Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2015

Tuesday 27th January 2015 Grand Committee

Motion to Consider

15:42

Moved by

[Baroness Verma]

That the Grand Committee do consider the Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2015.

Relevant document: 17th 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 amendment regulations on the renewable heat incentive scheme. There are a number of amendments to cover today to both the domestic and the non-domestic RHI. These are the Renewable Heat Incentive Scheme (Amendment) Regulations 2015, the Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2015 and the Renewable Heat Incentive Scheme and Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2015.

Before I explain the details of the amendments, I would like to update noble Lords on the progress of the RHI. The RHI is a key part of achieving the Government’s vision of the future of heating in the UK: a future with secure supplies of low-carbon and renewable heat at affordable prices. The scheme first opened in November 2011 to the non-domestic sector. Since its launch, some 7,000 installations have been accredited under the scheme. So far, the scheme has paid for 2 terawatt hours of generated renewable heat. In April last year, the scheme was opened to the domestic market and we have seen more than 20,000 accreditations since its launch. Across the two schemes, we anticipate that the RHI could support over 7 terawatt hours of renewable heat in 2015-16. The RHI supports a diverse range of technologies, but currently we are seeing the highest deployment from biomass.

The year 2014 was a busy one for the RHI scheme. I have already mentioned the launch of the domestic scheme. We introduced amendments in May 2014 to make the non-domestic scheme easier to access, more efficient and open to additional renewable technologies. We also conducted a review of the non-domestic scheme from which some of the changes I will be introducing today have evolved. We continue to evaluate the scheme to ensure both that it incentivises uptake and that scheme administration is effective and efficient. We also published our consultation and response on the review of the biomethane injection to grid tariff.

To recognise the importance of innovation and technology development, we gathered evidence to assess the case for new technologies, or innovations to existing technologies, being included in the RHI. Following this, we have now published our guidance setting out the evidence requirements for considering new technologies. We have listened to stakeholder concerns about investment certainty for large-scale renewable plants. In December last year, we published a position paper on the introduction of tariff guarantees for the non-domestic scheme. These plants can take a considerable time to come online and can be affected by the lack of a guarantee on the tariff that will be available when they complete. The published position paper sets out what the policy may look like if the work is continued in the next Parliament.

15:45

I now come to the proposed regulatory amendments before us today. These proposed regulations introduce a number of improvements to the non-domestic and domestic schemes. Biomass has seen the highest deployment of all renewable technologies across the scheme. Around 99% of the heat generated in the non-domestic scheme comes from biomass, biogas and biomethane. For the domestic scheme, around 48% of heat is generated by biomass installations.

Sustainability is of great importance to us. The biomass sustainability regulations we are proposing will ensure that we deliver significant greenhouse gas savings from this technology and protect our environment, at both a global and local level. We are introducing some of the toughest sustainability criteria in the world under the RHI. This will ensure that the UK continues to take a leading and robust role in developing the market for sustainable biomass. The biomass sustainability criteria will apply to current and future participants in both the domestic and non-domestic RHI schemes. It will affect users of solid biomass and biogas and biomethane injection participants who create their fuel from solid biomass.

The first biomass sustainability requirement is a minimum greenhouse gas emissions saving for all biomass supported by the scheme. This will allow biomass used in the RHI to continue to make an important contribution to our national carbon targets. Scheme participants will be required to demonstrate that the lifecycle greenhouse gas emissions of any biomass used do not exceed 34.8 grams of CO₂ equivalent per megajoule of heat generated or biomethane injected. This limit is designed to ensure that, compared to the average emissions from fossil fuels used in the EU to generate heat, biomass supported by the RHI will deliver a 60% greenhouse gas emissions saving.

The second biomass sustainability requirement is the introduction of land criteria for solid biomass. For wood fuel, this means demonstrating that the feedstock comes from sustainably managed forests or other sustainable sources. In order to provide a close fit to existing forestry management practices, we will require participants to demonstrate that their wood fuel is consistent with the UK timber procurements standard. For non-wood fuel biomass, the land criteria correspond to those set out under the EU renewable energy directive for transport biofuels and bioliquids. These consist of restrictions on the use of biomass sourced from land with high biodiversity or high carbon stock value such as primary forest, peat-land or wetland.

To help implement the adoption of these new sustainability criteria for small-scale users of biomass, we have sponsored the creation of a biomass suppliers list. The list was launched to wood fuel and short-rotation coppice suppliers in April 2014. The BSL has been publicly accessible since September last year and provides an easy, free at the point of use, light-touch method for participants to comply with the sustainability criteria. The regulations allow for the creation of other biomass suppliers lists, subject to Secretary of State approval. We hope the industry will use this flexibility to take the lead in demonstrating the sustainability of their businesses.

Participants will either have to buy their biomass from the BSL, register as self-suppliers or provide their own evidence that their fuel is sustainable. In all circumstances, participants will need to provide an annual declaration to the scheme administrator, Ofgem, and demonstrate how they are meeting their biomass sustainability requirements. The draft regulations set out that participants must meet these mandatory requirements from October 2015. The time between now and October will help provide sufficient lead-in time for participants, biomass producers and traders to understand the requirements and develop plans to demonstrate compliance.

The biomass sustainability requirements are both ambitious and will deliver significant benefits from the biomass supported. We consider this is achievable and will represent a vital step in ensuring the long-term future for biomass as a heating technology in the UK.

Biomethane injection to grid has been supported since the launch of the scheme and is a key contributor to the uptake of renewable heat. A review of the tariff was announced in February 2014 in response to market intelligence and updated evidence on planned new biomethane plants with much higher capacities than the scheme originally envisaged. The review looked at whether the existing support based on a 1 megawatt waste plant was still appropriate for much larger plants that may benefit from economies of scale.

Following consultation and analysis of detailed evidence from market participants, we intend to introduce a tiered tariff structure based on three tiers. This was the preferred option for those who responded to the consultation. Biomethane injection to grid plants will receive 7.5 pence per kilowatt hour for the first 40,000 megawatt hours injected; 4.4 pence for the next 40,000 megawatt hours; and 3.4 pence for any subsequent biomethane injected in a 12-month period from the date of registration.

When compared to alternative options, such as banding where support is based on capacity size, a tiered tariff is less likely to lead to unintended consequences such as gaming. It is also simpler to administer as payments will be determined on the volume of gas injected rather than asking for installations to determine a system capacity. The new tariff will be applied to biomethane injection to grid plants registered from the date when the implementing regulations come into force. The new tariffs will ensure the biomethane market remains sustainable and better value for money for the taxpayer by making sure that large plants are not overcompensated while also providing the right level of support to incentivise the uptake of smaller plants.

As part of the routine budget management controls for the RHI scheme, we announced in November last year a 10% tariff reduction to the current biomethane tariff, which took effect on 1 January 2015. We have built into the draft regulations protection for the new biomethane tariffs from any tariff reduction as a result of the budget management mechanism. The earliest point at which these new tariffs could be reduced is 1 July this year. This should provide stakeholders with a period of tariff stability following the introduction of tiering.

We have improved our support for combined heat and power plants. Stakeholders asked us to provide them with greater flexibility in the eligibility rules. The CHP rules are now flexible enough to allow a combination of different fuels to be used to generate heat and feed the same CHP unit. This could be both fossil fuel and renewable, so CHP operators can make a phased switch to renewable heat avoiding plant downtime and reducing the need to commit to a large financial outlay at the outset.

We are introducing a suite of changes which will provide greater efficiency and improve the application experience for consumers. These will also give Ofgem greater flexibility in how certain requirements are met, reducing some of the current scheme complexity and improving the accreditation process. For example, the requirement to confirm that biomass boilers are designed to burn biomass as their primary source of fuel will no longer be needed as this can be evidenced from the air quality criteria and the incoming biomass sustainability requirements.

Ofgem currently has powers to apply sanctions if a participant is failing or has failed to comply with the scheme requirements. We are introducing changes which clarify where sanctions can be applied in some circumstances: for example, if incorrect information was provided when applying to the scheme which would have affected the eligibility of the installation.

Amendments to the domestic RHI will introduce a number of general scheme improvements to drive uptake of the scheme and several minor amendments and clarifications. These minor amendments have been introduced based on experiences and feedback since the domestic RHI was launched.

The scheme currently requires all applicants to have a Green Deal assessment. This provides information about efficiency measures suitable for their homes. For social landlords, who are already required to meet minimum energy efficiency levels under the decent homes standard, the requirement of a Green Deal assessment does not provide them with any supplementary information on energy efficiency measures. With a larger number of properties, a Green Deal assessment for each property is a potential barrier to installing a renewable heat technology. This change will remove the need for social landlords to complete a Green Deal assessment when applying to the scheme. They will still require an energy performance certificate that is less than two years old for each property, so that RHI payments can be calculated and to confirm that the scheme’s minimum energy efficiency requirements have been met. This amendment will remove a significant barrier to uptake of the scheme for social landlords.

The scheme will be amended to include two additional subsets of technologies which were part of our original policy intent. The draft regulations allow cooker stoves and high-temperature heat pumps to be eligible technologies. The inclusion of high-temperature heat pumps will open up the scheme to potential applicants whose properties may not be suitable for other eligible technologies. Updated microgeneration certification scheme standards will help to demonstrate that high-temperature heat pumps can meet the scheme’s minimum energy efficiency requirements. The amendment to include cooker stoves as an eligible technology will correct an unintended consequence where stoves with a primary heating and hot water function were originally excluded from the scheme. Both the non-domestic and domestic amendments will update the regulatory provisions setting out the current MCS standards to ensure that installations which have to comply with the standards will be eligible for the RHI scheme.

A number of minor amendments will provide further clarification to the scheme requirements. For example, we have clarified that houses with more than one building such as a separate office, annexe or outbuilding are eligible for the domestic scheme. RHI support will however be paid for only the main dwelling.

These amendment regulations are focused on changes to both the non-domestic and the domestic RHI scheme. Biomass sustainability will be introduced to both aspects of the scheme. This will help us to work towards achieving our Government’s goal to deliver significant reductions in greenhouse gas emissions. Biomethane will be an important contributor to renewable heat. The changes that I have outlined today will ensure that the biomethane market remains sustainable and offers good value for money to the taxpayer.

By introducing new eligible products this will diversify the scheme and provide a wider technology choice and mix to help increase uptake of the scheme. Our continuing work to evaluate and engage with stakeholders for feedback on the scheme has resulted in several scheme improvements. These will provide greater clarity and improve the application experience for consumers. I commend these regulations to the Committee.

15:59

[Lord Teverson (LD)]

My Lords, I very much welcome the Minister’s statement and her description of these schemes. When talking of trying to decarbonise power and energy in this country, we always think first of electricity but heating is very important particularly at this time in January—although my wood stove at home was a great comfort to me over the weekend, the solar thermal supply for the shower was perhaps not quite as good. These are really important technologies and it is good that we are continuing to modify these schemes.

I should like to put a couple of general questions to the Minister and then one specific question. I particularly welcome the greater emphasis on the sustainability of biomass, and I do so for two reasons. One is obviously that the sustainability of sources is very important in its own right. The second is that biomass is attracting a lot of criticism from a number of areas—maybe some of it rightly but perhaps some of it not so rightly—and it is very important that biomass’s image and reputation are kept strong and that it remains part of our renewable energy sources in the UK. Only by ensuring that we meet the sustainability criteria will we be able to do that.

One thing that we know—the Minister started to explain this quite broadly—is that, with biomass in particular, the supply chains are global. Much of the supply for some of the very large applications in the UK comes from across the Atlantic and maybe from even further afield—on the other side of the Pacific and from other parts of North America. When those supply chains are as long as they are, how do we know that the sustainability requirements are really met? Do we ever inspect them, or do we just rely on companies to do that? I ask that because I know from other areas of industry that things such as the sustainable forests code have been abused in the past. We know that relatively easy supply chains for food within Europe have not always been as good as they should be, even when the purchasing companies, such as the supermarket chains, have some of the tightest controls—or we thought that they had. I would be interested in hearing the Minister’s comments on that.

Secondly, I have a question relating to the European single market. If businesses want to purchase through other European Union countries, how is this legislation compatible with a single market if we have different standards in the UK? I assume that this has been got over, but I would be interested in understanding how that works.

A more specific question, on which I am not necessarily expecting an answer from the Minister today, relates to CHP. I understand from the Renewable Heat Incentive Scheme (Amendment) Regulations 2015 that, quite rightly, plants established before 4 December 2013 cannot claim back RHI because they were established before this type of scheme started. I understand that entirely. Where a CHP plant is added on to a CHP facility, particularly an AD one, that would be eligible for claiming RHI, but I understand that if that plant was built before 4 December 2013 and the CHP was then added on, it would not be eligible. That is a change of policy, as outlined by DECC following one of the earlier consultations. I know that that has affected certain plants and investment decisions, and I welcome that. As we all know, CHP is a very important late innovation in the UK and we wish to copy our European counterparts due to the success of those sorts of schemes in the past. If the Minister is able to answer that now or in correspondence, I shall be very grateful.

I very much welcome the evolution of this scheme, which I regularly remind people does not affect consumer prices for heat and has no effect on increasing energy prices.

[Baroness Worthington (Lab)]

My Lords, I, too, am grateful to the Minister for talking us through these regulations and for presenting a very clear and informative case for them. I have a number of questions relating to the regulations.

I notice that in the debate in the House of Commons, where these SIs were discussed previously, the Minister responding was a little loath to answer general questions about how the RHI is delivering against its targets. Specifically, when questions were asked about the budget, including the budget going forward, no clear answer came back. I therefore begin by reiterating those general questions to the Minister. Could she tell us when we might expect an update on how the RHI is doing in relation to where we need to be to hit our targets? Could she also give us a sense of when we might hear about how we are going in terms of the budget? Are we underspent or near to an overspend, and what are the budget projections going forward?

On the regulations, we certainly welcome, like the noble Lord, Lord Teverson, the introduction of sustainability criteria for biomass. It is a good idea, and it is very important that we restore the reputation of sustainable biomass. It is very easy to have one rotten apple in the barrel taint the perception of the whole system. It is important that we have transparent and robust information about sustainability and requirements on suppliers to meet those standards.

However, there is a point at which this ever increasing pressure to incorporate every single element of carbon emissions upstream on biomass is unique. It is not something that we do in other fuel supply chains. For example, gas is in the headlines a lot at the moment, and we hear debate about fracked gas versus LNG and versus gas coming from Russia, all of which have a different carbon intensity and carbon footprint, but that fuel supply chain is almost ignored and is not paid the same degree of attention. I understand why, but would just question when we might start to see a slightly more equal handling of fuel supply chains across the piece. Biomass certainly has a role to play in decarbonisation, but it should not be singled out. We ought to apply equal and fair treatment to all fuels, if we are going to pursue this very detailed accounting of upstream emissions.

I certainly welcome the list of suppliers and the department’s attempts to try to simplify this for both end-users and suppliers to ensure that the industry can get off to a good start.

I am also encouraged to hear from the Minister that she believes that biomethane injection to grid could be an important contributor to our renewable heat targets, but I am just curious to know to what extent biomethane is delivering. I imagine that we are now introducing tiered tariffs because there has been a relatively good uptake. What does the department now believe the potential for biomethane is? It would be very helpful to have it as the percentage of the total demand for renewable heat and gases, just so that we can get a sense of how we are doing and what the potential is. We expect that the RHI will uncover information about this market which, as has been said elsewhere, is a world first in terms of creating an open and widely applicable subsidy scheme for renewable heat. We would expect it to deliver quite interesting findings in terms of the least-cost options for decarbonisation. We simply have some curiosity as to where we see biomethane injection as we progress towards our targets.

We support the new powers to cause payments to be stopped and the interventions that are now possible. We have said this before in debates on the RHI. We remain concerned, and hope that the Government share our concern, that we must not see abuses of the RHI. We cannot afford negative headlines in the press about subsidies being abused or any wrongdoing, so it is important that the enforcement and sanctions parts of this intervention are got right. Why were these powers not originally included in the proposals? I am glad that they are there now, but I question why we had not thought through the need to do this earlier. I reiterate that I hope everyone in the department is fully aware of the need to ensure that, even if we take a slightly light-touch regulatory approach, we are very vigilant in ensuring that there is no potential for misuse of the funds, which are public funds in this case, not bill payers’ funds.

I have a question about the overall way we are going to move forward on the RHI. As we have seen from today’s discussions, this is now quite a complex policy area which has many triggers within it, including digressions and abilities to change different levels and to move technologies and bands. During the passage of the Infrastructure Bill through this House, an amendment was introduced by the Government that removed the need for an affirmative resolution for changes to some important parts of the RHI. At the time, I asked the Minister whether it would apply to tariffs and budgets applied to different technologies and whether it was appropriate. I am grateful to the Minister for writing to me on 17 November to confirm that moving from the affirmative resolution procedure to the negative resolution procedure would apply to tariffs for technologies. I reiterate my concern. I do not fully understand why it should be felt necessary to remove this part of the process which allows us to comment on statutory instruments and changes to statutory instruments. In her letter, the Minister said that it was to enable the Government to act quickly, but this is not a particularly slow process. It is an important part of the democratic process that ensures that we get proper scrutiny and an opportunity to question changes. It reassures the industry that due process will be applied to changes which will substantially affect plans for investment.

So again I ask: what is the real rationale for removing this important process? Perhaps it is for no other reason than that we will have fewer of these conversations, and that would be a great shame because I enjoy talking about the RHI. As the noble Lord, Lord Teverson, said, it is refreshing to be talking about something other than power when it comes to energy. I think we should maintain full scrutiny of these changes. This is a complex policy area, but it is an important one that we need to get right.

I am also slightly not reassured by the Minister’s statement that the Government will continue to “engage” properly with industry. I would like to hear a bit more about what engage properly with industry that means. I say that in the context of experience where, for example, on feed-in tariffs for solar, we saw very hastily introduced changes that were not properly consulted, and a great deal of bad feeling was created. If a change to the way we consider these SIs leads to anything like that in this market, it would be a great shame.

I would welcome the Minister’s comments on why we are moving away from the affirmative resolution procedure and, if they continue to pursue the negative resolution procedure, what the Government will do to ensure that they are properly listening to industry and engaging. Other than that, I am happy to support the regulations.

[Baroness Verma]

My Lords, I am extremely grateful to my noble friend Lord Teverson and the noble Baroness, Lady Worthington, for their support for the regulations. They have raised a number of questions. I shall endeavour to answer as many as I can, but if I miss out on any question, I shall write to them.

16:15

My noble friend asked what measures we can use when we are trading at global level to ensure that the sustainability criteria remain at the heart of our trade. The UK Government have been a strong supporter of the UN-REDD+ mechanism. The processes that that entails enable us to keep on track of our global trading. My noble friend is right that we need to ensure that, as stringent as we are, our partners remain equally stringent. I reassure him and the Committee that the UK takes the process of trading very seriously, and we have been a leading advocate in ensuring that we are strong supporters of seeing UN-REDD+ being enforced and utilised at the very top.

My noble friend also asked whether the legislation is legally compatible with businesses being able to purchase biomass in the single market. The biomass sustainability criteria have been notified under the technical standards directive, so we do not think that the requirements will restrict trade, but in any case they are justified, as my noble friend rightly points out, for environmental protection purposes.

My noble friend also asked whether a CHP plant built before 2013 that has another facility added to it would be eligible to claim for RHI. In order to ensure value for money, of course it is necessary for an AD plant to be new. This policy will remain the same under the new regulations, so there has been no change. It continues in the same vein.

The noble Baroness asked whether we were meeting our targets. The Government are committed to meeting their ambitious renewables targets. We are committed to increasing the use of renewable energy by 2020 and we are on track to meet the 2013-14 interim target of 5.4% of final energy consumption from renewables. We have always stated very clearly that we want to see it from a wide range of renewables and not be focused on any one particular sector.

The noble Baroness also asked why powers of enforcement were not originally included. These changes are minor amendments to reflect experiences since the scheme was introduced and to make sure that Ofgem has all the powers that it needs and that those powers are clear.

The noble Baroness also spoke about the negative and affirmative procedures. The department undertakes formal and informal consultations with industry bodies and individuals. This is a very technical area. Sometimes, we need to make swift amendments to protect the value-for-money argument and ensure that there is technical delivery that is not hindered by process.

The noble Baroness also asked what DECC believes is the future of biomethane as we progress towards our targets. Overall, we expect the RHI to deliver between 5.2 terawatt hours and 7.4 terawatt hours by the end of 2015-16. We expect between 20 terawatt hours and 50 terawatt hours for the scheme by 2020-21. But it would be better for me to write to the noble Baroness because the answer is not as full as I would like it to be for her and for my noble friend.

The noble Baroness also asked when we will see the equal handling of fuel supplies across the scheme. The biomass sustainability criteria in the RHI apply to biomass, biogas, biomethane and bioliquids. Biomethane and bioliquids are not supported by the RHI, but where they are supported in electricity or transport, they are subject to the mandatory requirements of the renewable energy directive.

[Baroness Worthington]

Perhaps I did not articulate my question clearly enough. What I was asking about was not equal treatment within the RHI, but equal treatment across the energy sector. Why do we take a full “well to wheel” approach or a full lifecycle approach to biomass, but not to fossil fuels which, let us be honest, are inherently less sustainable? We do not treat them equally with biomass. My point was a broader one than simply about the RHI.

[Baroness Verma]

I am extremely grateful to the noble Baroness for that clarification, and clearly I failed to recognise the question as she originally put it. I think that the response needs to be made in a fuller, more formal letter to her. These are detailed criteria going forward, and of course what I cannot do is look retrospectively at the energy sources we have already.

Going forward with the schemes that we have control over today, we need to make sure that they are as sustainable and environmentally friendly as they possibly can be. Where we may have had trade-offs in the past, we want to ensure that those are now reduced to a minimum so that we can look not only at value for money for the consumer, but also that we play an active role in environmental protection, which is absolutely right.

I suspect that I have missed a number of questions, but since inspiration is not coming from behind me at this moment, I must assume that we will write.

I shall conclude by saying to the noble Baroness and to my noble friend that the contributions made by these schemes rightly should be reviewed regularly so that we can ensure that we are achieving the best value that we can offer to consumers without burdening the new sector itself. We also need to listen carefully to those in the sector to ensure that we do not inadvertently put up barriers that hinder their progress. We want to see newer technologies entering the marketplace, so a balance needs to be struck between reducing support when a technology matures and no longer needs so much support and encouraging the emerging ones. The noble Baroness mentioned the solar industry. Frankly, that is now seen as a mature part of the sector which needs less support, and rightly so.

In thanking both noble Lords for their support, I commend these regulations to the Committee.

Motion agreed.