15 December 2016

After nine months of waiting we now have a response from government on the future of the Renewable Heat Incentive (RHI). Many of the proposals put forward in the consultation have been implemented, but there are some notable surprises. Highlights include:

The full response from government is available here.

We have taken the time to produce a detailed appraisal of the consultation response, broadly split into:

Domestic RHI

Heat pumps
Biomass
Solar thermal
Assignment of rights

Non-domestic RHI

Planning permission
Tariff guarantee
Biomass
Biomass CHP
Solar thermal
Heat pumps
Anaerobic Digestion

Changes to both domestic and non-domestic

Budget cap
Tariff reductions

Comment - BEIS has shown heat ambition and ability to listen 

Timeframes

Most of the changes are due to come into effect on 'the date the regulations come into force'. It is suggested in the response that this will be in 'spring 2017' which would put 1 April 2017 as a likely target date.


Domestic RHI

Heat Pumps
The headline is the 33 per cent increase in tariffs for air source heat pumps (7.51 p/kWh to 10.02 p/kWh) and a smaller 1.1 per cent increase in tariffs for domestic ground source heat pumps (19.33 p/kWh to 19.55 p/kWh), when compared to existing tariffs. The government did want to increase the ground source heat pump tariff further, but they were limited by their own 'value for money cap', indicating a clear strategic desire to continue the electrification of domestic heating.

New heat demand limits for domestic RHI payments will be introduced. This sets an annual limit on the payments available - 20,000 kWh for air source and 30,000 kWh for ground source. Additional units generated above these limits will not receive support.
 
A further change is the requirement to fit an electricity meter to monitor the usage of the heat pump. This is an attempt to improve the visibility of heat pump performance and will not be used to assess payments. 

Biomass

A surprising 37 per cent increase on the existing tariff for domestic biomass (and stoves) could be due to the substantial tariff reductions over the last two years, that have left the existing tariff very low. Nonetheless, given the focus on heat pumps in the consultation document, this has to be a welcome change for the sector.

Biomass also now has an annual heat demand limit for domestic RHI payments set at 25,000 kWh. This is to try and reduce the number of large properties, with very high heat demand, which have been attracted to the RHI since it began.

Solar thermal
Following a concerted effort by the sector, solar thermal has been retained in the RHI at the existing tariff levels. It is worth noting that solar thermal installations will not have a heat demand limit on RHI payments, like the other technologies, which could help increase uptake.

Assignment of rights
BEIS has signallled its intent to bring in 'third-party' ownership of eligible renewable heating installations, by using assignment of rights of renewable heating systems in the future to allow RHI payments to go to a third party rather than the household. Whilst this already happens to a certain extent, using additional contracts between homeowner and supplier, this change could see a step change in domestic RHI installations. Third party providers are likely to be able to achieve significant cost savings compared to individual homeowners.
This change to the scheme is not going to come into force along with the other changes, due to concerns over consumer protection. When this will be implemented is unknown.

Non-domestic RHI

Planning permission
Planning permission (if required for the installation) will be compulsory upfront for all new plants applying for the non-domestic RHI. This will increase the upfront investment needed to develop a renewable heat system.

Tariff guarantee
One of the most significant changes to the non-domestic scheme is the confirmation of a tariff guarantee for certain technologies at specific scales (see those in bold in Table 2). Applicants can make a start on their application and opt to ‘fix’ the tariff they are going to receive on the day that a correct application is submitted.

Table 2: The current and new grouping of different technologies under the RHI. Those in bold are eligible for a tariff guarantee (source: BEIS consultation response)

This is designed to reduce the risk associated with larger and more complex installations. There is a possibility that some very large installations that use the tariff guarantee, could consume much of the budget, breaching the RHI budget cap, which could close the RHI scheme as a whole. The government will 'continue to assess this risk', so we will have to wait and see how the market reacts and what demand is created.

The big change for biomass is the move to, 'a single band and making the scheme more attractive to larger more strategic installations by structuring tariffs to promote higher heat load factors (HLFs)', see Table 3 below. This is a clear signal towards a smaller number of large biomass units (2 MW+). However, they do admit that the evidence received during the consultation showed a 'lower market potential' for large biomass. The result being that the tariff levels for biomass are at the upper limits of the proposals put forward initially (see Table 3).

Table 3: New changes to biomass tariff and tier threshold system (source: BEIS consultation response)

The tier threshold dictates when you receive tier 1 or tier 2 tariffs for the heat produced. The government stated in the initial consultation that it was worried that the existing tier threshold (15 per cent), 'incentivised the over-sizing...and over-production of systems'. So the new tier threshold (35 per cent) is designed to help stop this from happening by paying for more heat under tier 1 tariffs (3,066 hours over a year rather than 1314 hours previously) instead of tier 2. 

In addition, the government will, 'assess whether wood fuel drying should remain as an eligible heat use' and continue to receive support - but they haven't made any changes for now. It should be remembered that this sort of change would not affect existing installations.

Biomass CHP
The government had planned to add tiers to the biomass CHP tariff. This change has not been made. They have decided to reduce the 20 per cent (or above) power efficiency requirement down to 10 per cent for the biomass CHP tariff. This is a requirement to receive the biomass CHP tariff for all of the heat produced. This change has immediate effect. 

Solar thermal
As in the domestic scheme, solar thermal is retained at the existing tariff levels.

Heat pumps
Under the new scheme, the RHI tariffs for both air source and gorund source heat pumps remain the same. The only significant change is the ability for shared ground loop ground source heat pumps to be in domestic properties, but receive non-domestic RHI tariffs with the heat demand deemed (like the domestic RHI scheme). These installations will also need electricity meters and have a heat demand limit of 30,000 kWh per year. There will be no payments for heat generated over this limit.  

Anaerobic Digestion
Significant support has been given to biomethane and biogas. Deployment has been very high over recent months leading to a number of tariff reductions. The government has announced a 'reset' of those tariffs, to allow more growth in the sector going forward (see Table 4).

Table 4: Comparison of new 'reset' tariffs for Anaerobic Digestion against previous tariffs

As expected the government will introduce a requirement for at least 50 per cent of the feedstock to be from waste (or residues) in order to receive RHI support. This is a change designed to reduce the carbon emissions from the sector considerably. For Anaerobic Digestion (AD) plants that are 1 MWth and over this will be part of an independent sustainability audit report. Additionally, the drying of digestate is no longer eligible for support.

If preferred you could choose to go for the new tariffs for a project in development from now until the legislation comes into force, but this will only be applicable if you meet the new requirements detailed above. Developers will have to make a decision on a case-by-case basis. Once the new regulations come into force, all new plants will have to adhere to these requirements.

Changes to both domestic and non-domestic

Budget cap
The budget cap introduced in April 2016 provides the government the ability to shut the entire RHI scheme to new applicants with 21 days notice (or less), if certain limits are breached. With the introduction of a tariff guarantee for the larger and more complex projects and the uplift in tariffs for a number of technologies, the risk of this occurring is greater. The margin between central predicted spend provided in the impact statement and the cap limits is quite tight (see Figure below). The market response to the new reformed RHI will need to be closely monitored by government and others in order to manage the budget using tariff reductions.  

Figure 1: A graph of the total RHI predicted spend and the budget caps up to 2020/21 (source: BEIS impact statement).

Tariff reductions
The government has simplified the tariff reduction (known as degression) arrangements. They aim, 'to stop tariffs from continuing to reduce once deployment slows down'. In the domestic RHI, tariff reductions could be less likely as a new growth trigger will need to be breached, as well as the current technology trigger.
In the non-domestic RHI, the initial 50 per cent total anticipated expenditure trigger and the consideration of the size of the previous tariff reductions, will be removed. 
The impact of these changes will depend on what level the new triggers are set post April 2017, which will be published in the legislation. In general a simplification of the tariff reduction system is good for the sector.

BEIS has shown heat ambition and ability to listen 

This is an ambitious set of changes for the renewable heat sector to digest. Particular winners are solar thermal, domestic heat pumps and AD. Biomass has fared reasonably well considering the proposals and rhetoric put forward in the consultation, with an increase in the domestic tariff and higher than anticipated non-domestic tariff. The tariff guarantee and tariff reduction changes could have a big impact on the delivery of the scheme and the budget expenditure up to April 2021. 

This consultation response represents one of our first indications of how BEIS is approaching the sector. On this basis, the process has proved open and responsive to the views of industry. How the RHI will dovetail with a wider strategy on heat and decarbonisation, only time will tell.

Author: Olly Frankland

Contact: ofrankland@regensw.co.uk