THE RENEWABLE HEAT INCENTIVE Will it pay us to use renewable heat in our homes?

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1 THE RENEWABLE HEAT INCENTIVE Will it pay us to use renewable heat in our homes? Last month we looked at the Feed-In Tariff scheme, by which a householder is paid for producing electricity from renewable sources. There is intended to be a somewhat similar scheme for rewarding householders who produce heat from renewable sources: the Renewable Heat Incentive (RHI). The FIT scheme was implemented in April of this year; the RHI is due to be implemented in April of next year. However, if you install heating equipment before next April, whether in a selfbuild or not, you should make yourself familiar with the details proposed for the RHI: the scheme is to be applied retrospectively to renewable heating equipment installed after July 15, 2009 (when the Renewable Energy Strategy was published). Note in particular that the installer and equipment must be MCS certified. In introducing the FIT scheme, Britain followed on behind about 70 other countries. With the RHI, Britain will be leading the way. (Note that, as for the FIT scheme, the RHI will not apply to Northern Ireland.) The FIT scheme applied to small and medium scale installations; the RHI will apply to all, both big and small. Official estimates are that by 2020, the RHI could have saved 60 million tonnes of carbon emissions, compared to the 7 million tonnes expected to be saved by the FIT scheme. The politics The Renewable Heat Incentive is far from perfect. Nonetheless, it had cross-party support in its development, and so, assuming a way can be found to fund the scheme, the new government is likely to implement it. The manifestos of both the Conservatives and Libdems were sympathetic. The Conservatives said they would encourage low carbon energy production, in particular by giving incentives for smaller-scale energy generation. The Libdems said they would develop new incentives to promote renewable heat. On the same page of the Conservative manifesto as their quote above, I noticed a statement about the electricity grid: A Conservative government will transform this dumb, unresponsive network and create an electricity internet a highly interactive network, based on a new smart grid that will interact with smart meters in people s homes, to manage supply and demand. As I pointed out last month, the smart meters are to be introduced as a result of an EU directive. The euro-sceptical Conservatives seem to be trying to take the credit for complying with an EU directive that s politics, I guess. Funding the RHI The Feed-In Tariff scheme is being funded by increases in the bills of all electricity users. The original intention was that the RHI would be funded in a somewhat similar way, by a levy on supplies of fossil fuels (gas, oil, etc). But in the consultation document for the RHI, published in February, this approach was said to be too complex and costly. Instead, an announcement would be made about the funding of the scheme in the March Budget. But in that Budget, it was merely stated that the long-term basis for the funding was still being reviewed the government THE RENEWABLE HEAT INCENTIVE 1 AUGUST 2010.

2 was obviously finding it a tricky issue. Will the new Chancellor be able to sort it out in time for his June Budget? The RHI tariffs For the FIT scheme, the amount of electricity generated is easily measured by a meter. It is much more difficult to measure the output of heat, so the RHI scheme is more of a fudge: Payments for small (domestic) systems are based on the deemed output of heat over the year. (See below.) Wood stoves are excluded from the scheme. Payment per kwh of heat Tariff lifetime (years) Solar thermal 18p 20 Eg, solar hot water Solid biomass 9p 15 Eg, log or pellet boiler Heat pumps: Ground source (GSHP) 7p 23 Air source (ASHP) 7.5p 18 RHI payments for small installations Other technologies in the scheme are of less interest to selfbuilders: biogas, bio-liquids, renewable Combined Heat and Power, and renewable district heating. (In the future, though, some heating oil may have a bio-liquid component, eg, 30%.) The tariff rates are likely to be increased in line with inflation. And there will be no income tax to pay on RHI payments. What is the rationale behind the differing tariff rates? The tariffs are intended to provide: Compensation for the higher costs associated with the renewable technologies: invariably a higher capital cost and sometimes a higher fuel cost. Compensation for non financial barriers, eg, the disruption caused by the digging up of gardens to install GSHP s. An investment return of 12% though only 6% for solar thermal technology. The generous rate of return (12%) is intended to greatly increase the uptake of the technologies. Furthermore, if the price of the fossil fuel rises faster than the price of the renewable fuel and don t forget that sunshine is free! then the effective return would be even higher. (The main reason for a lower rate of return for solar thermal, 6%, is that this technology is already well established.) Some pundits think that the proposed rates are too generous. At the risk of annoying some readers, I would say that the RHI is certainly over-generous towards installations in new build (as opposed to replacing an existing fossil fuel system in THE RENEWABLE HEAT INCENTIVE 2 AUGUST 2010.

3 good working order). When the scheme is finalised, the actual tariff rates may turn out to be lower than the proposed rates given above. The tariff lifetimes equal the expected life of the equipment. As in the FIT scheme, the system must be installed by an MCS accredited installer using MCS certified equipment. (MCS Microgeneration Certification Scheme.) Deemed output The cost of metering heat on a small system would be relatively high. Worse than that, metering would encourage the generation of unwanted heat for profit. The excess heat would be dumped by the opening of windows, or whatever. (Unlike electricity, surplus heat can t usually be exported.) So for new build, the Standard Assessment Procedure (SAP) will be used to assess the demand for space and water heating. (A SAP calculation is required for the building regulations, anyway.) The deemed output over a year will be multiplied by the appropriate tariff rate to give the annual payment. Example Let s consider a newly built, detached house with a low annual space heating requirement of, say, 6,000 kwh, and a water heating requirement of, say, 3,500 kwh. Solar thermal panels might contribute 60% of the heat for hot water, and a pellet boiler the remainder of the heat required. Solar thermal: Heat provided 2,100 kwh (0.6 x 3,500) RHI payment 378 (18p x 2,100) Solid Biomass: Heat provided 7,400 kwh (0.4 x 3, ,000) RHI payment 666 (9p x 7,400) Total RHI payment 1,044 ( ) So the RHI payments would be 1,044 a year for 15 years, and then 378 a year for a further 5 years. Is that generous or over-generous? Payments The RHI is to be administered by the E-Serve department of Ofgem, the Office of gas and electricity markets. (The E conveniently stands for any or all of Environment, Energy, and Efficiency.) Upon installation of the heating system, the MCS accredited installer will register the installation with Ofgem. Thereafter, Ofgem will make an annual payment to the owner of the installation. To ensure that the equipment is kept in good working order, Ofgem may require evidence of ongoing maintenance by a qualified person. The wood stove conundrum Overall, wood stoves result in much lower carbon emissions than heat pumps, yet heat pumps are in the RHI while wood stoves are excluded. The reasons given are: THE RENEWABLE HEAT INCENTIVE 3 AUGUST 2010.

4 It would be difficult to know how often a wood stove is used, especially as a stove is often fitted as an optional, secondary source of heat. A householder may burn coal in the stove, instead of wood. (I don t find this convincing, especially as dedicated wood burners are not suitable for the burning of coal in contrast to dual-fuel stoves.) It is obviously a defect in the scheme that one of the most carbon neutral means of heating should be excluded albeit for possibly sound practical reasons. However, the consultation document does leave it open as to whether or not a wood stove with a back boiler for heating domestic hot water will be eligible. (Note that a log boiler which heats hot water for space heating is included in the scheme, under solid biomass.) By the way, while I am on the subject of wood stoves, it might be worth mentioning a recent accident in my village. Wood stoves and thatched roofs both appeal to greenies, but they don t go well together. A wood stove in one of our picturesque cottages caused a chimney fire, the thatch caught fire, and the cottage was gutted. If you do install a wood stove, select a stove which is as efficient as possible. (The more efficient the stove, the cleaner the smoke and the less the tar condensing in the chimney.) And have the chimney swept regularly. Should heat pumps be included? The heat taken from the ground or air is obviously renewable energy. Say the heat pump has an average Coefficient of Performance (COP) of 3 over the year. We gain 2 kwh of renewable energy by using 1 kwh of electricity. But to produce 1 kwh of electricity at a power station requires about 2.5 kwh of fossil fuel energy. So we use up 2.5 kwh of fossil fuel energy to gain 2 kwh of renewable energy and 1 kwh of delivered fossil fuel energy. That is satisfactory, but it is not a particularly good deal for the environment. It is questionable whether heat pumps are worth subsidising especially ASHP s which have lower COP s than GSHP s. An unintended consequence The best way to reduce carbon emissions is to reduce the consumption of energy. For housebuilding, that means building with plenty of insulation, good airtightness, and Heat Recovery Ventilation. Unfortunately, the RHI encourages building down to the energy requirements of the building regulations, not surpassing them. To maximise your future RHI payments you need as bad a SAP rating as you can get away with ie, the minimum set by the building regulations. To illustrate this point, consider the installation of a pellet boiler into a new build. In my article, Heating with Pellets (August 2009), I gave a price of 4.2 pence per kwh for the energy in pellets. Assuming that the cost of the energy delivered by the heating system is, say, 5p per kwh, then with an RHI tariff payment of 9p per kwh, there is a profit of 4p per kwh to be made in producing heat from pellets. (For simplicity, let s assume the capital savings made by building with poorer insulation and airtightness balance out the increased cost of a bigger heating system.) For maximum profit, the deemed output would need to be as high as possible. So the SAP rating would have to be low as possible a most undesirable outcome. THE RENEWABLE HEAT INCENTIVE 4 AUGUST 2010.

5 The designers of the RHI have been aware of this unintended consequence of the scheme. In fact, it forms the basis of one of their questions in the public consultation held earlier in the year: Q11: Can you provide suggestions for how to ensure that developers do not build to lower energy efficiency standards as a result of the RHI in advance of 2013 and 2016 building regulations taking effect? Will the scheme be amended before its final publication so that higher SAP ratings are encouraged, rather than discouraged? Rewards for those showing the way? Meeting the higher SAP rating that will be required in the autumn is fairly straightforward. It will be more challenging to meet the changes due in 2013, and much more challenging to meet the zero carbon target due to become compulsory in Before the higher standards become mandatory, we need pioneers to try out the improved practices and new technologies that will be necessary. Or maybe the English and Scots can just leave it to the Welsh to be the pioneers? In 2007, the Welsh Assembly set a target date for all new buildings to be zero carbon by So next year the Welsh will be showing us all how to do it. Or will they? I expect the over-ambitious target date set by their politicians will have to be put back, as aspiration gives way to practicalities. So instead, what about grants for bettering the required SAP ratings the better your SAP rating the higher the grant? This would have two benefits: It would encourage progressive housebuilders to show how to achieve higher energy standards before the standards become compulsory for all. (Most progressive housebuilders are selfbuilders, of course!) It could neutralise the incentive towards lower energy standards that the RHI in its present form would bring. Have I erred? A reader has rightly queried the financial analysis that I gave last month as an example of the Feed-In Tariff scheme. I ll return to the matter next month. FURTHER INFO: Department of Energy and Climate Change Their response to the RHI consultation is due in September. Microgeneration Certification Scheme, MCS Lists of certified products and installers. THE RENEWABLE HEAT INCENTIVE 5 AUGUST 2010.

6 Ofgem Their E-Serve business unit will administer the RHI. Renewable Heat Incentive Ltd Information about the RHI. Words: Copyright article by Robert Matthews in SelfBuild & Design magazine, August, THE RENEWABLE HEAT INCENTIVE 6 AUGUST 2010.