Slow burn

The RHI hasn't exactly flown off the shelves, but with increased tariffs available the future is looking brighter for the non-domestic and even potentially the domestic scheme. By Adam Davison

When it was introduced, the Renewable Heat Incentive (RHI) was the world’s first long-term financial support programme for renewable heat. In broad terms, it pays a financial incentive to participants that generate and use renewable energy to heat their buildings or which produce biomethane that is then injected into the gas grid.

The scheme was launched in November 2011 for the non-domestic sector, and while it was anticipated that it would be rolled out for individual households from summer 2013, the government recently announced that the domestic implementation would be delayed again until summer 2014.

By the end of the non-domestic scheme’s first year, the industry was disappointed by slow take-up. The Department of Energy and Climate Change (Decc) confirms that as of the end of May, around 2,100 applications had been submitted under the non-domestic scheme and around £27 million is expected to be made in payments for renewable heat produced in 2012/13.

The slow uptake prompted an announcement from Decc promising to consider whether initial cost assumptions had been accurate. In particular, it identified that uptake of biomethane-to-grid projects and heat use from biogas consumption has been particularly weak. It further announced that emerging evidence suggested there may have been a difference between actual costs and load factors of installations and the original assumptions used to calculate tariffs. The possibility of a tariff review, both specifically and in general, was therefore considered and a commitment to re-incentivising uptake was made.

This culminated at the end of last month in Decc proposals to increase tariff levels for heat generated by ground source heat pumps, large biomass and solar thermal (see table). No increases are proposed for small and medium-sized biomass, based on the current high level of demand for these technologies. Biomethane and biogas combustion fall outside the scope of the review. The consultation closes next Friday (28 June) and any resulting tariff changes will take place from spring 2014.

Decc also adopted a degression-based approach to the RHI earlier this year, similar to the regime adopted for feed-in-tariffs, under which there is a fixed annual budget for each year of the RHI, with the tariffs available to new applicants gradually reduced if uptake of the their chosen technology is greater than forecast.

While this initially cast a shadow on the situation, a clear strategy was at least announced, including quarterly monitoring against a series of triggers and monthly updates in respect of the triggers. At the end of May, Decc announced the first cuts under this mechanism: medium commercial biomass tariffs will be reduced by 5 per cent to 5.0p/kWh for tier 1 and 2.1p/kWh for tier 2. The biomass tiering system is designed to prevent the production of heat solely for the purpose of claiming the RHI tariff. Tier 1 is based on a minimum reasonable use of biomass heating installations, which is for 1,314 hours in the year, and is calibrated to compensate for the additional capital investment in renewable heat. Tier 2 is set to compensate only for the additional running costs of an installation, and is paid out on all heat after the first 1,314 hours.

There has been a welcome move in respect of metering. Decc has stated that more installations would be considered “simple” rather than “complex”, meaning that more applicants would have a simpler and cheaper application process. And it is understood that the RHI for businesses will be extended to cover combined heat and power systems, air-to-water and air-to-air heat pumps, anaerobic digestion, geothermal and a number of waste-to-energy technologies. Decc consulted on expanding the scheme in September 2012 and is expected to confirm the way forward this summer.

There is, therefore, tentative good news for the non-domestic sector. What of heat-generating households? The government has put its delay down to the complexity of heat generation in the domestic sector. A number of technical aspects are complex: monitoring, reporting and verification of heat are all challenging. Similarly, whereas surplus electricity can be exported to the grid, heat poses more of a problem and can only be exported where there is a district heating scheme. The government is keen to underline that the scheme is globally ground-breaking and delays are inevitable.

There was industry concern at the government’s alluding to the undesirability of incentivising people to generate more heat than they could use. Was the government saying that ensuring heat is used productively comes before heat generation, and really it is the energy efficiency stage that is most important? Could one infer that incentivising domestic heat generation is not actually where the government’s priorities lie? Not according to energy and climate change minister Greg Barker, who says the government is “110 per cent” committed to the scheme and has “a credible, sensible timetable for delivery of the policy”. The government intends to confirm how an RHI for householders would work and publish tariff levels this summer.

So the headlines are generally positive. The hope is that things are only likely to get better.

Adam Davison is a director specialising in energy law at Walker Morris

RHI in brief

Unlike other schemes to support renewable energy generation (such as the Renewables Obligation or feed-in tariff schemes, payments under the RHI are made by Ofgem rather than energy suppliers directly to heat producers. This means the payments come from general taxation revenue, rather than being recovered by suppliers via a levy on energy bills.

There are a number of technologies that are eligible for RHI support, including biomass boilers, ground source heat pumps, solar thermal collectors and biomethane and biogas installations.

This article first appeared in Utility Week’s print edition of 21st June 2013.

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