Imminent implementation of Renewable Heat Incentive

Updated March 2011

This article provides an overview of the Renewable Heat Incentive (RHI) including the previous government's RHI proposals and the current uncertainty surrounding the RHI pending the publication of the Coalition Government's RHI proposals.

The Coalition's proposals are now expected imminently and we will be issuing a further update as and when they are published.

Background

As part of the UK's Renewable Energy Strategy (published in 2009) the Government set itself a target of increasing the proportion of heat obtained from renewable sources in the UK from the current level of 1% to 12%. This forms a key part of the UK's wider target of sourcing 15% of overall UK energy needs from renewable sources by 2020.

In order to stimulate the increased use of renewable heating technologies it was recognised that, in a similar way to which the feed-in-tariff (FIT) scheme works for renewable electricity projects, some form of financial assistance scheme would be required to promote the uptake of renewable heat technologies.

In February 2010, the previous Government issued proposals for a financial assistance scheme, the RHI. The intention at that time was to implement the scheme in April 2011.

Key elements of the February 2010 RHI proposals

The key elements of the RHI as proposed in February 2010 are as follows:

Equipment Covered

A wide range of equipment and technology would be covered, including solar thermal, biomass boilers, renewable combined heat and power, air, water and ground-source heat pumps, injection of biomethane into the natural gas grid, biogas and bioliquids.

Eligibility

The owner of the relevant installed equipment would be eligible to receive RHI payments. Financial assistance would be made available for eligible renewable heating projects, irrespective of size, ranging from individual household installations through to community projects, industrial and commercial installations and installations on public buildings and social housing. As with the FIT scheme, the owner's right to receive the RHI revenue would be assignable e.g. to funders.

Financial assistance available

Payments calculated on the annual amount of heat output for the relevant equipment would be payable to eligible persons so as to provide a return on investment of 12% for all eligible technologies. This is with the exception of solar thermal where the intended rate of return would be 6%. The intention was that the payments would be made for the expected lifetime of the relevant piece of equipment. Additional payments would be available for certain technologies to compensate for non-financial barriers.

For smaller installations, the amount of heat generated by the equipment would be estimated or 'deemed' when installed. For larger scale installations the heat output would be metered.

Cut-off dates

The RHI would be open to installations completed after 15 July 2009 and all other eligible new projects until at least 2020.

Certification requirements

In small and medium-sized installations, both installers and equipment would need to be certified under the Microgeneration Certification Scheme.

Governance

OFGEM would administer the RHI, make the relevant incentive payments and audit and enforce the scheme.

Funding

The key issue of how the RHI would be funded was left open for discussion in the February 2010 proposals. There was some concern at the time that a proposed renewable heat incentive levy on fossil fuel suppliers would be too complex and costly to operate for both government and industry.

Current uncertainty

Since the publication of the February 2010 proposals, it has been a bumpy ride for the RHI.

With a change in government there were initial fears that the RHI would be scrapped altogether as part of the Comprehensive Spending Review. These fears proved unfounded when, in October 2010, the Chancellor of the Exchequer confirmed the government's commitment to the scheme and also indicated that £860 million would be allocated to fund the scheme.

Despite this renewed commitment to the RHI, the Coalition Government proposals for how the RHI will work, originally intended for release in December 2010, have still not been published. In addition, the planned implementation date for the RHI has been pushed back from April 2011 to June 2011.

There is a concern that these delays and uncertainty will impact on the willingness of investors to fund renewable heat technology and related projects. The recently announced review of the FIT scheme, especially the fast-track review for larger scale solar PV projects, may have created additional fears about the political risk associated with investment in tariff backed projects. The Coalition Government's RHI proposals are now awaited with baited breath.

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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