All systems go for the Renewable Heat Incentive

Updated March 2011

The Coalition Government has, for some time, been expected to publish their proposals for the Renewable Heat Incentive (RHI). The RHI was proposed by the previous government in February 2010 as part of the UK's Renewable Energy Strategy.

We can now report that the long-awaited proposals, including draft legal regulations, have been published and that they contain a number of key changes to the original proposals issued by the previous government. This article summarises the new proposals and highlights those changes.

If you wish to comment on the proposed regulations, the government has indicated that it will consider any such comments provided they are received by 5 April 2011.

Phased approach

A key change to the original proposals is that the government has split the implementation of the RHI into two phases.

The first phase, intended to be implemented in July this year, provides the expected long-term financial support for heat output from eligible renewable heat installations, but critically will only do so in the non-domestic sector. Similar long-term support for the domestic sector will not begin until the second phase of the RHI, to be implemented in the autumn of 2012.

On an interim basis, as part of the first phase, the government intends to make available to the domestic sector approximately £15 million of funding for what it calls "Renewable Heat Premium Payments". These will be direct payments to subsidise the installation of renewable heating systems in domestic properties. Specific details of how the Renewable Heat Premium Payments part of the scheme will work are expected in May 2011.

Those persons who have received or are receiving Renewable Heat Premium Payments will also be able to apply for tariff support when the second phase of the RHI is implemented.

The RHI has been phased in this way so that what the Government views as the big emitters in the non-domestic sector are prioritised to maximise the effectiveness of the scheme. In addition it is hoped that the Renewable Heat Premium Payment Scheme will provide valuable insights to enable the Government to appropriately scope what renewable heat technology should be prioritised under the Renewable Heat Incentive in the domestic sector.

Domestic/non-domestic

Domestic installations are those where a renewable heating installation services a single private dwelling only. It will still be considered to be a domestic installation where a landlord (whether a private landlord or a registered provider of social housing) installs single renewable heating units in one or multiple residential dwellings. Any such installations will not be eligible for long term support under the RHI until the implementation of the second phase.

District heating (for example a block of flats serviced by a central boiler) on the other hand will be eligible for RHI during the first phase. However the Coalition Government has confirmed that no additional compensation will be paid to reflect the additional cost associated with such systems, such as installing an appropriate piping network.

Reviews

The Government may at any time review the operation of the RHI. However, in light of the controversy surrounding the recently announced fast-track review of the feed-in tariff (FIT) scheme for renewable electricity, the Government has expressly recognised in its proposals that it is necessary to avoid making changes to the RHI scheme too often or unnecessarily to avoid impacting on investor confidence and ultimately the overall success of the scheme.

RHI proposals summary for the first phase (non-domestic installations)

Equipment covered

A wide range of equipment and technology will be covered including solid and gaseous biomass, solar thermal, ground and water heat-pumps, on-site biogas, deep geothermal, energy from waste and injection of biomethane into the grid. Certain technologies will be kept under consideration for inclusion in the second phase. Others such as exhaust air heat pumps are excluded altogether.

Eligibility

The owner of the relevant equipment (or producer of biomethane) will be eligible to receive RHI payments. Unlike the FIT scheme, the proposals state that the right to receive RHI revenue cannot be assigned formally to a third party recipient, such as a bank providing finance for a particular project.

Financial assistance available

The financial support payable for eligible equipment will depend on the technology type and size. Payments will be made quarterly over a period of 20 years irrespective of the type of installation. Some technologies have tiered tariffs to discourage production of excess heat.

Payments have been calculated to provide eligible persons with a 12% return on investment for all types of eligible technologies, with the exception of solar thermal where a different approach has been used by the government to determine an appropriate tariff rate.

Heat output for all equipment is to be metered. There will be no estimation or 'deeming' of heat output (as contemplated by the original proposals for certain types of installation), although, as noted above, we still await further details on how the second phase of RHI for the domestic sector will work.

The tariff levels will increase with inflation but will also be subject to review and also, like the FIT scheme, subject to degression (reduced support for new projects in the future) to reflect cost reductions in renewable heat equipment as the market develops. The government has not yet issued any specific degression proposals, but has stated that it will seek to introduce degression in 2012.

Transition cut-off date

As envisaged in the original proposals, the RHI will be available for installations completed on or after 15 July 2009. In line with the approach taken on the FIT scheme though, it should be noted that such installations will not be eligible for the RHI where other public funding has been or will be provided in relation to such installations.

Certification requirements

Installations will have to be accredited with OFGEM. For small and medium-sized installations, both installers and equipment will need to be certified under the Microgeneration Certification Scheme or similar standard (as contemplated by the original proposals).

Governance

As envisaged in the original proposals, OFGEM will administer the RHI, make the relevant incentive payments and audit and enforce the scheme.

Funding

The RHI will be funded through general government spending and not through any RHI levy on fossil fuel suppliers.

For more information on the Renewable Heat incentive, or any other renewables issues, please contact Maria Connolly.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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