REA response to DECC Consultation on the Renewable Heat Incentive Non-domestic scheme early tariff review

Transcription

1 REA response to DECC Consultation on the Renewable Heat Incentive Non-domestic scheme early tariff review The Renewable Energy Association (REA) is pleased to submit this response to DECC s consultation. The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. Members range in size from major multinationals to sole traders. There are over 1000 corporate members of the REA, making it the largest renewable energy trade association in the UK. We broadly support the aims of this consultation, and to look to unblock deployment of some technologies where the evidence suggests that initial tariffs were set too low. Having said that, the current cost control arrangements constrain biomass, relative to other technologies. This is counter-productive, since biomass is both successfully deploying and offers excellent value for money compared to most other heat (or power) technologies. Given that the Government is, rightly, focussed on ensuring value for money, it is clear that this approach (and, specifically, the projected levels of spend at which tariff reductions will be triggered) needs to be revised. In the light of the spending settlement reached for 2015/16 this moves from highly desirable to essential. We have already engaged with DECC on this and look to continue this over the coming months. Further detail on these points is set out in our response to questions 6-9. Responses to consultation questions Question 1: Do you support the approach to updating the VfM cap applied to RHI tariffs? Do you agree that the tariff for GSHP should be increased to the level of support provided to offshore wind? If not please state why. Although it seems counter-intuitive to set support levels for renewable heat with reference to renewable power generation, we agree with the approach of setting a maximum level of support beyond which subsidies would not go without very strong justification. If this cap is set with reference to subsidies for off-shore wind then we agree it makes sense to include the full range of support that gives renewable power an advantage relative to fossil generation. We do have serious reservations about the implications for revised ground source heat pump tariffs. Based on subsidies per unit of renewable output these are now around double those available to medium scale biomass. The case for this in terms of value for money is not clearly made in the consultation document. See also our response to questions Eccleston Place Tel: Victoria, London SW1 9NF

2 Question 2: Do you agree that the assumption of an average SPF of 3.6 is correct for non domestic GSHP? Please provide any evidence you may have to support your answer. We appreciate the desire for administrative simplicity, but it would surely be beneficial to meter electricity input to the heat pumps. This seems like a missed opportunity to gather real-world data on SPFs, and the additional costs would surely be small compared to the overall sums involved. This would provide hard evidence to set against the claims made by supporters and detractors of heat pumps it would also provide opportunities for learning from good and bad practice. Question 3: Do you agree that a 12% rate of return on the additional capital investment on the median cost installations (ie those installations at the upper end of the 50 th percentile of the cost curve) is the right rate of return to stimulate investment in renewable heat? This seems a reasonable approach given that the policy is looking to incentivise the non-domestic sector and, for the most part, those with cash to spend. Small and medium biomass tariffs have been set on this basis, with the market growing but not over-heating. Setting the tariffs to deliver 12% returns at the median point of the cost curve inevitably allows the market to chase after the higher returns available so it is likely that real returns achieved to date are significantly higher. To some extent, this balances out the fact that many businesses would not see a 12% return as high enough to overcome internal hurdle rates for capital investment, especially given other factors such as fuel price risk and the relatively high perceptions of policy risk. We do not see it would be possible or desirable for Government to try to micromanage market response to tariff rates, so the current approach seems roughly right and does at least provide a rationale for treating different technologies consistently. Question 4: Of the broader range of evidence used to identify tariff levels, as described above, are there any factors that should be excluded? Question 5: Are there other material factors we should consider in making judgements about the tariff levels needed? We agree with the approach proposed. The renewables industry has had several recent experiences where modelling has produced poor outcomes. Modelling is only as good as the market data it uses and the understanding of those putting it together. Renewable heat in the UK starts from a low base, so there is limited historical data available. Particularly in cases where actual deployment is low, industry can help provide insights, or at least sense check modelled tariff levels. Ultimately, industry is bestplaced to understand whether a given tariff is likely to stimulate their market. This does require Government to have some understanding of the reliability of those providing information, so it is also important for DECC to develop its own in-house expertise. Further, empirical evidence that there has been no response to a tariff would indicate that the policy needs to be reconsidered. The large biomass tariff is an example of this, but this is also relevant to the September 2012 proposals for a tariff for biogas combustion 200kWth and above. As noted in that consultation, the model could not be right when it indicated that no tariff is required at this scale. For the 2

3 most part, this market consists of developers who have already responded rationally to the incentives available under the Feed-in Tariffs or Renewables Obligation and yet continue to eject waste heat rather than use it. Question 6: Do you agree that the small biomass tariff should not change from its current levels through this tariff review? Question 7: If not, why should the small biomass tariff be revised and what would be an appropriate tariff? Please provide any evidence you may have to support this view. Question 8: Do you agree that the medium biomass tariff should not change from its current level through this tariff review? Question 9: If not, why should the medium tariff be revised and what would be an appropriate tariff? Please provide any evidence you may have to support this view. We agree that current support levels are appropriate, since industry is responding positively, without evidence that the market is overheating. Further, although the current tariffs factor in the possible costs of new air quality and sustainability regulations, final details are not known for either with the implementation of sustainability particularly uncertain. Until these are finalised, businesses will not be able to understand the likely cost implications and knock-on implications for the attractiveness of the tariffs. We would urge DECC to resolve these issues as soon as possible. Since smooth implementation of the sustainability criteria relies on the operation of a registered suppliers list, setting this up should be a priority. DECC should also ensure that the supplier list has been operational for long enough for the market to have confidence in it before sustainability criteria are fully implemented even if this involves re-considering the timescales announced in February Given this, DECC will be aware of serious concerns across the industry on the cost control mechanism brought into sharp focus by the 5% degression due to come into effect on 1 July. There is a risk that this (and the prospect of further degressions in the medium term) will undermine market confidence, especially in the light of the overall RHI underspend. The degression mechanism is extremely complex and REA and its members have struggled to grasp it fully. Since many of these members are extremely engaged with the policy development it is likely that the market as a whole has limited awareness of the policy and its implications. Given that the RHI as a whole is under-performing by a large margin, with just under 14m paid out to date 1 it makes no sense to pull back the only technologies that are actually delivering especially as there is no suggestion that current deployment indicates tariffs are too high. It is extremely frustrating that the policy has done just that, as this was the key concern that we raised repeatedly with DECC following the publication of the July 2012 consultation. There may well be a need to look again at the degression methodology either the regulations themselves or their interpretation. Similarly, raising the spend below which no tariffs will be degressed from 50% to 60% or 70% of overall intended spend on current tariffs would help in the short term. 1 Figure from Ofgem s public report, as at 28 June

4 Neither of these, however, would address the bigger issue. Now that triggers have been hit, the industry will essentially only be allowed to operate at current run rates there is no scope for the industry itself to grow. The sector is likely to stay at or around the trigger points for some time, raising the possibility of multiple degressions over the medium term. Delayed market response to the first trigger also increases this risk. The underlying problem is that DECC s intended deployment of biomass heat is far too low. The March 2011 impact assessment projected solid biomass providing only 58% of deployment by There are a range of factors, including UK housing stock and climate and relative ease of substituting for existing systems that would suggest that the potential of biomass in the non-domestic sector has been seriously underestimated compared to the alternatives. It may well be that the current dominance of biomass heat in the RHI at nearly 99% of accredited capacity 2 - is as much a result of market choice for biomass as opposed to current tariff levels holding back the other technologies. Looking at the current trigger points, solid biomass at all scales is constrained to just over 30% of the current year s budget for the RHI. 3 We understand the reason for this is to reserve capacity on the scheme for technologies that have yet to be included. The logic of this is difficult to follow, since this makes it inevitable that there will be a sizeable underspend - these tariffs have not yet been confirmed and are not due to be implemented before spring We note that existing triggers may be revised in response to a number of factors, including the outcome of the 2015/16 spending settlement. The funding announced on 26 June of 430m is only 6m more than that allocated for 2014/15. We are extremely concerned about the implications for achieving 2020 renewables targets, as well as longer-term climate change objectives. It also makes particularly acute the need to address the cost control triggers in the light of the value for money of the various tariffs. We note also that DECC intends to provide an update on this in the Autumn 4. We would strongly urge government to increase the triggers for small and medium scale biomass as part of that update, given that: Current policy will act as a serious constraint to the one area of the policy that is delivering The effective renewable heat subsidies for biomass heat are around half those now proposed for ground source heat pumps with this effect most severe in the case of large-scale biomass, even with the current proposed tariff increase The modelling on which the biomass triggers were based: o o seriously underestimated the potential contribution from biomass, both in terms of experience in other countries and GB market choice to date Should be re-calculated for technologies that are under-performing or not currently included in the RHI. Even if the original modelling was 2 Figure is 98.8% as at June , from Ofgem s public report 3 The most recent assessment was based on projected spend over 12 months from end April Combined triggers for all scales of solid biomass are 77m, compared to a budget of 251m for the financial year 2013/14 4 See paragraphs 96 and 97 of the consultation document 4

5 o accurate at the time, deployment in the medium term will be lower than originally expected due to the experience of the last two years Is not well-suited to determining annual growth patterns. It is ironic that DECC is proposing to move away from over-reliance on modelled outputs when setting tariffs but is still dependent on this approach when setting triggers Question 10: Do you think that the current approach of banding and tiering of tariffs may be incentivising the installation of inefficient systems? If so, what evidence do you have, and do you have any suggestions for how this could be deterred? Feedback from our members is that the banding is influencing sizing choices in that installations are tending to cluster around 199 and 999kW. To a large extent this is inevitable from the design choice made to band tariffs by size. We engaged directly with DECC on this issue last year, especially in the context of whether the combination of banding and the two-tier tariff might provide an incentive to oversize boilers. The conclusion was that this was unlikely, given the reduced performance such systems would provide. It was also noted that it would be extremely difficult for the scheme to guard against, since there is wide variation in boiler sizing based on the installer s experience and the user s needs. Anecdotal evidence suggests that 199kW boilers are just as likely to be under-sized in order to receive the higher tariffs. In general, tiering has been a good solution to the risk of over-generation of heat which was a legitimate challenge for the policy, both in terms of its effectiveness and its wider credibility. Tiering has also resulted in fewer size bands than were previously proposed. Our original proposals to DECC in 2009 (for both FIT and RHI) did not involve banding by size and DECC will already be aware of this and other approaches proposed by industry. In order to minimise disruption, these will need careful consideration but we hope that changes will be proposed as part of the 2014 review and will continue to engage with DECC on this. Question 11: Do you support our rationale for proposing a tariff of 2.0p to incentivise significant deployment of large biomass (specifically 50% of the heat potential) whilst avoiding overcompensation? Are there other factors we should consider? Please provide any evidence you may have to support your answer. Yes, although there is a range of views from our members, most likely reflecting the wide range of potential projects. There is a concern that the rate proposed could see funds used up more quickly, although this seems unlikely to be a problem in the short term given low uptake. What is clear is that, even at the proposed new tariff, large-scale biomass heat would still offer better value renewable energy and carbon savings than almost any other renewable heat or power technology. Although we have no new evidence to present, the level proposed seems reasonable, based on our experience of The original tariff proposed (3p in

6 prices 5 ) led to a high level of interest and fears from some that this would discourage CHP. When the EC intervened to block that tariff, there was a prolonged period of uncertainty during which developers made their own estimates of what the likely final rate would be. The 1p/kWh tariff was substantially lower than the most conservative assumptions of which we are aware, and confirmation of this level was followed by many projects being abandoned or re-sized to be sub-1mwth. This would suggest that a tariff around the level proposed is roughly right. Where larger-scale projects have long lead-in times there is a concern about potential tariff uncertainty both around the effects of degression and what rates may apply from April We have already been in discussion with DECC on this for a range of technologies and hope to provide further input on how this uncertainty could be addressed. For many of our members, the proposals in the July 2012 consultation provided a good starting point. We would also note that, the longer typical lead times for projects, the less likely degressions based on quarterly assessments of deployment are likely to be appropriate. This is because it will take a relatively long time for impacts of a change from degression to feed through to actual deployment levels with the risk of further reductions being triggered in the meantime unnecessarily. Question 12: Do you support our rationale for proposing a tariff of between 7.2 and 8.2p/kWh to incentivise significant deployment of GSHPs? Are there other factors we should consider? Please provide any evidence you may have to support your answer. Question 13: How much more deployment would you expect to see from a tariff of 8.2p/kWh as opposed to 7.2p/kWh? Question 14: How much greater would the potential for cost reduction be from a tariff of 8.2p/kWh as opposed to 7.2p/kWh Yes, although see also our response to questions 1 and 6-9. If nothing else, there needs to be a far clearer argument for the rationale for this relatively high tariff and how quickly costs are expected to reduce. As noted in our response to question 2, we appreciate the administrative simplicity of paying tariffs on all heat generated, but regret the missed opportunity to gather realworld data on overall system performance. We welcome resolution to the issue of recycled heat in ground source heat pumps but would want to be confident that the control measures proposed would be effective at avoiding perverse incentives. Question 15: Do you agree that a ground source heat pump tariff should be between around 3 or 4 times higher than a tariff for air to water heat pumps? We do not entirely follow the logic of this. On the face of it, it is odd to argue for the level to be set relative to another tariff rather than the costs of operating and maintenance costs of the installation. We do have some concerns about the implications of large-scale deployment of air source heat pumps in this sector on the gas grid, given the relatively low SPFs involved. This results in marginal GHG savings when substituting for gas, using the 5 Applying inflation to the summer 2011 rate at 4.8%, 3.1% and 3.2% in April 2012, 2013 and 2014 respectively. Note that the current rate of 1.0p/kWh would be 1.08p if the inflation adjustments to date had been performed to 2 decimal places. 6

7 current grid electricity carbon intensity. One possible approach to this would be to set tariffs based on a 12% rate of return relative to oil rather than gas so as to avoid excessive incentives to displace on-grid gas heating. Question 16: Do you agree that the tiering methodology is the correct approach for GSHPs? If not, please provide evidence on: a) What the minimum reasonable usage should be; and b) What the tier 2 tariff (ie operating cost) should be set at. We agree with the approach proposed. As we set out in our response to question 10, it is preferable to avoid banding tariffs by size. Tiered tariffs have been a good solution to the problem of a tariff being significantly higher than the cost of operating a technology, and the risk of this would be greatly increased at the tariff levels proposed. The experience for biomass has shown that this approach is not overcomplex once people are familiar with it, but can be offputting to customers initially. The biomass tier one split occurs at a 15% load factor, so DECC would need to consider whether that is also appropriate, since there are instances of ground source heat pumps sized for lower load factors. We also agree with the proposal to offer increased tariffs to ground source heat pumps only and not deep geothermal. So long as the deep geothermal tariff consulted on in September 2012 is implemented, this should not cause difficulties. Question 17: Do you support an increase to the solar thermal tariff to within the range set out in paragraph 39? If yes, please provide reasons. Yes. If the value for money cap is raised then the same logic should be applied to solar thermal. Question 18: Will increasing the tariff to within this range bring forward projects that would otherwise not have received investment? If yes, please provide evidence. Question 19: Is a tariff in this range likely to stimulate cost reduction in solar thermal technology? There is very limited evidence on this. Although it is possible that some projects would be more likely to come forward, this is likely to be marginal. By the same token, it is difficult to see how this could drive significant cost reductions, as the additional volumes involved would be small. It remains the case that a successful domestic RHI might lead to increased interest in the non-domestic sector, as happened with solar PV. Question 20: What do you perceive as the main opportunities and risks of the industry s proposal for a seven year tariff option? There is some merit to these proposals. We would certainly agree that a key argument against shorter tariffs has been the risk of switching back to fossil-fuelled heat once the tariff payments end. This risk seems negligible for a technology whose costs are almost entirely upfront. Having said that, reducing tariff terms to 7 years, with a corresponding increase in tariff rates could significantly impact on the RHI budget in the short-medium term. Any such change would therefore need to result in reduced triggers for solar thermal, so as to minimise risks to other technologies and the scheme s overall value for money. 7

8 Question 21: Do you agree with our intention that any changes to tariffs following this consultation should only affect those installations accredited from 21 January 2013? If not, please state why. We strongly agree that those accredited from this date should be able to move up to any higher rates that are introduced. This should reduce the risk of the market stalling between that date and the implementation of higher rates and sets a good precedent for the future. Having announced this intention at the time, we would also see it as very important that this was confirmed subsequently. As a general principle, we also agree with the logic that an installation accredited before then would have been funded on the assumption of the current tariffs and so the increased spending would not result in increased deployment. This logic does not necessarily hold good for the large-scale biomass tariff, however. We are aware of projects that were committed to in expectation of receiving the original tariff (which would be 3p/kWh in 2014 prices) but are now receiving the 1p tariff. DECC should consider allowing these to move up to the new tariff, since they were not financed in the expectation of receiving the lower tariff. Given that fuel costs will be a very substantial portion of the total cost of these installations, there is also the risk that later installations will be able to out-compete them on fuel price. Allowing these installations to move up to the higher price 6 would address this, as well as going some way to resolving the knock-on effects of such a drastic reduction in tariffs occurring after Parliamentary approval had been given to the regulations and days before the scheme was due to start. We would also not see it as creating a precedent for future changes to the scheme, as the combination of events around State Aids and the very low tariffs relative to fuel cost is unlikely to be repeated. If the approach taken above is not adopted, then DECC should, at least, adjust tariffs for those installations remaining on the original tariff to take account the inflation adjustments that have been lost due to the way they are rounded. As set out in our response to Question 11, the current rate would be 1.08p if inflation adjustments had been calculated to two decimal places. 28 June Perhaps only those that accredited after November Alternatively, those that could show they reached financial close between March and November There is precedent for this, in that financial close is likely to be used as a reference point for other policies, such as changes to the CHPQA and new dedicated biomass power generation under the Renewables Obligation. Given that this would involve a relatively small number of RHI installations, the administrative cost of taking this approach should be modest. 8