering in electricity go beyond that 10p cap. If so, why are we capping heat but not electricity in the same way? I am curious about that.
I have one question about the changes to the way that projects will be accredited. The tariffs for CHP state that the rules will be relaxed to allow CHP units that have both fossil and biomass to be eligible. How do we then police that? We know that all our HI payments are on a deemed basis. If people have one unit that can fire on either fossil or biomass yet they get a deemed payment, what is the evaluation, monitoring and verification process and how will we police it to ensure that we do not create some kind of weird incentives there?
I have raised in the past my keen interest in bio-oils being used to replace heating oil. I think I am going to meet officials informally to talk that through; I mention it again because it is still a low-hanging fruit that we should explore having.
Those are my main points. I say again that the regulations are welcome. My questions are probing in nature and from a desire better to understand the regulations. I look forward to hearing the noble Baroness’s reply, and if she would care to meet on this topic subsequently, that would be great.
Baroness Verma
I am extremely grateful for the general support that the noble Baroness has given to the regulations. As she and I are both aware, given that the scheme is the first of its type in the world, there will be lessons to be learnt as we go in looking at how technologies respond and react to the work we are doing. As she rightly points out, renewable heat is really key to being able to manage some of the stresses that will be put on the power sector in the longer term.
To respond to one or two of the noble Baroness’s direct questions, she asked about the solar thermal element and the difference between the incentives there. The key, of course, is that to achieve our 2020 renewables target we have to be able to set tariffs to consider all technologies. The width of the question is about ensuring that all technologies are able to partake in there without distorting the market for any technology that wants to come in but cannot find space to be supported. Of course we have to work to value for money as well.