Changes to the Renewable Heat Incentive (RHI) and their Impact on Biomass Projects for Local Government

APSE Energy has been advising local authorities on a range of different renewable energy projects over the past couple of years. However, there was a discernable fall off in projects relating to biomass boilers about 6 -9 months ago, which was caused by the announcements that RHI was to be reviewed. That created uncertainty about its future after March 2016.

Fortunately, that uncertainty has now come to an end, with the Chancellor of the Exchequer announcing new funding for the RHI moving forwards to 2020/21. It was always likely that the Government would continue to provide incentives in this area, bearing in mind the fact that it is still well short of its renewable heating targets under the EU Renewable Energy Directive. Now it is known that RHI spending will increase from £430m a year in 2015/16 to a whopping £1.15bn in 2020/21.

However, there are also changes afoot. Having said that new funding has been confirmed, the Government started a Consultation process earlier this month on re focussing the RHI scheme to maximise its impact. This means that if local authorities are to progress, they are likely to secure higher tariff payments for most projects in the next 12 months. That window of opportunity is there to be exploited, as explained below.

The Introduction of the RHI

This article is only focussed on the non-domestic RHI scheme, which was introduced in November 2011. By the end of last year, 13,580 installations had been completed, the vast majority of them the fitting of biomass boilers.

Some of these installations were by local authorities, where good rates of return could be secured by, for example, fitting a biomass boiler instead of a gas boiler in a school building. The RHI can be claimed for 20 years and over that period of time would deliver a substantial saving for the Council. In our view, not enough Councils recognised the value of the RHI a means of reducing energy bills and meeting carbon targets.

Historically, heat has been a much harder target for the Government to reach. The UK targets in the Renewable Energy Directive are 15% of energy from renewable sources by 2020. To achieve this level of overall deployment the UK has decided that renewable energy sources will provide 30% of electricity, 12% of heat and 12% of transport. The Government is set to achieve the electricity target fairly easily with the success of wind, bioenergy, hydro and solar PV. However, its current performance on heat is approximately 3%, well short of the 12% it needs in the next four years. This matters, as the heat market is nearly twice as large as the electricity market and means the UK has little prospect of meeting its binding 15% overall target as it stands.

The first phase of funding under the RHI for biomass projects ran from 2011 to March 2016. As indicated above, the Chancellor’s 2015 Autumn Statement allocated a budget for the RHI, but even after that it was not clear now the new money would be allocated. That has now been clarified in the Consultation exercise explained below.

Consultation: The Renewable Heat Incentive: A Reformed and Refocused Scheme

This Consultation was published by DECC on 3 March 2016. Its contents had been eagerly awaited and in almost 90 pages, DECC explains how it sees the RHI moving forwards to 2020.

The news is not all good or arguably sensible. Some areas, such as solar thermal have fared particularly badly – as that area will not be covered at all under the new proposals. For biomass, the position is better for larger schemes such as process heat users and energy intensive industries, but tariff changes proposed from April 2017 will affect the returns available from typical local authority schemes. This also has to be seen in the context of a range of other changes to the scheme, such as air quality and sustainability of supplies, which may make projects more onerous.

It is proposed that the reforms will be introduced in two stages: the first stage reforms have already been decided and will take effect on 1 April, in a couple of weeks time. The second stage reforms are up for consultation and will impact from the Spring of 2017. There is still the prospect of influencing DECC on the outcome of these proposals, by responding to the consultation.

The proposals are based on six principles: that the RHI is affordable; that it offers taxpayers value for money; that it promotes those technologies most likely to be strategically important in the longer term; that it contributes to sustainable markets; that it promotes widespread access; and that it incorporates robust scheme design. It is said that to implement these principles to form RHI 2, the scheme will need to be reformed.

New Budgetary Measures

One of the major changes proposed is in relation to overspend on the RHI budget. Here, the Government has the experience of what happened with Solar PV under the Feed in Tariff regime to remind it that budgets can soon overspend. Accordingly, it has set in place mechanisms to make absolutely sure that this will not happen. Firstly, the annual budgets have been stated (see p14 of the Consultation Paper). This also includes a prediction of which technologies the money will be spent on, seeing biomass reduce in comparison to other areas such as heat pumps.

Secondly, a degression mechanism will continue to operate (as has been the case in previous years). However, to add to the degression mechanism, there will be a budget ‘cap’ system implemented. This is seen to be necessary as degression only goes so far in limiting spend and cannot control the number of applications made. A budget cap - which will apply from April 2016 – effectively means that the scheme can be closed to new applicants.

Biomass Heating Projects

It is recognised by the Government that whilst biomass installations have dominated RHI schemes to date, these schemes have all been of a similar type: small and medium boiler installations. It is also recognised that the schemes with the best carbon performance, in accordance with the UK’s emissions targets, are larger schemes, including district heating networks and biomass CHP. So RHI 2 will be structured to change the emphasis in relation to biomass projects. This happens from April 2017 and means tariffs will not be so attractive for most local authority scale projects after that date.

The current system (until March 2017) is based on three tariffs for biomass: small, medium and large schemes. Each of the first two has two tiers of payment, with the first tier covering the first 1,314 hours of full load operation in the year and a smaller payment for heat delivered over that level for the rest of the year. The new scheme proposes a tier 1 tariff for all sizes of biomass boilers of between 2.03 – 2.90  pence per kWh, with the tier 2 tariff paid after 3,000 hours at between 1.8 and 2.03 pence per kWh.  This will ensure that larger schemes are favoured, such as those over 1MW and in the process heat and industrial sectors.

The new tariff will be supported by a single budget and a single set of degression triggers. On the positive side, tariff guarantees will be available for schemes that will be in a development phase for some time before commissioning. This is essential if the Government wants to favour larger, more complex schemes where funding will certainly be an issue. Tariff guarantees have been proposed as preliminary accreditation, which does exist for RHI schemes, does not promise any particular tariff will apply (unlike its cousin in relation to both FITs and ROCs in electricity generation). This will fix that anomaly. However, for biomass projects to qualify for a tariff guarantee, the project must be over 2 MW in capacity.

The Government’s proposals in relation to sustainability have now come into effect. These were proposed at the start of the RHI in 2011, but had been delayed, to enable the industry to put in place the required evidence and processes. The two elements to this are a greenhouse gas lifecycle emissions target and land use criteria.

The GHG lifecycle emissions targets were postponed numerous times, but eventually came into effect in Autumn 2014. By this time the Government had taken the view that the industry had had sufficient time to build an appropriate audit trail to demonstrate compliance. Of course, the easiest way to comply with this element is to purchase wood fuel from a supplier on the approved Biomass Suppliers List. Alternatively, it is possible for a large landowner to source biomass from its own landholdings and still be within the provisions.

The land use criteria were implemented in April 2015 and are consistent with those applicable under the Renewables Obligation. These consist of wood fuel land criteria and land criteria consisting of general restrictions on the use of biomass from land with high biodiversity or high carbon stock value, such as primary forest, peat or wetland.

What Does This Mean for Local Authority Schemes?

The Renewable Heat Incentive is going through more change and history has shown that the DECC proposals are usually implemented largely as proposed; even if they may not deliver the objectives hoped for. This means that we can probably see the shape of the RHI and calculate its impact on biomass projects over coming years.

Crucially the tariff for biomass over 200 kW and below 1 MW until March 2017 is still very good: at 5.18 pence per kWh for tier 1 and 2.24 pence per kWh for tier 2. After that it reduces by half if DECC get its way.

A rough business case for a biomass heating scheme in a secondary school is described below, demonstrating the benefits of acting quickly to capture this opportunity.

A ‘typical’ high school requires an 800 kW biomass boiler to replace its existing gas boilers. Annual biomass running costs (wood fuel and maintenance costs) would be around £50,000 a year. The scheme would generate £55,000 a year in RHI income at current tariffs. Therefore a biomass scheme heating typical high school would result in a net income of £5,000 a year. In addition the site would not need to purchase gas it was using before, saving about £42,000 a year (even at the current historically low gas prices). Nearly 300 tonnes of C02 would also be saved.

The costs of a 800 kW scheme would be in the range £300,000 to £350,000. Taking an assumption of £325,000 build costs and £46,499 savings the simple payback would be 6.9 years. The simple payback would be improved in practice as gas prices rise and so payback in reality is likely to be between 5 and 6½ years.

If capital costs are a barrier, biomass installers can provide a design, build, finance and operate solution, so that carbon savings are delivered with zero capital spend.

But this window of opportunity will not be open for long. As is usually the case with Government incentives for renewable energy, the money will be spent and the circumstances will change. However, we are aware that many local authorities have already undertaken preliminary feasibility work on biomass projects and can therefore move forwards quickly. There is no doubt that early mover advantage will apply here and those that are able to commission schemes in the next 12 months will benefit the most.

Stephen Cirell is the Lead Consultant with APSE Energy on renewable energy. Steve Luker is also a Consultant with APSE Energy and is a specialist in biomass heating. They are authors of ‘A Guide to Biomass Heating Projects in Local Government’ published last year.