SUMMARY

The Government is proposing to reform the RHI in two stages: firstly by introducing deployment caps from April 2016 and secondly, by "rebalancing" it from April 2017 to favour larger installations and move away from biomass to heat pumps.

The reforms should provide some clarity, as the current tariffs only go up to the end of this month (March 2016) and other than a short announcement in last November's Spending Review that spending under the scheme was expected to rise from £430m in 2015/16 to £1.15bn in 2020/21, the industry did not know what was going to happen to the scheme.  These reforms go up to April 2021, but it is telling that the consultation admits that "we currently have no guarantee about the availability of funding beyond 1 April 2021."

The consultation is open until 27 April 2016 and is on the gov.uk website here.

STAGE ONE: BUDGET CAPS

From 1 April 2016, degression will continue to be the key way to manage the RHI budget spend, and the degression triggers for the tariffs across all technologies will simply be extended on a consistent linear trajectory with the triggers set to date.

But in addition, there will be an overall budget cap from 1 April 2016: a single cap that will apply across both schemes and based on the annual budgets assigned to the RHI:

Click here to view table.

The Government will close the RHI if it calculates that the budget in any year will be exceeded.  It wants to have flexibility as to how it calculates progress towards the cap but intends to give monthly public updates on its assessment of progress towards the budget and 21 days' notice before closing the scheme, which it thinks will give plants that are on the verge of commissioning time to commission and apply for RHI before the closure is implemented.

If the scheme hits budget in any year and closes, the intention is that it will re-open at the start of the next financial year, but this is not automatic.  Even if it is re-opened, the tariff structure or eligibility might need to be revised.

Any large plant that has been given a tariff guarantee (see below for details of this) would be protected even if the scheme closes, as their tariff is taken into account in calculating whether the annual budget has been met.  Other than the tariff guarantee, there is no grace period so any plant which is fairly close to commissioning, but not close enough to do so within 21 days of a closure announcement, will lose out.

For 2016/17, the spending cap will apply across both the domestic and non-domestic RHI schemes, but from 2017 onwards the Government is minded to close only the non-domestic RHI scheme, which would mean it could be closed before the overall budget for both schemes was assessed to be likely to be hit.

STAGE TWO: REBALANCING THE SCHEME

The main reforms to the scheme will come into force from Spring 2017 and apply until 1 April 2021.  The aim is to achieve an optimal mix of key technologies which are likely to be strategically important in the longer-term, which in practice means a move away from small and medium biomass, an end to RHI support for solar thermal, and increased tariffs for heat pumps.  There will also be tariff guarantees for larger installations.

Changes to domestic RHI

Briefly, the main changes proposed to the domestic RHI are:

  • Introducing a heat demand limit, so that RHI payments will only be made up to an annual heat demand limit of 25,000kWhH for biomass and ground source heat pumps, and 20,000kWh for air and water source heat pumps.  This is so that larger properties do not get a disproportionate benefit
  • Allowing householders to assign their rights to RHI payments to a finance company (subject to state aid approval)
  • Measures to increase take-up of shared ground loop heat pump systems
  • Increasing the tariffs for heat pumps
  • Removing RHI support for solar thermal.

Changes to non-domestic RHI

Biogas

The Government is concerned that AD plants that use crops as a feedstock do not reduce greenhouse gas emissions as much as plants that are waste-fed.  It proposes two options: only pay RHI on biogas and biomethane that comes from wastes and residues; or limit the RHI payments for biogas and biomethane not derived from wastes and residues to 50% of the total biogas yield (this is the preferred option).

Heat pumps

The RHI has not to date supported as many heat pumps as were envisaged when the scheme was designed.  The Government is not proposing to change the tariff levels but is considering simplifying the scheme rules and wants to know what the industry sees as the main barriers to deployment.

Biomass

Small and medium biomass seem to be the losers in these proposed RHI reforms.  They have dominated RHI spend to date but it is clear the Government does not want this to continue.  It is proposing merging the current three biomass tariffs (small, medium and large) into one tariff, of between 2.03 and 2.90p/kWh (2.03p/kWh being the current large biomass tariff) and tiered so that the first 35% load factor is paid this tariff but the rest is paid a tariff of between 1.80-2.03p/kWh. This tier threshold is set above the level at which most plant will operate.

There will be a single budget (that will trigger tariff degression) for all new biomass, including new biomass-CHP.

Biomass-CHP

The current tariff (which was only introduced in May 2014) of 4.17p/kWh will be retained but it will be tiered so any heat generated above a 35% load factor would receive a reduced tariff of between 1.80-2.03p/kWh (as for biomass).

As mentioned above, the budget for biomass-CHP and for biomass will be combined for degression purposes.

Other technologies

Deep geothermal will continue to be supported at current levels, as although no such schemes have been accredited under the RHI yet, there are a number of potential projects that might accredit before 1 April 2021.

Support for solar thermal will end, as it has the lowest level of deployment but the highest tariff.

Tariff guarantees

The best news for the industry coming out of this consultation is the proposed introduction of tariff guarantees from Spring 2017.  This is different from preliminary accreditation, which only guarantees that a project will be eligible for the RHI.  The tariff guarantee not only guarantees eligibility but also the level of tariff that a project will get once it accredits.

Eligible installations

  • Deep geothermal – all sizes
  • Biomethane – all sizes
  • Large biogas – 600kWth and above
  • Large biomass – 2MW and above
  • Biomass CHP – all sizes
  • Ground and water source heat pumps – 100kW and above – and these will also become eligible for preliminary accreditation, so applicants can choose whether to apply for preliminary accreditation or a tariff guarantee.

There is a two stage application process.  At stage one, applicants must provide:

  • Proof of planning permissions and proposed heat use
  • A declaration of intent to reach financial close
  • The maximum installation capacity for their plant
  • An estimated annual eligible heat output/proposed injection rate for biomethane
  • Technical specification of the proposed system
  • Quality assurance for biomass-CHP plant
  • A connection agreement for biomethane.

If successful at this stage, applicants get a preliminary approval which gives them 8 weeks to submit a full application (stage two).  For the full application, they need to prove that the plant has reached financial close (which is defined the same as for the Renewables Obligation).  The plant then gets the tariff rate at the date that the full application (with confirmation of financial close) is received by Ofgem and subsequently approved.  Note that they still have to apply and be accredited onto the RHI scheme as normal once they have commissioned.

ADDING ADDITIONAL CAPACITY

It is worth noting that there are some proposed changes around adding additional capacity to existing RHI installations.

Under current rules, where additional capacity is added, this can move the whole plant into a different tariff band, unless the new capacity is added within 12 months of the original RHI accreditation.  It is proposed to simplify this, so that:

  • Ofgem calculate the total capacity of the plant (new plus original) and this combined capacity determines the tariff for the new plant.
  • The original plant keeps its existing tariff even after new plant is added
  • The additional capacity receives the prevailing tariff at the date it is accredited, based on the total combined capacity
  • Any plant awarded a tariff guarantee will need to apply separately to add new capacity and will not be able to extend their tariff guarantee to the additional plant.

INDUSTRY REACTION

The main reaction was an expression of shock at the removal of solar thermal from the scheme, which Paul Barwell the CEO of the Solar Trade Association said "simply doesn't make sense". 

There was also concern at the reduction of biomass boiler tariffs by up to 61% which according to Frank Aaskov, Policy analyst at the Wood Heat Association, "would make most biomass heating projects unviable, and represents a dramatic 98% reduction in deployment".

Dr Kiara Zennaro, Head of Biogas at the Renewable Energy Association said "We are pleased with the proposed growth rates and reset proposals of the biomethane tariffs, but are concerned with the proposed reforms of energy crop support and digestate drying."