In our November 2010 E-Bulletin we announced confirmation of the Renewable Heat Incentive (RHI) and that the Government had set aside £860 million to fund the scheme.  On 10 March 2011, DECC released a paper giving the long-awaited details on the RHI, a scheme to provide long-term financial support for renewable heat technologies - the first of its kind in the world.

Background and potential

The RHI will be funded by Central Government and is aimed at driving a seven-fold increase in renewable heat over the coming decade.  Heating accounts for 47% of total UK final energy consumption and more than three-quarters of energy use across all non-transport sectors (Energy Consumption in the UK, DECC (2010)).  The threats and challenges of climate change are clear and the RHI has the potential to reduce carbon emissions and encourage the switch to renewable heat sources.

How does it work?

The RHI will provide financial support to the owners of eligible renewable heat sources.  The scheme will be administered by Ofgem and it is expected that it will be as user-friendly as possible with much of the administration carried out via an online portal.  The RHI will be funded by the UK government and will be implemented using a phased approach.

Phase 1 – the non-domestic sector

The non-domestic sector is expected to be up and running by summer 2011.  This initial phase is focused on the "low hanging fruit" as the non-domestic sectors represent the most cost-effective way of delivering renewable heat, decreasing carbon emissions and helping the UK meet its renewable energy targets.  Systems installed since 15 July 2009 will be eligible for payments under the scheme.

The payments will be made quarterly over a 20 year period and the tariffs will be index-linked but also subject to "degression" in the same way as Feed-in Tariffs.  (Degression is the mechanism whereby tariffs are reduced annually to reflect, and to some extent encourage, expected decreases in technology costs.)  It is important to note that unlike Feed-in Tariffs, no agency relationships will be allowed and RHI payments will be made to the owner of the installation or the producer of biomethane.  DECC has stated, "The word 'owner' has its standard meaning, so the owner of an installation will be the person with exclusive rights and liabilities in respect of that installation.  The owner will therefore usually be the person who purchased and paid for the installation of the equipment."  The legislation has been drafted to allow an individual in possession of an eligible installation under a hire purchase, conditional sale or similar agreement to receive RHI payments despite such an agreement providing that they are not the legal owner.

Phase 2 – the domestic sector

Phase 2 is expected to begin in October 2012 although some funding will be available before then in the form of Renewable Heat Premium Payments.  The premium payments will be paid to households who install renewable heating and will subsidise the cost of the equipment.

Levels of support

RHI payments will be calculated by multiplying the appropriate tariff (see table below) by the eligible heat use.  The tariffs aim to reflect a "cost-based" approach where the tariff levels vary depending on the cost of the technologies at different scales.  In particular, the tariffs are calculated to:

  • compensate for the additional cost of the renewable technology over fossil fuel heating;
  • provide an incentive to overcome non-financial barriers; and
  • provide a return on the additional capital invested.

The tariffs are calculated to compensate for the additional cost of renewable heat.  This means that they do not compensate for the full cost either of the renewable heat equipment or any fuel used by the renewable heat equipment, but only for the additional cost of such equipment and fuel above that of the fossil fuel alternative (the exception is solar thermal).

DECC notes, "Tariffs have been calculated on the basis of a required return on additional capital invested of 12% for technologies and fuels except solar thermal.  This reflects the fact that renewable heat is still relatively unknown in the UK and that from this low starting position, the renewable heat market needs a kick-start in order to encourage high growth quickly.  The Government believes a 12% rate of return represents the likely level of compensation that professional and commercial market participants will look for with this type of investment (i.e. any business considering renewable heat either for its own heat requirement or to produce for sale to others."

Levels of support

 
Tariff name
Eligible technology
Eligible sizes
Tariff rate (pence/kWh)
Small biomass
Solid biomass; Municipal Solid Waste (incl. CHP)
Less than 200 kWth
Tier 1:
7.6
Tier 2:
1.9
Medium biomass
200 kWth and above; less than 1,000 kWth
Tier 1:
4.7
Tier 2:
1.9
Large biomass
1,000 kWth and above
2.6
Small ground source
Ground-source heat pumps; Water‑source heat pumps; deep geothermal
Less than 100 kWth
4.3
Large ground source
100 kWth and above
3
Solar thermal
Solar thermal
Less than 200 kWth
8.5
Biomethane
Biomethane injection and biogas combustion, except from landfill gas
Biomethane all scales, biogas and combustion less than 200 kWth
6.5

 

 

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