Considered in Grand Committee
My Lords, since this draft SI was laid before the House on 9 September, a minor correction has been made to the Explanatory Note to highlight that the scheme is intended to end in March 2041.
The UK is the first major economy in the world to set a legally binding target to achieve net zero greenhouse gas emissions by 2050. Between 1990 and 2019, our emissions have decreased by 44%, which is the fastest reduction in the G7, and we are continuing to advance sustainability through the Government’s Ten Point Plan for a Green Industrial Revolution, the net-zero strategy and, most relevant to this policy, the heat and buildings strategy.
Currently, the heating of our homes, businesses and industry is responsible for 21% of the UK’s greenhouse gas emissions. The decarbonisation of heat is recognised as one of the biggest challenges in meeting our climate targets, requiring virtually all heat and buildings to be decarbonised. Increasing the proportion of green gas in the grid is a practical, established and cost-effective way of reducing carbon emissions and contributing to the UK’s net-zero target, lowering carbon emissions from both domestic and industrial gas boiler use.
The green gas support scheme is a Great Britain-wide tariff-based scheme supporting new biomethane plants injecting biomethane produced by anaerobic digestion into the mains gas grid. It is expected to contribute 3.7 million tonnes of CO equivalent of carbon savings over carbon budgets 4 and 5, and 8.2 million tonnes of CO equivalent of carbon savings over its total lifetime. This is equivalent to taking approximately 3.6 million cars off the road for a year. The green gas support scheme is expected to help support high quality jobs in the renewable energy sector at a time when economic recovery is, of course, so important. It is anticipated that, when taking into account both direct and indirect jobs, the green gas support scheme could support up to 1,600 jobs per year during the construction phase of plants and up to 1,000 jobs once plants are fully operational.
Our analysis suggests that over two-thirds of existing biomethane plants are in fact located in rural areas, with 80% of all GB plants located in areas with a lower than average gross value added. We expect plants supported by the scheme to follow similar trends and therefore contribute to the Government’s levelling-up agenda. The Government believe that it is appropriate for gas consumers to pay towards decarbonising the gas grid, and therefore we have taken the decision to fund the green gas support scheme through a levy. The levy will be the sole funding source for the green gas support scheme and will be applied to all licensed fuel gas suppliers.
Of course, the Government acknowledge the impact of rising gas prices on consumer energy bills, and we are implementing stringent budget control measures to ensure that the costs of the levy are as low as possible and cannot rise unexpectedly. The cost to an annual gas bill will be relatively low, starting at around £2.50 per year, and it will peak at around £4.70 per year in 2028 for an average gas bill, assuming that we make a transition to a volumetric levy.
During peak years of production, biomethane plants incentivised by the green gas support scheme will produce enough green gas to heat around 200,000 homes, which would otherwise have been heated by natural gas.
While we are launching with a per-meter point levy that provides a high certainty of costs to both suppliers and consumers, the Government recognise the benefits of a volumetric levy that aligns costs more closely to gas consumption. We have committed to transition to a volumetric levy as soon as possible, subject to overcoming the feasibility issues, which include the impact on energy-intensive industries and other important UK businesses.
In conclusion, the scheme established by this statutory instrument will support ongoing investment in the biomethane industry and enable the development of new production plants for the injection of biomethane into the gas grid. In supporting this investment in new anaerobic digestion capacity, we expect to support more jobs, growth and innovation in the biomethane industry, while delivering important carbon savings, which are a vital part of meeting our overall net zero targets. I therefore commend these draft regulations to the House.
My Lords, I have come to learn rather than to criticise or analyse in much depth. I was on the Select Committee on energy in the other place and I have tried to keep up to date with developments. I congratulate my noble friend on the fact that, according to his statement, we are the first in the world to go down this track.
My questions are really exploratory. I looked particularly at page 70 of the extensive documentation. First, I have a question about energy crops. It seems that if we are starting in a new area, the bringing together of waste collection is quite a challenge, whereas energy crops by definition are probably on a 12-month cycle. Therefore, the 50% limitation that is mentioned here, while probably the right strategy in the medium term, seems a bit of wishful thinking, certainly in the initial stages. You have to have energy crops to get the thing going.
Secondly, what is the estimated time required to set up any of these plants? Are we talking about a year, 18 months or two years? That is fairly key.
Thirdly, there is the question of the intermix of the gas provided by this route alongside gas from the North Sea. As far as I can see—I have not done an in-depth analysis—there is no reference to this. Is there complete compatibility or does there need to be treatment one way or the other to ensure compatibility in the mix of gases going into the grid?
There is another area that concerns me. Like so many others, I was previously in local government. How will we ensure that local government waste collections collect food waste and other waste suitable to feed these new plants? I do not know the proportions, but at this point in time we in central Bedfordshire are separating only recyclable and non-recyclable waste. I do not know what is happening in the rest of the country, and an update on that would be very helpful.
I thank my noble friend for taking this forward; it is crucially important. I will do my very best to help him on the journey forward.
I thank the Minister for his explanation of the regulations before the Committee. They are important, because they establish the new green gas support scheme as a replacement for the renewable heat incentive, which closed to new applicants on 31 March this year. This scheme will begin on 1 April 2022, with a reach back to the scheme’s launch date, due to be 30 November this year.
This new scheme is for new deployment and excludes equipment and plants used to register under the RHI scheme, so can the Minister confirm that there will be no crossover of payments between the schemes and that there is therefore little likelihood of much new biomethane coming forward, certainly during the retrospective six months but also for some time to come as new plants come on stream? How soon, and in what number, does the Minister’s department expect applications for new plants to be built and come on stream? It would appear to be quite quickly, as payments will last for only 15 years in a scheme of 19 years until 2041. I presume that the department has confidence in the speed of decision-making, the planning process and the construction phase, all of which will need to go smoothly to encourage speedy deployment.
I must also admit to having some déjà vu moments as I read through the details of the scheme, with recollections of how Conservative Governments regarded such schemes in the past. When I read under paragraph 7.3 of the Explanatory Memorandum that tariff rates
“will be set at a level that aims to encourage continued deployment and ensure value for money”,
and, then, under the very next paragraph, that
“a degression mechanism … will reduce tariffs if certain triggers are met”,
I recall the devastating cutbacks introduced by the Conservative Cameron Government, which slashed support for wind and solar, devastating the industry and undermining investor confidence so tragically. The misprint in paragraph 7.4—
“compromise of an annual tariff review”—
only underlines the impression that undermining support for deployment, especially in conjunction with some sort of levy control framework coming back disguised as a budget cap, will be another feature of this scheme.
It also suggests that few lessons have been learned by the Government. The levy control framework became a politicised mechanism that defied industry understanding and eventually had to be scrapped. Can the Minister give more details today to give confidence that the balance between encouraging deployment and payback to investors will not suddenly lurch towards ill-defined value-for-money analysis being undertaken at the stroke of the department’s pen? Those lost years after those experiences for the solar industry, as well the jobs that were lost, have contributed to the climate emergency that is yet to be recognised fully across government.
Continuing further into the details, I commend the Government on the impact assessment accompanying the regulations. It gave greater insight into the set-up of the scheme and the changes from the RHI regime. This scheme will mandate biomethane producers to produce at least 50% of their biomethane from waste. On page 70 of the impact assessment, the full feedstock energy mix is identified, with 50% of the waste expected to be food waste. Can the Minister confirm whether there is a full definition of food waste that includes food waste in all its various unfortunate and distinguishing forms? My understanding is that this refers not merely to restaurant, domestic household and other post-consumption end-of-the-food-chain waste. It should also include waste that does not even reach the food chain, such as food being rejected or suddenly no longer wanted by supermarkets; this can befall farmers and growers, especially in salad crops and vegetables.
Has the Minister’s department worked closely with colleagues at Defra who are working to reduce food waste through recycling schemes and local authorities? Can he also say what analysis has been undertaken by the department to consider the effects on the renewable fuel obligation undertaken by the Department for Transport, which reuses cooking oils?
I am not aware of the definitions and analysis of “food waste” under the RHI scheme, but I remember that, at one time, miscanthus growing was an important feature of biomethane production plants. In the department’s analysis, maize is the next important feedstock, at 20%, along with agricultural waste. However, I note, under “Non-monetised costs and benefits”, which the Minister mentioned in his opening remarks, the effect on the rural economy. The analysis states that
“two thirds of … plants are located in rural areas, with 80% of all GB plants located in areas with a lower than average GVA.”
I welcome the positive effect that this will have on rural areas. I also note that many properties are not on the gas grid in these rural areas.
This scheme will apply the levy to the gas grid only and will not include electricity supplies, producing enough green gas to heat about 200,000 homes. In the context of the application of the levy, which is adjudged to have minimal effect on bill payers, this does not amount to a significant impact. Does the Minister’s department see this as an interim scheme in its thinking about a framework to bring hydrogen gas to the grid? Hydrogen would certainly bring far greater benefits to, and have a greater impact on, the decarbonisation of gas and is recognised as a possibility in the memorandum. Will this be a key feature of the reviews being built into the scheme? How often will the reviews be undertaken? Will they be public documents, and will they become part of the reporting structure to Parliament that monitors progress towards reaching net zero by 2050?
Another key feature of this scheme is that payments will be made only in respect of supplies that reach the grid. The Minister will know that many plants are considered for the savings they would generate in the industrial process—for example, sugar—and that therefore do not reach the grid. The Minister will also know that tanked or bottled gas goes to many properties off the gas grid, and that there are many district heating schemes. Can he explain why this scheme is so restrictive and does not look at the decarbonisation of gas in the round? Will this type of extension be considered under a review or excluded altogether?
Finally, it is important to note that the scheme represents yet another new levy on households—a change from the Treasury-funded RHI. It is also therefore a potentially regressive scheme, affecting poorer households already in fuel poverty. According to the analysis in the document, in the initial phases the effect on consumers starts at about £1.40 per year, and at £2.50 according to the Minister’s remarks today. Nevertheless, it will increase over the lifetime of the scheme, while moving to a levy on volume consumption. I understand that the devolved Administrations have looked at the effect on their schemes and appear to be content with it.
However, there are many simultaneous dynamics. Will the department be able to assess and review each change individually, as well as the cumulative effects that could have a meaningful impact on certain income levels and households? How will these reviews be conducted?
I grant approval today for the scheme and thank your Lordships’ Secondary Legislation Scrutiny Committee for its report. Nevertheless, there are many important areas of concern as the UK moves forward with plans for net zero, and I welcome further dialogue along that pathway.
Let me start by thanking both noble Lords for their valuable contributions to this debate. The need to make progress with decarbonisation of course remains an absolute priority for the Government, so we have to keep up the pace of change to fuel what will be a green, sustainable recovery as we build back better from the pandemic. So, to keep us on track, as noble Lords will be aware, the Government recently launched a landmark net zero strategy setting out how the UK will secure 440,000 well-paid jobs and unlock £90 billion-worth of investment by 2030—all on our path to ending a contribution to climate change by 2050.
However, to meet net zero, we are of course aware that virtually all heat in buildings will need to be decarbonised. Moving away from burning fossil fuels for heating is a great challenge, but it presents enormous opportunities for jobs, growth and levelling up. We are clear that achieving net zero will require a range of technologies and solutions for buildings, and that there is no single silver bullet. It is not a question of choosing whether electrification, hydrogen or heat networks are the answer, but of doing something on all of them, and everything that we can to deliver on all these fronts.
As I said in my introduction, within that framework biomethane has a clear role to play in decarbonising our energy supplies. The Committee on Climate Change stated that biomethane will be valuable across all decarbonisation pathways and recommended continued government support. Injecting biomethane into the gas grid means that more of the gas used in a gas boiler in a home or in industrial processes across Great Britain will be from renewable sources, meaning lower carbon emissions and a lower impact on climate change. Continued policy action is essential for maintaining investment in the biomethane industry and enabling the development of new production plants for biomethane to allow injection into the gas grid.
The green gas support scheme will also help to meet our commitments made in the 2019 Spring Statement and 2020 Budget to increase the proportion of green gas in the grid. It will help to promote a circular economy by encouraging the use of domestic and industrial food waste to heat our homes and businesses. It will contribute to achieving short-term carbon budgets and our broader target of net zero emissions by 2050. In addition, it will support high-quality jobs in the renewable energy sector as well as the development and diversification of the rural economy, in line with our net zero levelling-up agenda.
My noble friend Lord Naseby made a point about energy crops. Using waste feedstocks can contribute to carbon savings and to a circular economy, but given the uncertainty around food waste availability, a higher threshold could have had a negative impact on plant deployment and encouraged unintended competition within the anaerobic digestion industry. We will undertake a mid-scheme review in 2023 to review the waste feedstock thresholds, and we will adjust if necessary. My noble friend asked about the length of time needed to set up a plant. The answer depends on the size of the plant and the location, but in general it is about 12 to 18 months. He also asked how we will ensure that local government will collect waste to feed the new plants. We certainly expect food waste volumes to increase significantly over the lifetime of the green gas support scheme as a result of Defra’s household food waste collection policies. Those are outlined in the Environment Bill, which the House is debating as we speak.
I turn to the noble Lord, Lord Grantchester, who asked whether there will be crossover payments from the NDRHI and the green gas support scheme. We have carefully ensured that the regulations do not allow one plant to receive payments from both schemes; that would clearly be unfair to the taxpayer. We understand from market intelligence that roughly 53 plants will be deployed on the scheme, and we hope that building will begin on several of them later this year. The noble Lord also asked about value for money for the scheme. The degression mechanism will act to prevent the risk of overcompensation for deployment that exceeds forecast expenditure thresholds in year. The mechanism has been designed specially and revised in the light of the lessons learned under the RHI—for example, the degression triggers have been adjusted to mitigate some of the dynamics that were seen under the RHI. As always with these schemes, we need to balance our ambitions for biomethane plant deployment against the possible impact the scheme will have on the bills of domestic and industrial consumers. Budget management measures are designed to ensure that the decarbonisation of the gas grid occurs at the best possible value for money for bill payers.
Moving on to the noble Lord’s question about the definition of food waste, my department works closely with Defra, including on the waste hierarchy. This requires the prevention of waste in the first place; that is a good starting principle. Where that is not possible, we support the reuse, reduction or recycling of materials before, ultimately, disposing of any remaining waste safely through incineration, with the appropriate energy recovery. My department also works closely with the Department for Transport to ensure that the green gas support scheme and the renewable transport fuel obligation seamlessly work together to support industry, again ensuring no element of double subsidy.
On the question about miscanthus, energy crops are allowed on the scheme—up to 50%. As I said earlier, that threshold will be part of the mid-scheme review. On the noble Lord’s question about whether this levy will bring about any new levies on hydrogen, it is important to confirm that the green gas levy is the sole source of funding for the green gas support scheme. The Government have set out separate hydrogen and net-zero strategies, with the intention that, from 2025 at the latest, all revenue support for hydrogen production will be levy-funded. This is subject to consultation and the appropriate legislation being in place.
The noble Lord also asked me about reviews of the scheme and, as I said, a mid-scheme review will take place to ensure that it is meeting its aim to look at the balance of food stocks and energy crops. The broader decarbonisation of gas in the round is considered in the recently published Heat and Buildings Strategy and the various consultations alongside it.
On the noble Lord’s question about how this will impact households in fuel poverty, the Government’s impact assessment found that, even at the peak of the levy, the impact on both the number of people in fuel poverty and the size of the fuel poverty gap was minimal across Great Britain compared to the baseline scenario, where the levy is not imposed. The Government recognise the benefits of a volumetric levy, as opposed to a meter-point levy, which aligns cost more closely with gas consumption. We have committed to transitioning to a volumetric levy as soon as possible, subject to overcoming the various feasibility studies of which the noble Lord is aware, including the impact on energy-intensive industries and other important UK businesses. We are clear that any volumetric levy design must be simple to administer and must deliver and minimise the costs to consumers. Before we proceed on this, we will ensure that we fully consult on any new proposals in this area.
The noble Lord also asked how the Government will manage the cumulative impact of levies. The Government are committed to ensuring that the costs of decarbonising the energy system are fair and affordable for all energy users. We are considering the benefits and costs of the different approaches and, as always, are committed to working with industry and consumers to keep costs down and identify ways to incentivise behaviour change towards decarbonisation. As we announced, we will launch a fairness and affordability call for evidence on options for energy levies and obligations to help rebalance prices and support green choices, with a view to taking final decisions on that next year.
I think I have dealt with all the questions that were asked of me and, with that, I commend these draft regulations to the Committee.