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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I am very pleased to hear about proposed reviews of the tariff levels, because it is only in those reviews that we can make adjustments to increase the tariffs.
This statutory instrument is all about degression and reducing the tariff rates, but if we see that the policy as a whole is underdelivering, what are we going to do? How are we going to introduce more incentives or better target them? I should like some words of assurance that it will be through the review process that we address the current underdelivery.
The reason for degression is to prevent a stop-start market—again, a laudable aim—but the bigger picture is that the whole policy is stop-start. It runs out in 2015. Under the comprehensive spending review, the budget has been made available only until 1 April 2015. What happens after that? I should like reassurance that the scheme will continue and be open to new applicants. Otherwise, we are in danger of all this time and effort being spent on something that is completely stop-start and provides no certainty for investors. The proposals will introduce no fewer than eight degressionary reviews in the coming two years, but post-2015 there is no certainty about what happens next.
That is particularly important because it disadvantages larger projects, which have longer time horizons and planning periods. Those projects are the most cost-effective. I am thinking here of the larger-scale biomass schemes, which are much more cost-effective than some of the smaller ones, but they need time to plan. We already have only two years of visibility and certainty for the scheme. That must be addressed. The noble Baroness made some comments about being open to talk to the industry about that. I urge her to do that because it makes no sense to disadvantage the most cost-effective projects.
As the noble Baroness will know, the industry has proposed a solution of tariff guarantees, whereby you book your place on a tariff ahead and then have two years in which to get your scheme up and running. The industry feels that that is a fair system. It notes that it is already in use in the small-scale feed-in tariffs, so the Government have used that mechanism before. It is being considered for the CFD—the contracts for difference. Are the Government still considering that? The noble Baroness mentioned that she is talking to stakeholders, but could we have a little more detail on that proposal?
The SI contains two annexes which, compared to the rest of the document, are quite easy to understand, but are nevertheless very complicated. Annexe B sets out technology-specific budgets for when a degression trigger will be reached. Those are separate pots of cash for different types of technology but also for different scales of project.
I keep asking myself whether this level of disaggregation and micromanagement is necessary. I can understand why certain technology purveyors might want protection for their industry, but is it really necessary to separate biomass tariffs into two or three different levels? Once you get above a scale of, say, 100 kilowatts, and into the 100 kilowatt to 1 megawatt band, the same suppliers are involved. Can we have less micromanagement and slightly more aggregation, please? It always makes me smile when I hear a Conservative Minister talking about how market-led forces are not a good thing. We
should be embracing the market and listening to what it tells us. That is a way to get to a good, cost-competitive system.
I am especially concerned about the splitting up of cash, because it is all based on models. We all know that models cannot predict the future; they are at best a guess of what will happen. Already, we have evidence that those models are out of step with reality. It was predicted that biomass would take up to half of the budget but so far it has taken 92%. Heat pumps were predicted to take up to one-third of the budget; they have taken only 1% of it. The modelling was an attempt to guess what would happen with very little information, starting with almost nothing, and obviously got it wrong. The way in which people are responding to the system is not as predicted. Yet we have rigid budgets—per technology, per scale of technology—that seem to be out of step with reality.
I should like some reassurances that we will perhaps move away from this micromanagement and heavy-handed, very complicated regulatory process to something more akin to a market-based system. That has to be the future and I want to hear more about how we will get there. Some concessions have been made on the workability of the proposals. An important one is that if the overall market is underperforming by more than a half it will not be degressed. If we carry on with the woeful underspend that we have at the moment there will be no degressions. That is welcome but the 50% cut-off is probably too low. I say that because there is a plausible scenario in which a certain technology could be degressed even with a very large underspend. I can give an example of small biomass. Small-scale biomass has been more successful than we thought; it has taken up more of the budget to date. If the same number of new small biomass boilers as we accredited this year are accredited next year, that new money, plus the legacy money will exceed its degressionary trigger. That will be a success and will just about take the underspend over the 50% threshold. There is the situation in which one very successful deployment seems to make the whole scheme succeed, even though it is just over half in terms of spending, and then it has a degression. That is crazy; we are capping the one thing that is helping to deliver on targets at a point when we need to be boosting uptakes. I want to hear more from the Minister about how to prevent these perverse effects.
I shall say a few words on the RHI in general. It is a good scheme and we support it. There is no doubt that it could provide credibly cost-efficient sources of carbon reduction and boost jobs and investment into the UK which are much needed. I was going to talk a little about trying to compare the costs of the RHI with other support mechanisms because it bears good comparison. On offshore wind, we are preparing to spend in excess of £150 or £180 per tonne of carbon abated. That seems a lot but it is a very important industry. I mention that very high number because when we look at the costs per CO2 tonne abated in the RHI, it compares incredibly favourably. When looking at large biomass projects of more than a megawatt, the costs per tonne abated—this is based on assumptions that it is displacing gas—are as low as £30 per tonne of CO2. That is to be celebrated. We should be putting
more money into that. Even when we reduce to medium-scale biomass projects, it comes in at around £120 per tonne of CO2. That is pretty comparable to the cost of carbon abated by offshore wind.
Those are the sorts of things that we should be celebrating, which raises an important question. When we focus on the minutiae of this statutory instrument and the cost savings and penny-pinching, are we missing the bigger picture? We have a fledgling industry showing that it can start to make progress. It needs support but it will not need support for ever. Carbon prices will eventually mean that it can stand on its own two feet, but at the moment it needs support. Where is the flexibility in the Government’s thinking, by saying, “Hey, you know what, this is a winner? These technologies are delivering and we need to be thinking about giving them more money, not trying to penny-pinch and pulling money away from them, because they are succeeding”? I know that everyone has had their fingers burned with PV. Everyone knows that by the time it was introduced things had moved on and prices had crashed. We do not want a repeat of that, but are we now in danger of overkill in the sense of overreaction to an industry that will deliver good benefits into the future?
I shall not delay the Committee for too long but I have a couple of points to end on. I am encouraged to hear that we are to get some clarity on the domestic scheme. That is very important. The Minister said that it would happen “as soon as possible” but if we could have a more exact timeline, that would be helpful.
In all this, we need to look again at liquid biofuels. I know that they are currently excluded but I see no reason why they should be. Displacing oil with liquid biofuels would be very good and cost-effective, especially if you could simply reuse the existing infrastructure, displacing oil with oil. That has to be cost-effective and the carbon intensity gain would be so much better. Therefore, I should like to hear something about that.
I shall leave matters there and simply say that the Treasury is obviously very keen to make sure that we do not overspend. However, in this case, it seems that it is making quite a bit of money out of this system, and this SI seems to focus on entirely the wrong end of the problem. We have an underspend, not an overspend, problem and I should like the great minds of the Treasury to be applied to how we can hit our targets rather than constantly fretting about what, in the grand scheme of things, is a very small amount of money.