Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2018

Baroness Featherstone Excerpts

Wednesday 9th May 2018 Grand Committee

One thing I had not realised, which came out in the sub-committee I chair, is that the renewable heat incentive scheme is part of an agreement on the proceeds of the EU Emissions Trading Scheme. Some of that, in a sort of hypothecation, has to be ploughed back into certain energy schemes, and I understand the RHI is part of that contract. I wonder whether that, and the Government’s views about the RHI, will change once we are out of the EU—although I understand from Minister Claire Perry that we are going to remain in the EU ETS during the transition period. However, I would like to understand whether that affects the long-term funding of the scheme—which of course is funded by taxpayers, as opposed to the electricity schemes, which are funded through consumer bills.

[Baroness Featherstone (LD)]

The delay to the laying of these regulations has been hard for the industry. We will not stand in their way; however, perfect they are not.

I am sure the Minister will understand the need to keep a watch on their effect as they come into being as there may be unintended consequences—some of which I shall run through. I seek the Minister’s assurance that the Government will keep them under review and make further changes and revisions where needed. I shall put forward a raft of suggestions in that vein.

One of the shocking aspects of the RHI is how far short of the expected targets it has fallen, as mentioned by my noble friend Lord Teverson. I was watching the Public Accounts Committee session on the RHI and was astonished at the BEIS response to questioning from the committee on the fact that the original target for number of installations was 513,000 by 2020 but, as was mentioned, only 78,000 had been installed by December 2017, as stated in the NAO report.

The BEIS response was even more shocking because it was that this meant we had saved money and that was a good thing. BEIS prayed in aid unsubsidised companies which were doing brilliantly. The Government would reach their targets for emissions reduction and renewable energy production anyway, so it did not matter. I thought that was a concerning approach to the desperate need to decarbonise heat.

The NAO report demonstrated that the ambition of the Government in this regard has been scaled down from their original ambition. The proportion of renewable heat that will not be eligible for RHI has gone up by 270% and the lifetime emission reduction resulting from the RHI has gone down by 44% compared to the original ambition. The Government are not on track at all to reach their fourth and fifth carbon budget targets, and they will be missed. We were all celebrating when we signed the Paris agreement, yet there has been no step change in actions to match the step change needed to meet our commitments, particularly on heat. In terms of our debate today, there is a cliff edge coming in 2021, so will the Minister say what is the Government’s plan? What is going to happen when the scheme ends? The Government have said that they will bring forward lots of studies this year and report on their review in the summer of 2018, which is nearly upon us. Can the Minister be explicit in his response and tell us what we can expect to see and when we can expect to see it?

As the Minister said, there has clearly been a lot of gaming to get subsidies that are not in the spirit of this agenda. Can he tell me how many companies have been caught gaming the system? In the committee, it seemed that most of the checking is done at the point of accreditation and there is relatively little in terms of inspection and audit. If we need regulations changed to clamp down on this, perhaps the Government should also be looking far more strictly at their compliance regime.

I want to address one of the changes in these regulations that have been brought in to address some of the gaming that was mentioned; the drying of wood. It is obviously not the intended purpose of the subsidy, and companies which game the system should be ashamed of themselves, but shame clearly is not working. I totally understand and support the Government’s desire to make changes that will exclude this type of gaming, which unfairly means that those who play by the book find themselves at an economic disadvantage, and margins are extremely tight.

However, there are potential unintended consequences of the new regulations about feedstock rules, and I should like the Minister to address this issue. The regulations in relation to AD rightly want to encourage the use of non-crop feedstock. That means that there will be a greater need for feedstock processes, such as pasteurisation or hydrolysis, to make sure that digestate is safe to lay across the land. It also means that a wider range of feedstock will be used. This is not my specialist subject, but removing potential bugs from the digestate, meeting the requirements of the Environment Agency and reassuring end users that the digestate is okay to spread to land seem pretty important.

As we rightly shift to non-crop feedstock, this will become a bigger issue and the need for these processes will increase, so companies doing the right thing may find themselves penalised economically for doing so under the new rules. Going forward, all RHI projects will use some waste feedstock, and the change to waste eligibility potentially rules out these uses. If the RHI subsidy is not allowed for plants using these processes, projects may be unable to go ahead. The original consultation referred only to withdrawing support from drying “industrial or municipal waste”, and it is a good move in these regulations to remove the ability to game in that way. Is it intended that the policy should also capture pasteurisation and/or hydrolysis in AD plants with the exclusion process for waste? If that is the Government’s intention, how will it work if only a proportion of the input feedstock is waste? Does it mean that even a tiny amount of waste feedstock would render all heat generated ineligible for support? Could the amount of support paid be adjusted based on the proportion of waste feedstock used?

There is a call from some in the industry for flexibility in the system, as there is a difference between AD projects that use heat for pasteurisation or hydrolysis as opposed to blow-drying wood. To indicate some of the financial implications, although each plant is different, this one is an example of potential financial implications on set-up. Funding projects with a current long-term investor requires returns of minimum 8.5%; it would need to be more like 9.5% to 10% on the open market. For an average plant, therefore, the overall cost to build is £12 million. The RHI heat income that would be lost if the changes are interpreted as “no RHI paid on heat for pasteurisation or hydrolysis if any waste is used” means that £880,000 would be lost over a project’s lifetime, taking 0.4% off the project’s returns. Given that these projects are only just achieving the required level, a project that is just about fundable now would not be funded as the return would fall to only just over 8%.

I know that is very detailed. I obviously want to give the Minister time to think about this, but these issues have been raised by the industry. The Minister is getting sympathetic looks from my noble friend on my right. My point is that this is detailed and close, but when margins are close, this is important. We want to encourage these people to set up new plants, not discourage them. This needs looking at and we need to keep an eye on it because it puts people out of business. As small as it seems, it is hugely important.

[Lord McNally (LD)]

I intervene to say that this matter illustrates the importance of these committees, where the industry and Members are able to put on record real concerns that both Ministers and the learned people behind them can take on board for the future.

[Baroness Featherstone]

I thank my noble friend.

[Lord Henley]

My Lords, I intervene just to say that I caught the noble Baroness’s noble friend’s eye and he was looking faintly sympathetic towards me. The noble Baroness is making some very valuable points, some of which I will be able to respond to. In relation to the point being made by the noble Lord, I will write to the noble Baroness in much greater detail and make the letter available in the Library, as she knows I always do.

[Baroness Featherstone]

I know that the Minister will always write to me. He writes to me often. I will leave that issue for him to ponder and, I hope, address in his response; I am happy to have in writing whatever he cannot address now.

I want to move on to other issues that need addressing or reviewing as soon as possible in the regulations. I thank Energy UK for drawing my attention to the assignment of rights, for which we are all grateful. Will the Government extend similar rights to small and medium-sized businesses and, if so, when? The changes to support household customers with high up-front costs are excellent, but small and medium businesses need a similar provision. The Secondary Legislation Scrutiny Committee report was clear that a comprehensive review of the RHI is needed and that BEIS needed to be,

“rigorous and ongoing if the deficiencies of the past are to be redressed”.

To be sure that money is being spent appropriately, this needs to happen before the end of 2018 to make sure that what is yet to be spent is spent efficiently. Moreover, it is extremely important to introduce a long-term low-carbon heat incentive going into the future, beyond the cliff edge.

The NAO pointed out the scheme’s failure to be cost-effective and essentially said that that was down to poor monitoring and targeting. Can the Minister tell us how the Government will address the NAO’s concerns in monitoring and ensuring the appropriate targeting of the RHI in future?

Energy UK has helpfully published a report that lays out a way forward for the industry, the Government and Ofgem in terms of actions and decisions needed in order to decarbonise heat. Given the gap between where we are and where we need to get to on decarbonising heat—I was going to go into fracking but I will spare the Minister that—I suggest that the Minister not only reads that report by Energy UK but acts on the very good advice that is in it.

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[Lord Henley]

I appreciate what the noble Lord says about there being no logic to it. It is just that there is no evidence at the moment that lack of access to loans is a barrier to business. If the noble Lord thinks otherwise and can produce evidence, it can be looked at.

As I said, the order has largely been welcomed, and I am very grateful for that. These changes are necessary as a result of the NAO report. I think that we would all agree that there have been considerable successes this year. It is only part of the whole scheme of trying to decarbonise the system—again, we wish to pursue that even further.

I want to pick up on one final comment from the noble Baroness, Lady Featherstone. If I could persuade her and some of her Liberal friends of the benefits of what she referred to as fracking and of pursuing greater domestic production of gas—of which there is potentially a great deal in this country—in that it improves both our chances of a degree of decarbonisation and our energy security, I would feel that I had achieved a very great thing. That will no doubt come in the future. In the meantime, I will give way before I finally put these regulations to bed.

[Baroness Featherstone]

Without going into a detailed back and forth discussion on fracking, I simply want to add to the point I made about the Paris agreement. Bringing on stream another fossil fuel at this point might be a distraction from a real solution to our problems in the future.