My Lords, Amendment 21 is in my name. I apologise that I was unable to attend Second Reading. This is an empowering amendment to address an issue that could be of benefit to government going forward. As many noble Lords may be aware, an economically viable and clean fuel solution for HGV fleet operators has been pioneered by a company called Gasrec, and is now being followed by others. I should make it clear that I have no interests to declare, and gain no remuneration from these sources.
The new fuel is bio-LNG, which is an alternative to diesel. It is gaining significant support in the logistics sector, with Tesco, Sainsbury, Waitrose, UPS, DHL, B&Q and Eddie Stobart all participating. It is a blend of liquefied biomethane and liquid natural gas, and it is cheaper than diesel. It is also sustainable and fully compliant with the sustainability criteria for biofuels, as per the EU renewable energy directive 2009. It has the lowest carbon intensity of any vehicle fuel and, so far, the LBM in the blend remains the only way to address CO2 emissions in HGVs. It is therefore rather concerning that the delivery of bio-LNG production is currently undermined by the UK subsidy system.
As noble Lords will be aware, over the past 10 years the incentive schemes for bioenergy have offered different levels of incentive, depending on end use. Bio-LNG has been available only for the past 18 months, and its feedstock for production—biogas from large anaerobic digestion plants—is likely to be diverted by the terms of the existing renewable heat incentive regime away from bio-LNG to renewable energy and heat, for which of course there are many alternative renewable energy sources.
The RHI regulations adopted in 2001 create a system of incentives designed to promote renewable heat, including in particular the injection of biomethane into the gas grid. The threat to bio-LNG production arises from the current higher incentives for developers of large AD plants to inject biomethane straight into the gas grid. The RHI is set at 7.1p per kilowatt hour for direct injection, with no reduction for larger AD plants benefiting from
economies of scale, compared with only 2.18p per kilowatt hour for LNG production.
The effect of these incentives is to encourage large operators to plunder the RHI pot for super-profits, somewhat reminiscent of solar FIT tariffs back in 2011, at the expense of smaller AD developers and farmers, for whom the RHI funds were particularly intended, and the loss of biogas from larger AD plants that are ideal for the production of LBM and thus bio-LNG fuel because of their scale. It is not practical or economical to source an aggregate biomethane from small AD developers for bio-LNG because of the logistical problems with collection. It is thus impossible for producers of bio-LNG to offer large AD developers financial super-returns, which are presently available from direct grid injection as a result of the subsidy regime.
The 2001 regulations notified by the Government to the European Commission under Articles 107 and 108 of the Treaty on the Functioning of the European Union, covering state aid, were amended in 2012 and final approval was given this year. However, development of bio-LNG was not contemplated at the inception of the RHI programme. The Commission was not aware of the distortion of competition that subsidies would lead to in the market for AD biogas, particularly regarding large producers, or of the super-returns large AD developers would enjoy for grid injection at the expense of the taxpayer and smaller developers, for whom the subsidy was essentially designed and approved by the Commission.
The distortions are now clear and ought to be notified to the European Commission but there is a better solution for the Government to address the distortions of competition, which normally would necessitate further secondary legislation, in the opportunity provided by the passage of the Energy Bill to re-establish the principle of a level playing field. The level playing field principle in the 2011 regulations could be established without significant impact on the architecture of the Bill.
Following establishment of the principle of non-distortion, the Secretary of State would have to consider how regulations might be amended to reflect it. This is what Amendment 21 is designed to achieve. I hope that the Government will take heed of the points that I am making and might consider adopting this amendment. If not, as is likely to be the case, I am seeking some undertaking from the Minister to introduce the Government’s own amendments or other measures to achieve the desired outcome. Refusal to address this issue would be commercially foolish and certainly anti-green in terms of what the Bill is seeking to achieve overall.