Draft Renewable Heat Incentive Scheme Regulations 2018 Draft Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2018

Alan Whitehead Excerpts

Monday 23rd April 2018 General Committees

[Dr Alan Whitehead (Southampton, Test) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Hanson. I ought to state from the outset that we want these regulations in place as soon as possible.

The delays in moving from the revision of the RHI White Paper, through the consultation, to the production of the original draft regulations, and finally to the regulations that we are considering, have been considerable—indeed, they have been the subject of a number of inquiries over the past months asking when the regulations are coming in. Bodies involved in non-domestic RHI have said, “We have schemes ready to go. We are not sure what is happening. Can we please have the regulations so we have clarity for our forward development processes?”

The draft regulations have appeared today, and certainly not before time. I see that they will come into force the day after they have been agreed, which will not be a day too soon. Hopefully a number of the concerns that have been expressed can at last be laid to rest and people can get on with the process of delivering the renewable heat that I think we all want to progress. The Opposition will not oppose the draft regulations, but as the Minister should expect, we do not want them to go through without proper examination, one or two questions being answered and, ideally, some indication of what the longer term route for renewable heat is envisaged to be.

I have to say that I welcome many of the changes that will take place in terms of the scope and focus of the draft regulations—particularly, as the Minister mentioned, the concentration on biomethane and heat pumps, and the injection of biomethane into the grid. Those technologies are seen as increasingly relevant to the attack on the decarbonisation of heat, as it were. The different ambitions the renewable heat incentive will have as a result of these changes reflect a lot better where we actually are in terms of the development of those technologies going forward.

However, this is a change in ambition in that it is an overall reduction in ambition. We need to be clear about that. Not only is the renewable heat incentive, as it stands at the moment, not remotely enough for the ambitions that we have and should have on the decarbonisation of heat in terms of being a vehicle to bring that decarbonisation forward, but it is, as the Minister mentioned, very much a time-limited device, which will expire for new entrants in March 2021. In terms of the measures put forward in the clean growth strategy as some of the building blocks for serious clean growth and meeting climate targets, this is actually one of the most short term.

Indeed, in so far as investors and businesses are concerned, that time limit represents, in many ways, a cliff edge as to what will happen in the longer term future. As hon. Members will be aware, the period between where we are now—allegedly spring 2018—and March 2021 is barely time to get projects from conception, to proof, to development, to financing, to realisation. The cycle that is now in place with the renewable heat incentive is barely sufficient to support a lot of the schemes that will be needed—with all the care and detail that will be needed in their development—over the next few years, in so far as a major attack on the decarbonisation of heat is concerned.

A central question that we need to address in looking at the draft regulations is: what next? What will happen at the point at which this particular scheme, as presently rostered, comes to an end? In the clean growth strategy, the Government said that they have

“commissioned research into different heat demand scenarios, the use of hydrogen, what changes might be needed to the electricity grid in response to large scale uptake of heat pumps, the role that bioenergy might play in decarbonising heat and international activity.”

They then state that they

“plan to publish initial findings from a number of studies later this year, and a full report on our review of the evidence by summer 2018.”

Assuming that we have a summer, that Government report will then be in front of us. I imagine that that will be the occasion to look at the future of the RHI, in conjunction with the review that we are told is forthcoming, and to look at what imperative there is for a longer range renewable heat incentive, or a similar scheme, to take us perhaps to 2030 and give us the certainty we need for that period. I am interested to understand whether that is the view of the Government in their report due in the summer of 2018 on heat and heat demand, and whether possible commitments to the longer term basis of the RHI can be within the scope of that review of evidence.

There is one other alarming point we need to bear in mind. While the ambition of the RHI regarding what technologies it is focusing on has come into a more satisfactory trajectory, the National Audit Office and others recorded—as the Minister mentioned—that the new RHI has reduced its ambition substantially, as opposed to the original starting ambition of the RHI overall. For example, the NAO states that renewable heating that is not eligible for the RHI by 2020 has increased by 270%. Renewable heating funded by the RHI in 2020 has gone down by 65%. The total of renewable heating estimated by 2020 has gone down by 18%, from 71 terawatt hours to 58 terawatt hours. The lifetime carbon emission reductions funded by the RHI, in terms of the projections of the starting ambition compared with the current ambition, have gone down by no less than 44%.

This is a relatively modest scheme on the back of what was a relatively modest scheme in the first place. We should be under no illusion: these changes downgrade our climate change and heat decarbonisation ambitions quite substantially. To that extent, we cannot register anything other than considerable disappointment at that particular reduction. It makes it all the more essential that, in the summer of 2018, we get a grip on understanding what role the RHI or a similar incentive can and should play in heat decarbonisation, and how much further we need to go than the scheme presented to us today.

That is the framework in which I would be grateful to hear the Minister’s reflections on how the RHI as a whole may work for the future. I want to touch on one or two elements in these regulations. By the way, we have perhaps not fully reflected on the fact that these regulations reflect on both the domestic RHI and the industrial and commercial RHI, both of which started at different times and have slightly different objectives, but are brought considerably closer together by these changes, so I will talk about them interchangeably. However, there are issues where elements in one set of regulations do not appear to be read across fully in the other set. The Minister may have thoughts about some of those read-acrosses, if such a word exists. That would assure us that the overall coherence of the draft regulations for the two schemes, and how they come together, has been looked at properly.

My first specific point is about the assignment of rights, which is a welcome change in the new RHI. It enables a much better relationship between the people who fund an RHI project, the people who actually use it and the people who get the RHI funding for it, and it clarifies what happens if circumstances change. The draft regulations bring in full assignment of rights and a clear path for funding to be continued on the basis that there is proper documentation for a change to the assignment of rights, but just for the domestic RHI. I would have thought that it was just as important to make that arrangement for the assignment of rights in both sections of the RHI. Is there a clear and pressing reason why that has been done just for the domestic RHI, rather than across the board?

Secondly, the Minister mentioned the arrival of tariff guarantees in the new RHI. I wholly endorse the idea that there should be tariff guarantees. I mentioned investors; tariff guarantees will mean that, once their project is in the system, they are guaranteed a tariff, and it is not subject to the vicissitudes of subsequent degression or stops and starts in the scheme, so they can get on with the project with much more certainty. That is a sensible step forward.

Unfortunately, it is apparent from the explanatory memorandum that the tariff guarantees are not really the guarantees we think they are. They are subject to closure if it is considered that the guarantee amount has been exceeded in any particular period. There is an overall cap as a proportion of the total funding of the scheme in particular periods. The tariff guarantees will also come to an end before the RHI itself comes to an end in its present form—the beginning of 2021, as opposed to March 2021.

Therefore, people who thought they could safely move forward as far as tariff guarantees for their projects were concerned will have a rather rude awakening, because those guarantees are not guarantees. They are guarantees only inasmuch as Ofgem considers, given what else is happening in the scheme overall at any particular stage, that tariff guarantees can be offered. I am sure that the Minister understands that that is not exactly the cast-iron guarantee that one might have hoped investors would be able to get for RHI projects.

Thirdly, I welcome the geothermal element in the non-domestic scheme. The Minister will be aware that such projects are dear to my heart—I have invited her to see the geothermal project in Southampton. However, they are long-term projects that take a lot of funding up front and have long development periods. Although geothermal is in the allowed scheme for non-domestic RHI, it is probably sufficient for only a couple of schemes over the period. A geothermal developer is unlikely to be interested in geothermal projects where they think that the resource available to assist such projects—the short-term resource available in the RHI and across the board—is not enough to support the number of projects that they would need to make what they were doing stack up. That is a theoretical rather than a practical presence for the future of RHI.

Finally—I am sure the Committee will be glad to hear that word—I will talk briefly about the Minister’s comments on combined heat and power and power efficiency. In the regulations, the change the Government made a while ago and then withdrew has become a firm part of the RHI infrastructure.

CHP will not be eligible in full for its outputs if its electricity output is less than 20% efficient. The Minister will be aware that the same proposal was put forward several years ago and then withdrawn. The threshold was reduced to 10% after a review and consultation as to whether the 20% was justified. As part of the wider recent consultation, a special consultation was undertaken into the CHP proposals. Although the vast majority of those consulted agreed that there should be an efficiency level, 71% disagreed that the level should be 20%.

The reasons for that disagreement are fairly evident. CHP does not work on the basis of a known level of electricity efficiency that can be built in scheme by scheme and that could make it possible to decide whether one scheme was electricity efficient and, if it were deemed not to be electricity efficient below a certain point, to say without fear of contradiction that the scheme was not efficient and should not get the money for its activity.

Although I accept that a scheme that is less than 20% efficient will get a proportion of the RHI, schemes that cannot get to that 20% energy efficiency level will be substantially penalised, even though they are efficient schemes in their own right.

CHP schemes will be put in place in a lot of different circumstances. Some will have a relatively high electricity output, and some will have a relatively high heat output. The two are essentially interchangeable in terms of how CHP works, because the activities that produce heat can be diverted to produce steam for electricity production. A number of schemes have to have an emphasis on a slave heat load. That does not mean they are inefficient, but they will not be able to reach that 20% level under all circumstances. By setting that 20% level as if it were something achievable across the board without exception, the scheme potentially penalises and undermines the viability of several perfectly good CHP schemes that do not and cannot operate entirely on that basis.

As I have mentioned, I do not wish any of those concerns to be taken to mean that we do not support the regulations overall, but they need some looking at by the Government. I would welcome it if the Minister considers that at least some of the requests I have raised should be subject to further consideration, and if there is a wider review of RHI in future. I look forward to the Minister’s thoughts.

--- Later in debate ---

[Claire Perry]

Obviously we consulted on the cap last year. Given the current scope, the scheme will be affected. Part of its output will have a guaranteed tariff, but perhaps the development team can come in to speak to officials and have a conversation. The hon. Gentleman mentioned that the scheme was bidding into CfD regulations as well. There are other routes and opportunities. Hopefully the people of Grangemouth whom he represents will be pleased that there is so much incentive. We want developers to bring forward the schemes to take us to a lower-carbon future. If a meeting would be helpful, I would be glad to arrange it.

I praise the hon. Member for Southampton, Test, who is almost my hon. Friend these days. He has brought his typically detailed level of scrutiny, and I will try to cover as many points as possible. On the question of the cliff edge, we are undertaking a lot of work. We published a call for evidence on 19 March. We are keen to develop cost-effective policies for the 2020s through to the 2030s and beyond, but we have a unique situation in this country. We have a centralised gas distribution network to which 85% of houses are attached, and 15% of us, including many in my constituency, live off the gas grid. It is about trying to work out cost-effective ways of delivering those low-carbon, cost-effective solutions on which we all agree. We have published a number of studies. Only last month, we published one showing initial findings on the options available for long-term heat decarbonisation, which are typically hydrogen, bioenergy and electrification. As promised, we will publish a full report of evidence in 2018. I look forward to discussing that with the hon. Gentleman.

The hon. Gentleman raised a challenge about reducing ambitions. It is important to recognise the size of the scheme—£23 billion of taxpayers’ money is committed over its lifetime, which is a substantial investment. Its goals were ambitious, but it is important that we have responded to some of the concerns.

[Dr Whitehead]

I think we need to be clear that the £23 billion is over the lifetime of all the projects that would have got anything from the scheme up to its closure, which could be a period of up to 35 years. The £23 billion should be looked at in that context, rather than as something being funded by the scheme now. Indeed, the £23 billion should be compared with the estimated lifetime undertaking on the same basis with the original RHI, which I think the NAO put forward as £70 billion or so.

[Claire Perry]

I am not going to detain the Committee debating Her Majesty’s Treasury policy, but effectively this is an on-balance-sheet commitment to a liability for either current or future taxpayers that is part of the Government’s spending commitment in perpetuity, and I think £23 billion is a fairly substantial sum. The hon. Gentleman will be pleased to hear that we were keen to understand whether we were rolling this out in the right direction. The Select Committee on Energy and Climate Change made the point that mass roll-out was not the right way forward. That is partly because—this relates to some of the other comments raised—as with all elements of decarbonisation, we need to cut carbon, find cost-effective deployment pathways and create strategic ways to invest where we can grow a manufacturing base and deliver. This is what the reforms are about—trying to reform the scheme for technologies that are more likely to be strategically important in the long run, for example heat pumps. It is less about the fewer, larger installations that use technology that we all know about. I think that is really important for driving through our UK plc investment profile.

The hon. Gentleman raised a question about CHP and why we were bringing in the 20% efficiency point. Again, we do not believe that offering a full CHP tariff to plants with lower electrical efficiency represents good value for taxpayers. We have talked about the strategic elements of this. If I have not answered any of his questions, I will write to him. I did want to discuss an area where we both have a great interest: geothermal. That can be part of the scheme. I am particularly interested in geothermal energy from abandoned mine workings, which is possibly a great untapped source of heat. That would bid in as a heat pump scheme, as opposed to any other scheme. There are really good opportunities for us to look at where we can bring forward some heat from the work that has already been done.

My hon. Friend the Member for Stafford raised an important point, showing that he has read all his documents. I am very impressed. Let that be a lesson to the Committee. He and I always like to debate the numbers. I will write to him with the absolute detail, but essentially there was a revaluation of the air quality and decarbonisation benefits. We may not necessarily agree with them, but if it is sufficient, I will write to him to give him more detail on the calculations. I would like to put it on the record again that as much as we all love being bound by our Treasury guidelines, which are important for delivering value for money, sometimes others make the case that they do not always capture the benefits, particularly these early-mover schemes. They do not yet capture the benefits of any investment in UK manufacturing or service expertise that we might be developing as a result of these, effectively, very big Government procurement programmes.

My hon. Friend the Member for South Thanet offered a very nice invitation, which I would be delighted to accept, and raised a really important and telling point about assignment of rights. I do not know the answer and I will write to him, but it is a tribute to his background that he is thinking hard about avoiding any form of payment protection insurance scandal or any sort of mis-selling. We want to assign these rights to ensure that people in potentially lower-income households are able to get that third-party capital investment into these schemes, but not in a way that causes problems. I am told that the Financial Conduct Authority will look at contracts to ensure compliance with the Consumer Credit Act 1974, if needed, but it would be reassuring to him and me to put that in a letter. I would be happy to send that to him.