Non Domestic RHI Reforms: Implications for Local Authorities

In his latest blog for Clean Energy News, Stephen Cirell teams up with fellow APSE Energy consultant Steve Luker to consider the Government announcements on the RHI and considers the implications for local authorities.


Introduction

There has recently been a flurry of activity on the Renewable Heat Incentive. This follows the Government publishing its final proposals for reform of the scheme on the 14th December 2016. This blog offers a brief summary of the latest reforms and suggests how Local Authorities might best exploit the new opportunities that have been presented.

Any comments about the non domestic RHI should start by recognising that it is remarkable to have a 20 year output-based, state funded, index linked support mechanism for renewable heat. The Renewable Heat Incentive was a world first and unique when it was introduced. In the melee that that has followed each reform of the system, the positive factors of the existence of a mechanism at all has sometimes been forgotten.

The scheme has made a major difference to the economics of renewable heat and will continue to do so. On balance the reforms are highly welcome and positive for those looking to invest in renewable heat technologies, especially biomass heat and district heating.

Given that about 50% of the UK’s total energy use is heat, this is a big deal. For Local Authorities heat also remains a major cost and is often the single largest contributor to its carbon emissions.

It is indeed emissions that is really driving this agenda. Under the various Directives, the UK is performing well in relation to renewable electricity, but is well behind its targets on both heat and transport. Continued Government support for the RHI was always assured for this simple reason.

Background to the reforms

In November 2015 the Government renewed its commitment to the ‘transition to a low carbon economy’ by confirming a continued budget for the RHI right through to 2020/21. Then in March 2016 the Government set out its initial proposals for reform of the RHI. On the 14th December 2016 it published final proposals for reform of the scheme. These reforms will start to be implemented in April 2017.

As Government rightly puts it:

‘By confirming the available budget up to 2020/21 and setting out a number of reforms to how the scheme will operate, the RHI now provides the level of certainty needed for consumers and industry to invest in renewable heating and for the market to transition towards being sustainable without Government support in future’.

The final comment ‘without Government support in the future’ is a clear signal that the RHI is not likely to be around after 2021, particularly if the emissions targets have then been secured (which they should have been). Local authorities should therefore be aware that there is a defined window of opportunity to secure 20 years of RHI payments ending in 2021, if the right projects can be identified.

Eligible renewable heat technologies

Below is a brief description of the seven technologies that can secure RHI payments and how the reforms change the RHI.

  • Solar Thermal

The Government originally intended to remove support for solar thermal projects. It is therefore to be welcomed that it has changed its mind (largely due to extensive lobbying by the trade organisations) and the tariff will remain at the current level of 10.28p/kWh, as will the limit of 200 kW maximum size.

  • Heat Pumps

There will be no changes to the tariffs available in support of either ASHPs or GSHPs through the scheme. The tariff for ASHPs will remain at 2.57p/kWh. The tariff for GSHPs will remain at 8.95p/kWh for Tier 1 and 2.67p/kWh for Tier 2 with no change to the tier threshold. GSHPs sharing a ground loop will continue to be eligible for support however, for domestic properties sharing a ground loop payment will be made on the basis of deemed heat use, as in the domestic RHI scheme.

  • Deep Geothermal

Deep geothermal plant of all sizes will continue to be eligible for the scheme, with a tariff of 5.14p/kWh.

  • Anaerobic Digestion (Biogas)

For biogas, the tariff level will be reset to the levels between October and December 2016. (4.43p/kWh for small scale plant; 3.47p/kWh for medium plant and 1.30p/kWh for large plant).

  • Biomethane gas grid injection

The reforms will reset the tariffs available in support of biomethane production to the levels available between April and June 2016. The Tier 1 tariff will be set at 5.35p/kWh; The Tier 2 tariff will be 3.14p/kWh; and the Tier 3 tariff will be 2.42p/kWh.

  • Biomass CHP

There will be no further changes to support for biomass-CHP. Changes were introduced in August 2016 which set a minimum power efficiency which plant need to reach in order to claim the biomass-CHP tariff for all their eligible heat use.

  • Tariff Guarantees

Tariff guarantees for biomass heating are now to be provided, offering investors greater certainty regarding their tariffs earlier in the project cycle. The three current biomass tariff bands will be replaced with a single tariff, which will be subject to tiering. The Tier 1 tariff will be set at 2.91p/kWh and the Tier 2 tariff at 2.05p/kWh. Each plant will have a tier threshold equivalent to a 35% load factor (raised from 15%).

Implications for Local Authorities

For most Local Authorities the way the reformed RHI supports biomass heat will be of most relevance and indeed for most non-domestic RHI applicants that will also be the case.

It seems less likely that Local Authorities will want to develop deep geothermal projects, anaerobic digestion schemes or attempt biomethane gas grid injection, as these are all complex schemes. Perhaps food waste might tempt groups of authorities to go down the AD route, but this has not happened to date.

Another alternative is the potential to support private sector developers who seek to plan such projects in their areas. It will be interesting to see if the certainty brought about these reforms unlocks a flood of such new projects.

Of more direct interest to Local Authorities, however, will be the payments available for heat pumps, solar thermal, biomass heat and possibly Combined Heat and Power (CHP). The reason that there will be more support in these areas is that the availability of support for 20 years means Council owned buildings can switch to renewable heat and reduce heating costs and carbon emissions at the same time. At a time when every local authority is seeking to reduce costs and boost income, this is a genuine opportunity to add value.

In general this will be about retrofitting biomass boilers into existing buildings that are currently heated with gas. In smaller (more domestic scale) and new build schemes heat pumps and solar thermal may play a modest role.

Perhaps the key opportunity is now around district heating heat via biomass – as the new tariff is most attractive at the larger scale that district heating requires.

Identifying Schemes

Bearing in mind the above, every local authority should be considering where district heating schemes would be possible. As an example, consultancy work was being undertaken in a North Wales authority that was building a solar farm. The meetings were held at the Council’s offices, which fronted on to a green. Along the green was another civic building, a Police Authority HQ, a library and the local Court building. Fairly close there was also a museum and a leisure centre.

Clusters of civic buildings of this nature, all with a reasonable heat load (particularly the leisure centre) would make an ideal heating network. It is also the case that support from BEIS for early feasibility work is available via the Heat Networks Development Unit (HNDU).

Conclusions

The removal of uncertainty and the clarity over support to 2021, with tariff guarantees, means local authorities can now confidently plan biomass heat and district heating investment projects in their own buildings and possibly in partnerships with others: Housing Associations, Health Trusts, the Higher and Further Education sector and even the private sector.

The biomass heat tariffs make best sense for higher, stable and diverse heating loads. That is why, for example, district heating connecting a care home, a leisure centre and offices will be a great typical application.

As ever, of course, the case for biomass heat investment is heavily affected by the competing cost of gas. So Local Authorities will need to make some assumptions about gas pricing if they are to make major investments in a competing fuel like biomass.

But in general terms the RHI reforms around biomass heat offer a real opportunity for Councils to deliver large scale renewable heat in their own buildings and in town centres and nearby buildings.

Stephen Cirell and Steve Luker are consultants with APSE Energy. They are the authors of A Guide To Biomass Heating Schemes for Local Authorities and the Public Sector, published in 2015.