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Why the RHI probably won't encourage domestic solar thermal installations

Posted by Cathy Debenham on 1 October 2012 at 12:12 pm

New announcements about the solar water heating calculation for domestic RHI render this blog no longer relevant. For the latest information click here.

Unlike the feed-in tariff, the RHI (renewable heat incentive) is not designed to provide a specific rate of return. It is intended as a boiler replacement scheme, and as such, aims to cover the additional capital costs of investment in a renewable alternative.

Relative to the renewable energy that it provides, solar thermal is a more expensive technology than the others included in the incentive shceme. As a result, DECC has chosen to cap the tariff at the marginal cost of renewable energy – which is 17.3p – in its consultation on the domestic RHI. If there wasn't a cap, the rate of RHI for domestic solar hot water would be more than £1 per kWh (using the methodology used for all other technologies).

The economics of the RHI for a domestic solar thermal installation:

Average energy demand for 3-bedroom semi with cavity walls = 15,000 kWh per year of which 3,700kWh per year is for hot water.

A solar thermal system is estimated to produce 60% of the hot water = 2,200kWh

RHI = 17.3p per kWh paid for seven years.

2,200 x 17.3p = £380.60 per year
x 7 years = £2,664.20

Cost for installation for 3 bed semi providing water for family of four is likely to in the range £4,000 - £5,500. For this example I'm going to take the middle of the range: £4,750.

The running cost of solar thermal is estimated at around £100 a year (cost of electricity to run the pump, plus c. £200 every four or five years for servicing). However, if you have solar PV installed this should reduce or negate the cost of running the pump.

Financial savings per year from a solar thermal system vary considerably depending on what fuel you are replacing. Rough estimates for our 3-bedroom semi are:

Replacing electricity: £280
LPG: £212
Oil: £147
Mains gas: £92

It’s not entirely surprising that, at this rate, DECC expects the deployment of solar hot water systems to be “very low”. It is consulting on whether there is evidence to support a higher tariff - ie a reason why the cap should be broken (solar PV is currently subsidised above the cap). It is also asking whether a one off grant would be more attractive, or a combination of grant and tariff.

To put this in a historical context, under the low carbon building programme of grants which preceded the feed-in tariff, solar thermal was the most popular technology. This was despite the fact taht the grant for a domestic installation was just £400. 

We'd love to hear what you think of the solar thermal tariff level in the comment section below. Would it encourage you to install? If not, what rate would? Would an upfront grant be a greater incentive?

Solar thermal installed with complementary technologies

DECC thinks that there are often significant advantages in the performance of renewable heat technologies of installing solar thermal alongside. This reduces the need to use a biomass boiler in summer when space heating isn't needed, and heat pumps perform more efficiently in combination with solar thermal, as it can heat the water to higher temperatures.

Given that the cost of installing both technologies may well put people off, DECC is consulting on whether it should pay "an uplift" to provide an additional incentive to install solar hot water systems with complementary technology. It is also asking for views on what size of tariff would provide sufficient incentive.

The consultation closes on 7 December. You can download the document here. Or let us know below what you think and we’ll incorporate it in our response.

NB: this blog was revised on 3rd October, and again on 8 October.

Photo by Tony Roberts

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

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Comments

15 comments - read them below or add one

Cathy Debenham

Cathy DebenhamComment left on: 15 October 2012 at 8:27 am

Fred, the difference is that the RHI is paid for 7 years, so it doesn't even recover (pay back) the initial capital cost of solar thermal system. The feed-in tariff (FIT) is paid over 20 years, so it will pay back the investment, and carry on giving income after that has happened.

PDF27: good point. If the subsidies were more even, it might make people think about getting smaller solar PV arrays, and adding a solar thermal system at the same time. As you say surely makes more sense to do the hot water with solar thermal than with solar PV.

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Fred1

Fred1Comment left on: 13 October 2012 at 9:05 am

Hi pdf27,

I am getting consused again . Are not the two technologies being supported almost the same. The return for solar using Cathy's latest latest numbers would be £380.6 payment over £4,750 cost so I think that for Solar the return is 380.6/ 4750 or 8.01 %

For PV, based on your cost of £7800 ( although I have seen much cheaper systems quoted) and your subsidy of £620

So I think for PV the return is 620/7800 or 7.95 %

However this is not in line with the statements from DECC saying they expect the take up to be low and the statement that for RIH solar the payment needs to be over £1 per Kw hour....

Any thoughts on my calculations???

 

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pdf27

pdf27Comment left on: 12 October 2012 at 11:47 pm

Solar Thermal isn't similar to the other technologies supported in that it isn't a boiler replacement system, but rather a boiler supplement. Accordingly, it makes more sense to deal with it under a FIT-style payment scheme - PV after all isn't designed to replace your electricity supply but rather supplement it and export the excess to the grid.

It should be noted that Solar Thermal captures about twice as much energy per unit roof area as PV, but at the moment (and with the proposed RHI values) it makes more sense to install PV specifically to run an immersion heater. A 4kW PV system costs around £7,800 and will get a subsidy of £620 a year (16p/kWh + 50% deemed export) for 20 years generating 2200 kWh/year. The equivalent solar thermal system will have a subsidy of £380 a year for 7 years - £2600 in subsidy against £12,400, yet the PF is only £3000 more expensive

I think the condensing of the subsidy into the first 7 years actually makes a lot of sense - given that people will often move house in the course of 20 years, if it takes 20 years to pay back they will be discouraged from installing it. Having the subsidy pay in the first 7 years means the benefit of the subsidy goes to the person who paid to install the unit, and subsequent owners benefit from the fuel savings.

I would suggest that given how widely applicable solar thermal is, being of benefit and saving energy to most of the UK housing stock, and how much of a potential to get the installation cost down there is, the subsidy should be higher and aimed at replicating the success of FITs for solar PV. At the very least, if Solar Thermal is to be included, the subsidy should be high enough to be competitive with fitting solar PV + an immersion heater. Right now it isn't!

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JT

JTComment left on: 10 October 2012 at 2:35 pm

Thanks for clarifying that Cathy. 

Still £2,664.20 is much better than the £300 grant on offer at the moment.  I'm surprised they're not predicting better up take.

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Cathy Debenham

Cathy DebenhamComment left on: 8 October 2012 at 8:11 am

My apologies for the confusion (see comments below). This blog was correct as originally published. JT is right that the RHI is designed to pay on 20 years of generation, put wrong in the manner of calculating it. This has been incorporated in the tariff rates, and so you just multiply by seven - as per the calculations in my blog. This has been confirmed by the DECC press office.

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Plumb Solar LTD

Plumb Solar LTDComment left on: 4 October 2012 at 7:58 pm

If you size a system for space heating and hot water e.g. large thermal store of 750-1000litres and 10-12 sq metres of collector then the return will be much better...But if it is just a hot water system with a thermal store you will not get any meaningful contribution to space heating from the solar.

 The men from DECC and the STA also mentioned the possibilities of taking the cylinder as a separate item with regards to the RHI. Upgrading a cylinder can save you from 500-1500 extra kWh's / year in fuel

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Cathy Debenham

Cathy DebenhamComment left on: 4 October 2012 at 5:59 pm

Hi Fred

The scheme is under consultation at the moment, so no one can be certain what it's going to pay. As I say in the article, this is what they are thinking about, but I guess it will depend on what the responses are like. If your decision to change is dependent on the RHI, then it would be wise to wait until the government publishes its response to the consultation which is expected to be early next year.

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Fred1

Fred1Comment left on: 3 October 2012 at 6:15 pm

Cathy,

I am on mains gas so going for RIH I will save £92 per year compared with gas, the cost is £4,750 so without tariff payments from other taxpayers the payback would be 4750/92 approx 51 years.

Are you sure the scheme will deliver as generous a yearly payout as you assert???

 

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Fred1

Fred1Comment left on: 3 October 2012 at 5:52 pm

Editor's comment: please note that these figures are not correct - see blog & comment above.

A RHI return of 22.89% looks attractive, (Using the cost in your blog of £4,750 and yearly income of £1,087.43)

. Payback of 4750/1087.43 = 4yrs 4.5 months looks good also.

I imagine the cost could come down if the boiler manufacturers/ big six continue to offer boiler scappage grants, say £400 or £800 at the beginning.

Cheap finance using the green deal would open this scheme up to everyone. Getting a 23% return using finance at say 0.5% -1% would encourage take up.

I imagine the tariffs would go up at a higher rate than general inflation since alternative fuels costs  are increasing rapidly.

These changes would increase the rate of return, and could cause a lot of people to invest.

Be interesting to see the final numbers from DECC.

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alba

albaComment left on: 3 October 2012 at 4:45 pm

I am a bit confused by the decc consultation on the RHI from the impact assessment it seems to me that the tariffs themselves have been adjusted to reflect 20 years payment over 7 years so that your calculations would be very different to those in the blog.  I am under the impression that it would be deemed amount x tariff for 7 years.  This would work out to an amount that would roughly be equivalent to the difference in installing a fossil fuel system versus a biomass or ashp system (which is what the incentive is designed to do).  For solar thermal and gshp it doesn't really come close which is why I think they say they don't expect their to be a large uptake in these technologies.  Would like to hear if anyone has any further information on this or has managed to speak to anyone at decc on this.

Editors comment: this is correct.

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3coPete

3coPeteComment left on: 2 October 2012 at 6:17 pm

It is interesting that you touch on combined renewable technologies, I have assumed that the DHW element of a heat pump would be removed from the RHI claim if solar hot water was also being claimed. For that reason I thought it best to combine PV with ASHP/GSHP as they do not compete for RHI money.

It would be good to see your financial explanation relative to ASHP or GSHP if possible.

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JT

JTComment left on: 2 October 2012 at 5:04 pm

It does seem to imply that they would condense 20 years of heating into 7 years of payments. 

So that would be £380.60 x 20 = £7612

£7612 / 7 =  £1087.43 per year for 7 years.

I'd be happy to receive £7612 in payments for a solar thermal system. We could do with a worked example from DECC to clarify the language.  

Editor's comment: The 20 year return has been worked into the tariff level, so you just need to multiply by 7.

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Cathy Debenham

Cathy DebenhamComment left on: 2 October 2012 at 4:26 pm

Thank you for pointing this out Jonas. You're right - I'm just about to re-jig the numbers.

I agree, JT. The numbers look fine to me, now I've corrected the error. While reductions in your bills aren't huge, they will get better as fossil fuel prices increase, and you more than get the original capital expenditure back. What's not to like?

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Jonas

JonasComment left on: 2 October 2012 at 1:11 pm

Maybe I have this wrong, but reading section 139 of the consultation document I understood it that the proposal was for the tariff to be paid over 7 years, but that this would be for the total heat generated over the entire 20 years. In which case Cathy's numbers would look very different. That all said, the consultation impact assessment thinks that take up for solar thermal will be low! I would be interested to hear other's interpretation...

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banjax

banjaxComment left on: 2 October 2012 at 9:19 am

Wonder what the figures would look like if the standard solar thermal installation included a thermal store and the contribution to space heating?

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