The Department of Energy and Climate Change has recently published its consultation on the proposed Renewable Heat Incentive (RHI) financial support scheme.
The consultation outlines the government’s proposals on the design and operation of the RHI scheme, which is intended to provide financial support for individuals, communities and businesses to encourage a switch from using fossil fuel for heating to certain renewable technologies and sources.
This article summarises the key proposals of the RHI scheme, which the government aims to implement in April 2011.
Key Aspects of the Proposed RHI Scheme
Technology types
The RHI scheme aims to support the following types of eligible heat-generating technology (RHI technology) at all scales of generation:
- bioenergy, being solid biomass and biogas (including heat produced from on-site combustion of biogas and injection of biomethane into the natural gas grid);
- bioliquids;
- air and water source heat pumps;
- ground source heat pumps and geothermal sources;
- solar thermal; and
- renewable combined heat and power (CHP).
The RHI scheme is proposed only to apply to RHI technology installations completed after 15 July 2009, although where an increase in capacity of an existing RHI technology installation occurs, the additional capacity will be eligible for RHI support as if it were a new installation. The RHI scheme proposes to remain open to new installations until at least 2020. Regular reviews of the RHI scheme’s scope and tariff levels will be undertaken so as to adapt to new technology types and cost changes.
Basis of RHI scheme tariffs
The basis for the tariffs payable under the RHI scheme is to provide:
- compensation for the additional financial costs associated with the installation and ongoing operation of RHI technologies (when compared to an appropriate fossil fuel alternative);
- compensation for a limited number of non-financial elements of installation, eg the excavation of land to install a ground-source heat pump; and
- an investment return of 12% across all RHI technologies, except solar thermal (6%).
The rate of return is higher than that available under the Feed-In Tariff (FIT) Scheme for electricity generation (5%-8%), due to the government’s need for a higher rate of growth of renewable heat generation.
The adjacent table details the proposed tariff levels and payment lifetimes for each RHI technology. In summary, however, it is proposed that:
- tariff payments are calculated on the annual amount of heat output (kWh);
- separate tariffs have been proposed for each RHI technology (ranging from 1.5p–18p per kWh), with each technology split into various heat generation capacity bands;
- tariff payments are made over a defined period (between 10-23 years), depending on the expected useful life of the RHI technology and in regular instalments (annually for installations below 45kW and quarterly for those above 45kW);
- tariff payments are to be claimed by and made to the owner of the RHI technology;
- degression of tariff payments will not initially be implemented, but future implementation will be considered at the first regular RHI scheme review; and
- once an installation has secured its rights to an RHI tariff, the tariff level will remain fixed (grandfathered) for the applicable tariff lifetime (other than in respect of biomass, as further detailed below).
Measurement of heat output
Tariff payments will be calculated on the annual amount of heat output (kWh). The method by which heat output is measured will vary depending on RHI technology type and size.
Interaction with other government renewable schemes and proposals
1) Renewables Obligation (RO) interaction
Since April 2009, the RO has provided an uplift of (in most cases) 0.5 per MWh of electricity produced from a renewable CHP plant over that generated by an electricity-only plant of the same technology. Under the RHI scheme, CHP installations will be eligible for an RHI tariff for their heat output. A one-off choice will therefore be provided for RO-eligible CHP plants installed after 15 April 2009 and before the review of the RO in 2013, deciding whether to claim:
- 1) RO plus uplift; or
- 2) RO (without uplift) plus RHI.
After 2013, the RO uplift will be unavailable for new CHP installations and only the basic RO tariff plus RHI will apply.
2) FIT Scheme interaction
The FIT Scheme does not offer any compensation or uplift for heat output by FIT-eligible CHP plants. Instead, the normal RHI eligibility criteria will apply to any such heat output and the CHP plant may also claim a FIT for electricity generation if the FIT Scheme eligibility criteria are fulfilled.
Mixed fuel use
Where an installation can generate heat from both renewable and non-renewable fuels, the RHI tariff will only reward the certified renewable component. With respect to the generation of heat from municipal waste, the mixed waste can be combusted in a single boiler (ie no separation of biomass content is required) and, subject to establishing sufficient evidence for Ofgem that the fossil fuel content is unlikely to exceed 50%, a generator can agree with Ofgem that 50% of the full RHI biomass tariff will be payable.
Value of heat sold to third parties
Where heat is sold by an RHI-eligible generator to a third party, the government is not intending to regulate the sale price. Generators will therefore be free to secure their heat sale price in the marketplace.
Conclusion
In designing the RHI scheme, the government is trying to learn from the lessons provided by the implementation of the RO and, consequently, they have adopted a simpler approach, which is similar to the FIT Scheme. Notwithstanding this, it is clear that several key areas require further clarification, particularly with respect to the manner in which heat output is to be measured.
For small to medium-sized RHI installations, the attractiveness of the RHI scheme will, arguably, depend on the accompanying administrative burden, which the government is attempting to ease (at least in part) by allowing the deeming of heat output in certain cases. In contrast, new CHP installations constructed before 2014 will need to carefully compare the financial support offered by the RHI scheme and the RO to ensure that the correct one-off choice is made regarding whether to receive the RO uplift or an RHI tariff for heat generation.
Finally, a key issue that is not addressed in the consultation is the method by which the RHI scheme will be funded. The consultation notes that the government is currently considering its position and intends to make a further announcement in the 2010 Budget.
By James Phillips, senior associate,Ross Fairley, partner andMichael Barlow, partner, Burges Salmon LLP.
E-mail: james.phillips@burges-salmon.com;ross.fairley@burges-salmon.com;
