The long-awaited Renewable Heat Incentive (RHI) formally ‘opened for business’ today. With £864 million available for the cashback scheme to support biomass boilers, solar water heating systems, ground source heat pumps and bio-methane projects, it should be 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 actually started at all. It is also apprehensive about the future beyond the next few years.
The past 6 months has seen the RHI increasingly affected by the collateral damage of rolling cuts to the solar PV FITs scheme. RH 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.
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 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 and 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||Year 2 – 2012-13||Year 3 - 2013-14||Year 4 – 2014-15|
Of the £16 million earmarked for the RHPP scheme, £4 million of this has recently been allocated to social housing under a competition scheme. In addition we now have some numbers as to the RHPP voucher uptake and allocations to date. Between August 11th and late October the voucher allocations were:
|Table 2 – RHPP Allocation and Uptake to October 2011|
|Technology||Voucher Numbers||Value £||Total £|
|Air source heat pumps||921||850||782,250|
|Ground source heat pumps||514||1250||642,500|
|Source: DECC and Energy Savings Trust, November 2011|
Not all of the voucher allocations will be used in the end but if assume a 75% uptake and a continuation of uptake at similar levels until the end of March 2012, then we could assume a further £3 to £4 million uptake. From the £16 million allocated therefore even a fair wind might see more than £8 million under-spent, heading back to the Treasury. Whether £40 million 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 £10 million 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 Year’s would make more sense.
On the domestic front, Oliver Duckworth, MD of Windhager UK, a wood pellet and log boiler company, puts the sales problem simply 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 heating including social housing and residential care homes. With continued ambivalence from DECC to supporting domestic systems, it is a sensible business move.
Rich Promise for 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. 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
Bigger district heating (DH) 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 RH Projects?
While domestic RH 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 they 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 RHI has at times been a surreal and painful experience for the RH 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 Government that renewables are expensive is 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 £85 million in the past few years on new production and delivery capacity. It is ready to service a massively expanded industry – but will this become reality?
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, 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.
Stewart BoyleRead More...