Renewable Heat Incentive Analysis

The Government has just published its consultation on the proposed Renewable Heat Incentive Scheme. This signals a major gear up in the incentives paid for all heat producing Renewable Technologies. The technologies covered include:

1. Biomass boilers
2. The Use of Bio-liquids in oil burning boilers
3. Bio-gas for onsite combustion
4. Ground source heat pumps
5. Air source pumps
6. Water Source heat pumps (to be combined within the tariff structure of either air source or water source).
7. Solar Thermal
8. Bio methane injection into the gas grid

The proposal is to pay an index linked, energy based tariff throughout the deemed lifetime of the technology. What that means is that, for every kWh of heat produced by a renewable technology the government will pay an amount of money which depends on the type of technology used and the size of the installation.  Each technology is split into 3 bands in terms of size of the installation the small band is pretty much sized to take in the majority of household applications, the mid range band will include most installations of small businesses and the large scale will apply mostly to significant commercial or industrial enterprises. This incentive scheme is due to come into force in April 2011 and some of the details are still being worked out.

The government has undertaken to include installations completed after the 15th of July 2009 and before the start date of the scheme as if they were completed on the day that the scheme begins so long as they were installed by an MCS accredited installer and used MCS accredited components. There is a requirement to have the energy consumption estimates from at least two MCS accredited providers. The government will then pay out on the lower of the two estimates. The payment of this tariff is unaffected by any grants which may have been paid to assist with the installation cost. The government has, since the publication of the new tariff structure for electricity from renewable sources, moved very rapidly to withdraw other forms of grant aid so expect the same to occur as soon as the final tariff levels for the heat incentive are published. This means that there is still a window of opportunity where grants are available and the tariffs will be paid!

The scheme will be administered by Ofgem and for home owners, the tariffs will be paid annually and will be based on the energy saving figures provided by the installer. These payments will continue for between 15 and 23 years depending on the technology installed. The level of proposed payments has been set so as to provide an approximate 12% return on investment. As stated before, these payments will be index linked to provide inflation protection.

There are a few questions that remain unanswered and there are some conclusions which can be drawn. These are listed below under the headings of political, architect, installer, homeowner and business in order to cut the quantity of information down to a reasonable level.

• If there is a significant uptake of heat pump technology replacing gas and oil appliances there may well be a significant increase in the demand for electricity. The government will need to react to this quite quickly given the current reduction in generating capacity. It may well be difficult to respond in an eco friendly way within the timescales required to fulfil the demand.
• The government recognises that, with wholesale adoption of biomass as a source of fuel, there may be a drop in air quality.
• Ensuring that biomass producers sustainably maintain their land is potentially a significant problem area. Scarcity of biomass fuel and high prices will encourage producers to maximise production and potentially use fossil fuel derived fertilisers. This is of course not ‘sustainable’ in the green sense of the word.
• The government also recognises that a significant increase in the production of bio fuels may ultimately lead to increases in the price of food.

• The tariffs as published do not encourage innovation. They do encourage cost reduction which in some specific instances is equivalent to innovation. In the case of solar thermal technology it definitely is not. Innovation in Solar thermal technology is all about designing panels which are more efficient in varying cloud cover and overcast conditions. The collectors which perform best in these conditions tend to cost a bit more than standard flat plat panels but their steady state performance numbers (how much heat they collect on a cloudless day) are quite similar. It is the dynamic performance that differs. The calculation technique used to set the tariff depends only on the steady state performance and therefore favours cheaper, older technology panels, which do not perform as well in real live situations.
• There is no scope for small scale innovative projects to receive payments from the tariff system as it currently is laid out. To illustrate the point, consider an innovator who wishes to cover the major part of the south facing area of his building with solar thermal panels. He wishes to provide a major portion of his heating in the winter from solar thermal with a large thermal store. In the summer months he will benefit from a low demand for cooling as his south facing aspect will effectively be water cooled. He will have a massive excess of heat generation in the summer months. To make some use of this heat he wishes to generate electricity using an innovative, closed loop refrigerant based generator. He will then have to dump excess heat by mounting condenser panels on the north facing aspect of his property. There is currently no methodology in the proposed tariff structure to allow for a radical design innovation such as that described above. The encouragement of radical innovation is essential to avoid the UK becoming solely a mass importer of cheaply manufactured low technology stop-gap solutions. We would advocate that there be allowance for small projects to opt for a combination of metering and auditing when applying for grants. This would provide for one-off projects to become test beds of innovation. In support of this there needs to be a published tariff for ‘electricity from other renewable sources’ and a tariff for ‘heat from other renewable sources’. These tariffs could be set at a level which would encourage experimentation. Successful spin-off technologies could then have their own tariffs added to the structure when commercial viability was proved.  
• Estate agents will need to be given advice on how they decide the value added to a property by renewable installations and the revenue stream they represent.

• The start point for calculations of heat requirements for new buildings will be the energy performance certificate rather than calculations from within SAP (which may be an overestimate).
• Once the renewable energy contribution from solar thermal (for hot water) or from heat pumps or biomass has been calculated, the approximate repayment amounts can be calculated.
• Optimising the income versus expenditure for a building will depend on many factors and working out the combination of technologies to apply to a project may require the advice of an accredited installer or a consultant.
• It is unclear at this point whether domestic swimming pools will be included in the incentive scheme.
• When performing refurbishments or retrofitting renewable technologies, certain assumptions will be made in the SAP2009 calculations about the energy performance of the building. We are told that the requirements will be quite basic so as not to place too great a burden and disincentive upon the householder. We do know that cavity wall insulation will be assumed where the building type allows and loft insulation will be assumed to be a minimum of 150mm.
• Solar thermal is the only technology covered that has no ongoing fuel cost. Whether to install a biomass or heat pump based heating technology will depend to an extent on estimations of the future relative price fluctuation between the two fuels. If biomass boilers are installed in their hundreds of thousands then there will be a scramble for fuel and the price may well outstrip the cost of electricity. The government will also be placing some regulation on the biomass producers to ensure that their production methods are sustainable. This will inevitably have an impact on future pricing.
• Payment for the incentive scheme will be funded by the fossil fuel providers so there will inevitably be price rises for gas, oil and fossil fuel generated electricity.
• There are no subsidies for designing passive solar or super insulated buildings so their immediate financial attractiveness may well diminish in the short term.

• Only MCS accredited installations will be eligible for incentive payments. In the past this did not matter as the grant level was small enough that the non-MCS installer could absorb the difference through operating a lower cost business.  The market for non-accredited renewable installations will dry up completely.
• The demand for accredited installations is set to grow very rapidly. The fact that the government may well decrease future incentive levels will lead to high demand in the first few years.
• The government has expressed the desire to increase the size of installation covered by the MCS accreditation system to include everything that it defines as being a medium installation.
• The government recognises that there will be a shortage of accredited installers and yet it is set to require that at least two accredited installers perform the calculations for each installation. This will cause a major bottleneck.
• The fact that it will be virtually impossible to sell a non-accredited installation to a customer means that the part of the accreditation process that requires the inspection of an actual installation will be well nigh impossible for a non-accredited installer to achieve.
• Large installations will be metered and the total payment will be determined from the metering rather than by an average calculation used for other installations. Large installations do not require the use of accredited components or installers. It is assumed that anybody undertaking large scale renewable projects will have the expertise to ensure that they get value for money.
• Solar thermal systems are currently specified depending on the number of occupants in a house and their consumption of hot water. This is not useful for under-occupied homes and leads to systems being undersized. If the owner then sells, the system may well not be correctly sized for the new house owner. The system should be designed to suit the design occupancy level of the house.
• The setting of tariff rates on the basis of SAP calculations for QSOL are counter innovative in that the calculations use only the steady state performance figures for a panel. This means that financially the best option to fit is the cheapest possible panel for steady state heat collection regardless of its dynamic properties and its ability to collect heat in low light conditions. All research effort into solar thermal panels is about collecting more heat in variable cloud cover and in overcast conditions. This research will be completely stifled by the current tariff calculation method. There is an urgent need to come up with a solution to this problem to avoid retrograde development in solar panel design and manufacturing.

• The home owner who is in a position to invest in renewable technologies stands to benefit greatly from these new tariffs.
• The tough choice will be the decision as to which technology to go for in terms of space heating. Biomass boilers currently seem a good option but security of supply seems a potential difficulty.
• The current reliance of the electricity industry on fossil fuels for the bulk of its generation capability will also be a source of concern to those thinking about adopting heat pump technology. Inevitable rises in fossil fuel costs will be compensated for in the main by the index linking of tariffs.
• The only technologies which do not incur an ongoing fuel cost are solar thermal, photo voltaic and wind generators. After the initial payment is made there are effectively no ongoing charges. This means that returns will increase year on year without risk. The tariff is index linked and the savings will be directly proportional to the cost of fuel (which is bound to increase year on year)
• If there is an old solar thermal installation at a house then there is not entitlement to the solar thermal tariff unless the existing system is replaced by a new one. There is a requirement for some further clarification on this statement since what exactly constitutes a new system could be a matter for discussion. If for example there is a perfectly good solar thermal tank which is correctly sized for the household and the pipe runs are in stainless steel, these items are maintenance free and will not require replacement. It should be sufficient to replace the panels, the solar pump station and control system. This would in many cases provide a cost effective means of accessing the tariff for solar thermal.

• At present businesses are still able to claim tax relief in year one for energy efficiency and renewable technology expenditure.
• For medium sized installations, payments will be made every 3 months. These payments will still be based on calculated rather than metered energy contributions.
• We still need clarification as to whether heat pumps using waste process heat as a source will be eligible for one of the standard heat pump tariffs. This could represent major opportunities for many industrial businesses to cut their energy costs quite significantly.
• Large biomass projects need some sort of long term security over fuel source and should ensure that such a fuel source is sufficiently ‘sustainable’ that it will not be hit by future tightening of the regulations regarding sustainability.
• All large scale projects will be metered. This does not represent an issue but expect additional rules about placement of meters to avoid dumping of produced heat to profit from tariffs.


Full Break Down of Proposed Renewable Heat Incentive Tariffs

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