Renewable Heat Incentive Scheme (Amendment) Regulations 2013

Baroness Worthington Excerpts

Monday 25th March 2013 Grand Committee

In concluding, the measures contained in these regulations are good for taxpayers—who pay for the RHI—and for investors in renewable heat technologies. The RHI must deliver renewable heat in the most cost-effective manner and the mechanism being introduced through these regulations will ensure that we have long-term budget management mechanisms in place which will provide clarity and assurance about how we will manage the budget. As I have said, the renewables market is in its infancy, and there is uncertainty about how it will develop and respond to the RHI. With improvements and extensions now under way, we plan to achieve a significant increase in uptake to ensure that we are on track to meet our 2020 target for renewable heat. I firmly believe that the RHI scheme will deliver on its objectives and I commend these regulations to the Committee.

[Baroness Worthington]

My Lords, in this freezing cold, it is nice to talk about heat being released. As for these regulations, if there was a competition for the most inscrutable, least easy-to-follow set of regulations, these would surely be a contender. Can anyone honestly say they have read all these documents and fully understood them? I have spoken to the trade association, the Renewable Energy Association, and its expert who tracks this in great detail said he finds it almost impossible to follow. What hope do the rest of us have? I shall endeavour to work out what is happening here.

The bigger picture is that these regulations broadly aim to introduce a system for what to do in the event of overspend, so that the department can manage its budgets. The RHI as a policy differs from the electricity market because funds made available for this support mechanism come from the public purse—the taxpayer—not via the market. Therefore, the Treasury takes a keen interest. I can understand that, and the desire to stay within budget is of course laudable. However, to what extent is this really necessary? These are hugely complicated regulations, which, I am afraid, potentially undermine investor certainty, despite what the Minister has said. How needed are they?

In reality, as the noble Baroness has indicated, this policy remains drastically underspent. If anything, we should concentrate on how to boost uptake, not worry about paranoid penny-pinching in the event of overspend. The operational budget under the cost control mechanism is around £70 million for the current financial year and estimates of committed spend are only around £25 million. That is slightly more than a third of the budget spent, so two-thirds are unspent. The curious fact about this policy is that any underspend simply returns to the Treasury. It is not carried over to help the industry, but simply disappears into the Treasury. It is not even clear if it will come back to the taxpayer; it is not good for the taxpayer, but good for the Treasury.

That £70 million is already a reduction on the estimated budget of £133 million that was first put forward, so this policy is not in danger of overdelivering and overspending, but of underdelivering. Our target for renewable heat is around 12% of heat. This, it is said, can make a contribution to our legally binding 15% renewable energy target in 2020. We are currently at only a few percentage points and starting from a very low base. Where do we currently stand on the percentage of heat coming from renewable sources, and are we getting any more on track? The last data that I saw for 2011 showed that we were already off our proposed trajectory.

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[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.

Motion agreed.