Considered in Grand Committee
My Lords, I am pleased to open the debate on the Renewable Heat Incentive Scheme (Amendment) (No. 2) Regulations 2013. Before focusing on the detail of these amendments, I will take the time to provide some background on the renewable heat incentive scheme, or RHI.
The scheme was introduced to improve our approach to using energy in the UK. Since the scheme launch in November 2011, more than 2,200 applications have been received to date, with around £27 million-worth of RHI payments expected to be paid out in 2012-13. By this time next year, we expect to have paid out more than £53.8 million through the non-domestic RHI, and 280 gigawatt hours of reported renewable heat have been produced through the RHI to date.
The recent spending review has reinforced our commitment to long-term support for renewable heat. The agreed budget for 2015-16 of £430 million enables us to continue to work to stimulate and achieve ambitious growth of renewable heat and, in turn, to create new jobs in the green sector.
The UK is legally bound to achieve a set 2020 renewables target of 15%, with interim targets between now and 2020. Our most recent interim target is to reach 4.04% of total energy from renewables as an average across 2011-12. Today’s statistics show that we achieved 3.94% across those years, short by just 0.1%, but within the margin of error for a statistical estimate. This means that we are currently on track for our 2020 target, but we must continue our work to ensure that this remains the case.
Heat is the single biggest use of energy. We use more energy for heating than for either transport or the generation of electricity. Therefore, it plays an important role in the UK being able to achieve this target. At the point of opening the RHI scheme, renewables produced less than 2% of our total demand. We are aiming for this to increase to 12%. In addition to achieving the renewables targets, the RHI will help to reduce greenhouse gas emissions, providing a platform on which to build towards eliminating greenhouse gas emissions from our buildings by 2050.
Ofgem administers the scheme and provides financial, tariff-based support for commercial, public sector, industrial and community renewable heating installations for the 20-year life of their tariff. The scheme has already provided financial support to a range of technologies, including biomass, solar thermal, heat pumps and biogas combustion. Applicants to the scheme are also spread across various sections of the non-domestic sector—small businesses, and public sector and community projects. The uptake of renewables is increasing but needs to be increased further for us to achieve our 2020 targets.
As with all taxpayer-funded schemes, all expenditure must be justified and provide good value for money. I should like to take a moment to reflect on the last time that I spoke to your Lordships about the RHI, which was back in March.
We discussed the introduction of a budget management system for the RHI. Following the March debates, in April, the degression-based approach to managing the RHI was introduced. This mechanism ensures that the RHI does not overspend while providing clarity and assurance to the industry about how the budget will be managed. Since those debates, we have seen the first degression take place, against medium biomass.
Medium biomass has deployed to the level that a trigger point has been met, which resulted in a 5% tariff reduction. Gradual deployment-led managed decreases like this will allow us to direct deployment so that we achieve an affordable, good mix of technologies in the scheme and ensure value for money in tariffs paid. It is important that we continue to evaluate the RHI scheme so that we ensure that it is incentivising uptake while ensuring value for money.
Before moving on to the main topic of today’s session, I will update the Committee on wider change and additions to the RHI. These regulations form part of an ambitious and busy schedule for renewable heating policy. The importance of low carbon and renewable heat in the long-term energy mix for the UK, and the “world first” nature of RHI, necessitates an ongoing programme of improvements, expansions and enhancements. For instance, the Government expect to be announcing the details of a domestic RHI very soon. We have also just concluded, on 28 June, an early tariff review consultation for the non-domestic scheme, proposing revised tariff levels for technologies where we have not yet seen the levels of deployment that we need. Initial feedback from industry is positive, and we are really pleased with the level of response to the consultation. We will analyse the consultation responses and further develop the policy before announcing our decisions in the autumn.
We are not only focusing on improving the existing scheme; we are also working on introducing support for other exciting renewable heating technologies through RHI. Our consultation last September made proposals for the introduction of support for air source heat pumps, large-scale biogas combustion, biomass direct air and expansions in the forms of waste that are eligible for the scheme. We also consulted on introducing new specific support for deep geothermal heat and for biomass and bioliquid combined heat and power. We are now considering whether we need to adjust any of our plans as a result of the spending review announcement on 26 June, and will publish an update on progress on the extensions to the non-domestic scheme and tariff review alongside our announcement of the domestic policy.
The regulations before us bring in a number of amendments delivering several distinct and wide-ranging changes, protecting the quality of the air that we breathe through the introduction of emissions limits for new biomass installations supported through the scheme; increasing the uptake of renewable heat by reducing the burden associated with metering; extending the scheme to commercial drying and cleaning, which takes place outdoors; and allowing the relocation of accredited installations. We are also using this opportunity to provide greater clarity to some areas of the regulations. It is our intention that these regulations will be made on 23 September, coming into force on 24 September.
The amendments in these regulations are predominantly based on the outcomes of the RHI Providing Certainty, Improving Performance consultation published in July last year. This consultation attracted 100 responses, and the final policy outcome was published in the Government’s response on 27 February this year. We proposed a method of demonstrating compliance with the air quality emissions limits announced in March 2011. More than 70% of respondents supported the proposals, and therefore the compliance regime detailed in these regulations remains very similar to the consultation proposals.
The simplification of metering requirements involved a number of proposals. These were aimed at reducing the number of heat meters required and driving down the cost of participating in the RHI, while protecting the public purse by ensuring that only eligible heat is paid for. More than 90% of respondents were in support of our proposed changes. Following this high level of support, we have moved to revise the RHI metering requirements, with the resulting requirements being very similar to our original proposals.
In addition to these headline changes, four smaller scheme improvements are included in these regulations and have been made with the intention of increasing uptake to the scheme. Two improvements were included in the July consultation: relocation of an installation and allowing certain processes to occur outside. Both were supported by those respondents who commented on them. These regulations will make it possible for an RHI accredited installation to be relocated and to continue to receive tariff payments for the remainder of the 20 years, provided that, on relocation, the system meets the necessary requirements. It will also be possible to receive RHI payments for commercial cleaning and drying processes that occur outside. Both these changes were supported by those respondents who commented on the proposed amendments.
Finally, two further amendments to the scheme were included to provide clarity to the regulations. The first is the addition of ground water as an eligible heat source for ground source heat pumps. The second is a minor word change to allow renewable installations that are used as the assessment installation—for an installer to join the microgeneration certification scheme —to be eligible for the RHI.
As these amendments show, the performance of the RHI is constantly under review. The need to increase uptake of renewables through this scheme is paramount to achieving our 2020 renewables target. Improvements to the scheme are focused on increasing uptake while still ensuring best value for money.
As I am sure the Committee will agree, good air quality is vital to our health, and it is essential that the RHI scheme does not have a negative impact on our environment. Since the announcement of the scheme in March 2011, we have made it clear that we are committed to introducing air-quality emissions limits for solid biomass boilers. The main pollutants which can be increased through increased combustion of biomass are particulate matter and oxides of nitrogen.
Currently, combustion of biomass contributes only a very small proportion of these harmful emissions. However, to date, biomass has made up a significant proportion of RHI accredited installations, and we expect this to continue. Where biomass replaces either heating oil or coal, there is no increase in the emissions levels of key air-quality pollutants. However, when replacing gas or electricity, the emissions are higher, meaning that it is important to limit the air-quality implications of burning biomass. The emissions levels to be introduced for biomass boilers producing heat from solid biomass are set at 30 grams per gigajoule of thermal heat input for particulate matter and at 150 grams per gigajoule for oxides of nitrogen.
New participants will be required to demonstrate that they meet the emissions limits by providing emissions certificates to Ofgem. These certificates will be provided to participants by the manufacturers of biomass boilers. When producing the certificates, manufacturers will be required to test their boilers and to show clearly through the certificate what types of biomass fuel their boiler can combust without exceeding the emissions limits. Participants will not be permitted to use types of biomass fuel that are not listed as being compatible with their boiler on their emissions certificate, and they will be required to demonstrate to Ofgem that they are meeting this requirement.
We are keen that that does not prove to be overly burdensome for manufacturers of boilers and we are therefore introducing flexibility through type-testing. This will mean that, when there is a “family” of boiler models which are identical apart from their capacity, only a limited number of them will need to be tested. Also, plants which have had to obtain an environmental permit will not be expected to provide an additional emissions certificate.
I will now cover the other major change to the regulations, the revised metering requirements of the RHI. This is another technically complex area covered by these regulations. Since the launch of the scheme in November 2011, the metering requirements have been highlighted as overly burdensome and considered a disincentive to joining the scheme. We place great importance on feedback from industry and from the scheme operator, Ofgem. This feedback led to our proposal to revise the metering requirements of the scheme. As all payments made on the non-domestic RHI scheme are on the basis of metered heat, it is essential that this is done absolutely right, by ensuring that only generated heat being used for an eligible purpose is paid for. Fundamentally, we remain committed to the principle that the non-domestic RHI payment is based upon metered heat. At least one meter will always be required to measure the heat used for eligible purposes.
The proposed changes to metering are to allow more flexibility and to reduce the number of unnecessary meters being installed. Under the revised regulations, there will be an increased use of heat loss calculations when participants have taken appropriate energy efficiency measures and insulated external piping to industry standards. We also recognise alternative ways of determining heat generated. When a back-up gas or electric fossil fuel heat source is still in place, we will allow its fuel consumption to be measured rather than the heat output. We will assume that 100% of the fuel consumed is converted into heat, ensuring the taxpayer never loses out to inefficient heat conversion, while still providing additional flexibility to the participant.
In moving on to the smaller scheme improvements included in these regulations, I will focus first on the two that are aimed at increasing uptake to the scheme. Allowing the relocation of an accredited RHI installation will increase the uptake of companies providing heat to third parties. The ability to relocate while continuing to claim RHI will remove the barrier of needing to obtain a long-term lease to make a renewable heat source a viable option. On relocation, the installation will need to be reassessed by our delivery partner Ofgem to ensure that it still meets the accreditation requirements before payments recommence. We recognise the need to provide greater reassurance for investors that renewable heat is a good investment. This change will help provide confidence that their asset will retain value, by enabling a renewable heat installation to be moved.
The final amendment expands the number of “eligible purposes” under the scheme. Currently, to be eligible for the RHI, any heat produced must be used within a building. However, this has restricted the suitability of the scheme for some industrial processes. In order to incentivise additional renewable heat, these regulations open up the scheme to commercial cleaning and drying, which can take place outside. This would allow woodchip and wood pellet drying to take place without the need to construct a shell of a building around the process. Allowing cleaning that takes place outside will encourage the use of renewables for heating water for commercial cleaning processes, such as washing a fleet of commercial vehicles.
The emissions limits being introduced were agreed on by both DECC and our colleagues in the Department for Environment, Food and Rural Affairs. Defra is the lead department on issues relating to air quality. The limits set were at a level intended to significantly reduce the air quality impacts of the RHI, but where we could also expect significant growth in the biomass boiler market and the rollout of renewable heat. The aim of introducing these limits is not to exclude any particular biomass fuel from the scheme but rather to ensure a good level of air quality. We accept that it will be harder for some fuels than others to meet the requirements of the scheme. However, we should not be supporting fuels which cannot meet the stated emissions limits.
The changes I have set out will apply to England and Wales, and Scotland. RHI policy in Northern Ireland is devolved. Colleagues in Scotland have confirmed that they are content with the changes I have set out today, and Scottish Ministers have given their consent to the regulations as required by the Energy Act 2008. Northern Irish Ministers administer a separate but equivalent scheme and have been notified of the intended changes, as have Welsh Ministers.
In conclusion, the RHI must drive up the uptake of renewables for us to meet our 2020 renewables targets. These amendments go some way to making that scheme more accessible. The renewables market is still relatively young and the improvements and extensions planned for the RHI will result in our seeing a significant increase in the uptake of renewable heat. The scheme is a key driver in helping to develop that market. I therefore commend the regulations to the Committee.
My Lords, I always find on these occasions that it is a great motivation to speak to a crowded House. I congratulate the Minister on her mastery of the subject. I did not even see her grasp for her water once, which is a tremendous start to the debate. I now understand the context of drying and cleaning. I could not quite work that out; I was thinking of washing machines, but it was clearly nothing to do with that.
This is a serious subject. As my noble friend said and as the Explanatory Memorandum sets out so well, heat is an important part of our energy usage in this country. It is an important part of decarbonising our energy requirements and meeting our 15% target by 2020. Starkly, as the Explanatory Memorandum says, we are now at something like 2% and we need to get that up to 12%. That is a big ask over the next few years and therefore I very much welcome this instrument.
There are bits of the regulations that I particularly like. One is the emphasis on air quality, which is really important in terms of solid biomass, and another is the flexibility that it gives to ensure that the scheme will be much more user-friendly than it is at the moment. The consultation showed that some of the metering requirements were difficult, and I congratulate the Government on taking that on board and trying to fix it in a very practical way. I shall come back to a couple of issues on that but, as I say, the air quality side is important as well. In my modest house I have two wood burners, and if the wind is in the wrong direction the air quality in my house is pretty bad with the solid biomass of the logs. However, that is not quite what this statutory instrument is about.
I wanted to ask the Minister about the domestic RHI but she has more or less answered that. I hope that the urgency on that continues because, apart from anything else, there has been a stalling of that industry in terms of waiting for the scheme to come along. It is very important to make sure that it starts now.
Coming back to the regulations and the Minister’s speech, she said that certain of these technologies have not met their potential with the RHI so far. What are those technologies? I particularly welcome deep geothermal technology as one of the things that the Government are starting to look at in terms of future moves on these schemes. That is excellent.
I should like to ask a question about Regulation 23. It refers to new Regulation 42A(3)(a), which states that,
“each length of piping which is 10 metres or less and situated outside a building is properly insulated”.
Although this document has technical depth, it says that the piping must be “properly insulated”, and we see that that is key when reading the document all the way through. I am surprised that there is not more of a specification there. I presume that there is an industrial definition of “properly insulated” but, to monitor and control the process, it would seem to be important to have a specification relating to the insulation. It is a term that I would like to understand.
When equipment is moved—again, I welcome this as part of the flexibility—does it have to be recertified or does it have so-called grandfather rights in its new situation?
My last question is on the impact. Paragraph 10.2 of the Explanatory Memorandum talks about air quality limits and states clearly that they will affect only people who are investing in the scheme. Does that mean that the air quality standards for an RHI installation are different from those for boilers otherwise—or are there air quality standards for these boilers otherwise? I should be very interested to understand whether there is a differentiation here and, if so, why, and how we move forward on that—or perhaps I have misread or misinterpreted that.
I am delighted to say that I have just completed a solar thermal installation on my house—at my own expense, obviously, as there is not a domestic RHI. I got it there just in time for the wonderful sunshine that we are having at the moment, and I am really enjoying free hot water. The more that British industry can do this, the better.
I thank the Minister for her extensive introduction to the regulations. The RHI, launched in November 2011, is a key financial scheme focused on encouraging climate change mitigation and is especially relevant to off-grid businesses in rural areas which are dependent on heating oils.
On all sides of the House, renewable heat is recognised as an essential component of the UK’s long-term energy mix. In a debate on the order in the other place yesterday, the Minister there gave details regarding uptake of the scheme, which is very encouraging—indeed, the Minister here has mentioned some of those figures today.
However, I am concerned about the application of the degression system, whereby tariffs are reduced if one or other or both of two thresholds of expenditure are reached—namely, a technology-specific trigger where an imbalance in take-up between technologies occurs and a total trigger that puts an overall cap on spending. While I am not critical of there being an overall total trigger, I am nevertheless concerned that the total may be set rather low, and therefore I am concerned about its effect on applications. If, as of 1 June this year, a scheme payout to date of £13 million has resulted—as the Minister in the other place said yesterday and the noble Baroness has repeated here today—the degression system is already in action.
I am concerned that a tariff reduction of 5% at this early stage will discourage schemes coming forward. The Minister in the other place went on to say that £53.8 million is expected to be spent by this time next year. Will this result in further tariff reductions and does this total include the effect of degression? When an application is made under the scheme, when is it known at what level the tariff will be paid? While it is not specifically relevant to the regulations, it is nevertheless important to understand how the scheme has worked to date and how details of the degression payments are published in real time to applicants. Will the payment level be set at the time of an application and thereby not be affected by later uptake by further applicants?
The developments in the RHI that the Minister has outlined today are entirely to be welcomed. Meeting renewable energy targets should not come at the price of increased risks to public health or the environment. Several key outputs will be achieved. First, air quality will be protected through the introduction of emission limits for new biomass installations supported through the scheme. Secondly, the number of excessive, burdensome compliance requirements will be reduced, thereby increasing take-up; for example, by reducing the burdens associated with metering.
Thirdly, the relocation of accredited installations will be permitted, thereby allowing asset values to be maintained and the economic life of assets to be extended. The Explanatory Memorandum is commendable in its assessments, judging that the total resource cost increase will amount to about 8% over the lifetime of the policy, that additional testing and certification costs are likely to be largely immaterial and that Ofgem’s administrative costs be limited to 0.5% of total costs. Against this, the benefits are estimated to outweigh costs by the commendable margin of eight to one.
I have one or two further questions for clarification. The regulations are set to come into force in September 2014, allowing manufacturers to have new biomass boilers fully compliant by that time. The memorandum identifies that, where a biomass installation replaces a non-net-bound fuel-based installation such as heating oil or coal, its introduction can improve emissions and therefore there should be no delay to any scheme. In contrast, where biomass displaces electricity or gas-fired heat, the air quality impacts are negative. Will the Minister clarify that, in the run-up to September 2014, biomass installation applications that displace electricity or gas-fired heat may well be rejected?
There is already confusion; I have heard that environmental health officers are recommending the rejection of installations even for oil-fired boilers because of the air quality requirements. Will the Minister provide assurances that in any assessment of an installation the environmental health officer will be able to provide advice on all the necessary compliances, whether under the Clean Air Act or under the requirements of these regulations? Will the limit set by the regulations supersede the limits beyond the Clean Air Act 1993? The Explanatory Memorandum is otherwise excellent in clarifying that the regulations will now be extended to small installations with a thermal capacity of under 50 megawatts.
The Minister has spoken regarding clarity on the types of fuel that the department expects will not comply in future, such as damp logs and soft woods. Will she clarify what checks and inspections will be able to identify whether any have been used and what penalty would then follow?
The regulations are necessary to allow the RHI scheme to evolve and achieve the take-up for renewable heat that is needed for the UK to achieve its 2020 renewable target. From this side of the Committee, I am content to agree to the regulations today as another step forward. I anticipate a further statement extending the RHI to the domestic market before the recess.
My Lords, I am grateful to my noble friend Lord Teverson and the noble Lord, Lord Grantchester, for their warm welcome to the regulations. I am also grateful for the quality, rather than the quantity, of the debate. In this House, the one thing that we do well is contribute with quality. A number of questions have been asked and I will try to go through them as much as I can. If there are any questions that I fail to answer today, I will undertake to write after reading Hansard.
My noble friend Lord Teverson asked what “properly insulated” means. I am advised that it means that it is a section of external piping that does not exceed the maximum permissible heat loss outlined in British Standard 5422. I am sure that means a lot more to the noble Lord, Lord Teverson, than it does to me. “Properly insulated” is defined in Regulation 3 of these regulations.
My noble friend also asked about relocation. I think that I referred to that in my opening remarks. However, I am quite happy to repeat myself if the noble Lord wishes me to. Basically, if any plant is relocated the participant will be entitled to the remainder of the existing tariff for the remainder of the tariff lifetime. The plant does not have to meet air quality requirements, for example, as it is not a new accreditation, provided that the original accreditation is provided.
My noble friend also asked whether air quality emissions limits will apply only to future installations. The RHI emissions limits in these regulations are more stringent than those that apply to the highest-emitting boilers currently in the market. As a result, we will be encouraging the use of lower-emitting boilers.
On the question of which technologies have not met their potential, the currently supported technologies that have been subject to the tariff review are large biomass—that is, with a capacity of over 1 megawatt—ground source heat pumps and solar thermal.
The noble Lord, Lord Grantchester, asked why we were using degression so early in the process. The deployment of medium biomass has exceeded the rate that we had expected when the tariff was originally set, which suggests that the tariff is higher than is necessary to incentivise installers. Therefore, we may be overcompensating further installations if we do not adjust our tariffs downwards. Although we encourage biomass through its size, we do not want to support one type of technology in particular when there are other technologies out there that may do as well and provide equal value for money—and it is value for money that we are really keen to get. I hope that that has answered the noble Lord’s question.
I am listening very carefully to the noble Baroness. Following the wise words of the noble Lord, Lord Teverson, my concern is that it is quite a big ask to reach our limits by 2020. I am concerned that, if the degression totals are set too soon and too early, we may choke off from coming forward those who could potentially help to meet these quite stringent targets.
The difficulty is achieving a balance between value for money and ensuring that we meet our targets. However, as I said, I think that we are managing to provide some encouragement and there is a great deal of interest. What we do not want is for one energy source to have an unnecessary advantage over another.
My noble friend Lord Teverson asked about the limits on boilers outside the RHI scheme. There are no emission limits for boilers outside the scheme but other measures may apply—for example, where environmental permits are required or where a boiler is within a smoke-controlled area under the Clean Air Act.
The noble Lord, Lord Grantchester, asked some other questions but I may have to respond to him in writing because I am finding it slightly difficult to read the responses. However, I shall finish with a response that I can read concerning a question from the noble Lords, Lord Teverson and Lord Grantchester, on the urgency of the domestic scheme. Details of the domestic scheme will be announced before the Recess—that is, in a matter of a few days rather than months.
I hope that, on that note, noble Lords will support these regulations and I commend them to the Committee.