Baroness Verma
Main Page: Baroness Verma (Conservative - Life peer)Renewable Heat Incentive Scheme (Amendment) Regulations 2013
Baroness Verma Excerpts
Baroness Verma
That the Grand Committee do report to the House that it has considered the Renewable Heat Incentive Scheme (Amendment) Regulations 2013.
Relevant document: 22nd Report from the Joint Committee on Statutory Instruments.
The Parliamentary Under-Secretary of State, Department of Energy and Climate Change (Baroness Verma)
My Lords, it gives me great pleasure to open the debate on the Renewable Heat Incentive Scheme (Amendment) Regulations 2013.
The renewable heat incentive scheme is a world first, designed to improve the way in which we use energy in the UK. Since the scheme was launched in November 2011, more than 1,700 applications have been received to date, with about £25 million-worth of RHI payments expected to be paid out in this financial year. Installations that have already been accredited into this scheme have generated 118 gigawatt hours of heat.
The RHI is essential if we are to meet the UK’s legally binding target, as set by the renewable energy directive, of 15% of our energy coming from renewables by 2020. Heat has an important part to play in achieving this target and we are aiming for 12% of our total heat demand to come from renewables, increasing from less than 2% before the RHI opened, by this date.
Through the scheme we will continue to reduce our greenhouse gas emissions and begin the journey that we need to make towards our goal of eliminating greenhouse gas emissions from our buildings by 2050. Renewable energy generation is essential to our economic growth and energy security. It reduces our reliance on imported fossil fuels and helps keep the lights on and our energy bills down.
The RHI scheme is administered by Ofgem and provides financial tariff-based support for commercial, public sector, industrial and community renewable heating installations for 20 years. It has already supported technologies and fuel uses, including solid biomass, solar thermal, ground and water source heat pumps, biogas combustion, energy from waste and the injection of biomethane into the grid.
We have seen participation in the scheme across small businesses, industry, the public sector and community projects. RHI support is being given to the Meikleour Trust, a Scottish estate that installed a 500-kilowatt thermal biomass boiler to supply heat via a district heating system to a range of buildings. In addition, the RHI is expected to generate £300,000 per year in support for Overbrook Farm in Derbyshire as it replaces its old petroleum gas systems with biomass boilers. However, the RHI goes wider than this and is supporting installations in schools, dairy farms and other major retail outlets across Great Britain such as Sainsbury’s, which has invested extensively in renewable heat, including biomass and ground source heat pumps.
The RHI is funded by the taxpayer and must be financially sustainable. It must help to deliver renewable heat in the most cost-effective way. It must do so by avoiding rapid reductions to tariff levels, which can create market uncertainty and instability, neither of which will help us to achieve the goals that I have just outlined. We have learnt lessons from the feed-in tariff scheme in developing this current mechanism. It introduces flexible controls which will provide certainty to investors and, through it, we will see continued growth in renewable technologies, helping us to meet our renewables and carbon targets.
These regulations amend the Renewable Heat Incentive Scheme Regulations 2011. They will implement the outcome of a consultation, published last July, which sought views on the best way to control spending under the scheme until March 2015. The consultation attracted 100 responses from a wide range of stakeholders. The results are set out in the government response published on 27 February. More than 70% of respondents supported the proposed degression mechanism. The feedback on the design of the proposed degression has resulted in adjustments to the proposals that were set out, although the broad principles remain the same.
The regulations build on the foundations laid down for controlling spending introduced under the feed-in tariffs scheme, following the consultations that took place on that scheme in 2012. The framework for financial control of the renewable heat incentive scheme will therefore also be based on a system of degression. Degression is not a new word: it is used in economics to define a system which gradually reduces, by stages, a rate or specified sum. A system that sets out clearly how and when tariff levels may be reduced, and by how much, will undoubtedly provide greater certainty to the industry—and certainty is what industry tells us that it wants.
Let us also not underestimate the current level of public interest in how taxpayers’ money is spent. More than ever, we need to constrain spending within budgetary limits, and the regulations aim to do that. Simply put, degression will reduce existing tariff levels if uptake of renewable heat technologies is greater than we require to meet our renewables target. They will help to safeguard against the possibility of overspend and against the detrimental impact on the supply chain of a reduced budget next year that would be caused if we spent more than expected.
Last July, the Government introduced an interim, or stand-by, mechanism of budget control for the RHI while we developed a longer-term approach. Under the interim mechanism, the scheme would have been suspended had spending levels reached 97% of the budget limit, which in real terms meant if we had forecast spending to reach £67.9 million in 2012-13, against a budget of £70 million. The interim mechanism would therefore have temporarily closed the scheme’s doors to potential investors.
As it happens, the scheme was not suspended, with spending levels expected to reach £25 million during this financial year. Nevertheless, a more sustainable approach is needed to deliver the certainty to industry that I mentioned earlier.
I will gladly hold up my hands and accept that the regulations are not at first glance simple to understand. If I may, I will therefore attempt to summarise the main features of the degression scheme. At its simplest, degression will mean that tariffs available to new applicants may be gradually reduced, but only if uptake of the various technologies supported under the RHI is greater than has been forecast. This will be done by monitoring uptake on a quarterly basis against a series of expenditure limits, listed in the schedule to the regulations, to which I will refer as triggers. The reason why I use this term is that if those limits are hit, they will trigger a fixed reduction to tariff levels. Monthly updates on progress towards all triggers will be published online so that stakeholders can readily access them, and one month’s notice will be given before any reductions are made to the tariffs for new applicants.
The key aspects of degression of which noble Lords should be aware are as follows. Those who are already in receipt of RHI support will not be affected by any future reduction to the tariff levels taking place as a result of degression. Applicants to the RHI scheme will receive existing, that is non-degressed, tariffs, if the date of accreditation for their installation, or date of registration for a biomethane producer, is before any new tariffs came into effect for the full 20 years.
The system includes a rule which means that degression will not be activated for a particular quarter—so tariffs will not be reduced—if total expenditure in any quarter is estimated to be equal to or lower than 50% of what we expected it to be at that point. In that way, the Government intend to avoid reducing tariff levels if only a few technologies are performing well and contributing towards heat targets. Where total expenditure is more than 50%, the regulations prescribe the assessment that government must make to determine whether degression has been activated, and whether any tariffs should be reduced and by how much.
Baroness Verma
My Lords, I am pleased that the noble Baroness was able to follow very closely what I must admit was a very complex issue. She has raised a number of questions. I shall attempt to answer as many as I can but, if I fail to answer them all, we will write to her.
The noble Baroness must accept that this Government have been prepared to look at what is good for both consumers and the industry. That is why these reviews are important. I make no apologies for the fact that if in my own role in the department I feel that something needs to be revisited, I am very happy to do so. With these technologies being in their infancy, it is only right that we go over the issues. I am not dogmatic in my approach and would rather review a matter several times to get it right.
Perhaps the noble Baroness slightly missed the point that this Government are incredibly supportive of renewables being part of our energy mix. I have stood at the Dispatch Box on several occasions and have said that it is very important for our energy security that we have a range of energy mixes.
I shall attempt to respond to some of the questions that the noble Baroness raised. She must recognise that when we are using taxpayers’ money, we need the right balance between certainty, value for money and clarity for investment, and we need to respond to the market. We do not want to disadvantage any technology in the scheme of things, so when the noble Baroness says that we have many triggers for degression, it is also important to see that some technologies have reached a further stage of development than others. We do not want to exclude or disadvantage some of those that will have a longer lead time. Therefore, it may well be that there are a lot of triggers for a range of technologies, but I would rather be in that position at the moment than to disadvantage any technology that may need a longer lead time.
The noble Baroness asked why the number of applications was so low. I think that is an unfair comment. By and large, take-up has been relatively steady. Applications for non-domestic RHI may appear low but a greater interest is beginning to be shown. It is right that we address the issues behind the low take-up, and therefore this engagement with industry and other stakeholders is really important. I absolutely agree with the noble Baroness that that is crucial to the debate but she also asked whether degression would put investors off. I absolutely think that it will not. Adopting such measures places much greater certainty in the hands of investors. We have learnt from other schemes not to repeat those mistakes again. We have tried to put mechanisms into place that support the longer-term aim of what we are trying to deliver. Of course, we still have plenty of learning to do. There is no doubt that we have to put our hands up to the fact that we may not have got it exactly right, but at least we are going in the right direction.
Baroness Worthington
I do not dispute that. Having some clarity is important for investors, but these are incredibly complicated proposals. Investors are simple folk. They want a clear plan and to know how much money they will get in return. In this system quite a lot of risks are involved. They have to carry the costs of all the preparatory work before they receive their money from Ofgem and if a policy cannot be explained in a few minutes, investors will get bored and go elsewhere. That is my concern.
Baroness Verma
I very much take that point on board. Much of where we have reached has come from talking to industry and stakeholders, so they are part of the journey towards making these recommendations. So, point taken, but some of these things are incredibly complicated. However one tries to simplify them, they will still have a degree of complexity about them.
The noble Baroness asked why budget management was necessary. There is a degree of uncertainty about how the market will respond over time, so it is right to be prepared for unexpected changes in the uptake that may arise. The noble Baroness also raised the point that budgets are not flexible, and spending less than the allocated budget in one year does not permit that underspend to be transferred to future years. It is about balancing what we need to do—which is in line with what the Treasury expects us to do—with ensuring that, as we hope, the uptake will not lead to as big an underspend as in the past, given that we are putting in place these mechanisms to encourage better uptake.
The noble Baroness asked what will happen after 2015. The Government’s policy on this was published in February in response to the July consultation and was cleared across all government departments. It will remain open to new applicants until 2020. The spending review commencing in June will provide a chance to set the scheme’s budget beyond 2014-15. The noble Baroness asked about booking tariffs and guarantees and referred to the EPA. We do not propose to bring forward the EPA at this time, but recognise that there are arguments for introducing measures to improve certainty, even though these can be difficult to evidence. We intend to monitor the introduction of degression and other planned improvements to the scheme. We will continue to work with industry and stakeholders to improve our evidence base, then see what other options may be available to us.
The noble Baroness asked about biomass. It is true that biomass accounts for the majority of the applications and accreditations on this scheme. However, we want to see more deployment across a fuller range of technologies supported by the scheme. This is why we continually review the scope, so that—as I said before—we do not exclude some of the technologies that have longer lead-in times or are still at early development stages.
I must respond to two more questions. The noble Baroness asked why the mechanism was necessary. It has been supported by 77% of the respondents we spoke to as being the most appropriate mechanism. As I said, they are on side with us. I completely understand the complexity of it, but we need to be able to provide them with clarity and they are supportive, so I think we are in the right space. Needless to say, that does not mean there is no room for improvement.
The noble Baroness also asked why it is necessary to separate the tariffs. I touched on that. There are different technologies and different tariffs. That is important and it is to ensure that one technology does not have an undue advantage over other technologies.
The noble Baroness rightly asked questions about the complexity of the scheme; we do not underestimate that. However, I hope that the regulations debated today will ensure that RHI continues to drive forward renewable heat deployment, which is what we all want, and is the most cost-effective way of doing so for the taxpayer. I have taken on board many of the points made by the noble Baroness; I shall read Hansard carefully to see whether there are any that I have missed. None the less, I hope that I have her support in commending the regulations to the Committee.
Baroness Worthington
My Lords, I thank the Minister for her responses. I am very impressed. I asked a lot of questions and I think she covered most of them, although there are a few outstanding, particularly on liquid biofuels and associated things. However, she acknowledged the complexity of the main matter before us and argued the need to provide certainty around the technologies. That is fine in the early stages but at some point we have to start backing winners. The targets that have been set for us are challenging. There is only so long that you can flog a dead horse. There are some technologies which, for whatever reason it may be—be it non-market barriers or there being no appetite for them—you just cannot get deployed, whereas there are others which seem to hit a sweet spot, where there are lots of reasons why people like them and, suddenly, off they go. Those are the things that you can build a business around. They can give you great potential for investment and, one hopes, lead to exports. It is great that we are trying to nurture as many technologies as possible, but that cannot be the case for ever. These reviews are important but, please, let us not have too many of them. A good, solid review after a certain time is the right way forward. Let us try to get back on track.
Perhaps the Minister could write to me on how we are doing in terms of our trajectory. I worry that, while we have this very slow start, we will have to go into a very steep curve to reach that 12% target and that discussions with the Treasury will become ever more difficult. If the Minister could let us know how we are doing, that would be great.