Tuesday, 19 June 2012

RHI cost control mechanism announced

The Government consulted on how it might apply cost control mechanisms to the RHI in May.  The results have now been published and a summary is provided below.

The mechanism will work as follows:

  • The RHI would be suspended for the remainder of the financial year if the budget forecast suggests that the budget could be breached.  For 2012/13 no more than £70m should be spent on the RHI.  Spending more would be likely to exhaust next year’s budget through the cost of installations already receiving RHI funding, leading to a boom and bust approach.
  • Given the £70m cap, the cost control mechanism should suspend the scheme at 97% of the annual budget (£67.9m) with one week’s notice.
  • A weekly update will be provided on the DECC website setting out progress towards the suspension trigger, alongside a methodology used to calculate the forecast.  This will allow the market to make informed judgements about the likelihood of suspension.
  • Those installations that have already been approved will not be affected.
  • Applications made before the notice period will be processed as normal.
  • Applications made during the notice period will be processed if the installation has been commissioned before the suspension date.
  • Applications made after the suspension date will not be processed.

DECC currently estimates that RHI expenditure in 2012/13 will be around £42m.  While this amount could vary, weekly RHI application rates would need to increase by around 500% by the end of the year to reach £70m. Therefore, DECC sees the likelihood of suspending the scheme as low.

However, DECC acknowledges the high degree of uncertainty about how the market will respond to the RHI and has therefore introduced cost control procedures so it is prepared for unexpected changes in application rates (which is unlikely given that rapid cost reductions are unlikely in renewable heat technologies and also because there are significantly more barriers to the deployment of renewable heat).

As of 27 May 2012 Ofgem had received 533 applications (43 preliminary), had accredited 88 installations and rejected two (on account of these installations having received a grant).  There are concerns about the current backlog of applications for accreditation and Ofgem is working to resolve the delays via reallocation of staff resources and by reviewing approval processes.

A summary of the milestones for the RHI is shown below.

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