Draft Renewable Heat Incentive Scheme (Amendment) (No. 3) Regulations 2013
The Committee consisted of the following Members:
† Barker, Gregory (Minister of State, Department of Energy and Climate Change)
† Bradley, Karen (Lord Commissioner of Her Majesty's Treasury)
† Bray, Angie (Ealing Central and Acton) (Con)
Donaldson, Mr Jeffrey M. (Lagan Valley) (DUP)
† Farrelly, Paul (Newcastle-under-Lyme) (Lab)
Field, Mr Frank (Birkenhead) (Lab)
Godsiff, Mr Roger (Birmingham, Hall Green) (Lab)
† Halfon, Robert (Harlow) (Con)
† Jones, Susan Elan (Clwyd South) (Lab)
† Lammy, Mr David (Tottenham) (Lab)
† Loughton, Tim (East Worthing and Shoreham) (Con)
† Reynolds, Jonathan (Stalybridge and Hyde) (Lab/Co-op)
† Sandys, Laura (South Thanet) (Con)
Smith, Mr Andrew (Oxford East) (Lab)
† Stewart, Bob (Beckenham) (Con)
† Thornton, Mike (Eastleigh) (LD)
† Wheeler, Heather (South Derbyshire) (Con)
Helen Wood, David Slater, Committee Clerks
† attended the Committee
Third Delegated Legislation Committee
Thursday 5 December 2013
[Annette Brooke in the Chair]
Draft Renewable Heat Incentive Scheme (Amendment) (No. 3) Regulations 2013
2.30 pm
The Minister of State, Department of Energy and Climate Change (Gregory Barker): I beg to move,
That the Committee has considered the draft Renewable Heat Incentive Scheme (Amendment) (No. 3) Regulations 2013.
It is a pleasure to serve under your chairmanship, Mrs Brooke, and I thank members of the Committee for their time in debating these regulations today. I will focus on two things. First, I will explain briefly what the regulations do and why they are needed. These are relatively minor amendments which I intend to cover fairly briefly, but I do of course welcome any questions Members may have following that explanation. I will also provide the Committee with an update on the renewable heat incentive scheme more generally, as there have been some important developments since we last met.
I am proud to say that we have been learning from our experience of this world-pioneering renewable heat scheme since its inception two years ago, and we have been listening closely to stakeholders’ experiences and drawing on their knowledge to improve the scheme. With that in mind, I am pleased formally to advise the Committee of the latest announcements, which I made yesterday and am confident will help the scheme to realise its full potential. I will say a bit more about that later on.
What do the regulations do? In earlier debates we covered two detailed yet important improvements to the non-domestic RHI scheme. The first of those changes related to the introduction of a long-term budget management mechanism. This degression mechanism is now controlling how we spend taxpayers’ money under the scheme to ensure that value for money is maintained. It is also helping to deliver the right level of support needed to encourage the deployment of renewable heat technologies. The mechanism is working effectively and the latest quarterly announcement, which my Department made last Friday, set out that there would be no decrease in any tariffs within the scheme for the next quarter.
The second change was concerned with how we control emissions from biomass boilers, and the application of correct standards when testing that limits are being met. In the light of our experience of the scheme to date, we have identified two minor improvements that can be made to the regulations relating to these areas. The changes will help with the practical implementation of the policy intent.
In February, the Government published the policy explaining how the budget management mechanism for the non-domestic scheme would work. The mechanism itself aims to balance a number of objectives for the Government. How do we spend taxpayers’ money more
wisely? How do we adequately incentivise a range of renewable heat technologies? How do we reduce uncertainty for potential investors over future tariff levels? How do we provide important flexibility? All these considerations are important, and achieving the right balance between them has meant that the mechanism is unduly detailed. I apologise for that. However, the simpler alternative option would have been to apply a scheme cap, which would have been very damaging to the market and left no room for flexibility whatsoever. This approach does not mean that we are micro-managing the scheme, however. Rather, it is a full and proper set of controls for how we spend taxpayers’ money.The amendment I am making affects the last of those considerations: scheme flexibility. Under the mechanism, a tariff is initially reduced by 5% where levels of take-up are more than expected and scheme spend is estimated to be greater than the budget can afford. After a 5% reduction, a further or higher level of reduction can be applied at the next quarter, but this only happens if the first reduction has not cooled take-up sufficiently, which is itself defined by the regulations.
This is where the flexibility comes into play, as a second or even third reduction, and the size of any reduction, is not automatic but depends on how the market has responded to the earlier reduction. It is this aspect of the regulation policy that I am seeking to amend, so that we clearly define the tests that need to be applied in the assessment of when a further reduction is needed. This will provide additional clarity concerning how the budget mechanism operates, and provide that all-important certainty to industry.
A very small drafting change is needed to achieve this amendment, but, by being transparent about when tariffs might be reduced, we are maintaining the value for money of the scheme and ensuring that funds are available for future technologies. I hope the Committee can agree that this amendment is beneficial and necessary.
The second minor amendment relates to air quality emission limits for biomass boilers. On 24 September, emissions limits were introduced as part of the eligibility requirements for biomass boilers. It is now necessary for applicants to prove that their biomass boilers do not exceed the stated emissions limits, which are 30 grams per gigajoule for particulate matter and 150 grams per gigajoule for nitrogen oxides. Since the regulations have been in force, we have identified a minor issue with their practical implementation. The regulations set out two sets of standards that testing can be done by. However, they currently imply that all boilers need to be tested by one of these sets of standards. This may not always be the most appropriate method, and indeed, the alternative EN303-5 is actually better placed in some cases. It may not be possible to provide a valid emissions certificate for some boilers as they are tested against EN303-5, not the alternative I just mentioned, even though they have been tested reflecting our policy intent and do not exceed the emissions limits.
In such cases, the lack of a valid emissions certificate can prevent these applications from being accredited to the scheme, even though they reflect our policy intent. Therefore, these amending regulations simply mean that the most suitable standards can be applied when testing boilers for these emissions limits, which is not always currently the case. I hope the Committee will be able to support the amendments.
On the RHI scheme itself, I am keen to update the Committee on the announcements I made yesterday. First, let me provide a quick update on performance of the non-domestic scheme. As of 28 November, the scheme had been open for two years, which in itself is a significant milestone. Ofgem received more than three and a half applications in that time. That alone is well over 1,000 more than when I last spoke to the Committee, in July, and application levels are increasing.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op): I think the Minister just made a slight mistake: he said three and a half applications, and probably meant three and a half thousand.
Gregory Barker: I am sorry—I meant to say three and a half thousand. I am very grateful to the hon. Gentleman for that probing question.
We estimate that some £70 million of RHI payments will be paid out under the scheme in the next year. These payments will be made across the full range of technologies already supported by the scheme. Installations that have already been accredited have generated 497 GWh of renewable heat. This is significant progress but there is more we can do, and yesterday I published a response to consultations on scheme improvements and the outcomes of a review into existing tariff levels. This also addressed the outcome of four calls for evidence relating to bio-propane, large biomass, ground-source heat pumps and landfill gas. I am confident that the changes I have announced will drive significant take-up across the full range of available technologies. The initial public response to the announcement, particularly from directly engaged stakeholders, has been overwhelmingly positive.
The changes I have announced mean that we are increasing the support available for renewable combined heat and power, large biomass boilers, deep geothermal, ground-source heat pumps, solar-thermal and biogas combustion. New support is being introduced for air-to-water heat pumps and commercial and industrial energy from waste. We are evolving our approach to budget management, using improved market intelligence to allow credible growth rates across the range of supported renewable heating technologies, while ensuring that the scheme remains affordable and achieves value for money. Taken together, I estimate that the policy changes set out could incentivise some 5,000 large non-domestic installations and an additional 6.4 TWh of renewable heat by the end of 2015-16.
I have also published further details of the domestic RHI related to budget management policy, phasing of legacy applications and treatment of some types of subsidy, as well as confirming the tariff for solar-thermal at 19.2 pence per KWh. Together, these changes will help to sustain and build the supply chains needed to deliver our big aspirations for renewable heat in 2020 and beyond.
The minor amendments we are debating today will ensure that the RHI scheme is managed by robust, fair and exacting standards. I am genuinely encouraged by the first 24 months of the non-domestic RHI scheme. The announcement I made yesterday demonstrates how committed the coalition Government are to improving and expanding the scheme. We have worked closely with industry and responded to its feedback, and I am confident that the scheme will help us to deliver our ambition. I commend the regulations to the Committee.
2.40 pm
Jonathan Reynolds: It is a pleasure to serve under your chairmanship, Mrs Brooke, at the end of another contentious week for energy policy. In the light of the changes relating to energy company obligation, the Energy Bill returning to the Commons and today’s autumn statement, it is nice to end the week discussing a broadly bipartisan policy area, and I would like to thank the Minister and his officials for introducing the regulations today.
I also welcome the Minister’s wider announcement yesterday, which he is right to say has been positively received, particularly the changes in the use of air-to-water heat pumps and the tariff guarantee for larger installations, which I do not think he mentioned. The changes the regulations make are relatively minor and we will not oppose them. The change to the small biomass boiler regulations has been broadly welcomed and is a sensible amendment, as is the change to degression payments. However, this is an interesting policy area, so I should like to ask the Minister some questions about it and the wider picture.
On degression, would the Minister go so far as to say that the Government are learning the lessons of previous schemes that perhaps have not handled the degression payment system as smoothly as we would like? Most colleagues’ experience of that will be the solar PV changes, which, although they provided the correct level of support, were handled contentiously, giving rise to many concerns among the investor community.
On budgeting and underspend, the Minister is of course right to say that the scheme has to control costs robustly, but what about the possibility of an underspend in a budget for a particular technology being used to fill a gap in a budget for another technology caused by an overspend? He will be aware that, during the two years in which the non-domestic RHI has been in operation, some technologies have been widely subscribed to and some have not. Clearly, the domestic RHI, when it is rolled out next year, will be more appropriate for some technologies, but it would be interesting to hear his thoughts.
On funding and investor certainty, we fund renewable electricity generation through the levy control framework. That is put on to bills, whereas the RHI funding comes from general taxation. The latter is a preferable method, but clearly it is a different mechanism, particularly given that any support from direct taxation can only exist in the current spending review period. Therefore, I presume that the tariff guarantee cannot be extended beyond March 2016, when the current spending period ends, whereas the wider support through the levy control framework of electricity generation has the benefit of not being limited to each parliamentary and Treasury cycle. How can we try to improve investor certainty in the long run? If a discussion between Government and Opposition Front Benchers can help to facilitate that, I am more than willing to extend that invitation.
I have some wider questions, which are still very much focused on the RHI. Will the Minister say something about the relationship and interaction between contracts for difference and the RHI for those premises using combined heat and power generation when contracts for difference are fully rolled out in 2017? I also want to ask the Minister about his support for district heating, in which he and I share an interest. What are the ramifications, if any, arising from that format?
Finally, I want to ask the Minister about a subject that I am sure was raised with him at last week’s Heat conference: the Government’s tax regime for combined heat and power. Changes in the previous Budget resulted in CHP being taxed more heavily than less efficient forms of generation. How does that fit into the Government’s overall strategy for renewable heating’s contribution to the mix?
2.45 pm
Gregory Barker: I welcome the constructive spirit in which the hon. Gentleman has scrutinised these measures. It is good to know that there is a large degree of cross-party consensus on some of the issues where we prize above all a long-term strategic approach, particularly given the important message that that sends to investors, as these are long-term schemes by definition.
The hon. Gentleman first asked whether we were learning lessons from degression. Yes, we absolutely are, and he may recall that we inherited a feed-in tariff from the previous Government that had only a set review and no degression trigger related to deployment, and that the budget for FITs was under threat. We had to intervene in a relatively arbitrary manner to bring that under control.
I was determined that we learn that lesson right across the piece. That is why we first reformed the feed-in tariffs to put in clear deployment triggers, so that, as deployment grew in response to falling costs, that automatically triggered, in an entirely predictable and scientific way, a regular reduction in the tariff. Secondly, we moved the scheme away from requiring arbitrary interventions from Ministers, of whatever party. It was on that basis that we looked to the renewable heat system to try to instil a degree of predictability and certainty in how the budget would be managed. We have therefore certainly learnt lessons from the scheme we inherited.
The budget is for the whole scheme. Initially, when we came into office, the RHI was funded from levies on bills, not taxation, and I am glad that the hon. Gentleman agrees that taxation is a better and more progressive funding method. Although there are individual triggers and budgets for individual technologies and sizes, there are no budget silos within the overall budget, so we have a welcome degree of flexibility.
On the question of long-term certainty, because the programme is now funded from general taxation it will,
like other programmes, be subject to the Chancellor’s next spending review at the end of the relevant period. We are committed to long-term support for renewable heat and, while I cannot pre-judge the Chancellor’s allocations in the next spending round, we are clear about our departmental priorities, and support for that is part of our strategy through to 2020 and beyond. Investors understand and take comfort from that.The hon. Gentleman is a big supporter of CHP and district heating, which is an area of common ground between us. I am very keen to drive a more plural, more distributed energy system—not just more distributed electricity, but more distributed renewable heat. Unfortunately, in recent years, probably since the 1970s, we have seen a turnaround—communities digging up or taking out community heating schemes and district heating schemes, one of the most famous of which was just over the river from here, at Battersea power station.
There is a renaissance in community heating. We have a community heating strategy and a district heating strategy, and the Department of Energy and Climate Change has deployed resources to support those. This is now something very real that we are driving forward, not least so that we can take advantage of the technological innovation that makes such schemes attractive again for consumers. This is also an important, efficient and effective way in which we can drive down our carbon emissions.
I therefore welcome the hon. Gentleman’s support for CHP. I note the point the CHP industry raised about taxation changes, which he is aware of, and we are working with the industry on that. We are bringing forward other, offsetting policies, not least support through the revisions to the energy company obligation that were announced this week, whereby district CHP schemes will be eligible for support from ECO.
The hon. Gentleman asked about CFDs. Under the Government’s new support mechanism, the strike price for biomass CHP is set to be equivalent to the RO support for dedicated biomass power only—that is, without the CHP uplift—and the intention is for participants to be able to apply for the RHI as well as CFD support.
I thank the Opposition for their probing questions and for their support for the overall direction and intent of this policy. I commend the regulations to the Committee.