Considered in Grand Committee
That the Grand Committee do report to the House that is has considered the Renewable Heat Incentive Scheme (Amendment) Regulations 2012.
Relevant documents: 3rd Report from the Joint Committee on Statutory Instruments, 5th Report from the Secondary Legislation Scrutiny Committee.
My Lords, before your Lordships is an amendment to the renewable heat incentive regulations that sets out details of a standby mechanism to ensure that the scheme stays within budget in the current financial year.
The non-domestic RHI scheme launched in November 2011. Through this scheme we are already supporting renewable heat installations in small businesses, industry, the public sector and communities. The RHI supports a number of emerging technologies and is therefore helping to support the UK renewables industry. This is vital to making the transition to a low-carbon economy.
The vast majority of the heat in this country is produced by burning fossil fuels. As a result, heat is responsible for a third of the UK’s greenhouse gas emissions. It is imperative that we start the transition to low-carbon heat immediately. We must do this to set the UK on a path to reducing carbon emissions in the long term and to contribute to our share of the global effort to combat climate change.
As set out in The Carbon Plan, we will need virtually to eliminate greenhouse gas emissions from our buildings by 2050 and we need to see deep reductions in emissions from industrial processes. By 2020, 12% of our total heat demand will have to come from renewables, increasing from 2% currently. This means that we need to find alternatives to fossil fuel for our heating. The RHI, which is the first scheme of its kind in the world, is an essential part of helping us to achieve this.
However, we have learnt lessons from FITs. The RHI must be financially sustainable and help to deliver renewable heat in the most cost-effective way and it must be able to deliver consistent support to the industry. These regulations will help us to keep within the budgetary limits set by the comprehensive spending review if uptake is greater than we expect. They will safeguard against the possibility of overspend in the current financial year and against the detrimental impact on the supply chain of a reduced budget next year that would be caused if we spent this year’s budget.
We have set out in these regulations that the standby mechanism would suspend the scheme at 97% of the budget limit, with one week’s notice. If our forecast shows that we expect to spend £67.9 million in 2012-13, we would give notice of suspension and the scheme would be suspended one week later. To ensure that investors are able to monitor progress towards the suspension trigger, we will make estimates of committed expenditure available each week. Furthermore, if we expect to suspend the scheme, we will announce informally one month before we estimate that the scheme will need to close.
This is a precautionary measure. We do not believe that rapid cost reductions are likely in renewable heat technologies in the way that has been seen with solar PV. However, there is a high degree of uncertainty about how the market will respond to the RHI. Therefore, we must be cautious and prepared for unexpected changes in application rates. If RHI spending were to exceed budgets, it would be difficult in retrospect to justify a lack of action now.
Alongside these regulations, I am pleased to inform the Committee that on Friday 20 July the Government published the consultation Renewable Heat Incentive: Providing Certainty and Improving Performance. This consultation seeks views on our proposals for a longer-term budget management mechanism, which we are expecting to implement by the beginning of the 2013-14 financial year.
These regulations will therefore ensure that we have a standby budget management mechanism in place this summer and they will provide clarity and assurance about how we will manage the budget prior to our implementation of a longer-term cost control mechanism. I therefore commend these regulations to the Committee and beg to move.
My Lords, I welcome the foresight that these regulations bring. We certainly do not want a repeat of the solar PV issue, where we had a lot of changes at very short notice and a lot of confidence went out of the market. I note yet again that we remind ourselves that some 12% of heating needs to become renewable to meet our 2020 target, as the Minister said. Heating is a largely unrecognised but major part of our energy consumption, in households in particular, and has to be decarbonised by 2050. The irony of this is that, as the Explanatory Memorandum states, at the moment we have, if anything, underdemand for this initiative. Given those targets, it is quite important that we move it forward quickly.
I have some questions for the Minister. First, why does he think that the scheme has been relatively slow so far? I know that there is a learning curve and it is still relatively young. Can he give us some idea of the types of scheme that have been approved so that we can understand them a little more? Do the Government have plans to stimulate these schemes if demand remains low? Lastly, will he give us a view, even at this early stage, of what lessons have been learnt for rolling out this scheme for domestic RHI, to which we all look forward very much?
My Lords, I have two quick points, one of which is fairly forlorn. The Minister referred to the ambition to raise the level of renewable heat to 12% from its current level of 2%. I commend and support that objective—it is right that we should give special provision for renewably sourced heat—but the overall objective is, of course, carbon saving. An awful lot of fossil-fuel-generated heat or dual-fuel heat is currently going to waste. It really ought to be part of the Government’s strategy, perhaps at a lower rate than the subsidy for renewable heat, to ensure that we maximise the use of the heat that is generated from fossil fuel, because the more widespread and efficient use of CHP and trigeneration will achieve larger carbon savings than the current targets for renewable-based heat. That is not to say that we should not do what the noble Lord is suggesting and which these regulations seek to implement, but there seems to be a lacuna—if you can have a lacuna in a suite of measures—in this respect.
With regard to the regulations before us, the Minister said that he has learnt from the FITs experience, and to some extent he has, but in these regulations and in what, at a quick read, is proposed in the consultation paper, I am not sure about giving much confidence or certainty to the market. Certainly, the Government are not avoiding sudden changes of policy. A week’s notice of the budget running out is likely to put off not only people who have gone some way through the process but those who are likely to apply the following year.
It has always seemed that annual budgets, no doubt imposed by the Treasury, are the department’s main problem. Under the solar energy part of FITs, in retrospect the take-up was too fast and the level of subsidy too high. However, as the noble Lord, Lord Teverson, said, the take-up of these RHI provisions has not been as great as the Government wanted. It would surely be better to manage the market according to a total amount rather than an annual budget, so that things would not be stopped half way through development because the budget has run out. Instead, the budget should be brought forward if it has been overspent or carried over into the following year if it has been underspent. That could be linked to the expected take-up.
The current mechanism has an annual budget that stops projects that might otherwise take off within the aggregate budget—for example, over the CSR period. There can also be overshoots, as happened with solar power. Once again the outcome was to cause uncertainty in the industry and to stop projects that were on line under existing rules and which had qualified under the regulations. This scheme is falling into the same category, although probably with less disastrous effect. If we are to maximise and smooth over the take-up of a new technology, we need to provide some degree of certainty over a minimum of two or three years rather than have a cut-off point with an annual budget.
In the medium term it would not cost the Treasury any more but it might make Treasury accountants a bit nervous. In terms of the objectives here, if we cannot have at least a three-year budget run in which we do not stop projects half way through their development, we will not achieve our objectives. I hope that the outcome of the consultation process produces something like that for the period starting in 2013. This does not do that and could put off a number of worthwhile projects.
I thank the Minister for introducing this statutory instrument. This is a policy that we support. We hope that the regulations will be quickly implemented. There has been a slight delay, so the sooner we can get on with it the better. I will start with a general comment on renewable heat. The atmosphere does not care where we make our carbon savings. It is incumbent on us as Governments to realise the most cost-effective savings. We have neglected carbon reductions in the heat sector for too long, so these are very important regulations to help start, from a very low base, an industry in renewable heat.
The noble Lord, Lord Teverson, asked a couple of questions that I will add to. It would be interesting to see what has come forward so far, and to hear from the department why the take-up has been relatively slow. The area has been neglected for many years, so perhaps it is just a question of starting up. However, there are some issues to do with the design of the instrument that may be holding back take-up. The first is the question that my noble friend Lord Whitty raised about the industry perceiving a lack of clarity or certainty. Annual budgets are not ideal. We strongly recommend the introduction of minimum three-year rolling budgets. It is clear in the documents before us that we will not exceed the budget this year. If anything, we will see a shortfall, even of the reduced budget. We are reducing the budget by £38 million and we are not likely even to spend that, and it therefore seems odd that we are focusing on a piece of legislation that is not really needed at the moment. What is needed is a much greater effort by the Government to promote the mechanism, and confidence in it so that we start to see an uptake.
I have a question about where the £38 million that has been saved is to be spent. I suspect that the Treasury will claw it back, but could the money not be used to help promote uptake in this sector? I have no doubt that the sector will contribute to the UK’s return to growth. The CBI’s recent report into the contribution that green energy makes to the UK’s growth was very well received and researched. It estimated that a third of growth is green, and I therefore see no reason for the Government not to put their efforts behind these sectors and new technologies that can help to reduce our trade deficit, boost our economy and employ people.
Although I did not want to go on for too long, there is another question around the future visibility of the budgets. I have spoken to a potential investor in a large energy-from-waste CHP plant who says that for such projects not knowing what the budget would be post-2015 simply means that it would not be possible to get sign-off on that project. The fact that there is no visibility at all of what the budget would be post-2015 will cause delay and prevent that potential investor making that investment. That issue needs to be addressed.
That is all I will say for now. This is an important sector. It is far more efficient to use renewable energy, particularly biomass. With such heat, you do not see two-thirds of the energy wasted up the chimney, as happens in a coal-fired electricity plant. This sector needs to be supported and we would like the Government to do more to make sure that there is a good uptake and that we hit those targets of 12% renewable energy in the heat sector. We support the regulations and look forward to the market developing over time.
My Lords, I am, as always, grateful. It is a common theme among those of us who debate the energy sector that we agree on many things. I am grateful for that.
The noble Lord, Lord Teverson, compliments the Government on their foresight in this issue. He is a man of deep knowledge and insight. We are grateful for his words. He asked what he called a couple of questions that turned out to be three, but mathematics may not be the noble Lord’s strong suit. I should just point that out.
The most important and relevant thing here is that this RHI scheme is the first of its kind. That is just one, I should say to the noble Lord, Lord Teverson. There will therefore be an element of trial and error, and we will have to learn from the FITs situation and make sure that we have escape routes if the situation gets overheated. That is surely and simply good housekeeping in terms of the regulations. The noble Lord asked what the take-up of the scheme has been and what types of businesses have been involved. It was a rhetorical question because the noble Lord is closer to these industries than I am but, as he knows, a lot of people in agriculture are heavily committed. I understand that a company that makes umbrellas has taken up the scheme. A wide cross-section of people has done so. In order for noble Lords to go away with a heart full of hope, the statistics are that by 11 July, Ofgem had received 670 applications, of which it had accredited 128. Ofgem had rejected four—therefore, not too many. The breakdown is: 517 biomass, two biogas, 34 solar/thermal, three biomethane and 53 heat pump schemes. I hope that that adds up to 670.
The point is that it is not about money. It is not about whether the cost is £17 million, £38 million or £50 million, but about the number of schemes that are taken up. They could be small schemes, but I think that the figure of 670 represents a pretty good stab at things. We are hoping that 2,000 might be taken up.
I am sorry if the noble Lord, Lord Whitty, is forlorn, although he is also wise. He is quite right: carbon savings are critical and we must be committed to them. I applaud his comments about making use of heat wastage and coming up with plans that maximise heat so that we can convert. That is fundamental good housekeeping and we are committed to that.
He says that we should have a lacuna suite of measures, which is a bit lost on me, but we have room for explanation later. He makes the point that we can turn the tap off with a week’s notice. In fact, it is a month’s notice. We will advise people a month ahead that we are getting to the end of the spending year and that they should be prepared. That does not mean that they cannot apply for the following year, which is entirely acceptable.
I do not disagree with the noble Baroness, Lady Worthington, and the noble Lord, Lord Whitty, when they talk about having perhaps a rolling budget or a rolling figure, but before committing to that I would like to introduce them to some Ministers and officials at the Treasury. A day spent there will help them realise that that is not the type of thing towards which they will be disposed.
I thank the noble Baroness, Lady Worthington, for offering her support. It is important for government and for the energy industry that both parties are seen to be supporting the right things. I agree with her that what we do must be done with confidence and that we must send a clear message to the sector about we are doing. Learning from past mistakes and acting upon them send a clear message that we are listening and learning, and that we have seen how things go wrong and are acting upon them. That is what we are doing with this legislation.
I understand the need to learn from mistakes. I take very seriously the Minister’s comments about the Treasury. It is apparent today in the newspapers that there is a divide within the coalition Government over the right way forward. When we think about how we hit our carbon targets, let us think about least cost but also look at what is happening and what is being supported by the market. These budgets are very small. Seventy million pounds is not a lot of money in the grand scheme of things. Growth potential is actually great. Instead of being rigidly attached to these budgets, let us have a rational discussion: if something is going well and carbon is being reduced, we should not be counting pennies and penny-pinching at the expense of an industry that has great growth potential. I urge that we do not get too obsessed by these small-scale budgets, but think about the bigger picture. If things here are succeeding that is good. We do not want to cut things off just because they are becoming successful.
I am grateful to the noble Baroness, Lady Worthington. The reality is that in times of greater largesse these things would be considered, but we are not in such a time. We are in a very tight fiscal time. In such financial circumstances, the Treasury has to be careful and clear about what we spend annually. There is no conflict between the Treasury and our department about this. We understand the fiscal rigour that needs to be put into this mechanism. We are giving plenty of support to this take-up. As I indicated earlier, we are satisfied with the number of people who have taken this up, but in financial terms we have not had the take-up that we would have liked. In an ideal world we would have liked that. Unfortunately, at the moment the world is not ideal, but we continue to press on.