The Government announced the details of its Renewable Heat Incentive today and the key question is how does it shape up? First thing to say is that this is the first scheme of its kind and this Government should be applauded for carrying through the work of the previous Government in getting such a scheme in place. The second thing to say is that we should not underestimate the importance of this. While electricity supply can be decarbonised by using large installations – be it wind farms, wave power, hydro or nuclear – heat can’t. Given that heating is responsible for three quarters of our energy use (if we don’t count transport) there is clearly a huge challenge if we are going to cut carbon emissions in line with current targets (and an even bigger challenge if we are to make the sort of reductions needed to give ourselves any chance of keeping to a 2 degree target).
So what does the Renewable Heat Incentive (RHI) give us? Importantly, the scheme is not, at the moment, going to cover domestic installations – the plan is to bring these in with the Green Deal in 2012. In the meantime though £15million has been set aside for Renewable Heat Premium payments (from July 2011), which will help subsidise the upfront costs of domestic installations. What does this mean? According to the Environment Agency there are about 4,000 heat pump installations a year and about 80% of those are domestic. So, if we take an average of installation cost of £13k (according to the Energy Savings Trust) then you could offer a subsidy of about 35% to every domestic installation. Obviously if the aim is to increase the number of installations then this figure would drop. Anyway the Government will announce the detail of this scheme in May. Whether whatever subsidy is offered will be enough to persuade people to go ahead with an installation while the uncertainty about the RHI scheme remains is impossible to say.
Having said all that, the message that seems to come across in the document published by DECC is that government doesn't see domestic installations as the real area of interest. Others may disagree but the talk of focussing the scheme to ensure the most cost-effective way of increasing renewable heat, at a time when they domestic installations aren't included in the scheme, does suggest that the domestic sector is not seen as the most cost-effective way of doing this. This is a point which is certainly correct – but clearly low carbon heating in homes is essential and hopefully the details of domestic arrangements will reflect that.
Phase 1 of the scheme is focused on the non-domestic sector – industry and commercial; public and not-for-profit; and community schemes. In the consultation proposals for the RHI payments for installations below a certain size were to be based on estimates of what the system would produce, however, this has been ditched and every installation will now have to be metered. The original reasons for not metering below a certain level were that it is not simple or cheap to meter heat, and that metering could provide an incentive to overproduce heat that you don’t need just to get more money through the scheme. So have these issues gone away? Well it depends. As it says in the report metering on larger systems is commonplace so there is no extra burden – but what about smaller systems for SMEs, community buildings, charities etc.? Thre is no real comment in the document and this seems to emphasise the message that came out that, for the moment at least, it is the bigger installations that matter. What about the second reason? The new proposals have effectively reduced this risk by ensuring that the tariff levels just don't make it cost effective to buy more fuel (biomass, electricity) to run the system to generate more heat than you need. For biomass this has been done by introducing a two tier tariff system – you get paid the higher tariff up to a certain amount and any heat produced above that attracts a lower tariff.
What of the Tariffs themselves – how do they compare with the consultation document? The answer is it varies. Following the theme that the scheme favours larger installations, the tariff levels for installations at the upper end of the scale seem to be higher under the actual scheme compared to the consultation. At the lower end it is more complicated. For biomass the tariff for the smallest schemes (below 100kW) is lower than in the consultation but you will get payments for 5 more years than originally proposed – a quick calculation suggests that this will mean that payments over the lifetime of the scheme will be higher. For ground source heat pumps the picture is not as rosy as the tariff level is lower, and the lifetime of the payments is less as well. It suggests in the RHI document that schemes should be looking at a return on investment of about 12% but it would be interesting to see some examples of this.
Finally there is the issue of where the money comes from? Unlike the feed-in-tariff that is basically paid for by the electricity companies, the £860 million to paid out through the RHI over the first 4years will come from central Government funding. They say that this is because a levy is too complex and that this should alleviate fears about impact on energy prices but surely if it can work for the feed-in-tariff it could work for the RHI? Is this just a case of the Government not wanting to put any more burden on the utility companies? Given that, taking one example, British Gas recently announced profits of £742m, surely some money could be found to fund the scheme? The issue of impact on energy prices seems a bit of red herring. It has been suggested that Ofgem may refer the industry to the Competition Commission because of pricing so there is more going on than meets the eye. In addition, increases in energy process wouldn’t matter so much if we can reduce demand through energy saving measures. If you can insulate you house and reduce your energy demand by 20% then if prices go up by 10% you are still better off (and not just in terms of money). By drawing the cash from Government funds there is always the risk that come the next spending round the Treasury (who let’s face it, is not known for its support of environmental issues) may try and claw some of it back. Although if DECC can get hold of it in the current climate maybe we should be more confident - we shall have to wait and see.