R Brooke Energy Ltd v Secretary of State for Business, Energy and Industrial Strategy
| Jurisdiction | England & Wales |
| Judge | Mr Justice Holgate,Lord Justice Flaux |
| Judgment Date | 31 July 2018 |
| Neutral Citation | [2018] EWHC 2012 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: 794/2017 |
| Date | 31 July 2018 |
[2018] EWHC 2012 (Admin)
Lord Justice Flaux
and
Mr Justice Holgate
Case No: 794/2017
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
DIVISIONAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Richard Drabble QC (instructed by Prospect Law) for the Claimant
Mr Jason Coppel QC and Mr Tom Cross (instructed by Government Legal Department) for the Defendant
Hearing dates: The 3 rd and 4 th of July, 2018
Judgment Approved
Introduction
In this claim for judicial review, the claimant, which is a company involved in projects to generate energy through Biomass Combined Heat and Power (“CHP”) systems, seeks to challenge the Renewable Heat Incentive Scheme (Amendment) (No. 2) Regulations 2016 (which for reasons which will become apparent below I will refer to as “the 2017 Regulations”) which amended the Renewable Heat Incentive Scheme Regulations 2011 (“the 2011 Regulations”). The 2011 Regulations set out a statutory scheme called the non-domestic Renewable Heat Incentive scheme (“the RHI scheme”) under which tariffs are payable, at differing levels, in respect of the generation of renewable heat energy.
Statutory framework and background to the dispute
Section 100 of the Energy Act 2008 empowered the Secretary of State to establish an RHI scheme. The non-domestic RHI scheme with which this case is concerned was established by the 2011 Regulations. To become eligible for support under the RHI scheme, the owner of an installation has to make an application under regulation 22 for accreditation by the Office of Gas and Electricity Markets (“Ofgem”). Ofgem will not grant accreditation unless satisfied that the installation satisfies the relevant eligibility criteria laid down by the 2011 Regulations. Under Regulation 22(9), added by the Renewable Heat Incentive Scheme (Amendment) Regulations 2014 (“the 2014 Regulations”), Ofgem must not accredit an eligible installation unless it has been commissioned, in other words the plant is operational and producing renewable heat.
Once a plant is accredited, its owner becomes eligible for support in the form of periodic support payments from the “tariff start date”, defined in regulation 2, in relation to an eligible installation, as the date of its accreditation. Regulation 2 also defines the date of accreditation as the later of (a) the first day after the date of receipt by Ofgem of the application for accreditation on which both the application was properly made and the plant met the eligibility criteria and (b) the date on which the plant was first commissioned.
Prior to accreditation, there is no certainty that an installation will be accredited and therefore have any entitlement to payment under the RHI scheme. The scheme is funded by the taxpayer and there is no guaranteed budget to support new applications. A budget cap mechanism would allow the Government to close the scheme altogether to new applications if there were a risk of overspending. Furthermore, the tariff payable to a new entrant may be lowered pursuant to a process euphemistically described as “degression”, which may occur in relation to particular technologies as numbers of installations using that technology grow. Degression has ranged from a 5% to 25% reduction in tariff level.
Under Regulation 37(1) the periodic support payments accrue from the tariff start date and are payable for 20 years. Regulation 37(3) provides that the tariff is fixed when the installation is accredited. The tariffs payable were originally set out in Schedule 3. The 2014 Regulations added a new Schedule 3B which set out a tariff rate for CHP installations of 4.1p/kwh of heat generated. This was much higher than the tariff previously payable, which for large heat-only biomass plant was 2p/kwh. The higher rate was payable to a biomass CHP plant with a tariff start date on or after 4 December 2013, provided that it was certified under a quality assurance scheme called CHPQA. The rationale for the higher tariff was that the cost of biomass CHP plant was understood to be much higher than biomass heat only plant of a similar capacity.
However, after the higher tariff had been operating for some time, a concern developed in the Department of Energy and Climate Change, now the Department for Business, Energy and Industrial Strategy (“the Department”) that ways were being found to convert plant generating heat only into plant which generated both heat and power, so that the plant could qualify for the higher CHP tariff even though only small amounts of electricity were being generated, for example by biomass plants which used a “heat converter”. These did not face the significantly higher costs which had been the rationale for the higher tariff and did not represent value for money for the taxpayer. The problem was discussed in an internal report within the Department in October 2015. This put forward a number of potential solutions to the problem, including requiring higher CHPQA requirements for all CHP plant, requiring a minimum heat: power ratio to attract the higher tariff or excluding these type of heat converters from the higher tariff.
Discussions ensued between the Department and Ricardo-AEA, the organisation which administers the CHPQA scheme on behalf of the Government. They suggested two options, either a minimum heat: power ratio or the introduction of a 20% minimum power efficiency threshold, in other words the ratio of the electrical power output from the turbine/generator divided by the total fuel input to the system. The benefit of the latter option was that the CHPQA certificate already included the power efficiency, so Ofgem would have readily available evidence without any additional burden. In addition, the power efficiency was already used to determine a plant's access to other benefits such as the exemption from Climate Change Levy payments. In relation to the latter option, there were also two possible approaches: to exclude altogether from the higher tariff plant with power efficiencies below the proposed threshold or to apportion payments to plant on the basis of their power efficiency compared with the power efficiency threshold, in other words a tapering mechanism.
The latter option with the tapering mechanism was what was eventually introduced by the Renewable Heat Incentive Scheme (Amendment) Regulations 2016 (“the 2016 Regulations). In terms of consultation, with which the present judicial review is concerned, the submission made to the relevant minister in April 2016 identified as the problem with consultation, that there was a risk of a rush of further applications for accreditation to take advantage of the higher tariff by operators of plants who were “gaming” the system by using heat converters or similar technology to obtain the higher tariff in relation to all their heat output, even though the power efficiency of such plants might be 5% or less.
In the submission, the Department's officials recommended to the Minister that there should be no public consultation prior to the introduction of amended Regulations introducing the 20% power efficiency threshold, in order to avoid the risk referred to in the previous paragraph. The Minister agreed with that approach. Accordingly, the 2016 Regulations were laid before Parliament on 11 July 2016 and came into force on 1 August 2016. They applied to plant with a tariff start date on or after that date.
Regulation 5 of the 2016 Regulations introduced a new Regulation 39D into the 2011 Regulations which provided:
“39D.—(1) This regulation applies where—(a) an accredited RHI installation which is, or includes, a new solid biomass CHP system has a tariff start date on or after 1st August 2016; and (b) the power efficiency of the CHP system is lower than 20%.”
A complex formula for the calculation of the tapered periodic support is then set out, but the effect of it is explained clearly in the Explanatory Note:
“The formula in the new regulation 39D for calculating the payments provides that the heat generated using solid biomass in a CHP system (in accordance with regulation 9A of the 2011 Regulations) will only receive the new solid biomass CHP tariff for all of that heat where the CHP system achieves a power efficiency of at least 20%. Where the power efficiency is lower than 20%, the proportion of the heat which receives that tariff will be reduced in accordance with the reduction in power efficiency below the 20% threshold (for example, where a CHP system has a power efficiency of 15%, 75% of the heat generated using solid biomass will receive the new solid biomass CHP tariff). The periodic support payment for the remainder of the heat generated using solid biomass will be based on the standard solid biomass CHP tariff which applies where a biomass CHP system is not certified under CHPQA. The formula provides for payments calculated for heat generated using other sources of energy to be added to the payment calculated for the new solid biomass CHP system in order to give a total periodic support payment figure for the installation for each quarterly period.”
After the 2016 Regulations came into force, the owners of affected plants wrote to the Department, to their MPs and to ministers. The Department developed a standard response letter which stated, inter alia:
“Recently, the Government has become aware that some types of CHP systems can qualify for the RHI's biomass-CHP tariff for all their eligible heat output despite having relatively low levels of power efficiency and / or delivering only a small amount of power, meaning they do not necessarily face the significantly higher capital costs and / or constitute the highly...
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