RENEWABLE HEAT INCENTIVE FOR NORTHERN IRELAND

Transcription

1 髂髂獒獒 RENEWABLE HEAT INCENTIVE FOR NORTHERN IRELAND A REPORT FOR THE DEPARTMENT OF ENTERPRISE, TRADE AND INVESTMENT (DETI) 28 June 2011 Final Report Submitted by: Cambridge Economic Policy Associates Ltd and AEA Technology 盽盽 Ы" Ы ǿ Project part financed by the European Regional Development Fund under the European Sustainable Competitiveness Programme for Northern Ireland 1

2 CONTENTS Executive Summary Introduction Approach Supporting policies Report structure Context Renewable heat technologies Specifics of each renewable heat technology Technology comparison The policy context and drivers for renewable heat The Northern Ireland context for heating The need for Government intervention Impact of no Government intervention Objectives and funding Objectives Funding Option development Option parameters and framework Further issues to consider when developing options Conclusions Detailed option design Eligible technologies Inclusions and exclusions Options Do nothing option Challenge Fund RHI options NI RHI subsidy levels Renewable Heat Obligation Option assessment Assessment criteria Model

3 7.3. Assessment of the shortlisted options Segment analysis Carbon savings Monetisable costs Sensitivity analysis and risks Quantitative sensitivity analysis Qualitative analysis of risks Non-monetary impacts Employment and capacity building, particularly in green sectors Job displacement Open to all (special consideration to fuel poor) Reduction in oil imports Impact on the gas network Displacement effects in other sectors Air quality Summary of costs and benefits Monetisable costs and benefits Value for money Funding, management, monitoring and evaluation Funding Administration costs Options for management Monitoring Evaluation and review Summary, conclusions and recommendations Summary Conclusions and recommendations Other recommendations Annex A: Cost and Performance Data Annex B: Use of Bioliquids Bioliquids considered Feedstocks Northern Ireland resource Costs Sustainability

4 GHG emissions savings Demand for heating oil in NI Annex C: Fuel cost assumptions Electricity Gas Heating oil Biomass Bioliquids Biogas Annex D: Administering renewable heat grant programmes Scheme initiation/preparation phase: Project Assessment phase Scheme initiation phase Project monitoring Project Completion Other costs Annex E: Alternative rate setting methodology Characteristics Assessing subsidy levels required Selecting the bands Selecting the reference installation Tiering Differences from DECC methodology Annex F: Details of renewable heat technologies Air Source Heat Pumps (ASHPs) Ground Source Heat Pumps (GSHPs) Solar Thermal Biomass Boilers Bioliquids Biogas Bio-methane Injection into the Gas Grid Renewable Combined Heat and Power (CHP)

5 EXECUTIVE SUMMARY This report was commissioned by the Department for Enterprise, Trade and Investment (DETI) in Northern Ireland to produce a recommendation on the most appropriate form of a Renewable Heat Incentive (RHI) for Northern Ireland. This RHI would help to deliver the target of having 10% of heating in Northern Ireland from renewable sources by Our approach Our approach follows the Northern Ireland Guide to Expenditure Appraisal and Evaluation (NIGEAE) guidelines. We therefore start by setting out the context for renewable heat. This includes a discussion of the available renewable heat technologies, the cost gap between them and the oil and gas counterfactuals, and an initial assessment of those that it would be most costeffective to install. This showed that the conversion costs were in all cases thousands of pounds, a significant outlay for most households. We went on to look at the strategic and policy drivers. This leads on to the rationale for Government intervention. This rationale is then set alongside DETI s specific objectives and constraints, including funding. Our consideration of options follows. To guide our analysis, we set out a framework for classifying and thinking about policy options. This focuses on the key decisions that define a policy for subsidising technologies, such as who will receive the subsidy, what the profile of the subsidy will be and which technologies will be supported. As well as the possible RHI options, we consider capital grants for comparison purposes. This includes administratively allocated grants (with equivalent support to the preferred RHI option) and competitively allocated grants (a Challenge Fund ). The latter in particular, since it is assumed to subsidise renewable heat in order of cost-effectiveness, indicates the limits of what is possible within the constraints. However, while grants have some benefits in terms of reducing capital barriers, they can be seen as only providing a short-term incentive. Grants also, because they cover the costs of renewable heat upfront, can deliver renewable heat more slowly than an RHI, for the same funding, as the degree of financial leverage is lower than for an RHI payment structure. This has to be taken into consideration in deciding between an RHI, which can leverage the funding to accelerate deployment, and the increased lifetime cost of doing so. The RHI that we consider is along the lines of the Great Britain (GB) model, but with appropriate modifications to fit Northern Ireland s specific circumstances. Modifications are necessary since previous work 1 has shown that the GB RHI would be sub-optimal for Northern Ireland. Moreover, since an RHI would require long term funding, we have at DETI s request, considered two possible long term funding scenarios. We also consider the scenario where DETI only has the existing committed funding of 25m, although we understand from DETI that HM Treasury has agreed that funding beyond 2014/15 will be available for those installations that are installed within the Spending Review period (i.e. up to 2014/15). This is subject to funding being basically flat beyond 2014/15, and initial payments being affordable within the Spending Review 1 AECOM/ Pöyry, 2010, Assessment of the Potential Development of Renewable Heat in Northern Ireland: Final Report 5

6 funding profile. The 25m funding scenario should therefore be considered as being for comparison purposes only. We then analyse the options, taking into account efficiency and several constraints on deployment. Our quantitative assessment of the options uses the economic model we have developed for DETI, which is outlined in Section 7.2; however, since any model can only be a partial representation of reality, we also assess options qualitatively. Consideration of risks and key sensitivities ensures that our analysis is robust to possible future developments. We focus on risks that would lead to relatively low uptake in particular in the domestic sector and on the impact on the gas network. Section 10 summarises the preceding analysis of costs and benefits and draws them together. After considering the administrative and funding issues in Section 11, we present our overall conclusions and recommendations in Section 12. These include recommendations on the appropriate form of an NI RHI, as well as recommendations for complementary or supporting policies. Options considered and overall assessment We consider the following options: Do nothing. An administered capital grant scheme A Challenge Fund (competitively allocated grant). Three possible RHIs (long term funding scenarios only): o GB RHI, which uses the rates proposed for the GB RHI. o NI RHI DECC, which uses the same methodology as DECC used for the GB RHI rates, but using our data for NI. o NI RHI Alt, which uses a slightly modified methodology 2 (see Annex E for details). We conclude that the Challenge Fund delivers the most renewable heat, at the lowest cost, and delivers 10% under both long-term funding scenarios. Grants tend to deliver renewable heat more slowly than an RHI with the same rates - our modelling suggests that an administered grant scheme with grants equivalent to the present value of subsidy under NI RHI Alt would deliver 10.69% in Funding 2. This is one key advantage of an RHI approach in that, as for FITs for renewable electricity, it allows for the available subsidy to be leveraged to increase the speed at which renewables are deployed (although it is likely to be significantly more expensive over the long term). However, the fact that the Challenge Fund is competitively allocated (and is 2 The main difference between the method used to calculate the rates in this report and that used by DECC is that positive and uniform discount rates are used to value costs in future years and recover of upfront costs across heat output in all years. In each case this results in rates that are less than one penny per kwh different except for solar thermal. Solar thermal incentives would be over 15 pence less per kwh using the DECC methodology as their approach assumes investors place a high value on ongoing fuel savings. 6

7 neutral between technology types) means that it is much more efficient than an administratively allocated grant, and this overcomes the funding disadvantage of grants compared to an RHI. The 10% target can be delivered by any of the RHI options under Funding 2, but the NI RHI Alt rates deliver more renewable heat than the NI RHI DECC rates, at a similar cost per unit. The GB RHI rates perform poorly. None of the RHI options delivers the 10% target under Funding 3 (and so equivalent administered grant schemes would not either). We also conclude that delivering the cost-effective renewable heat (that delivered under do nothing ) will be crucial to achieving the target. Details of assessment Table 1 below shows the heat estimated to be delivered by each approach as a percentage of the projected overall heat demand for Northern Ireland in Table 1: Level of renewable heat in 2020, by funding level and policy, as % of total heat demand Do nothing Challenge fund Capital Grant GB RHI NI RHI DECC NI RHI Alt Funding 1 - Short term funding: 25 m to 2014/15 Funding 2 - Long term funding: 25 m to 2014/15, additional 5m/ year from 2015/16 Funding 3 - Long term funding: 25 m to 2014/15, 12m per year thereafter 7.65% 8.47% 8.05% 11.69% 10.69% 10.23% 10.84% 11.14% 11.19% 8.90% 8.73% 9.49% 9.42% The Challenge Fund delivers the most renewable heat of any option. As noted, this is because it is competitively allocated and is technology neutral. A Capital Grant delivers less than the NI RHI options, as expected, but more than the GB RHI applied to Northern Ireland, reflecting the tailoring of the approach to the Northern Ireland context. Of the RHI options, the NI Alt approach delivers more renewable heat than any other RHI in Funding 2 and about the same in Funding 3. Table 2, which shows the net monetisable cost/ benefit), shows the grant options to be best on a pure monetisable cost-benefit basis (with the competitive allocation of the Challenge fund providing additional benefits). 7

8 Table 2: Overall monetisable (cost)/ benefit, compared to do nothing ( m, 2010 prices) Do nothing Challenge fund Capital Grant GB RHI NI RHI DECC NI RHI Alt Funding 1 - Short term funding: 25 m to 2014/15 Funding 2 - Long term funding: 25 m to 2014/15, additional 5m/ year from 2015/16 Funding 3 - Long term funding: 25 m to 2014/15, 12m per year thereafter Of the RHI options, the NI RHI DECC and NI RHI Alt rates are comparable, with both doing significantly better than the GB RHI rates. An important message from the table is that all options do worse at the higher level of funding. To deliver high levels of renewable heat, the more expensive technologies must be subsidised and installed, but this inevitably pushes up the cost per unit of heat. This points to the importance of acting to reduce any non-financial barriers to the deployment of the cheaper technologies, such as awareness, the supply chain and the availability of suitably qualified installers. This is illustrated in Table 3 below, which shows the average cost in per unit of additional renewable heat deployed in Table 3: Average cost, in, per kwh of additional 3 renewable heat deployed in 2020 Do nothing Challenge fund Capital Grant GB RHI NI RHI DECC NI RHI Alt Funding 1 - Short term funding: 25 m to 2014/15 Funding 2 - Long term funding: 25 m to 2014/15, additional 5m/ year from 2015/16 Funding 3 - Long term funding: 25 m to 2014/15, 12m per year thereafter n/a That is, beyond the heat that would be deployed under do nothing. 8

9 In all cases, the move to Funding 2 increases the average cost per unit. Overall, the picture is very similar to that in Table 2 above - the Challenge Fund does best, while the NI RHI DECC and NI RHI Alt rates are similarly cost-effective, and significantly better than the GB RHI rates applied to Northern Ireland. We have also considered the cost-effectiveness of the options in terms of their impact on carbon dioxide emissions. As Section 10.2 shows, our recommended NI RHI option is roughly as costeffective as offshore wind. The Challenge Fund is significantly better. Main recommendation On a monetised cost-benefit basis, a Challenge Fund or other grant therefore appears more attractive than an RHI; this would also be likely to be the case for the rest of the UK. Part of this will be driven by the technology neutral approach of the Challenge Fund. However, there are other factors in the decision between an RHI and a grant scheme which need to be considered. These include the fact that an RHI is less expensive upfront than an administered grant scheme, that it provides a long-term signal for the generation (as opposed to simply installation) of renewable heat and the benefits of consistency/ administrative simplicity across the UK. On the other hand, a capital grant scheme can help to overcome upfront financing costs, particularly for domestic consumers, and is as noted likely to be less expensive over the long term. On balance, these factors could indicate that an RHI should be pursued for commercial installations, with their ability to access finance and their relatively lower discount rates. This will also have the advantages of consistency and administrative simplicity with the rest of the UK. The picture is less clear for domestic consumers. Our results are shown on the basis that domestic consumers are included in any RHI, and that they take up renewable heat based on its lifetime costs and benefits. While this is sensible from an economic point of view, it does not fully consider the financing issues that domestic consumers face, in particular their ability to borrow. There are significant concerns about the upfront capital costs of renewable heat equipment, and their potential to be a barrier to households installing them. This barrier can be overcome by adopting a grant-based approach for households. That said, the evidence from other RHI-type schemes (i.e. FITs) is that energy service companies come forward with ways of reducing or removing the upfront costs for consumers. We also note that the GB approach for domestic consumers beyond 2011 is not yet clear, and it would be unwise for DETI to commit firmly to an approach before GB does. We therefore recommend that DETI reserves any final decision on the inclusion of domestic consumers in an RHI until after the final GB approach is clearer. If it is decided that the inclusion of domestic consumers in an NI RHI is not appropriate, DETI should introduce a grant scheme. The evidence from our analysis in that particularly in the Funding 2 scenario, the available subsidy is not the limiting factor, which reduces the advantage of an RHI over grants. DETI should in any event explore the possibility of domestic NI consumers participating in the GB RHI Premium Payments scheme. We provide below a table showing possible NI Premium Payment levels, based on the value that consumers would receive from the first year of an RHI. The table also includes a figure for suggested one-off grants, which represent the same support as 9

10 domestic consumers would receive under our RHI proposals, but over the full 20 year period, in present value 4 terms; however, our results strongly suggest that a Challenge Fund would be preferable to a fixed grant payment. Table 4: Suggested Premium Payment and one-off grant levels, by technology Technology Premium Payment One-off grant Detached Other houses Detached Other houses ASHP ,700 2,300 Biomass ,100 5,100 GSHP ,500 2,800 Liquid biofuels ,600 1,000 Solar Thermal RHI recommendation We recommend that any NI RHI should be structured as in Section 6, and use the NI RHI Alt rates. These are shown below in Table 5. Following the table, we discuss a number of the rates in more detail. Table 5: Recommended NI RHI rates, in pence per kwh 5 Technology, by size NI recommended levels ASHP Small 3.3 ASHP Medium - Biogas injection All 2.5 Biomass boilers Small 4.5 Biomass boilers Medium 1.3 Biomass boilers Large - GSHP Small 4.0 GSHP Medium 0.9 Liquid biofuels Small 1.5 Liquid biofuels Medium - Liquid biofuels Large - Solar Thermal Small 8.5 Solar Thermal Medium At domestic consumers assumed discount rate of 16%. 5 For example, suppose that a commercial property installs a biomass boiler of 50 kw. This is eligible for the medium rate of 1.3p per kwh, from the table above. Following our technology assumptions (Annex A), a typical boiler of this size produces around 30,000 kwh per year. This gives a total annual subsidy of around 390, or four quarterly payments of

11 Solar Thermal The rate for solar thermal is significantly below the raw rate given by our methodology of 32.5p per kwh. If the rate is set at this level, the heat deployed in funding scenario 2 increases by 13 GWh (from 1,860 GWh to 1,873 GWh) but at an additional subsidy cost of 175 million 6. It is difficult to justify that level of support on cost-benefit grounds. We therefore recommend a lower level of support for solar thermal, at the same level as the GB RHI. In any case, support for solar thermal carries the risk of funding being diverted away from less expensive technologies. This suggests that a cap on the annual subsidy paid to solar thermal should be considered in all funding scenarios. Comparison with GB RHI rates The rates we propose are lower than those for the GB RHI 7. The main driver for this difference is the different counterfactual fuel assumed. More concretely, the GB RHI provides an incentive to switch from gas, the main fuel in GB, while our proposed rates provide an incentive to switch from oil, the main fuel in NI. Since the cost of oil is generally higher than that of gas (see Annex C for our assumptions), less subsidy is required to make renewable heat economic compared to oil than compared to gas. Large industrial sites There are 17 industrial sites in Northern Ireland which are sufficiently large to be covered by the EU Emissions Trading System. We have considered the case for providing support through an RHI for these sites. Some of the sites have heat requirements for which renewable heat is not suitable. The majority of the others are either on gas or near the gas grid. If they were to switch to renewable heat, this could conflict with DETI s objective to extend the gas network. For the remaining sites, our analysis suggests that biomass is likely to be cost-effective for them later this decade without additional subsidy. We recognise that this is driven by the relative costs of biomass and fossil fuels and the cost of carbon, and so recommend that DETI keeps this conclusion under review. However, our conclusion is that it would not be appropriate to subsidise renewable heat in the large industrial sector on current evidence. Tariff bands Table 6 below sets out our suggested tariff bands. In most cases these are close to those in the GB RHI consultation, which included the domestic sector. 6 In funding scenario 3, the heat deployed decreases, as subsidy is diverted from more cost-effective technologies. 7 With the exception of solar thermal, where we propose the same rate. 11

12 Table 6: Proposed sizes for subsidy bands Technology Group Investor groups GB RHI consultation ranges 8 ASHP Small All domestics and small commercial/public sector Biogas injection Biomass boilers Medium Large commercial/public sector (but not large enough for industrial) GB RHI proposal rates 9 Proposed range Lower bound NI Upper bound 0-45 * 10 0 Less than No upper limit All All All All All All Small All domestics and small commercial/public sector Medium Large commercial/public sector (but not large enough for industrial) GSHP Small All domestics and small commercial/public sector Liquid biofuels Solar Thermal Medium Large commercial/public (but not large enough for industrial) Small Small Other recommendations All domestics (but not large enough for small commercial/public sector i.e. 50kW) All domestics and small commercial/public sector Less than No upper limit Less than No upper limit 0-45 * We include a number of other recommendations, which are made at appropriate places in the report. These are: 8 entivenerareport.pdf These rates are included for comparison purposes, since they include domestic installations, unlike the current GB RHI proposed bands. 9 These rates do not include domestic installations. There are also no rates given for a number of technologies that we suggest are included in the NI RHI. A direct comparison is therefore difficult. 10 Not eligible in phase 1, under review for inclusion in phase Based on our analysis, we recommend a zero rate for large industrial sites, and so recommend that they are excluded from this band. 12 Not eligible in phase 1, under review for inclusion in phase If non-domestic schemes are to be included, then we recommend a separate band above 45kW. 12

13 To look at how DETI could support the renewable heat industry, and supply chain, in Northern Ireland. Our analysis shows this to be a significant barrier to high levels of deployment, with an increase in deployment rates of 50% leading to our recommended RHI delivering 12.58% compared to 11.14% with the standard constraints. To explore with Ofgem whether there is scope to use the GB Premium Payments processes for NI domestic consumers. To engage with industry to look at how the energy service company (ESCO) model could help deliver renewable heat in Northern Ireland, particularly for those on lower incomes. To explore with the relevant large industrial sites what the barriers to uptake of renewable heat might be, and how they could be overcome. This includes consideration of the biomass supply chain. DETI should also keep the policy of no subsidy for industrial consumers under review, to allow for movements in the relative cost of biomass and oil or gas. To work closely with the Green New Deal team in the Department for Social Development, reflecting the recommendation, following the Reconnect programme, of the importance of considering a whole house approach to renewables. This should include informing those benefiting from the Green New Deal about the incentives available for renewable heat. To explore the option of contracting out the management of an NI RHI to a third party. To monitor uptake of any renewable heat incentive on an on-going basis, and to do a periodic monitoring of a selection of installations to ensure that they are operational and continue to generate. To undertake a review of any scheme after two to three years. Uncertainties We recognise that information on renewable heat technology and on its likely uptake has significant uncertainties, particularly in the domestic sector 14. Section 8 looks at the results of sensitivities around the uptake rates and barriers, to assess the robustness of the policy options. In summary, an RHI is quite sensitive to upfront capital barriers. A Challenge Fund is more robust to this uncertainty, partly because it is a grant scheme. Impact on the gas network We also considered the impact of the renewable heat target on future demand for gas, which could affect the rollout of the gas network. Under the assumptions in our modelling, the impact is small, and this is borne out by our sensitivity analysis. Nevertheless, our view is that risks remain and we recommend this issue is considered as part of an overall review of any NI RHI 14 This is consistent with the conclusion in the recent proposal from DECC for an RHI for Great Britain. 13

14 after two to three years. Such a review will take into account lessons from experience of operating an RHI that cannot be captured by a modelling exercise. 14

15 1. INTRODUCTION This report was commissioned by the Department of Enterprise Trade and Investment (DETI) in Northern Ireland, to consider the options for a Renewable Heat Incentive (RHI) for Northern Ireland and to make a recommendation Approach This final report is structured around the steps in the Northern Ireland Guide to Expenditure Appraisal and Evaluation (NIGEAE) guidelines. We begin by considering the strategic, policy and technological context within which the RHI is to be applied. After a brief introduction to renewable heat technologies, we turn to the EU and UK legislation that will provide the driver for renewable heat. We consider the current heating situation in Northern Ireland, and also the GB and Republic of Ireland context. Issues surrounding the roll-out of the gas network are specifically considered. Following this, we look at a framework for developing options, based on the what, who and how of subsidy design, in terms of technologies supported, eligible beneficiaries and the different ways in which support might be awarded. We then settle on possible options, and analyse them in more detail using our project model. This is supplemented with qualitative and policy advice to arrive at our final recommendations for DETI. In all this, we have discussed our conclusions with DETI, but the recommendations remain our own Supporting policies There are a number of supporting polices that could be introduced alongside an RHI, such as: the introduction of building standards such that new buildings would have to justify not having renewable heating; a requirement on fuel suppliers to source at least a certain percentage of their fuel from renewable sources (at DETI s request, we discuss this briefly in Section 6.8); building the technical capacity of heating engineers to install and inform on the benefits of renewable heating, perhaps through subsidised training courses; and a requirement for public sector to convert buildings either with or without subsidy. The focus of this report is an RHI and so we do not consider further the specifics of these potential policies. That said, our later analysis suggests that policies to build capacity could be very useful, as the ability to deploy renewable heat appears to be the binding constraint Report structure Following this introduction section: 15

16 In Section 2, we introduce the available renewable heat technologies, and discuss costs and technology-specific issues for each. We also cover the strategic and policy framework within which the RHI is being developed. In Section 3, we set out the rationale for Government intervention, including a consideration of technology costs and the implications of doing nothing. In Section 4, we look at the overall and secondary objectives for renewable heat policy, and the potential funding. In Section 5, we develop a framework for developing options. In Section 6, we set out the details of the shortlisted options. In Section 7, we set out the framework that we have assessed the options under, and presents the results of our analysis. In Section 8, we look at the risks to delivery, and the impact of sensitivity analysis. In Section 9, we look at the non-monetary benefits of renewable heat. In Section 10, we summarise the costs and benefits of the options. In Section 11, we look at the funding, management, monitoring and evaluation of any renewable heat support mechanism. Section 12 contains our overall recommendations. In addition: Annex A gives cost and performance data for the renewable heat technologies considered. Annex B discusses the detailed cost issues associated with bioliquids. Annex C sets out the fuel price assumptions that we have used in our analysis. Annex D looks at the tasks needed for administering a typical renewables capital grant scheme. Annex E sets out the methodology for calculating the rates for the NI RHI Alt approach. Annex F gives more details about the technologies considered, including an assessment of their suitability for particular uses and how their deployment might affect the delivery of other policies and objectives. 16

17 2. CONTEXT Before going into the detail of policy design, it is important to understand the overall strategic, policy and technological context for renewable heat, as well as the specific circumstances of Northern Ireland. That is the purpose of this section. We start with a brief introduction to renewable heat technologies, looking at those that might be deployed in Northern Ireland. Knowledge of the technological options is crucial for full understanding of the implications of the policy drivers. More detail on the technologies can be found in Annex F. We then turn to the legal and policy drivers for renewable heat, first at a European level and then focusing on the UK and NI context. A particular driver here will be the proposals announced for an RHI in GB. We then move on to look at the current circumstances of Northern Ireland, both in terms of overall heat demand and the current levels of renewable heat deployed Renewable heat technologies In this sub-section, we briefly present the available renewable heat technologies that might be deployed by any subsidy. Each of the technologies has a range of costs, and there are technologyspecific issues to consider. For instance, some technologies are not suitable for particular applications, and some may be relatively more appropriate to the Northern Ireland context. The costs and characteristics will help determine the most appropriate form and level of subsidy. Table 2.1 below lists the technologies that have been included in this study. Table 2.1: Technologies included Technology Description Heat Pumps Solar Thermal Ground, air or water source heat pumps, used for space or water heating. Solar panels for water and space heating. Biomass combustion Biomass boilers used for the combustion of wood and other biomass. Used for space heating, hot water or process heat. Bioliquids Biogas Biomethane in the gas grid Renewable CHP Bioliquids are liquid fuels produced from biomass materials. Production and use of a fuel gas derived from a biomass feedstock. Upgrading of biogas. Combustion of biomass to generate electricity and heat, only when from renewable sources. 17

18 2.2. Specifics of each renewable heat technology Air Source Heat Pumps Air Source Heat Pumps (ASHPs) use an electrically-driven vapour compression cycle to extract heat from ambient air. The vapour compression cycle is shown in Figure 2.1 below and is comprised of four components (evaporator, compressor, condenser and expansion valve). Figure 2.1: Operating Principle of a Heat Pump A refrigerant that has a low boiling point is circulated in the heat pump unit. Electricity is used as an input to the system to compress the vapour before the heat is extracted to a heating medium (typically water) via a condenser. An air conditioning system typically operates in reverse with some heat pumps termed as reversible able to operate in either heating or cooling mode. A critical metric of efficiency for a heat pump is the Coefficient of Performance (CoP). This is the ratio between the heat output and electricity input. For example an ASHP with a CoP of 3 would be expected to generate three units of heat for each unit of electricity consumed. The CoP is a measure of the efficiency of the heat pump equipment and is strongly dependent on the difference in temperature between the heat source (ambient) and the heat destination (the heating system). The CoP is normally measured with a standard temperature difference under test conditions. A further measure of efficiency is the average efficiency of a heat pump over a year of operation that takes into account the inherent seasonal variation in ambient temperature. This is termed the Seasonal Performance Factor (SPF). If the efficiency of a heat pump is lower than then it is not classed as renewable (the same applies for Ground Source Heat Pumps). Typical sizes of ASHP are between 2kW to 100kW. ASHPs are best suited to residential and commercial applications that do not have access to the gas network and that do not have access to land needed for ground source heat pumps (discussed elsewhere). Disadvantages are that the CoP for ASHPs falls with lower air temperatures. They are 18

19 also limited by the low temperatures they can deliver into the heating system which normally require an upgrade to the surface area of the emitters Ground Source Heat Pumps Ground source heat pumps (GSHPs) use the same operating principles as an ASHP. The main difference between the technologies is that a GSHP extracts heat from the ground, which maintains relatively constant temperatures through the year. Extraction is achieved by installation of a ground loop (through which refrigerant circulates) acting as the evaporator. The ground loop can be installed either as a horizontal slinky system in a trench (see Figure 2.2 below) or a vertical pipe (boreholes) varying in depth depending upon the ground type (typically depths are 75m to 100m). A horizontal ground loop requires a considerable area and therefore is best suited to rural domestic installations while a vertical loop is more suitable with constrained land availability. A further option for schemes with land constraints is the extraction of heat from groundwater via a borehole. A GSHP is illustrated in Figure 2.2. Figure 2.2: Ground Source Heat Pump Horizontal Slinky Ground Loop Typical sizes for GSHPs are between 5 and 50kW although utility scale units exist in other EU countries utilising water from aquifers or lakes with capacities of several megawatts. Advantages of GSHPs are that they do not experience the same performance loss as ASHPs in cold weather due to ground temperatures remaining constant through the year. However, installation can require significant disruption associated with installation of the ground loop and this adds additional cost Solar Thermal A solar (thermal) water heating system uses solar collectors (panels), normally mounted on a roof, to capture the energy released by the sun to heat water. These collectors contain liquid, which 19

20 once heated travels to a coil in the hot water cylinder and transfers heat to the water store. So over a period of time a full tank of hot water is created. The time period will depend on the intensity of the sun, the size and efficiency of the collectors and the size of the hot water tank. A properly sized solar thermal installation will provide 60% to 70% of annual domestic hot water needs which generally equates to 100% of the demand in summer months and around 20% of demand in winter. A typical solar thermal for hot water will occupy an area of approximately 5m 2 and will need to be mounted on a south-facing surface. The two main types of solar collector are evacuated tube and flat plate collectors as shown in Figures 2.3 and 2.4 below. Figure 2.3: Evacuated Tube Solar Collector 15 Figure 2.4: Flat Plate Solar Collector 15 Both figures sourced from 20

21 Systems will typically not be designed to meet space heating requirements as this will normally require a larger collector area than would be available for a single residence. Solar collectors can only be deployed where the user has access either to a south facing roof or an unshaded area of land on which collectors can be erected. As a result solar thermal installations may not be well suited to high density residential accommodation. Furthermore, the effectiveness of solar collectors will be dependent on the level of incident solar radiation, which diminishes with increasing latitudes Biomass Boilers This refers to the combustion of biomass material within a boiler for the production of heat. This technology covers a wide range of scales, from domestic wood boilers of about 15kW heat output to industrial-scale boilers producing high pressure steam with capacities of several megawatts. Biomass can be derived from virgin sources or as the biomass element of waste streams from municipal, commercial/industrial or construction/demolition sources. The most common form of virgin biomass used (on the basis of installed capacity) is wood, which can be provided in a variety of forms including chips, pellets, briquettes or logs. Other forms of virgin biomass that can be used include short rotation coppice (normally willow or poplar) or miscanthus 16, both of which can be cultivated as energy crops. Waste-derived biomass may either be in the form of biomass recovered from a waste stream (e.g. wood recovered from demolition waste) or the biomass element of a mixed waste stream that includes non-biomass material such as plastics. Where a mixed waste stream is used, the renewable heat output is limited to the output attributable to the biomass content of the input fuel. In the majority of cases, facilities utilising biomass derived from waste sources will be required to comply with the EU Waste Incineration Directive 17. The biomass content of wastederived biomass streams typically vary depending on the nature of the waste stream and the extent of any processing to separate biomass and non-biomass material however values will tend to be between 50% (e.g. unprocessed municipal solid waste) and 90% (e.g. waste wood extracted from construction/demolition waste) on the basis of energy content. Biomass boilers can be developed at scales that make them suitable for the provision of renewable heat via a district heating network. A key constraint in the deployment of biomass at all scales is the requirement for space for fuel storage. Furthermore, transport connections will be an important consideration for large-scale biomass projects due to the potential need for frequent fuel deliveries and the removal of combustion by-products (e.g. furnace bottom ash and fly ash) generated Bioliquids Bioliquids are liquid fuels produced from biomass materials, including waste such as used cooking oil and tallow. Examples include bio-ethanol or biodiesel. Within Northern Ireland it is 16 Miscanthus giganteus is a perennial tall grass. 17 European Community (EC) Directive 2000/76/EC on the Incineration of Waste 21

22 expected the principal role that can be played by bioliquids is as a replacement for heating oil within a domestic context. Given the high proportion of oil used for heating in Northern Ireland, we have looked specifically at the possibility of using bioliquids to replace some of the fossil fuel-based oil currently used. In summary: Greenhouse gas emissions savings are low relative to a wood-fired boiler: o o o o using 100% biodiesel from waste oils/tallow in domestic heating boilers potentially has good GHG emissions savings, about 82%. However, if the biodiesel component is limited to 30%, for operational reasons, then the GHG emissions savings in each installation are reduced to 25%; for comparison, a B30 blend of biodiesel meeting the minimum GHG emissions savings to meet the requirements of the Renewable Energy Directive (RED) of 35% yields a GHG emissions saving per installation of 10.5%; the GHG emissions savings may be further reduced if the converted boiler has a lower efficiency than modern oil boilers; and for comparison purposes, a pellet boiler using clean waste wood as feedstock has a GHG emissions saving of about 92% for each installation. B30 is not a drop in fuel. The boiler must be adapted to use B30, and cannot then be easily changed back to operation on 100% fossil oil. There will be stiff competition for biodiesel from the road transport sector. In particular biodiesel from UCO/tallow will be in demand because of its good sustainability characteristics and high emissions savings. There is therefore likely to be a problem with availability of biodiesel from UCO/tallow at an acceptable price in the heating market. If applications using bioliquids are eligible for inclusion in the RHI, then a scheme to monitor and verify sustainability and greenhouse gas emissions savings will be required to comply with the RED. The current model in the transport sector places the responsibility for these issues with the fossil fuel supplier. Our initial conclusion is that the issues, advantages and disadvantages of supporting bioliquids do not differ markedly between NI and GB. The higher proportion of oil fired equipment in NI does, however, offer the prospect of a rapid take up at minimal initial cost which would support the fuel poverty alleviation and social inclusion policies by allowing poorer households to share the benefit and participate. The greenhouse gas savings are critical to value for money however and a method of ensuring that only waste derived materials are used is needed to prevent very high costs of abatement and potential negative impact. There is more detail in Annex B Non-domestic technologies The following technologies - biogas, biogas grid injection and renewable CHP - are expected to be larger scale in supply and given the nature of biogas provide the same quality of heat as natural 22

23 gas. Renewable CHP will again be suitable for providing heat and power to all sectors aside from those with exceptionally high grade heat requirements. Biogas This refers to the production and use of a fuel gas derived from a biomass feedstock. Biogas can be used as a replacement for natural gas and so can be used in gas boilers for the production of heat, or gas engines for heat and electricity. Processes for the production of biogas can be split into thermal or biological processes. Thermal treatment options cover technologies such as gasification and pyrolysis, while biological processes refer principally to anaerobic digestion. Gasification refers to the process where a feedstock is heated in the presence of an oxidising agent (e.g. oxygen) whereas pyrolysis refers to the application of heat to a feedstock in a reducing (i.e. oxygen-free) atmosphere. Both processes cause the feedstock material to chemically degrade to form a synthesis gas ( syngas ) composed of carbon dioxide, hydrogen, carbon monoxide, methane and steam. Pyrolysis processes may also utilise a liquid mixture of oils, tars and waxes known as pyrolysis oil. Gasification and pyrolysis processes can be divided between those that are required to burn the biogas immediately following its production and those that are capable of storing the gas for later use. Anaerobic digestion (AD) refers to processes where biomass material is broken down by microbial action within a sealed vessel to produce a biogas composed principally of methane and carbon dioxide. AD-derived biogas will usually require treatment before use to remove impurities such as sulphur compounds. In the short-to-medium term, biogas production is expected to be centred upon AD processes. The deployment of AD is widespread in the treatment of sewage and is becoming increasingly common in the treatment of high moisture content biomass wastes from agriculture, food production or municipal food waste collections. Bio-methane Injection into the Gas Grid Biogas can also be upgraded (removing carbon dioxide and other impurities from the gas) so that the biogas closely matches the properties of natural gas. This bio-methane gas can then be odorised and compressed before being injected into the natural gas transmission network for supply to consumers. Deployment of bio-methane injection is currently limited in the UK, with only a small number of evaluation projects taking place. However capacity is expected to expand should these projects prove successful, with anaerobic digestion plants a major potential contributor to this. There is one project that has been commissioned in late 2010 in Oxfordshire which will supply enough gas for 200 homes. This project run by Thames Water utilises sewage waste to generate biogas which is upgraded and injected in the gas grid

24 Renewable Combined Heat and Power (CHP) Combined heat and power (CHP) refers to a range of technologies that simultaneously provide electrical power and heat at much higher efficiencies than can be achieved by the separate supply of electricity and heat. Examples of CHP based on renewable fuels include: Biomass boilers providing heat and generating electricity by means of a steam turbine, where the heat is then extracted from the turbine for useful purposes. Reciprocating gas engines fuelled by biogas or bioliquids to generate electricity and where heat is recovered from the engine jacket or exhaust gases. Cases of renewable CHP schemes already exist in Northern Ireland such as Balcas plant at Enniskillen. Some of the barriers facing Renewable CHP will depend upon the feedstock, i.e. biomass, energy from waste 19 or bioliquids Technology comparison Table 2.2 below provides a comparison of different renewable technologies in respect of the forms of heat that can be generated. Table 2.2: Grades of Heat achievable by Different Technologies 20 Technology Space Heating Hot Water Services Process Heating Form of Heat Provided Wet system Hot water Hot Water or Steam Air Source Heat Pumps Ground Source Heat Pumps Solar Thermal Biomass Boilers Biogas Bio-methane Injection Bioliquids 21 Renewable CHP Table 2.3 on the following page provides an overview of the suitability of different technologies and their typical applications. This table seeks to reflect the technical feasibility of the technologies for each application taking into account factors such as planning and environmental consent issues; it does not reflect the likely economic viability, which we consider later. 19 Energy from waste is likely to be fully considered during phase 2 of the GB RHI. In the interim, it will receive support for the biomass proportion; we suggest that NI could adopt a similar approach for now. 20 Direct heating via hot air is not supported under the GB RHI and so is not considered here. 21 Bioliquids have been excluded from the GB RHI phase 1. This will be reviewed in

25 Table 2.3: Suitability of different technologies Technology Air Source Heat Pump Ground Source Heat Pump Solar Thermal Biomass Boilers Biogas Biomethane Injection Bioliquids Renewable CHP Residential Single rural residence with no mains gas Single detached, semi-detached or terraced residence with gas connection Single Residence in a multi-storey high density housing development Multiple residences supplied by a community heating network Commercial Property and Public Buildings Single commercial property or public building, town/city centre location 22 Single commercial property or public building, sub-urban or edge of town location Multiple commercial properties / public buildings supplied by a district heat network Agricultural Operations Agricultural operation with no mains gas connection Agricultural operation with mains gas connection Industrial Operations Industrial operation with no mains gas connection Industrial operation with mains gas connection 22 GSHPs may be possible in central locations for major new developments where there is the opportunity to install a ground loop or borehole. 25

26 2.4. The policy context and drivers for renewable heat The previous section discussed the what of renewable heat. We now turn to the question of why what is driving the desire to support the deployment of renewable heat? To answer this question, we need to look at the policy and legal context for renewable heat, at a European, UK and NI level. We will also consider the context in the Republic of Ireland The European requirement for renewable energy Through European Directive 2009/28/EC 23 (the Renewable Energy Directive) the EU has committed itself to sourcing 20% of its energy needs from renewable sources by The Directive requires Member States to achieve mandatory overall targets, but allows this to be achieved in any combination across three sectors: energy from renewable sources for heating and cooling; electricity from renewable energy sources; and energy from renewable sources in transport. The UK s overall target is set at 15%. While the Government has not committed to a particular sector mix, the lead scenario in DECC s Renewable Energy Strategy 24 envisages the overall target being met through renewables fulfilling: 12% of heating and cooling needs; more than 30% of electricity demand (29% large and 2% small-scale electricity generation); and 10% of transport energy needs. The Renewable Energy Directive is not directly binding on devolved administrations but renewable deployment in all regions contributes equally to the requirements placed on the UK under the Renewable Energy Directive and each region will be expected to implement a plan for delivery. In September 2010, DETI committed to achieving a renewable heat target of ten 25 % by 2020 in its Strategic Energy Framework 26, subject to an economic appraisal and a decision on the best means of support. While achieving the 2020 target will require a significant change in how our energy needs are met, it is only a small part of the way towards the target of reducing greenhouse gas emissions to 80% below 1990 levels by 2050, as required by the 2008 Climate Change Act. 23 Directive 2009/28/EC, on the promotion of the use of energy from renewable sources 24 DECC, July 2009, Renewable Energy Strategy, 25 While this target is two percentage points below that for the UK as a whole, the Northern Ireland commitment to 40 percent renewable electricity generation is ten percentage points higher than DECC s commitment for the UK as a whole. 26 DETI, 2010, A Strategic Framework for Northern Ireland, 26

27 Renewable heat policy in the UK and Republic of Ireland We now turn to what is being done to deliver the targets, particularly the 15% renewable heat target for the UK. We look at GB, NI and the Republic (which has a 16% target) in turn. Great Britain The previous UK Government committed to a GB Renewable Heat Incentive (RHI) starting in April 2011 that would subsidise new renewable heat installations sufficient to achieve the level in the lead scenario in the Renewable Energy Strategy (i.e. 10%). The Energy Act set the parameters for renewables heat incentives in GB but not NI 28. The current UK Government announced in the October Spending Review 29 that the incentive would start in Summer 2011, would be funded from DECC s budget, and would represent over 860m of investment between now and Proposals appeared on 10 March , with further details to be published later in the year. DECC s RHI has been presented as a clean energy cash-back scheme paid to the owner of new renewable heat equipment 31. It is designed to encourage take-up of renewable heat technology by bridging the financial gap between renewable and conventional methods of heating. The tariff payments, to be administered by Ofgem, will be paid periodically over the expected useful life of the equipment. These will be contingent on evidence of the continued use and maintenance of the equipment. It is likely that once installed, a particular installation will receive a guaranteed stream of payments, with levels changing over time for new projects based on new information on costs and take-up rates. Most tariffs proposed are set at a level to cover the difference with conventional heat at different scales plus an annual investment return to reflect the effort, risk and opportunity cost of capital involved. A 12% return will be paid on most 32 technologies. Details of the current proposed tariffs and banding are shown in Table 2.4 below. 27 Energy Act 2008, Part 5, Renewable Heat Incentives, 28 While a number of sections of the Act apply to Northern Ireland, the section on Renewable Heat does not Installations completed since 15th July 2009 as if installed on the first day of the scheme going live. 32 Biomethane support is set based on parity with feed-in tariffs rather than a specified rate of return. The rate for solar thermal is set to be equivalent to that for offshore wind. 27

28 Table 2.4: DECC RHI consultation table of tariffs DECC will also be providing a Premium Payments scheme for the domestic sector from June 2011, to assess likely levels of take-up in that sector. The proposed payments, by technology, are set out in Table 2.5 below. Table 2.5: DECC proposed Premium Payments by technology, for the domestic sector Technology Proposed payment per installation Solar Thermal 300 Air Source Heat Pumps 850 Biomass boilers 950 Ground Source Heat Pumps 1,250 Northern Ireland As shown in Figure 2.5, HM Treasury has ring-fenced 25m over 2011/12 to 2014/15 for DETI for the sole purpose of funding a renewable heat incentive. Energy minister Arlene Foster 28