The Big Question: Will the U.K. Renewable Heat Incentive Work?

In this edition’s Big Question feature, we asked readers to give us their predictions for how the U.K.’s recently announced Renewable Heat Incentive will play out. Will this new policy successfully engage industry and consumers? What will the outcomes be for manufacturers, consumers and industrial sectors?

David Thorne, CEO, Gemserv

The Renewable Heat Incentive (RHI) is the first scheme of its type and all eyes will be on the U.K. to determine its success and whether it can be replicated by other countries.

It is vital that the tariff bands are set correctly to prevent the market from being distorted and to create a level of stability which will ensure economic success. Currently, the government has sought to set tariff levels to achieve a 12 percent annual rate of return for installing renewable heat technology. However, it is unable to predict all changes to the industry and the impact the RHI will have. Therefore it is vital that the tariff bands are regularly reviewed to ensure the market is not over incentivised and to take into account changing technology costs.

Dramatic changes in the incentives would, however, result in unease within the industry, especially with regards to investment opportunities in the technology. Since the budget for the scheme is set by the Treasury each year, it’s important that larger installations don’t take ‘too big a piece of the pie’, so to speak. The larger the system, the greater the heat generated and amount paid (albeit at a lower tariff rate), so to ensure that smaller-scale domestic installations gain access, any subsequent tariff cuts are most likely to be imposed on the larger scale “non-residential installations” – in other words, the commercial and industrial sectors. There is, of course, a fine balance to be achieved, since these sectors will deliver the largest proportion of overall renewable heat generation. Naturally, any reduction in tariff bands could adversely affect demand for renewable heat technology across the board – for manufacturers, consumers and the commercial and industrial sectors.

Xavier Noyon, Secretary-General, European Solar Thermal Industry Federation

On the whole, both the European Solar Thermal Industry Federation (ESTIF) and the solar heating industry were enthusiastic when the RHI consultation was launched in 2009. For years ESTIF has been promoting renewable heat as a sector with huge potential but requiring specific policies. Industry had already pointed out the benefits of financial incentives based on a systems’ performance/output rather than on mere square metres. On both counts the outline of the RHI was promising.

At the time, we did not contradict some of the preliminary studies commissioned in preparation for the RHI, such as the NERA/AEA (2009) and the NERA (2010) reports on initial and levelised costs that were biased, with a negative effect on solar thermal. Besides warmly welcoming the initiative, ESTIF concentrated its efforts on the recognition of the Solar Keymark alongside national marks and on the importance of a proper and accurate measurement methodology based on European standards.

Source: Ritter Solar

Following the initial consultation phase, there was a long period of uncertainty due to both the political changes and the 2011 financial situation. Once the financial decisions were made and it became obvious that the RHI would be maintained in some form, a first period of consultation resulted in the launch of the RHI for the non-domestic sector. In this scheme, solar thermal does not get fair treatment and the negative effects of the originally flawed cost analysis to be found in the background studies result in a tariff for solar thermal which does not offer a satisfying return on investment.

The announcement on the crucial domestic sector was postponed and Renewable Heat Premium Payments have just been introduced as an intermediate solution. Today we do not know what will be the tariff for domestic solar thermal, but considering the premium payments and the non-domestic scheme there are no grounds for optimism. Despite the fact that the U.K. is home to some pioneers of the solar thermal industry, it fails to acknowledge the full potential of solar thermal.

The RHI is an excellent example of a very ambitious and well-conceived policy that results in conflicting effects in the market due to problems in its implementation.

The concept of a tariff for renewable heat is making progress in Europe (Spain, Italy) and the U.K. will serve to test large-scale implementation of such innovative schemes, testing issues such as monthly payments, metering and so on. However, the great uncertainties surrounding the “domestic” RHI are discouraging for both consumers and industry, leading to a stagnating market in 2011.

Neil Schofield, Head of External and Government Affairs, Worchester-Bosch   

The first thing to say is that the RHI is a very welcome initiative by the government which could be a game changer in terms of the U.K.’s uptake of renewable technologies, in particular solar thermal and heat pumps.

However, there is good and bad news. Any government incentive will drive the market as we have already seen with the feed-in tariff for solar PV. If, on the back of the RHI, take-up is greater than anticipated it is not impossible that the government could again begin to rein demand back in.

It has been made clear by government that the £860 million (US$1.3 billion) set aside for the RHI is set in stone and will not be increased. However, it has also been made clear that this money is ring-fenced and will not be reduced.

My concern now is that the government may be forced to eke out the cash to make it last for the full three years, which could lead to a stop-start, stop-start approach, which we are already seeing with the gap between the end of the RHI Premium Payment and the full start of the programme in 2012.

Longer term, the government has taken a very risk-averse approach to implementation due to fears of abuse of the system. However, this has led to the development of a highly complicated system which is a potential red-tape headache for commercial applicants with the potential to put off domestic households altogether.

This is particularly ironic given that the government has said it wants to cut red tape for small businesses.

David Blake, Renewable Energy Recruitment Manager, Allen & York

From conversations we’ve had with our marketplace contacts, there are positive signs for the way in which the RHI will affect the installation levels of renewable energy technologies.

The incentives published by DECC of an increase in the number of industrial, commercial and public sector installations by seven times to 2020 look achievable.

Nevertheless, the key make-or-break difference is the fact that, unlike the FiT, the RHI is being financially supported by the Treasury and not the energy user, so again there is a dependence on the government’s decisions around reward levels.

In addition, recent revisions of the FiT (after a very short period of time) show how unpredictable incentive schemes can be.  These revisions can be seen as a direct result of large firms and utilities monopolising the FiT incentive, which is an issue that will hopefully be addressed by the RHI. This time the playing field seems to be more level, with room for the smaller providers as well as the large energy companies, which is a positive step forward.  

Heating is responsible for 46 percent of U.K. carbon emissions; the RHI aims to cut that by 10 percent by 2020. This will not only support a predicted 150,000 jobs in the heating industry, but also bolster the renewable energy market within the U.K.

I have come across a certain degree of scepticism surrounding the RHI, probably due to the frailties of the FiT. However, if successful the RHI could be an integral part of strengthening the security of the U.K. renewable heating supply and reducing our dependence on fossil fuel heating. It is hard to predict whether this incentive will be a success, but I believe it’s the best option to date and would like to see it work.

Paul Thompson, Head of Policy, REA

DECC decided to split the policy in two “phases” so that issues they could not resolve in time for 2011 don’t hold back the RHI as a whole. Although there are plenty of quibbles to make on phase one, the main concerns are not over what has been missed out – which, we hope, will be included in “Phase 2” from 2012.

As with the FiT, the big question is whether there is enough money to back the scheme. The RHI’s budget to 2014-2015 has been divided into four annual budgets. There is no flexibility between years, so any overspend in one year will have to be made up elsewhere – and any underspend goes straight back to the Treasury. This makes the task of getting the RHI up and running even harder. The longer a project takes to complete, the harder it will be to live with the risk of tariff changes – a particularly unfortunate outcome as these will generally be claiming the lower rates.

Treatment of CHP is another issue. At the time of writing, we are still waiting for the government’s proposals on the future of the CHP “uplift” within the Renewables Obligation. If the uplift is removed, those projects will be dependent on the RHI. As we’re talking about a relatively small number of large projects, this would compound the difficulty of staying in budget.

The RHI is a major achievement, and certainly has the potential to deliver. But there is still a great deal that could go wrong, and government must be very careful to finish the job in Phase 2 – and implement it as promised by autumn 2012.

Peter Verkempynch, Managing Director, Daikin U.K.                                 

Although its first phase may not have extended as far as many would have liked, the fact that the government has stuck to the principle of accelerating the widespread domestic take-up of renewable heating technologies should be applauded.

This incentive is a much-needed fillip for an industry which until now has been inundated with lots of sticks – in the form of standards and regulations – but very few carrots.

In the domestic heating sector there is no doubt that its introduction is good news for all concerned. Payments will be made to the home owner in addition to any savings resulting from the installation. By embracing the opportunities that the RHI brings, it is possible to set homes apart by offering a real marketing advantage – both in the private market and for social housing (where fuel poverty is high on the agenda).

The inclusion of air-to-water heat pumps in the long awaited details of the one-off Renewable Heat Premium Payment is a welcome demonstration that the government has confidence in this technology. Given this, the next logical step is to include them as part of the wider RHI.

We see the continued development and widespread adoption of air-to-water heat pumps as an investment in the UK’s future. However, at the moment only a small minority of homes will benefit from explicit incentives. The decision to restrict some RHI payments to the fewer than three million U.K. homes in off-gas areas means that more than 19 million homes will not currently benefit.

Robin Welling, Managing Director, Tisun Gmbh

The U.K. government is to be applauded for being the first to implement an incentive of this nature. However, there is a lesson for other countries wishing to implement similar schemes, in that any scheme needs to be executed within the time frames announced. The U.K. government has repeatedly delayed the implementation of the scheme resulting in possible purchasers holding off from investing in a solar system. This has achieved the opposite of what the RHI was intended to do, which was to stimulate the market for renewable heating. Investor confidence has not been increased by the lack of information over the past two years, and as yet the government has not announced the all important details of domestic RHI payments.

Now that the RHI has been confirmed for implementation for commercial installations at the end of September, we believe that the uptake of solar thermal will see increases similar to the effect that the feed-in tariff had on solar PV.

While the payment of 8.5 p/kWh is far below the 43 p/kWh that solar PV is awarded, the lower capital cost of solar thermal will generally achieve payback in under 10 years, according to our modelling. If there are further increases in the cost of fuel like the recent 18 percent increase in the U.K., the case for solar thermal is clearly strengthened.

In summary, although the government’s vacillation has damaged the solar thermal industry, the RHI will still result in increased uptake.

Cathy Debenham, Founder and Director, Yougen

Heating our leaky old housing stock is a significant cost for most people in the U.K., and with oil and gas prices rising is only likely to get greater. This means more people in fuel poverty. It’s also a significant cause of carbon emissions. So it makes sense to incentivise people to both to reduce their needs and switch to renewable heat.

There is much to welcome in the domestic element of the Renewable Heat Incentive. I’m pleased that basic energy efficiency measures must be in place to qualify, and it’s great to hear that there’s going to be research into how people use renewable heat, and how well it works in practice. I also welcome its integration with the Green Deal. But (there had to be one) policy seems to be being made on the hoof.

The six-month window for applying for the renewable heat premium payments (RHPP) is during the winter, when you don’t really want to be doing major renovations on your heating system. Then there are five warm months before the launch of the RHI proper – will that be sufficient time to obtain any meaningful data and feed it into the design of the RHI?

And how high will take-up be? The government still hasn’t announced what rates will be available for the domestic incentives, and what the eligibility criteria are. Without this information, such investment is still prohibitively expensive for most people.

Source: WDS Green Energy

Many installers have dismissed the renewable heat payments as too small to make a difference. A change in the price of oil is much more likely to get their phones ringing.

I realise that this is a difficult “chicken-and-egg” situation. Without the findings of their research, the eventual Renewable Heat Incentive probably won’t be as effective in incentivising uptake of solar thermal, biomass boilers and heat pumps. But unless people know the long-term financial implications of investment, I don’t think these relatively small grants are likely to be enough.

As for the domestic RHI – it’s difficult to comment on whether it will be a success until we have more information. I really hope it will be.

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