Renewable Heat Incentive Scheme Regulations 2011

Baroness Stowell of Beeston Excerpts

Tuesday 22nd November 2011 Grand Committee

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[Baroness Stowell of Beeston]

That the Grand Committee do report to the House that it has considered the Renewable Heat Incentive Scheme Regulations 2011.

Relevant document: 31st Report from the Joint Committee on Statutory Instruments.

[Baroness Stowell of Beeston]

My Lords, climate change is one of the defining challenges of our generation. At a time when we are trying to reduce our energy consumption but still need to heat our homes, renewable energy must and will play a part in managing this situation. This is why we want to introduce the renewable heat incentive, or RHI, to support renewable heat generation and to complement the renewables obligation and feed-in tariff schemes which support the generation of renewable electricity.

Previous draft regulations for the renewable heat incentive were debated by both Houses. While both Houses passed those regulations at the time, they were subject to state aid approval being received from the European Commission for the scheme. In the event, the European Commission decided to approve the scheme, on the condition that the tariff for large biomass installations was reduced. The reason the Commission was concerned with the large-scale biomass tariff was because the tariff-setting methodology used for it differed from that applied to other technology bands. The Commission believed that this could result in overcompensation for some biomass installations.

The proposed large biomass tariff was set to incentivise 100 per cent of potential large biomass installations, allowing us to maximise the level of biomass take-up at this scale. This approach differed from that taken to other technologies supported under the scheme. We had decided on this approach because large-scale biomass represents the most cost-effective way of meeting our EU renewables targets. As the tariff levels were set out in the previously debated regulations, we have revised the draft regulations to include the new tariff level for large-scale biomass.

The new set of draft regulations is available to your Lordships today and sets out the details for the renewable heat incentive under which this scheme will operate. There are two changes to those previously debated in the Committee on 12 July. The tariff for large biomass installations—those of over 1 megawatt capacity—has been reduced from 2.7p per kilowatt hour to 1p per kilowatt hour, and the dates on which Ofgem is required to first report to the department on the administration of the scheme have been altered to reflect the delay in launching the scheme.

These regulations provide the basis for 20 years of financial support for a range of renewable heat technologies such as solar thermal, biomass boilers and ground source heat pumps. Support levels are intended to bridge the financial gap between the cost of conventional and renewable heat systems. Once in the scheme, the level of support for participants will be fixed and will change each year only with inflation. The Government have committed £864 million in funding for the scheme up to the end of 2014-15. This funding will come from general taxation rather than the proposed levy suggested by the previous Government, which was found to be unworkable. Support under these regulations will be available for renewable heat installations in England, Wales and Scotland. The Northern Ireland Executive, who are developing their own scheme under powers provided by the Energy Act 2011, have consulted on their proposals and are now analysing responses to that consultation.

The RHI will provide the right framework to enable a rapid transformation of the way heat is generated. We expect it to provide carbon savings between now and 2020 of 44 million tonnes—equivalent to all the carbon emitted by 19 typical new gas power stations operating at full load in one year. The RHI will be available to generators of renewable heat in the industrial, commercial, public, not-for-profit and community sectors in the first instance. We want to incentivise a wide range of businesses and organisations to realise the opportunity provided by the RHI and start generating heat from renewable sources.

The domestic sector is currently being supported by the renewable heat premium payment scheme, which provides a one-off payment to households that have installed an eligible renewable heat plant. We are working on proposals for an ongoing domestic scheme as part of phase 2 of that scheme. However, in the light of the later than expected launch of phase 1 as a result of the changes required by the European Commission, we are reviewing the timetable for the introduction of phase 2. We will be in a position to confirm the exact timing early in the new year.

The RHI will be delivered by Ofgem on behalf of DECC. I am pleased to confirm that the delay to the scheme has not impacted on its readiness to administer the RHI and, subject to parliamentary approval, it will be in a position to start accepting applications once these regulations have been approved and made. Ofgem has significant experience in delivering financial support schemes to renewable energy generators, and already delivers the renewables obligation and feed-in-tariff. Because Ofgem has experience in delivering similar schemes, it will be able to build on this experience and existing structures such as IT systems to ensure that the RHI operates as effectively as possible. Generators will need to apply to Ofgem to be accredited under the scheme, and the processes that they need to undertake are set out in guidance recently published on the Ofgem website.

In order to be able to participate in the scheme, applicants will need to meet a range of eligibility criteria intended to ensure the integrity of the scheme. This includes the requirement that, for small and medium plants, installers and equipment need to be certified under the microgeneration certification scheme or an equivalent scheme. Generators will also need to commit to undertake certain ongoing obligations to receive payments under the scheme—for example, providing meter readings so Ofgem can calculate their quarterly RHI payments, maintain their equipment and, in the case of biomass installations, provide information on a number of sustainability issues.

It is worth spending a little time considering bioenergy, which is a key element in allowing us to achieve our renewable energy targets. The amendments to Section 100 of the Energy Act 2008 that were approved in the summer went some way towards achieving this by enabling biogas to play a much more significant role in the RHI. We are still aware of the concerns surrounding the increased use of biomass as an energy source, particularly with regard to sustainability of the fuel sourced and air quality. Those concerns are addressed in the regulations by including sustainability reporting criteria from the outset. Air quality will be addressed through existing legislation for large-scale biomass, and we will introduce emission limits for all other biomass installations in phase 2 of the scheme.

Rising energy prices, an increased dependence on imported energy and the impact of climate change all mean that we need to change how we use and generate energy. Energy used to generate heat is a key aspect of this, as heat energy contributes half of the UK's carbon emissions. We are also no longer able to rely on cheap fossil fuel gas, which historically has supplied 70 per cent of our heat. It is time to address this situation. By introducing the RHI we are taking a first step towards a radically new approach to how we generate heat in this country. I beg to move.

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[The Duke of Montrose]

My Lords, I, too, thank the noble Baroness for her explanation of this measure, which takes up many pages, and congratulate her on taking up the cudgels for the Department of Energy and Climate Change. I have a mild interest since I have a farm, where there is obviously scope for generating various kinds of renewable energy. I was interested to hear the noble Baroness say that the plan was to reduce the periodic support payments for large biomass operations, which reminded me of something that I saw recently on a BBC web page. Perhaps the Minister can write to me if she does not have a ready answer for this. The Scottish Government have devolved powers for renewable energy, and seem to be holding a consultation on reducing the ROCs on large biomass generation because they want to devote them to marine energy. However, does large-scale biomass qualify for ROCs as well as periodic support payments? What power do the Scottish Executive have over renewables obligation certificates? Can they allocate them up and down at their own will, or is the allocation of ROCs still a UK power?

[Baroness Stowell of Beeston]

My Lords, I thank all noble Lords for contributing to this debate. Quite a few issues have been raised and I will do my best to cover most of them in as much detail as is sensible on such a complex matter. I welcome not only everybody’s contributions today but the support that this initiative has received from the Opposition and my noble friends in all parts of the Committee. As someone who is new to this brief, it was interesting for me to learn that the scheme was first mooted by NGOs 10 years ago and that the Back Benches, rather than previous Governments, were behind this move, although it obviously now benefits from the decision of this Government.

I will go through the issues that were raised, some of them by several noble Lords. A number of noble Lords sought to draw comparisons between this scheme and the feed-in tariffs scheme for solar panels. I understand why some people might be concerned that issues will arise from this scheme similar to those which arose from the feed-in tariff scheme. The key thing is that this Government are learning lessons from how the feed-in tariff scheme was set up by the previous Government. There has been a much higher level of collaboration with the industry and stakeholders in setting up this scheme. We have tried to build in the flexibility that is not there in the feed-in tariff scheme. I point out, as I did in the Chamber earlier today, that the changes that we are making to the feed-in tariff scheme are to ensure that the industry is sustainable in the future. It is an important industry and we want it to be part of the future.

The noble Lord, Lord Grantchester, my noble friend Lord Teverson and the noble Baroness, Lady Worthington, raised the issue of why the RHI is being funded by general taxation, whereas the feed-in tariff scheme is funded by a subsidy, or a levy on consumer bills. The difference is that feed-in tariffs are paid to consumers by electricity suppliers. That is, there is a tariff for the energy that is generated by people through the solar panels on their roofs. To fund feed-in tariffs from general taxation would require the scheme to be restructured or the Government having to pass money to the electricity suppliers to pay to the solar panel participants. It is a different scheme altogether; that is the main reason why it is funded differently.

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[Baroness Worthington]

Could I ask specifically about the notice period, which has been such an issue with the solar feed-in tariffs? The Minister mentioned it but I am seeking an assurance that any changes are not introduced with too short a time period for the industry. A minimum of three to four months is necessary for the industry to adjust its order books and supply chain. Can the Minister assure me that there will not be changes posted that will be enacted within six weeks? That is a significant issue for investor confidence.

[Baroness Stowell of Beeston]

I understand the point that the noble Baroness makes. However, the way in which we have constructed the scheme means that I would not expect the sort of change that we have experienced with the feed-in tariffs for solar PVs to be repeated in this context. We would ensure, through our mechanisms for cost control within the department, that we are monitoring progress very transparently and that we would avoid that kind of emergency change that she refers to. It is unnecessary to give a specific commitment on a timetable as such because of what I have said, but I absolutely understand and appreciate her point.

Turning to the points raised by my noble friend the Duke of Montrose about large-scale biomass, the renewables obligation certificates and RHI, it is possible for new projects to receive the renewables obligation for the electricity generated in a CHP plant and the RHI for heat generated by that plant. A plant cannot claim the higher awards for CHP under the RO and the RHI. Does that make sense to my noble friend? I am glad if it does. My noble friend also asked whether the Scottish Government could award ROCs. The decisions regarding the details of renewables obligations, including the setting of banding levels, are for the Scottish Government. A separate consultation on their support of renewables obligation certificates was published on 21 October.

[Lord Grantchester]

Perhaps I might detain the Committee for one extra moment. Could the noble Baroness consider the question of affordability? While understanding the situation that we are in—especially in the wider European context at the moment—nevertheless, I am concerned that affordability is put up as a criterion that may overrule all other aspects. Could she comment on the relative importance of affordability and say whether her department is moving in any way at all to pick winners and losers? Winners such as PV might provide more affordable success stories than other technologies that might, in terms of their overall rate of return, be worthy of being equally treated. Nevertheless, because of the extra costs involved in their technologies, they are unlikely to be as affordable as others. Can she comment more widely on the affordability criteria in the memorandum?

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[Baroness Stowell of Beeston]

One thing that I would like to make clearer—and remind the Committee about, as well as the noble Lord—is that the department and the Government have three clear strategic aims in this area. One is to ensure we have security of supply so that we keep the lights on. The next is to make sure that we play our part in safeguarding the future of the planet for future generations. The third is to make sure that we do both of those things in the most cost-effective way possible. By that, we want to make sure that, in all the things we are trying to do, we do them in a way that is at the lowest possible cost to those who pay. Obviously, people who pay are having to do so either through their bills or through public money via taxation. Affordability, therefore, is a key issue for us.

I cannot comment specifically on each emerging technology, but obviously there will be a situation where some things are more successful, some more attractive and some more likely to be taken up than others. These incentives are there to help industry get something off the ground which is very powerful in meeting those objectives. I hope, at some point, that they will not need incentives at all but will work in their own right.

In conclusion, the RHI is a departure from our conventional approach to generating heat. This is a new market for the UK and our introduction of long-term financial support for heat generators under the RHI, alongside existing renewable financial incentive schemes, the renewables obligation and the feed-in tariffs, sends a strong signal to the renewables sector that the Government are committed to supporting renewable energy in this country. I hope we can all agree that this is a sector that should be supported. I commend these regulations to the Committee.

Motion agreed.