Renewable Heat Incentive Scheme Regulations 2018
Considered in Grand Committee
That the Grand Committee do consider the Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2018 and the Renewable Heat Incentive Scheme Regulations 2018.
21st Report from the Secondary Legislation Scrutiny Committee
My Lords, the draft Renewable Heat Incentive Scheme Regulations 2018 were laid before the House on 23 March 2018, and the draft Domestic Renewable Heat Incentive Scheme (Amendment) Regulations 2018 were laid before the House on 7 February 2018. Just to save the noble Lord, Lord Stevenson, some trouble, I can let him know that the common commencement date rules do not apply to this type of regulation as they have no impact on business, so he need not raise that.
I am grateful to the Minister for raising the point before I had time to do so, but I just point out to him that that puts the score at 8-1 against.
I am grateful to the noble Lord. As I said earlier on, I will endeavour to improve; I know that the noble Lord will keep a record on these matters.
The purpose of the draft orders is to implement reforms to the renewable heat incentive, or RHI. The reforms will deliver changes that will strengthen the focus on long-term decarbonisation, offer better value for money for taxpayers, increase protection for consumers and further support supply chain growth in the renewable heat sector. Heat accounts for around half of the UK’s energy use and one-third of total carbon emissions. Increasing the share of heat derived from renewable sources is a critical challenge, both to meet our renewable energy targets and to deliver the Government’s long-term carbon goals. Building a vibrant renewable heat sector is a key objective of my department’s clean growth strategy and the industrial strategy. The RHI is the main programme to deliver those goals over this spending period. Before the RHI started, only 1% of our heat came from renewable energy sources; that figure is now around 7% of total heat.
This type of tariff-based support for renewable heat is the first scheme of its kind in the world. Inevitably, there are lessons to be learned, and these reforms are a response to some of the lessons from the early years. The National Audit Office published a review of the RHI in February this year, which we were pleased to receive. Many of its comments related to issues covered by the draft regulations, which I hope will go some way towards addressing some of the issues raised by the NAO, which were also noted by the Secondary Legislation Scrutiny Committee. The draft orders will deliver a series of important reforms that will help us to deliver a more strategic mix of technologies and improve value for money over the next three years until the scheme closes in March 2021. I will highlight the main ones.
We will increase the tariffs available for biogas and biomethane technologies while introducing new restrictions on the feedstock that those plants use. That will encourage the increased use of food and agricultural waste and will reduce the use of energy crops, making better use of farmland for food production. Alongside changes already made last year, this will rebalance deployment away from biomass in favour of heat pumps, biogas and biomethane, which will all play a much stronger role in the scheme over the long term.
Another important change is that we will bring in tariff guarantees that will allow RHI applicants to secure their place on the scheme in advance of construction. This will support investments in larger plants that deliver better value for money. We will cap the amount of heat covered to 250 gigawatt hours per year to protect the scheme budget.
In the domestic scheme, take-up to date has been dominated by owners of larger homes. To promote wider uptake, we will introduce the assignment of rights. This will allow third parties to finance renewable technology and to be repaid directly from the RHI. Crucially, that will open up access to the scheme for those without up-front capital to pay for a new heating system.
Following consultation last year, we will limit the eligibility of certain heat uses. These provisions will remove most instances of wood-fuel drying and waste processing or drying. In addition, we will remove the use of heat for drying digestate in anaerobic digestion facilities as an eligible heat use. We consider that these processes are poor value for money and that many would not exist without RHI support. We will also remove support for heating swimming pools on the non-domestic scheme, unless the pool is for commercial or municipal use.
We are also introducing changes to allow more than one heat pump to use a common or shared ground loop. This should facilitate greater deployment of that important technology. The introduction of electricity metering for heat pumps across both schemes will allow participants to better monitor the efficiency of their plant and build confidence in the technology.
Following consultation, another change will be to increase the power efficiency threshold of combined heat and power technology from 10% to 20% to reduce the risk of overcompensation and to encourage plants to run more efficiently. There is also a whole series of mainly administrative changes to tighten cost control, reduce the risk of gaming and improve Ofgem’s delivery of both schemes, including by tightening its enforcement powers.
The Renewable Heat Incentive Scheme Regulations 2018 also consolidate all previous revisions to the original regulations, as recommended by the Joint Committee on Statutory Instruments. The RHI plays a central role in the Government’s programme to decarbonise heating. These regulations are an important step in refining the scheme and I commend them to the Committee. I beg to move.
My Lords, in general, I welcome this secondary legislation, in that the National Audit Office report from February certainly needed some reaction from the Government on the way that the scheme operates. Just to put it in a bit of context, the audit report included some very interesting figures: between 2012 and 2017, there have been some £1.4 billion-worth of payments, which should lead to commitments of some £23 billion. To me those sound like big numbers but, as we know from smart meters, they are absolutely piffling. There have been 78,000 installations already and there were expected to be 500,000 by 2020. It is estimated that we have got to about a fifth of that original target. To give the Government their due, they have responded to reality in this area and moved some of those targets.
Although the Minister made a strong point about this being a major contributor to our carbon targets, the point I want to make is that, in many ways, it is a small drop in the ocean of what we need to do to meet our carbon budgets in future. The renewable heat incentive is certainly nothing like sufficient to meet those budgets in the heating sector, nor was it ever meant to be. That sector is so important, but it is one in which we still have so few solutions for meeting our targets. In electricity generation, we are well on our way; in transport, we at least have the solutions on hand; but in space heating, we do not yet, and the RHI is never going to get us there. There are big challenges for this scheme.
I was quite surprised to see in the audit report that Ofgem, which is the manager of the scheme, had not really managed to tackle some of the gaming issues and was uncertain on the overpayments side. I guess that all auditors have to find something. Certainly, the report praises the GB scheme in comparison with that in Northern Ireland, where clearly the scheme got completely out of control and caused the political difficulties that we now have there. However, it is estimated that we still have some £3 million-worth of overpayments.
The noble Lord mentioned biomass heat pumps and anaerobic digestion. One of the things I have installed in my own house, at my own expense, is solar thermal. I do not know whether this will be an area that is targeted in the future. Solar energy for electricity generation has been so successful, and I cannot see why it is not something we should be able to better promote through this scheme.
The issue I would like to raise with the Minister is this: I can think of particular anaerobic digestion operators in the south-west that are really concerned about the amount of feedstock that is available to the industry. On anaerobic digestion, I understand that food waste available to existing AD plants is declining and that gate fees have been declining over some considerable time and in some cases are negative. Under these regulations and future plans, what are the Government doing to make sure that the stream of food waste that can go to anaerobic digestion will be available? I do not know whether this is on the Government’s horizon, but one thing I would like to see is a complete ban on food waste going to land fill and much better food waste collection by local authorities. Are there any Government plans in this area?
It has been pointed out to me that the new tariff guarantee procedure could be used to make sure that, when that process goes through, there is a sufficient waste stream available to the new AD facilities to ensure that the contract can be met over the 20 years. Further, I welcome the assignable rights; that is a very positive move forward.
One thing I had not realised, which came out in the sub-committee I chair, is that the renewable heat incentive scheme is part of an agreement on the proceeds of the EU Emissions Trading Scheme. Some of that, in a sort of hypothecation, has to be ploughed back into certain energy schemes, and I understand the RHI is part of that contract. I wonder whether that, and the Government’s views about the RHI, will change once we are out of the EU—although I understand from Minister Claire Perry that we are going to remain in the EU ETS during the transition period. However, I would like to understand whether that affects the long-term funding of the scheme—which of course is funded by taxpayers, as opposed to the electricity schemes, which are funded through consumer bills.
The delay to the laying of these regulations has been hard for the industry. We will not stand in their way; however, perfect they are not.
I am sure the Minister will understand the need to keep a watch on their effect as they come into being as there may be unintended consequences—some of which I shall run through. I seek the Minister’s assurance that the Government will keep them under review and make further changes and revisions where needed. I shall put forward a raft of suggestions in that vein.
One of the shocking aspects of the RHI is how far short of the expected targets it has fallen, as mentioned by my noble friend Lord Teverson. I was watching the Public Accounts Committee session on the RHI and was astonished at the BEIS response to questioning from the committee on the fact that the original target for number of installations was 513,000 by 2020 but, as was mentioned, only 78,000 had been installed by December 2017, as stated in the NAO report.
The BEIS response was even more shocking because it was that this meant we had saved money and that was a good thing. BEIS prayed in aid unsubsidised companies which were doing brilliantly. The Government would reach their targets for emissions reduction and renewable energy production anyway, so it did not matter. I thought that was a concerning approach to the desperate need to decarbonise heat.
The NAO report demonstrated that the ambition of the Government in this regard has been scaled down from their original ambition. The proportion of renewable heat that will not be eligible for RHI has gone up by 270% and the lifetime emission reduction resulting from the RHI has gone down by 44% compared to the original ambition. The Government are not on track at all to reach their fourth and fifth carbon budget targets, and they will be missed. We were all celebrating when we signed the Paris agreement, yet there has been no step change in actions to match the step change needed to meet our commitments, particularly on heat. In terms of our debate today, there is a cliff edge coming in 2021, so will the Minister say what is the Government’s plan? What is going to happen when the scheme ends? The Government have said that they will bring forward lots of studies this year and report on their review in the summer of 2018, which is nearly upon us. Can the Minister be explicit in his response and tell us what we can expect to see and when we can expect to see it?
As the Minister said, there has clearly been a lot of gaming to get subsidies that are not in the spirit of this agenda. Can he tell me how many companies have been caught gaming the system? In the committee, it seemed that most of the checking is done at the point of accreditation and there is relatively little in terms of inspection and audit. If we need regulations changed to clamp down on this, perhaps the Government should also be looking far more strictly at their compliance regime.
I want to address one of the changes in these regulations that have been brought in to address some of the gaming that was mentioned; the drying of wood. It is obviously not the intended purpose of the subsidy, and companies which game the system should be ashamed of themselves, but shame clearly is not working. I totally understand and support the Government’s desire to make changes that will exclude this type of gaming, which unfairly means that those who play by the book find themselves at an economic disadvantage, and margins are extremely tight.
However, there are potential unintended consequences of the new regulations about feedstock rules, and I should like the Minister to address this issue. The regulations in relation to AD rightly want to encourage the use of non-crop feedstock. That means that there will be a greater need for feedstock processes, such as pasteurisation or hydrolysis, to make sure that digestate is safe to lay across the land. It also means that a wider range of feedstock will be used. This is not my specialist subject, but removing potential bugs from the digestate, meeting the requirements of the Environment Agency and reassuring end users that the digestate is okay to spread to land seem pretty important.
As we rightly shift to non-crop feedstock, this will become a bigger issue and the need for these processes will increase, so companies doing the right thing may find themselves penalised economically for doing so under the new rules. Going forward, all RHI projects will use some waste feedstock, and the change to waste eligibility potentially rules out these uses. If the RHI subsidy is not allowed for plants using these processes, projects may be unable to go ahead. The original consultation referred only to withdrawing support from drying “industrial or municipal waste”, and it is a good move in these regulations to remove the ability to game in that way. Is it intended that the policy should also capture pasteurisation and/or hydrolysis in AD plants with the exclusion process for waste? If that is the Government’s intention, how will it work if only a proportion of the input feedstock is waste? Does it mean that even a tiny amount of waste feedstock would render all heat generated ineligible for support? Could the amount of support paid be adjusted based on the proportion of waste feedstock used?
There is call from some in the industry for flexibility in the system, as there is a difference between AD projects that use heat for pasteurisation or hydrolysis as opposed to blow-drying wood. To indicate some of the financial implications, although each plant is different, this one is an example of potential financial implications on set-up. Funding projects with a current long-term investor requires returns of minimum 8.5%; it would need to be more like 9.5% to 10% on the open market. For an average plant, therefore, the overall cost to build is £12 million. The RHI heat income that would be lost if the changes are interpreted as “no RHI paid on heat for pasteurisation or hydrolysis if any waste is used” means that £880,000 would be lost over a project’s lifetime, taking 0.4% off the project’s returns. Given that these projects are only just achieving the required level, a project that is just about fundable now would not be funded as the return would fall to only just over 8%.
I know that is very detailed. I obviously want to give the Minister time to think about this, but these issues have been raised by the industry. The Minister is getting sympathetic looks from my noble friend on my right. My point is that this is detailed and close, but when margins are close, this is important. We want to encourage these people to set up new plants, not discourage them. This needs looking at and we need to keep an eye on it because it puts people out of business. As small as it seems, it is hugely important.
I intervene to say that this matter illustrates the importance of these committees, where the industry and Members are able to put on record real concerns that both Ministers and the learned people behind them can take on board for the future.
I thank my noble friend.
My Lords, I intervene just to say that I caught the noble Baroness’s noble friend’s eye and he was looking faintly sympathetic towards me. The noble Baroness is making some very valuable points, some of which I will be able to respond to. In relation to the point being made by the noble Lord, I will write to the noble Baroness in much greater detail and make the letter available in the Library, as she knows I always do.
I know that the Minister will always write to me. He writes to me often. I will leave that issue for him to ponder and, I hope, address in his response; I am happy to have in writing whatever he cannot address now.
I want to move on to other issues that need addressing or reviewing as soon as possible in the regulations. I thank Energy UK for drawing my attention to the assignment of rights, for which we are all grateful. Will the Government extend similar rights to small and medium-sized businesses and, if so, when? The changes to support household customers with high up-front costs are excellent, but small and medium businesses need a similar provision. The Secondary Legislation Scrutiny Committee report was clear that a comprehensive review of the RHI is needed and that BEIS needed to be,
“rigorous and ongoing if the deficiencies of the past are to be redressed”.
To be sure that money is being spent appropriately, this needs to happen before the end of 2018 to make sure that what is yet to be spent is spent efficiently. Moreover, it is extremely important to introduce a long-term low-carbon heat incentive going into the future, beyond the cliff edge.
The NAO pointed out the scheme’s failure to be cost-effective and essentially said that that was down to poor monitoring and targeting. Can the Minister tell us how the Government will address the NAO’s concerns in monitoring and ensuring the appropriate targeting of the RHI in future?
Energy UK has helpfully published a report that lays out a way forward for the industry, the Government and Ofgem in terms of actions and decisions needed in order to decarbonise heat. Given the gap between where we are and where we need to get to on decarbonising heat—I was going to go into fracking but I will spare the Minister that—I suggest that the Minister not only reads that report by Energy UK but acts on the very good advice that is in it.
My Lords, I thank the Minister for his excellent introduction to these regulations and other speakers who have contributed. It is a truism to say that these regulations are an important part of decarbonising the economy and reducing greenhouse gas emissions in line with our international commitments and targets. The key question has to be whether these regulations before us will help us in our drive to achieve the Government’s stated aims, which include a,
“focus on long-term decarbonisation, promotion of technologies with a credible role to play in that transition, and offering better value for money for taxpayers”.
I couple that observation with a question to the Minister: does he agree that the evidence before us—which, as has just been said, is not complete by any means—seems to show that we have been less successful in reducing carbon from heat in this country than we have been in decarbonising electricity generation? It may be that that is a lesson that we need to learn and expand upon during this process.
The noble Baroness, Lady Featherstone, has just said that we are approaching a cliff-edge. Not only is this scheme time limited, but we have had very little information on how the Government are going to drive this policy through to 2030 and beyond and, indeed, on whether they are focusing sufficiently on decarbonisation or are falling into the trap of choosing some current technologies over others, which experience tells us is not the way to go. We need to go single-mindedly for the higher carbon-generating technologies and stick with that before we start playing around with too many other options that may well not be as efficient in getting us to the target.
Turning to the regulations, we do not disagree with the proposed changes. There have already been delays that have been far too long, revisions and seemingly endless consultations. The most important thing is to get on with delivering progress in renewable heat generation. However, we have to bear in mind, as the NAO report, which has already been mentioned, has brought into clear focus, that this reset of where we currently are translates into a very severe overall reduction in ambition. Can the Minister give us some indication of the longer-term plan that the Government have for renewable heat, and of what exactly the plan will consist? The ambition, which I thought all parties shared, of a substantial decarbonisation of heat cannot be achieved on the RHI alone. Indeed, as has been mentioned, these regulations are going to end, and will be closed to new entrants in March 2021. This is very short-term target and few, if any, new projects can be expected to be devised, tested and financed, or even introduced, in that timeframe. So, while we welcome what is being done, the Government need to answer some key questions: what is going to happen next and when will it happen? Where is the research on different heat-demand scenarios? What is the future for hydrogen, which recent reports have talked up? What changes will be needed in the grid, for example, if there is a large- scale uptake of heat pumps, and who will pay for that? What is the proper role of bioenergy, given its sometimes adverse impact on the natural environment? All we know is that the Government intend to publish a full report on the evidence by summer 2018, which is not, frankly, enough, and is, of course, already too late.
We have, as the Minister said, the benefit of a NAO report, which was picked up by the Secondary Legislation Scrutiny Committee. The key point that emerges from that is that the amount of renewable heating funded by the RHI will have reduced to 65% by 2020, and the lifetime carbon emission reductions achieved by the RHI, in terms of the current ambition compared with the original starting ambition, is a reduction of 44%. This is a substantial downgrading, which is very disappointing. As a country, we surely deserve better.
I have some specific questions for the Minister, some of which have been raised already. On the assignment of rights, which we agree is important, surely it is important for both domestic and non-domestic RHI, but the regulations restrict it to domestic. Can we have an explanation of why that is the case? On tariff guarantees, the regulations are sending the wrong signals; people need certainty, and making these TGs subject to closure if the guarantee amount is exceeded in any particular period is obviously is helpful in capping the costs, but will be disastrous because they leave investors and operators uncertain about the likely financial return they will obtain from their investment. We welcome the geothermal element in the non-domestic scheme, but the funding identified seems very ineffective and insufficient. Can this be looked at again? Finally, I am surprised at the outturn position of 20% adopted on the CHP efficiency threshold, as 71% of the consultation responses disagreed that the level should be returned to 20%. The argument goes that CHP, because of its variable outputs, does not work on the basis of a known level of electricity certainty. By setting the level at 20% as if it were achievable across the board without exception, the scheme potentially undermines the viability of good CHP schemes that cannot operate entirely on that basis. I would be grateful for a comment from the Minister on that.
I look forward to the response from the Minister, but I echo what has just been said by the noble Baroness, Lady Featherstone: if he wants to add to his letter-writing, I am sure that we can wait for that.
My Lords, as always, I make the offer of a letter to all noble Lords who took part in the debate, because obviously I will not be able to pick up all the points. I am grateful for noble Lords’ general welcome for the regulations and our response to the NAO report.
The noble Lord, Lord Teverson, talked about this being a drop in the ocean given the large sums of money that are involved—we all know that a billion here and a billion there soon adds up to quite a large sum. Take, for example, AD, which was mentioned by the noble Lord, Lord Teverson, and the noble Baroness, Lady Featherstone. We know that AD will never solve all our problems, but it can deal with a certain amount of waste. As was pointed out by the noble Lord, Lord Teverson, the important thing with any AD plant is to make sure that you have adequate waste as feedstock for the future. We do not want people producing waste for the sake of waste just to go into a plant. We want to use only genuine waste or, on occasion, to top it up with a certain amount of crops that are grown for that purpose. Principally, however, plants would be designed to deal with waste.
In my former life as a Defra Minister, I saw quite a number of AD plants taking in waste from very different sources. Where they were attached to a supermarket, one would see bucket loads of old yogurts or whatever else had gone past its sell-by date being tipped in. That was a good way of using it, and we want to devise schemes that will, as the noble Baroness rightly said, prevent that waste going to landfill. I saw excellent small schemes also. I remember one used by a salad producer, which took the waste from its own products—the stalks from tomatoes are actually rather difficult to break down—and used it to produce both heat and power to grow more tomatoes in due course, and used the digestate that comes out in the end to fertilise those tomatoes. It was, wonderfully, almost a closed loop. There are terrific advantages to AD, but, as we all know, it will not solve all the problems.
RHI will be an important step in helping to reduce carbon emissions and—I say this to the noble Lord, Lord Teverson—make progress towards the legally binding renewable energy targets that we have. As I made clear, we will certainly look very carefully at ensuring that there is suitable waste feedstock and that the scheme ensures current and future supplies to anaerobic digestion. If the noble Lord has a local problem in the south-west, it is important that he, and those in that world, brings it to the attention of the department when it is reviewing this matter. I assure the noble Baroness, Lady Featherstone, that my right honourable friend Claire Perry and the department will look constantly at these matters to make sure that there can be further tinkering to get it right.
The noble Lord, Lord Teverson, asked about solar thermal. My understanding is that it is eligible for both schemes, so it is already support by RHI. If he wants to look at that for his own domestic arrangements, he is welcome to do so.
As I said, I very much welcome what the noble Baroness, Lady Featherstone, had to say. I made it clear that we will keep these matters under review. I cannot give a precise date for when and how my right honourable friend will respond. I will certainly respond to some of the noble Baroness’s more detailed questions, particularly those relating to electrolysis and other matters, most of which I shall make a complete hash of if I try to respond to them now. I think all those taking part in this debate would be far more grateful for a written response.
The noble Baroness is right to raise the whole question of detecting abuses and gaming—something touched on by other noble Lords and which the NAO was wary of. As she pointed out, with any changes that we make, there are always potential unintended consequences, and we keep that under review. It is a large and varied scheme, and the non-domestic scheme in particular has huge variation in size, heat and use and the technology used between projects.
Despite all those challenges raised by the NAO, the department—the former Department for Energy and Climate Change, which noble Lords on the Liberal Democrat Benches will know well because it was one of their great Secretaries of State who sat in that department, which is now within BEIS—is working with Ofgem and, I think, developing a better approach to identifying gaming. We will certainly respond to the NAO in due course.
The noble Lord, Lord Stevenson, also welcomed the changes, and I am again grateful. He particularly welcomed the assignment of rights, but was concerned that it might lead to a lack of access to loans or other finance for a number of businesses and that that could be a barrier for them. I can only say that we have no plans to widen the assignment of rights beyond the household sector at the moment, but we would always want to keep all matters under review.
What is the logic to that? The issue for small and medium-sized businesses is exactly the same as for domestic users: it is about high capital outlay, which is equally difficult for SMEs as for private, domestic householders. This has really got in the way. The Government have a great solution there now for the domestic sector; if the principle is being breached, I do not see why it is a difficulty to extend it to the SME sector.
I appreciate what the noble Lord says about there being no logic to it. It is just that there is no evidence at the moment that lack of access to loans is a barrier to business. If the noble Lord thinks otherwise and can produce evidence, it can be looked at.
As I said, the order has largely been welcomed, and I am very grateful for that. These changes are necessary as a result of the NAO report. I think that we would all agree that there have been considerable successes this year. It is only part of the whole scheme of trying to decarbonise the system—again, we wish to pursue that even further.
I want to pick up on one final comment from the noble Baroness, Lady Featherstone. If I could persuade her and some of her Liberal friends of the benefits of what she referred to as fracking and of pursuing greater domestic production of gas—of which there is potentially a great deal in this country—in that it improves both our chances of a degree of decarbonisation and our energy security, I would feel that I had achieved a very great thing. That will no doubt come in the future. In the meantime, I will give way before I finally put these regulations to bed.
Without going into a detailed back and forth discussion on fracking, I simply want to add to the point I made about the Paris agreement. Bringing on stream another fossil fuel at this point might be a distraction from a real solution to our problems in the future.
I do not believe that it would be a distraction. It would have considerable benefits for the United Kingdom, bearing in mind what is available to us here. I hope one day to persuade the Liberal Democrats of the virtues of that approach. We might get there.