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'World's first RHI' launch over-shadowed by FITs debacle

Posted by Stewart Boyle on 7 December 2011 at 10:08 am

The long-awaited Renewable Heat Incentive (RHI) officially ‘opened for business’ on 28th November. With £864 million available for the cashback scheme to support biomass boilers, solar water heating systems, heat pumps and bio-methane projects, it should have been a day of great celebration and popping champagne bottles.

In truth the renewable heat (RH) sector is actually breathing a huge sigh of relief over a strong cup of tea that the scheme has started at all. It is also apprehensive about the future beyond the next few years. 

The past six months has seen the RHI increasingly affected by the collateral damage of rolling cuts to the solar PV feed-in tariff (FITs) scheme. Renewable heat companies have ended up spending precious time simply shoring up client confidence that the RHI will actually happen and that the tariffs won’t face sudden cuts within six or 12 months.

With DECC officials and energy ministers running scared about over-spending on renewable support schemes, it was no surprise to see recent swingeing cuts to ‘big biomass’ heating tariffs by DECC. Paul Thompson of the REA (Renewable Energy Association) rightly described these as "a drastic reduction" which undermined the advanced plans of a number of companies. They came on the back of an embarrassing screw-up in signing off the scheme with EU State-Aid officials, a growing lack of commitment to domestic biomass boilers, and low tariff rates for solar thermal. It’s all a far cry from the near euphoric announcement by Chris Huhne in March this year, when he proudly highlighted 'the worlds first renewable heat incentive" and talked about saving 44 million tonnes of carbon by 2020. 

So what has actually happened to the RHI, what are its prospects and where should domestic and commercial investors be looking at to make sensible decisions?

As a tariff-led cashback scheme, the RHI has a lot going for it. Incentivising well run heat schemes with 20 years of guaranteed support should help build a sustainable industry. Companies will finally be able to plan and invest long-term, avoiding the ‘stop-start’ nature of the previous grant support schemes.  

What we have ended up with is an increasingly proscribed RHI, with tight budget levels in each year and the likelihood that any under-spend will simply go back to the Treasury. Table 1 shows the budget limits. With £56 million available for this financial year, and £16 million of this earmarked for the Renewable Heat Premium Payment (RHPP) scheme, it’s a poorly kept secret within DECC and the industry that the RHPP money will be significantly under-spent – perhaps by as much as £8 to £10 million. 

Table 1: RHI Budget - 2011-2015 (Source DECC)

Year 1 2011/12: £56m Year 2 2012/13: £133m
Year 3 2013/14: £251m
Year 4 2014/15: £424m

Of the £16 million earmarked for the RHPP scheme, £4 million has recently been allocated to social housing under a competition scheme. In addition, we now know that just over £2m worth of RHPP voucher was allocated between August 11th and late October 2011. This divides as follows between the technologies:

Solar thermal: 791
Air source heat pumps: 921
Ground source heat pumps: 514
Biomass boilers: 427

Source: DECC and Energy Savings Trust, November 2011

Not all of the voucher allocations will be used in the end but if we assume a 75% uptake and a continuation of uptake at similar levels until the end of March 2012, then we could assume a further £3m to £4m uptake. From the £16m allocated therefore even a fair wind might see more than £8m under-spent, and heading back to the Treasury.

Whether £40m can be spent under the main commercial scheme is also debateable – a simple function of time. Most companies in the sector assume it will be at least £5 to £10m under-spent – making a total under-spend of up to £18 million or one-third of the whole year 1 allocation. The rate of growth after that might allow us to get back on the curve but having the ability to switch funds between years would make more sense.

On the domestic front, Oliver Duckworth, MD of Windhager UK, a Cheltenham-based wood pellet and log boiler company, admits there are serious sales pitch issues. He puts the sales problem as: "it’s a tough sell to say to clients, 'we have £950 on the table and we hope there is more but we can’t guarantee it and we have no idea of the conditions that might exist'." One of these conditions might be to only get RHI tariffs with a really energy efficient home. What is appropriate for relatively modern homes would be a non-starter for much older buildings where you can’t use cavity wall insulation or double-glazing. 

For domestic solar thermal, with a £300 RHPP – around 6-8% of an average domestic scheme costs – and a tariff providing maybe £85 a year, it’s an even harder sell. For this and other reasons Windhager UK and other companies have re-orientated their business to small commercial biomass and solar, including social housing and residential care homes. With a growing sense of ambivalence from DECC to supporting domestic systems, it is a sensible business move. 

Rich promise for the RHI lies in the middle heat ground.With domestic renewable heating unlikely to boom short term, and now big biomass above 1MW effectively scaled back due to cutting tariffs by 2/3rds, the real RHI promise lies in the middle ground. From 50kW to 999kW, and particularly at just under 200kW, good investments are still possible. The same is true for ground-source heat pumps and solar below 200kW. Schools, hotels, residential care homes, hospitals, small-scale district heating projects, country estates with woodland, social housing and leisure facilities can all do well under the scheme. My own analysis of 30 plus projects over the past six months has suggested an 8-17% IRR for such projects, with an average level of 12.5%. All of the main biomass heating companies I have canvassed recently are doing quite well, with many recruiting staff. One long-established company reported their “best month ever” in October this year.

Bigger district heating schemes may struggle, as there is no uplift in tariffs to reflect the much higher costs of the heating infrastructure. Under the rules of the scheme the heat losses between separate buildings will also be excluded from payment – a double whammy which may prove hard to overcome.

The future for domestic renewable heat projects? 

While domestic renewable heat projects have suffered in the back-wash of the domestic solar PV tariff climb-down, there is still some life in the sector. If the industry manages to get practical proposals agreed by DECC which make the Green Deal workable, and the tariffs are reasonable, the lift-off may yet happen after October 2012. A growing awareness within DECC that it will be heavily under-spent on the RHPP scheme may start to tip the balance towards a more attractive tariff approach. Until then, don’t expect significant growth.

Cheers – the RHI adventure begins!

Waiting for the renewable heat incentive has at times been a surreal and painful experience for the renewable heat sector. While we are looking forward to a buoyant period – notwithstanding that the UK is about to go into a double-dip recession – our belief in the Government’s green credentials has been badly dented. The mood music from some sectors of Government that renewable energy is expensive is certainly not helpful. 

Many companies who have made significant investments are nervously wondering if these can now be justified. The wood pellet sector alone has for example invested more than £85m in the past few years on new production and delivery capacity. With more than 500,000 tonnes of pellet capacity, it is ready to service a massively expanded industry - but will this become a reality? Right now many export the bulk of their production or sell it to co-firing coal plants.

At this stage I guess we just have to take a deep breath, raise our glasses (or cups of tea) and say 'cheers' as we finally welcome the RHI. We now have to get on and show the Government what we can do. As one of the most cost-effective parts of the renewable market – up to six times cheaper at saving carbon than solar PV - it’s up to us to demonstrate our value and worth and start saving some serious carbon. We also need to start fighting our political corner and make sure our message is getting out there.

Photo by Mick

About the author:

Stewart runs the consultancy arm for South East Wood Fuels. His book The Sleeping Giant Awakens: Bioenergy in the UK will be published in May 2013. Click here to get a free download of the first chapter and put Free Download in the subject line.

If you have a question about anything in the above blog, please ask it in the comments section below.

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