A subsidy for green heating systems worth more than £400m a year is set to be pruned in the autumn spending review as ministers seek to rein back spending at the Department of Energy and Climate Change.
Energy ministers have drawn up cuts to the Renewable Heat Incentive, a scheme designed to encourage a shift to low-carbon heating systems.
The Decc submission to the Treasury for the autumn spending review will also feature heavy job cuts; the department’s headcount rose by 35 per cent under the coalition even as other ministries saw net staff cuts.
Officials have also proposed earmarking some of the money Decc gives to the International Climate Fund — amounting to £335m in 2015 — and instead taking it from other areas, such as the ringfenced international development department.
Meanwhile, Decc is playing down a rumour that it could be merged into another ministry, the business department, for example, to cut costs. “I’d strongly, strongly steer you away from that,” said one insider.
Big cuts to the RHI would be disastrous for a sector supporting 32,000 jobs and which has installed thousands of green heating systems across the country, said the Renewable Energy Association, a trade group.
“It would be a catastrophe for the industry if the government chooses to cut it,” said Frank Aaskov, a policy analyst at the association, explaining the main point of the scheme was to encourage a stable supply chain and reduce costs so the sector could eventually survive without government aid.
The RHI was launched in late 2011 to encourage schools, care homes, hospitals and other large building owners to stop burning oil, gas and other fossil fuels for heat and switch to cleaner alternatives such as biomass boilers, solar water heaters or heat pumps.
The scheme was extended to domestic households in April last year and has been regarded as an important measure in helping the UK meet its EU renewable energy obligations for 2020, as well as domestic carbon reduction targets.
Mr Aaskov said uncertainty around the subsidy was already a “big problem”. He said the taxpayer-funded subsidy was only set up to last to the end of March 2016 and companies have been increasingly concerned about whether it would be extended.
A lack of clarity about the scheme’s future has already affected a water heat pump project in north London aimed at drawing heat from the Regent’s canal to warm local homes and businesses.
Scotland’s Star Renewable Energy company said it had reluctantly decided to pull out of the venture because it was not clear if RHI payments would be available.
“That was a bitter disappointment,” said Dave Pearson, the company’s director. “Ultimately we were unsure of the continuance of the RHI and this was a factor in our withdrawal.”
Some £424m was spent on the RHI last year, and the eventual cost is set to rise further because the scheme guarantees annual payments far into the future.
A Decc spokesman said the department’s priority was to keep bills as low as possible, while cutting emissions in a cost-effective way.
“Departmental spending will be set out in the spending review this autumn and any estimates before this is published are pure speculation,” he said.
Ministers recently confirmed a report in the FT that they would cut the £370m Green Deal Home Improvement Fund, which provides money for double-glazing, boilers and insulation, while also curtailing the overall Green Deal credit finance scheme. Ministers had previously called the Green Deal the “biggest home improvement scheme since the second world war”.
The government has also reined back various subsidy schemes for renewable energy, most recently for solar, but these are typically paid through household bills rather than directly from the state. As such those cuts do not help Decc meet the Treasury’s command to cut back on departmental spending.
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