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Renewable Heat Incentive Scheme (Amendment) (No. 3) Regulations 2013

Volume 749: debated on Tuesday 26 November 2013

Motion to Approve

Moved by

That the Grand Committee do report to the House that it has considered the Renewable Heat Incentive Scheme (Amendment) (No. 3) Regulations 2013.

Relevant document: 12th Report from the Joint Committee on Statutory Instruments.

My Lords, in moving the Renewable Heat Incentive Scheme (Amendment) (No. 3) Regulations 2013, I start with an apology. These regulations correct earlier amendments made in April and September to the Renewable Heat Incentive Scheme Regulations 2011, as after further scrutiny of them some minor corrections proved necessary. I am, as always, extremely grateful for the opportunity to speak to the Committee, and am always grateful to your Lordships for helping the Government deliver a robust set of regulatory controls for the scheme.

Before I expand on the purpose of the regulations and why the corrections they deliver are now warranted, I reassure noble Lords that I spoke in good faith during the earlier debates and that our policy intent was correctly reflected in the draft regulations. In ensuring that we were absolutely sure of policy interest, we ensured greater scrutiny and, in doing so, recognised that minor corrections were necessary.

The non-domestic RHI scheme has now been in operation for two years. Over 3,500 applications have been received to date, with around £68 million-worth of RHI payments expected to be paid out in the next year. Installations that have already been accredited have generated 497 gigawatt hours of renewable heat, and biomass has performed particularly well under the scheme. My department will shortly publish details of scheme improvements to drive uptake across the full range of technologies. This will include the outcomes of a review into existing tariff levels. Detailed plans have also been announced for a domestic scheme to open from next spring, which I know has been warmly welcomed by many. We are on track to deliver this commitment.

The RHI remains a vital component in the Government’s strategy to increase the amount of energy delivered from renewable sources by 2020. It is helping to achieve this by incentivising installations that produce heat from renewable sources. By doing so, it will help to reduce the UK’s greenhouse gas emissions. The introduction of the domestic scheme and improvements to the non-domestic scheme next year will also move us closer towards our goal of working to eliminate greenhouse gas emissions from our buildings by 2050.

In earlier debates we focused on two complex yet important changes to the RHI. Those changes were vital if the scheme was to be successful in its aims to provide value for money and protect our environment. In March we debated the mechanism to control spending under the scheme until March 2015. It is crucial that taxpayers’ money is spent appropriately. In July we debated the introduction of emissions limits for biomass boilers, so that the quality of our air is protected, among other measures intended to reduce the scheme’s complexities. The House agreed to both sets of changes.

I will now speak about the corrections needed to the regulations that govern these two policy areas. The first of these corrections is to ensure that the budget management policy—or cost control mechanism—for the scheme is able to operate as intended. The policy reduces existing tariff levels if the uptake of renewable heat technologies is more than expected and the scheme spend is estimated to be greater than the budget can afford. Tariffs are then reduced—or degressed—where there is strong market growth as a way to cool uptake.

The Government published the full and correct policy explaining how the mechanism should work in February of this year. The regulations debated in March were believed to deliver this policy in full. Subsequently, we detected a small part of the policy detail that was not accurately reflected in the regulations. However, I am keen to reassure the House that where the policy has not been fully reflected in the regulations, this has not resulted in any adverse impact. This is because the situation that is incorrectly accommodated in the regulations affects only a high market growth scenario occurring after an earlier degression. Such a scenario has not happened to date. There has been no impact on tariff levels and so all applicants who have successfully applied to the scheme have received the tariff as intended by the policy.

The framework for the financial mechanism is very detailed, which is why this error occurred. This level of complexity, as noble Lords are only too aware, is necessary as the regulations must set out exactly how we will keep spending on the RHI within budgetary limits. Because of this, it is vitally important that we reduce tariffs by an appropriate amount where needed, and the regulations must be specific in how we will calculate what an appropriate amount is.

The regulations specify that a reduction is applied where expenditure limits—which are often called triggers—are hit. To avoid overreducing tariffs, the level of a first reduction is set at a rate of 5%. The manner in which this reduction can be applied is correctly set out in the regulations. Indeed, we applied the regulations in this regard to the medium biomass tariff in July.

The regulations then allow reductions to double in size each quarter from 5% to 10%—and from 10% to 20% if growth rates demand it. It is this aspect of the policy where the regulations do not reflect the policy intention. I alluded to the fact that a scenario where the application of this part of the policy would be needed has not yet occurred, but because there remains a possibility that it might occur, it is important to amend the regulations now.

The policy is purposefully flexible, and a higher rate of reduction is not automatic. My department will examine the impact of an earlier reduction applied to tariffs and ask itself, “Has it had an impact? Has it started to slow down deployment?” If the answer is no, a further or higher rate of reduction can subsequently be applied.

The regulations define the tests to be applied in this assessment of when a further reduction is needed. It is the tests in Regulation 37D(2)(c) to (e) that contain the discrepancy with our policy intent, and which we are now amending. The regulations as they stand require much higher growth rates in expenditure to occur between two quarters before a further or higher rate of reduction can be applied to tariffs.

As I said, the rationale for this approach was to build greater flexibility into the system and also to control spend. If we cannot apply the correct level of reduction, we risk breaching the budget. We then risk not being able to support some installations in future, which will damage the scheme as a whole. I therefore hope that the Committee will be able to support this minor correction.

The second minor correction I will speak about relates to air quality emission limits for biomass boilers. I have already said that biomass has performed very well under the RHI, but burning biomass clearly raises questions for some: for example, how do we ensure that pollutants from biomass fuels are controlled? Regulations were debated by this House in July that introduced measures to tackle this issue. Your Lordships supported those changes, for which I am extremely grateful.

Specifically, in relation to air quality standards, those regulations require applicants to provide an emissions certificate demonstrating that specified criteria are met. The certificate provides evidence that the installation does not exceed the stated emissions limits, that testing has been carried out by a certified test house and sets standards following a specified method.

The issue with the existing regulations relates to the specified standards against which testing must be carried out and to the issuing of compliance certificates. Simply put, certificates cannot be issued for some biomass boilers, regardless of whether they meet the emissions limits set out by the policy.

Paragraph 9 in Schedule A1 to the regulations sets out standards to which tests must be carried out for measuring particulate matter and nitrogen oxides. Those standards are suitable only for some biomass boilers, particularly those that cannot be tested by standard BS EN 303-5. As worded, paragraph 9 wrongly requires those standards to be applied to the testing of all biomass boilers. That makes it impossible to issue compliance emission certificates for boilers that are unable to be tested by those alternative standards. The latest regulations correct this error so that the most suitable standards can be used for testing.

It is vital that we amend that, as the issue currently impacts on approximately 49% of all applicants to non-domestic RHI, given the high uptake from biomass technologies. We have worked with Ofgem to ensure minimal disruption to applicants in the light of that error. All applicants who may be affected are being advised at the point of application that there could be a small delay to their accreditation date, due to the air quality requirements. Ofgem has agreed to work through all applications as normal up to the point of accreditation, which will be dependent on a valid RHI emissions certificate. Those that cannot meet this requirement will not be rejected but held until the regulations are amended.

Before I conclude on that issue, I wish to draw the attention of the House to an additional regulation which will not apply if these changes are made before 1 January. These regulations offer protection to applicants who have applied under the current regulations but cannot meet the required standards through no fault of their own. Their application can be accredited by Ofgem only once the amending regulations are made. It is possible that a tariff reduction could be announced by my department before then, and our next quarterly degression announcement, due to be published by the end of this month, will confirm that. It would not be right for those applicants to receive a lower tariff due to this error, and this addition simply seeks to ensure that it does not happen.

In conclusion, the measures contained in these regulations are needed so that the correct policy can be applied in all instances. These corrections will ensure that the RHI scheme delivers renewable heat in the most cost-effective manner, as well as ensuring that emissions from biomass have minimal impact on air quality. While I am extremely apologetic for these minor errors, I am confident that the dedicated work by my department in identifying and correcting any areas of uncertainty will help us to maintain our strong relationships with stakeholders, which is a great strength for us all.

I reassure noble Lords that my department has examined the process it follows when making regulations and is undertaking changes internally to ensure an improved quality assurance regime that will help to minimise the likelihood of such errors in the future. I hope that my explanation has been clear and comprehensive, and I commend these regulations to the Committee.

My Lords, I am grateful to the noble Baroness for her explanation. We have debated the RHI regulations on a number of occasions and have all noted that they are very complex in nature. Therefore, I thank the Minister for her clear articulation of these two minor amendments. We are grateful for the spirit in which the regulations have been brought forward and we of course accept that these minor corrections should be agreed to. However, I will take this opportunity to ask the noble Baroness some questions in relation to the policy.

We are expecting announcements in the autumn—I think that that was what was stated—and I am interpreting that as meaning before Christmas. It is important to note that the regulations that we have debated have been very complex and technical in nature, and they have mainly focused on the Government’s almost paranoiac fascination with trying to make sure that we limit the amount of money that we pay out through the scheme. However, the figures show that, overall, we are massively underspending in relation to this policy. The noble Baroness said that £68 million was expected to be spent this year. That is against an annual budget of, I believe, around £251 million. Therefore, obviously less than a third of the budget is likely to be spent this year. Why is that? Can the noble Baroness indicate whether perhaps we have been focusing all our energies and efforts on trying to reduce incentives? Given the numbers, it seems that this policy is failing to bring forward sufficient investment.

Secondly, it is a question not just of the money that is spent but of the impact that that money has. I only have the figures for 2012, but in that year our renewable heat stood at around 2.3%. We need to get to around 12% in 2020 in order to be compliant with our overall legally binding European renewables targets. Can the noble Baroness give me any indication of where we are likely to get to at the end of 2013 after this £68 million has been spent? Are we making inroads into that target?

I have mentioned that we are expecting more announcements, and those will be very welcome. We look forward to what I hope will be good, thorough debates once we have those announcements. I am sure that that will be when Ministers are able to outline improvements and we will see an increase and uptake in this scheme.

Today’s announcements are, as has been described, technical corrections. The explanation that has been given is valid and we agree with it. Air quality, which is covered in one of these technical amendments, is of paramount importance. We are pleased that this error has been spotted and made good. As the Minister said, this applies to a number of applicants. I think 49% of applicants will be caught by it, so it is good that it is being dealt with and corrected in a timely fashion.

My final comment is that the scheme sits on the public accounts. Much has been made in recent debates in the other place about how different Governments approach energy policy. The fact that this sits on the taxpayers’ books does not mean that it never takes off or delivers. There is a temptation for micromanagement and ever-increasing levels of complexity, which stem from a wrong assumption that if a technology or category of technology is going well, that means we are overpaying and must throttle back. That assumption that success equals oversubsidy is dangerous. It might well lead to the outcome that anything that gets going and gets momentum behind it gets cut off at the knees, and we never successfully allow market forces to be applied.

Those market forces would, by their very nature, find the most efficient and profitable solutions, yet because this is being managed out of the public purse, we are in danger of having too much micromanagement and not allowing the market to select the most cost-effective solutions because we are proceeding on a false assumption that popularity and scale of uptake equals oversubsidy. It might well be that it is a very popular technology that has fewer non-market barriers to its uptake. I hope that we can guard against that and that we will see significant announcements soon on how the scheme will be improved so that we will see increased uptake and more progress towards our targets.

Finally, I hope that this does not foreshadow what we are going to see in the broader market when we discuss contracts for difference and strike prices. This policy can be very complicated and difficult to understand, and investors may find it difficult to get their heads around it to perceive where the supply chain is in the market. If this is anything in the nature of a foreshadowing, we will need a very different approach or we will be in danger of seeing underspend there, too, which would be a very significant outcome indeed.

My Lords, I am extremely grateful to the noble Baroness for welcoming the corrections and for her broad support for what we are doing. She raised a number of issues that we successfully debated during the passage of the Energy Bill. I am very grateful for the way she helped me navigate some complex and difficult issues in the Chamber.

We have just navigated that Bill. It illustrated the Government’s long-term commitment to putting low-carbon energy supply in the system on a much more stable footing. I recognise some of the concerns the noble Baroness raised. Given the measures we have taken, we will be able to see greater competition among the range of technologies. Part of that will be to see whether we need to put in the same support as we currently provide. There is no wish prematurely to withdraw the support we currently provide to any technology if it is giving a constructive, positive return. However, it is in our interest to ensure that where technologies have matured enough not to need as much support, that support is gradually withdrawn. It means that those technologies are able to stand alone and complete in the marketplace on an even footing.

The noble Baroness asked about underspend in the policy. It has been steadily growing since April. Of course, we have a long way to go, but we are going in the right direction. The useful thing about a policy that grows steadily is that we can identify whether a review is needed and whether it is making progress in the right direction—and, if not, what more we can do to better the policy. I am not sure that it is a bad thing for it to grow at a slower pace because, as often as not, identification of things that are not going as well as they could be can give them prominence.

I am slightly more optimistic than the noble Baroness on this one. It was right that she asked the question, but this Government are trying to be robust in ensuring that whatever policies we are to be measured against stand up to the test. I am extremely grateful for the noble Baroness’s questions and for her support.

Motion agreed.

My Lords, it might be convenient and a help to the Minister if we pause slightly, so that the civil servants, who have mysteriously disappeared, can reappear. They are doing the rounds. If it is in order, we will give them a couple of minutes to get round the back.