Renewable Heat Incentive Scheme (Amendment) Regulations 2012

Lord Teverson Excerpts

Monday 23rd July 2012 Grand Committee

[The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Lord Marland)]

My Lords, before your Lordships is an amendment to the renewable heat incentive regulations that sets out details of a standby mechanism to ensure that the scheme stays within budget in the current financial year.

The non-domestic RHI scheme launched in November 2011. Through this scheme we are already supporting renewable heat installations in small businesses, industry, the public sector and communities. The RHI supports a number of emerging technologies and is therefore helping to support the UK renewables industry. This is vital to making the transition to a low-carbon economy.

The vast majority of the heat in this country is produced by burning fossil fuels. As a result, heat is responsible for a third of the UK’s greenhouse gas emissions. It is imperative that we start the transition to low-carbon heat immediately. We must do this to set the UK on a path to reducing carbon emissions in the long term and to contribute to our share of the global effort to combat climate change.

As set out in The Carbon Plan, we will need virtually to eliminate greenhouse gas emissions from our buildings by 2050 and we need to see deep reductions in emissions from industrial processes. By 2020, 12% of our total heat demand will have to come from renewables, increasing from 2% currently. This means that we need to find alternatives to fossil fuel for our heating. The RHI, which is the first scheme of its kind in the world, is an essential part of helping us to achieve this.

However, we have learnt lessons from FITs. The RHI must be financially sustainable and help to deliver renewable heat in the most cost-effective way and it must be able to deliver consistent support to the industry. These regulations will help us to keep within the budgetary limits set by the comprehensive spending review if uptake is greater than we expect. They will safeguard against the possibility of overspend in the current financial year and against the detrimental impact on the supply chain of a reduced budget next year that would be caused if we spent this year’s budget.

We have set out in these regulations that the standby mechanism would suspend the scheme at 97% of the budget limit, with one week’s notice. If our forecast shows that we expect to spend £67.9 million in 2012-13, we would give notice of suspension and the scheme would be suspended one week later. To ensure that investors are able to monitor progress towards the suspension trigger, we will make estimates of committed expenditure available each week. Furthermore, if we expect to suspend the scheme, we will announce informally one month before we estimate that the scheme will need to close.

This is a precautionary measure. We do not believe that rapid cost reductions are likely in renewable heat technologies in the way that has been seen with solar PV. However, there is a high degree of uncertainty about how the market will respond to the RHI. Therefore, we must be cautious and prepared for unexpected changes in application rates. If RHI spending were to exceed budgets, it would be difficult in retrospect to justify a lack of action now.

Alongside these regulations, I am pleased to inform the Committee that on Friday 20 July the Government published the consultation Renewable Heat Incentive: Providing Certainty and Improving Performance. This consultation seeks views on our proposals for a longer-term budget management mechanism, which we are expecting to implement by the beginning of the 2013-14 financial year.

These regulations will therefore ensure that we have a standby budget management mechanism in place this summer and they will provide clarity and assurance about how we will manage the budget prior to our implementation of a longer-term cost control mechanism. I therefore commend these regulations to the Committee and beg to move.

[Lord Teverson]

My Lords, I welcome the foresight that these regulations bring. We certainly do not want a repeat of the solar PV issue, where we had a lot of changes at very short notice and a lot of confidence went out of the market. I note yet again that we remind ourselves that some 12% of heating needs to become renewable to meet our 2020 target, as the Minister said. Heating is a largely unrecognised but major part of our energy consumption, in households in particular, and has to be decarbonised by 2050. The irony of this is that, as the Explanatory Memorandum states, at the moment we have, if anything, underdemand for this initiative. Given those targets, it is quite important that we move it forward quickly.

I have some questions for the Minister. First, why does he think that the scheme has been relatively slow so far? I know that there is a learning curve and it is still relatively young. Can he give us some idea of the types of scheme that have been approved so that we can understand them a little more? Do the Government have plans to stimulate these schemes if demand remains low? Lastly, will he give us a view, even at this early stage, of what lessons have been learnt for rolling out this scheme for domestic RHI, to which we all look forward very much?

[Lord Whitty]

My Lords, I have two quick points, one of which is fairly forlorn. The Minister referred to the ambition to raise the level of renewable heat to 12% from its current level of 2%. I commend and support that objective—it is right that we should give special provision for renewably sourced heat—but the overall objective is, of course, carbon saving. An awful lot of fossil-fuel-generated heat or dual-fuel heat is currently going to waste. It really ought to be part of the Government’s strategy, perhaps at a lower rate than the subsidy for renewable heat, to ensure that we maximise the use of the heat that is generated from fossil fuel, because the more widespread and efficient use of CHP and trigeneration will achieve larger carbon savings than the current targets for renewable-based heat. That is not to say that we should not do what the noble Lord is suggesting and which these regulations seek to implement, but there seems to be a lacuna—if you can have a lacuna in a suite of measures—in this respect.

With regard to the regulations before us, the Minister said that he has learnt from the FITs experience, and to some extent he has, but in these regulations and in what, at a quick read, is proposed in the consultation paper, I am not sure about giving much confidence or certainty to the market. Certainly, the Government are not avoiding sudden changes of policy. A week’s notice of the budget running out is likely to put off not only people who have gone some way through the process but those who are likely to apply the following year.

It has always seemed that annual budgets, no doubt imposed by the Treasury, are the department’s main problem. Under the solar energy part of FITs, in retrospect the take-up was too fast and the level of subsidy too high. However, as the noble Lord, Lord Teverson, said, the take-up of these RHI provisions has not been as great as the Government wanted. It would surely be better to manage the market according to a total amount rather than an annual budget, so that things would not be stopped half way through development because the budget has run out. Instead, the budget should be brought forward if it has been overspent or carried over into the following year if it has been underspent. That could be linked to the expected take-up.

The current mechanism has an annual budget that stops projects that might otherwise take off within the aggregate budget—for example, over the CSR period. There can also be overshoots, as happened with solar power. Once again the outcome was to cause uncertainty in the industry and to stop projects that were on line under existing rules and which had qualified under the regulations. This scheme is falling into the same category, although probably with less disastrous effect. If we are to maximise and smooth over the take-up of a new technology, we need to provide some degree of certainty over a minimum of two or three years rather than have a cut-off point with an annual budget.

In the medium term it would not cost the Treasury any more but it might make Treasury accountants a bit nervous. In terms of the objectives here, if we cannot have at least a three-year budget run in which we do not stop projects half way through their development, we will not achieve our objectives. I hope that the outcome of the consultation process produces something like that for the period starting in 2013. This does not do that and could put off a number of worthwhile projects.