Renewable Heat Incentive - safe from degression (for the time being)

Following the most recent check on uptake Ofgem has announced that the commercial RHI tariffs will remain unchanged.

This was the first serious 'degression test' for the commercial RHI. DECC's figures show that both the small and medium commercial biomass tariffs had exceeded their degression trigger points:

• Small commercial biomass: Forecast spend over the next 12 months is £32.3m. This is £4.3m over its individual technology trigger.

• Medium commercial biomass: Forecast spend over the next 12 months for is £26.5m. This is £0.2m over its individual technology trigger.

However, because spend for all other tariff categories were considerably below their individual tariff thresholds for this quarter, and overall spend was within budget, Ofgem has decided to leave all tariffs unchanged.

Commercial RHI - total spend (Nov 14 2013)

Total forecast expenditure for the scheme (as of October 31st) was £70.3 million. 

As the £70.3m figure does not exceed either threshold (see below) the scheme has been left unchanged:

• The “50% trigger” for the scheme as a whole as at 31 October is £71.6m.

• The “100% trigger" for the scheme as a whole as at 31 October is £143.3m.

Biomass heating is clearly the biggest 'winner' from the commercial RHI. In contrast to the feed-in-tariff (FiT) for renewable electricity, which grew exponentially, RHI growth has been far more linear (and thus more predictable).


But as you can see the commercial RHI was very close to its degression trigger in October - for some tariffs - and we suspect that things may get even tighter in the near future.

Uptake of commercial RHI Source: KDAONB

The forecast spend for the small commercial biomass tariff means that it is already above its next quarters individual technology trigger (£30.9m on January 31st 2014).

This means that there is enhanced risk of degression in this tariff.  However, this would only occur if next quarter’s 50% trigger for overall expenditure of £83.2m was also exceeded.

RPI (%) Source: ONS

The good news is that the scheme overall is nearing its third 'inflation point' on April 1st 2014.  

The commercial RHI tariffs have already been increased by the Retail Prices Index (RPI) twice (4.8% in 2012, 3.1% in 2013) and the increase may help offset degression  if it happens.

However, the latest figures from the ONS show that the RPI is falling so the cushioning effect may not be so marked in April '14.

Domestic RHI - summary of scheme proposals

DECC has published its response to the consultation on the domestic version of the Renewable Heat Incentive (RHI).  The response includes a lot of detail on the types of technology that will be supported, their 'performance' and the type of properties and tenure that will be eligible.

To assist readers we have produced a summary of the proposals as they stand.  This can be found here.

The proposals for biomass heating are of particular interest to this blog.  The main points of interest include:

• The tariff for biomass has increased from 8.7 p/kWh (initially proposed in 2012) to 12.2 p/kWh.  Whilst this is slightly below the 13-15 p/kWh we would have liked to see it is clearly an improvement.  The final tariff is yet to be announced but presumably it will be well before the proposed scheme opening date of April 1st 2014.

• The tariff will be paid over seven years according to deemed heat.  This is the heat load as determined by the EPC that is created during a Green Deal assessment which is a mandatory requirement.

• Legacy systems installed since 15th July 2009 will also be eligible providing they were installed by an MCS accredited company.  
• Biomass equipment will need to meet meet air quality standards in relation to particulate matter (PM) and oxides of nitrogen (NOx). Legacy installations, installed between 15th July 2009 and the launch of the scheme, will not need to meet this requirement.
• A new requirement around fuel sustainability will be introduced for  biomass installations.  To be eligible for and continue to receive RHI support for a biomass system, fuel needs to be sourced from a supplier registered on an approved supplier list. Such a list will be set up ahead of the launch of the scheme and will be the same one that is being established for the non-domestic RHI scheme.

The final point on sustainability is interesting and has important implications for wood fuel suppliers. To be included on the list, DECC intends that fuel suppliers will have to meet two criteria from April 2014:

• Supply fuel which complies with the greenhouse gas (GHG) lifecycle emissions target of achieving 60% GHG savings against the EU fossil fuel heat average, assuming a boiler efficiency of 70%.
• Report their performance against the relevant land criteria from the following list (although compliance with the criteria will not initially be required):
• For wood-fuel: the UK public procurement policy on wood and wood products or its equivalent

Evidence of legality and sustainability can come in two forms:

• Category A evidence is independent certification of the timber/ timber products by any of the forest certification schemes that meet the policy requirements (such as FSC and PEFC).
• Category B evidence is alternative documentary evidence that provides assurance that the source is legal and sustainable.

Category A evidence is the 'belt and braces' approach and undoubtedly involves the procurement of external expertise from Forest Stewardship Council and the accredited certification bodies are authorised to issue FSC certificates.

The alternative is Category B evidence and you will be glad to hear that this includes use of the Forestry Commission's Woodland Planning Grant (WPG) that falls under the English Woodland Grant Scheme (EWGS).  

However, the WPG Category B option is open to owners with less than 100 hectares of woodland, and more than 3 hectares, and whose woodlands are not certified.  As such it is envisaged that owners with more than 100 hectares will pursue the Category A, full certification option.

As ever we would recommend a good read of the full DECC document to make sure you pick up all of the salient points.

Latest results from Renewable Heat Incentive (RHI) show steady uptake

Ofgem's latest set of results for the Renewable Heat Incentive (RHI) paint a positive picture about the uptake of the World's first renewable heat incentive.  

Whilst the numbers overall are still small uptake accelerated during the first 15 months of the scheme and installed capacity approximately doubled every quarter.

At the end of March '13 there were 1,238 approved installations and a further 649 being processed.  Only eight applications had been rejected. Total installed capacity was 266 MW and these installations had generated 168 million kWhth.  Cumulative payments were £7.62m.


The technology split is still dominated by biomass (92%) with solar thermal and ground source heat pumps making up the majority of the remainder (3.9% and 3.4%, respectively).

The emergence of solar thermal as the second most installed technology under the RHI is interesting. It is not clear what the split is between stand-alone systems and those integrated with biomass systems. As Jamie Oliver would say biomass boilers and solar panels are "best friends" and the latter can make a useful contribution to the overall efficiency (and no doubt payback) of a biomass system.

The message overall, therefore, appears positive. We of course know that the RHI has already had to return some of its funds due to under-performance, but given the long lead-in time for biomass and its relative high capital cost it is perhaps not surprising that the situation is 'steady'.

In Kent installation activity for biomass boilers is again steady. Of the projects we know about around 2 MW of biomass heating capacity has come on-stream since December '12. These project at a range of scales but most are in the sub-200 kW range at the moment. Most are chip systems with local fuel supply.

RHI Developments

Whilst the policy overall is very much intact there have been one or two changes that are of interest:

• Medium tariff (200-999 kW): This tariff was inflated on April 1st 2013 and then promptly deflated by 5% (which effectively brought the tariff back to its pre-April 1st level). This only has a minor impact on the attractiveness of the tariff which, in our opinion, remains very good.
• Large tariff (1 MW+): This was doubled to 2.0p.

These tariff adjustments are fairly straightforward and only to represent some fine-tuning rather than a radical re-think or withdrawal of support.  The small tariff has remained unchanged to date.  The current tariff is shown below and can be found here. 

The Ofgem website indicates that the next tariff table will be published on September 15th. It is not known at this stage whether more changes are planned...we will keep an eye out.

Other developments include:

Degression

On 30 April 2013 the Renewable Heat Incentive Scheme (Amendment) Regulations 2013 came into effect. These regulations introduced:

• A long term cost control mechanism, otherwise referred to as the degression mechanism.
• removal of the provisions relating to the scheme suspension mechanism (Stand-by Budget Mechanism) introduced in the Renewable Heat Incentive Scheme (Amendment) Regulations 2012.

The degression mechanism enables reductions to be made to an individual tariff, or all tariffs, if certain requirements set out in the RHI (Amendment) Regulations are met. It aims to ensure that the non-domestic RHI does not exceed its fixed annual budgets by lowering tariffs to bring deployment down

in line with affordable levels.

Simplification of metering requirements

DECC is addressing issues raised by stakeholders about the complexity of metering requirements and the proportion of complex systems. DECC is addressing this by requiring that the installation only installs meters necessary for the RHI payment formula. This will allow heat loss from external

pipework to be disregarded in specific circumstances (ie if properly insulated). If it is either physically or financially problematic to install a heat meter, we will allow applicants to instead submit a heat loss calculation.

A number of industry associations are taking steps to develop RHI specific training and assessment programmes for those that wish to provide Independent Reports on Metering Arrangements (IRMA). In the interim the Building and Engineering Services Association has published a Guide to Good Practice for Heat Metering in the RHI.

Air quality (AQ) compliance

DECC is introducing requirements for all biomass burning installations to submit a valid certificate or an environmental permit with their application. This will need to show that the boiler complies with the required AQ limits. All applicants with biomass burning installations will now need to submit an RHI emission certificate or a valid environmental permit with their application. If an applicant is submitting an RHI emission certificate it will need to show that the boiler complies with the specified air quality limits.

RHI: consultation on interim cost control

DECC has launched a consultation on possible approaches to cost control for the RHI.

The document focuses on the amount of notice that would be provided and is largely informed by the difficulties that were caused by short-notice changes to the Feed in Tariff.  The proposals range from one month, one week and no notice.

The document also clarifies the structure of the RHI budget.  It is interesting to note that each year has a fixed budget and any underspend will not be carried over to the next year. 

As of 18th March 2012 298 applications hd been received, of which only 11 have been accredited.  Based on the current level DECC expects that spend in 2011/12 will be approximately £2m, which is somewhat short of the £56m allocated to 2011/12 (although this includes £25m for RHPP Phase 2).

Based on this uptake DECC suggests that the proposed interim cost control measure would not be needed and suspension would not occur.

However, based on our recent interaction with installers there is likely to be a step-change in the number of new applications over the next quarter as both new systems and post July-2009 projects are submitted.

Annual RHI budget (Source: DECC)

Predicted budget allocations for 2012/13 are:

• £15m - from installations already accredited
• £40m - new installations coming on stream

The main points from the consultation are as follows:

• The Renewable Heat Incentive continues to be a top priority for Government as a means to reduce our carbon emissions and because it is central to delivering our strategic framework for heat. It is therefore essential that the RHI policy is sustainable and that we have the ability to ensure that year to year spending does not exceed available funding.
• This consultation sets out a proposed interim cost control measure that would suspend the RHI until the next financial year should estimated spending reach a level where the budget could be breached.
• Only new applications would be affected. Accredited installations already receiving the RHI tariff from Ofgem would continue to receive that tariff. Applications submitted to Ofgem prior to the suspension would be processed as normal.
• Current application levels are low relative to the available budget and if these levels were to continue the proposed interim cost control measure is unlikely to be needed. However, there is a high degree of uncertainty about how the market will respond and we need to be prepared for unexpected changes in uptake. Having this interim approach set out in advance will ensure that Government is able to respond quickly if required and that stakeholders will be sighted on future action.
• The proposed circumstances under which suspension would occur will be specified in the RHI regulations and will include a predetermined trigger that would set off suspension and a fixed notice period before the suspension begins.
• We intend to frequently publish the data being used to monitor progress towards the trigger. This will allow the market to make informed decisions about the likelihood of suspension.
• We are proposing this policy as an interim measure. Over summer we plan to consult on a longer-term flexible degression-based mechanism which would automatically reduce tariffs should spending against the overall budget or deployment of certain technologies exceed forecasts.