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.
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There are two types of trigger which apply: a total trigger and triggers for each technology supported by the scheme. All triggers are measured in pounds spent, as this goes to the very heart of what budget management looks to control.
The total trigger ensures that overall spending levels for the non-domestic scheme are protected. Fixed annual budgets, which cannot be exceeded, have already been set for the four years of this spending review period. The total trigger has been set based on the combined estimated uptake of all of the technologies supported by the non-domestic RHI scheme. It is the estimated cost of support needed for that part of the scheme’s contribution to the heat portion of the Government’s 2020 renewables target as set by the renewables directive. Monitoring uptake will take place on a quarterly basis, and the annual total trigger has been split into quarterly amounts which are shown in the schedule to these regulations.
The reason for having separate technology-specific triggers is to prevent one technology dominating the RHI market. If there were only a total trigger in place, market forces would ultimately determine which technology deployed well, which could easily force out
technologies which have a role to play in the UK in the longer term. The Government wish to encourage uptake across all the technologies supported by the scheme, hence the need for technology triggers. Once again, these triggers, which are based on projected market uptake, have also been split into quarterly amounts as shown in the schedule to the regulations.
The tariff triggers—tariffs are for each technology and, in some cases, different sizes of the same technology—are based on the deployment levels that we were expecting when the scheme was launched, but have been increased by a proportionate amount above these levels. The Government’s intention is to build greater flexibility into the system, and this approach recognises that what happens in practice may differ from projections. This flexibility is possible because we also have the total trigger. The precise level of scaling for tariff triggers depends on expected levels of uptake. For most of the technologies where forecasts indicate good levels of potential uptake, triggers have been at levels that are 50% higher than these. Conversely, where uptake forecasts are low, triggers have been set at 5% of the value of the total trigger to ensure plenty of scope for deployment to increase without triggering degression.
It is vital that we avoid overreduction of tariffs, as this could easily undermine the renewable heat market. The level of reductions to individual tariffs will commence at a rate of 5% initially if the triggers are hit. However, the regulations allow reductions to increase by up to 20%. These higher levels would be needed only if any earlier reductions had not been successful in bringing deployment levels back into line with estimates. If the total trigger is also hit, tariffs for all technologies that are exceeding their estimated deployment levels will be reduced by a further 5%—I am sure noble Lords are all keeping up.
I should like to address other issues, which may go some way to answering some of the questions which noble Lords may have on aspects of the RHI scheme. I trust that this will smooth the way for a focused debate on the changes that the regulations introduce.
At the same time as consulting on proposals for budget management, the Government sought evidence on the link between uncertainty and deployment of renewable heat. They suggested a possible solution through enhanced preliminary accreditation, which is in essence a form of tariff guarantee. We have subsequently announced that we will not implement this proposal at this time but will continue to work with stakeholders to determine how greater certainty can be provided. The Government recognise that projects with long lead-in times will have greater uncertainty as to future tariff levels when investment decisions are taken, which in turn can affect the cost of project finance and viability of schemes. However, we have not yet identified cost-effective ways of managing the risks associated with tariff guarantees, which can be gamed, encouraging speculative applications and significantly increasing the cost of the scheme. We need to find ways of unlocking the investment needed at an acceptable cost to the public and we will therefore continue to work with industry throughout 2013 to achieve this.
The Government have recently announced measures in two key areas: sustainability requirements for the use of solid biomass and biogas for heating, including air quality controls; and simplification of the current metering requirements.
On biomass sustainability, we will improve performance by introducing sustainability requirements for all existing and new installations using solid biomass as a feedstock. This means that to be eligible for the RHI, biomass installations of all sizes will be required to demonstrate, either through reporting or sourcing from an approved supplier, that their biomass meets greenhouse gas emissions criteria from April 2014 and land criteria from no later than April 2015. The standards will apply to existing RHI biomass installations and new applicants to the scheme. We have already announced this policy and intend to bring forward the regulatory amendments later in the year.
As well as ensuring that biomass fuel is sustainable, the Government want to ensure that the by-products of its combustion are controlled. Good air quality is vital to human health and the Government are committed to controlling emissions throughout the UK. Emissions limits will therefore apply to solid biomass installations, including combined heat and power installations which burn biomass. The limits will apply to all new installations accredited from the date the regulations come into force. Before these limits can be introduced, European state aid approval is required and the policy and compliance regime have to be published for a minimum period as part of the technical standards directive. Subject to approval, these requirements will be brought forward as draft regulations for debate by this House and in the other place as soon as the processes permit.
The Government will simplify metering requirements to introduce more flexibility and to avoid redundant meters being installed. This is designed to reduce costs to applicants and Ofgem without compromising on the accuracy of measuring heat. It is expected that the changes will come into force in autumn 2013.
It is important to improve and develop the RHI policy and its evidence base, learning from earlier implementation to keep delivery focused. The Government have therefore rightly consulted on expanding the non-domestic scheme and on introducing a domestic RHI to ensure that the market for renewable heat can grow further.
The Government will publish their response to earlier September consultations, Renewable Heat Incentive: Air to Water Heat Pumps and Energy from Waste and Renewable Heat Incentive: Expanding the Non Domestic Scheme, later this year and will be providing confirmation shortly about exactly when this will happen. The Government continue to welcome evidence on other suitable technologies which could be supported under the RHI.
Noble Lords may be aware that the Government announced earlier this year that they will be reviewing tariff levels across all technologies and plan to publish proposals in spring this year. This is in part due to calls received from stakeholders that the time may be right for such a review.
The renewables market remains in its infancy and, since the Government launched the RHI scheme, fresh evidence continues to become available which rightly needs to be taken into account. In addition to the review of tariffs that will take place this year, the Government will also review the non-domestic RHI scheme and its tariffs in 2014 and 2017. Early parameters for these reviews were set out in the Government’s February response to the July 2012 consultation. The exact scope of this year’s review of tariffs will be refined in due course. Any changes to tariffs as a result of the review will be subject to Parliament and state aid approval, but it is the Government’s intention that, where tariffs increase as a result of this year’s review, installations accredited from 21 January 2013 will benefit from any increase once the new tariffs come into force.
I know that some noble Lords will have significant interest in the timetable for introducing a domestic RHI scheme. The Government published a detailed and wide-ranging consultation, which closed last December, and will make an announcement as soon as possible. It is imperative that the final proposals deliver cost-effective and sustainable support for a scheme that is, above all, operable. I am sure noble Lords can appreciate that, with more than 400 responses received, there have been a number of challenging and complex questions.
Lastly, but certainly not least, I wish to address an issue that may be on the minds of some noble Lords: that is, the scheme delivering on its intended aims. Let us not pretend for a moment that the targets we must achieve are anything but challenging, but it is right to challenge ourselves on such an important issue. The scheme itself is 16 months old and still in its infancy. Since November 2011, the application rate has been relatively steady and we are seeing accreditations across all technologies. Interest in the scheme is extensive, with Ofgem receiving more than 2,000 calls per month on average and more accreditations taking place than ever before.
I have already outlined how we strive continually to improve the scheme and how we have consulted on improvements and extensions. We are working towards achieving a significant increase in uptake to ensure that we remain firmly committed to meeting our 2020 target for renewable heat. The changes that I have set out apply to England, Wales and Scotland. There are complementary measures in place for Northern Ireland, which has its own RHI scheme. As required by the Energy Act 2008, consent to the regulations has been obtained from Scottish Ministers.
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.