Renewable Heat Incentive: proposals for a domestic scheme. Community Housing Cymru Group response

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Annis Harris
6 years ago
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1 Renewable Heat Incentive: proposals for a domestic scheme Community Housing Cymru Group response 1. About Us The Community Housing Cymru Group (CHC Group) is the representative body for housing associations and community mutuals in Wales, which are all not-for profit organisations. Our members provide over 136,000 homes and related housing services across Wales. In 2010/11, our members directly employed 6,500 people and spent over 800m in the Welsh economy. Our members work closely with local government, third sector organisations and the Welsh Government to provide a range of services in communities across Wales. Our objectives are to: Be the leading voice of the social housing sector. Promote the social housing sector in Wales. Promote the relief of financial hardship through the sector's provision of low cost social housing. Provide services, education, training, information, advice and support to members. Encourage and facilitate the provision, construction, improvement and management of low cost social housing by housing associations in Wales. Our vision is to be: A dynamic, action-based advocate for the not-for-profit housing sector. A member centred support provider, adding value to our members activities by delivering the services and advice that they need in order to provide social housing, regeneration and care services. A knowledge-based social enterprise. In 2010, CHC formed a group structure with Care & Repair Cymru and the Centre for Regeneration Excellence Wales (CREW) in order to jointly champion not-for-profit housing, care and regeneration.

2 Introduction As the membership body for housing associations and community mutuals in Wales, we welcome the opportunity to respond to the Department of Energy and Climate Change (DECC) consultation on a Domestic Renewable Heat Incentive (RHI). We have discussed the consultation with our members and with partner organisations including our counterparts in England and Scotland. Context The latest fuel poverty figures show sharp regional differences in the levels of fuel poverty. In Wales, an additional half a million households, over 40% of the total, are now classed as fuel poor. The North East and West Midlands have levels of fuel poverty over 30%, while the North West has just under 30%. The figure for the South East, meanwhile, is just 17%. With large numbers experiencing fuel poverty in Wales, many have to spend 10 per cent or more of their income on energy to heat their homes adequately. Social housing makes up approximately a fifth of the homes in Wales and also houses those in society who are at most risk of being fuel poor. Welsh housing associations own approximately 140,000 homes with around 68% of tenants claiming some kind of income support. Therefore, our members have the ability to target hard to reach people who are exposed to fuel poverty and an improvement in the energy performance of these homes has the dual effect of reducing energy poverty and also lowering our collective carbon footprint as a sector. Communities where housing associations work can benefit from training opportunities and work. Local contractors and suppliers can make the most of the investment in improving homes, maximising the benefit for the local economy. Many of our members operate in rural areas of Wales where fuel poverty can be distinctive due to the number of hard to treat properties and the number of properties off the gas grid which house many vulnerable tenants. Wales has a high proportion of hard to treat properties. These are properties where low cost solutions to improving energy efficiency such as cavity wall insulation and loft insulation are not appropriate, for example, buildings with solid stone walls such as traditional tenements, multi-storey flats and timber frame buildings. Wales also has a high proportion of properties that are off the gas network and households that do not have access to mains gas are more likely to experience fuel poverty than households who do, because of the higher costs of other fuels. The Renewable Heat Incentive offers the opportunity for our members to drive this uptake in renewables with the price of oil and concern for the environment being strong drivers for our members. Statistics show that there are over 90,000 people on social housing waiting lists in Wales and that an estimated 284,000 additional homes are required between 2006 and 2026 (this includes 101,000 homes from the social rented sector) to meet newly arising need and demand. These pressures on social housing are further exuberated by the welfare reform changes, stricter lending criteria, significant reductions in social housing grant in Wales for new builds in the coming years amongst other pressures. Therefore it is a huge challenge to build the number of homes required to meet housing need and building to higher standards and maintaining minimum standards within social housing is a challenge in itself. Whilst housing associations have the skills and experience to continue to lead the way in developing and maintaining sustainable housing standards and, in this context, the installation of micro-renewables in particular, this can only happen on any scale if they have access to appropriate support and funding.

3 Responses to the Specific Consultation Questions Do you think we should introduce a domestic RHI tariff for social landlords? Why/why not? Yes. Social landlords can and should play a vital role in the roll out and eventual mainstreaming of renewable heat technologies. The key objective in the first instance should be to increase the uptake and public acceptance of renewable heating in the early days and social landlords have an important part to play in achieving this objective. Several of our members have been piloting the installation of renewable heating systems 1 and several have been successful under the RHPP social landlords competition, although it has to some extent become clear that there has been mixed feedback on schemes, some that is positive and some that is negative. Significant costs have resulted in the need to engage with tenants following renewable heat installations. What is evident from projects is that householder education is an important factor to improve both the acceptance and operation of renewable heating systems. It can be accepted that renewable heat technologies are generally less well known and there are more hassle factors associated with their installation, which increases the barriers to installation. Therefore, bearing in mind the experience of social landlords in installing renewable heating systems, social landlords have the skills and expertise to work with the industry to accelerate this process, but only with the right incentives. RSLs have the ability to start addressing these barriers to design, installation, operation and maintenance of renewable heating systems through the relevant expertise in the sector and the willingness to evaluate the effectiveness of such technologies and engage and inform tenants, as well as the determination to tackle some of the challenges outlined in the introduction. Furthermore, without an appropriate subsidy or RHI for social landlords, it will be hard to make a business case for replacing fossil fuel heating systems with more expensive renewable ones, and they are unlikely to get Board or resident approval for such additional expenditure. With an appropriate incentive, with RSLs having large percentages of tenants in receipt of benefits or low incomes, the scheme would enable RSLs to install renewable heating into their properties at a faster rate due to the subsidies available in order to help reduce fuel poverty. In reference to RSLs, the consultation states, Unlike individuals, their often large property portfolios mean we anticipate that they are likely to able to access cheaper finance and negotiate cheaper purchase costs for equipment and in regard to on-going biomass fuel costs. For these reasons, as the proposed domestic tariff compensates at a rate for individual households, we believe that offering it to social landlords would over-compensate them and, given the scale some can operate at, this could result in significant profits. CHC and our counterparts in England and Scotland do not accept the proposition that social landlords should initially get a lower tariff due to this reasoning. Due to some of the reasoning 1

4 outlined above, we envisage that even with incentives, it will take time for social landlords to develop larger schemes where economies of scale might be realised. Due to many reasons, including the cost and the need for renewable heating to be used more widely and be more universally acceptable, from liaising with members, renewable heating projects within the social housing sector in Wales have tended to be small and usually pilots without procurement in large quantities and some members are still assessing the effectiveness, running costs and tenant satisfaction from this/last year s installations. Considering the size of certain housing associations in Wales, scale is not necessarily even an option. In agreement with the National Housing Federation in England, we feel that it is essential that a dedicated social landlord tariff be provided equivalent in value to the individual RHI tariffs at the beginning of the scheme. It could be beneficial for social landlords to receive an up-front payment (similar to RHPP) and a lower tariff over the 7 years to cover significant additional capital costs to move to a replacement programme for renewable heating. Alternately they should receive the same 7-year tariff regime proposed for individual households, provided the overall tariff was at the same level. Whichever tariff design is adopted, the social landlord tariff should be designed to be equivalent to the overall amount for the individual domestic tariff. One advantage of having a dedicated social landlord tariff is that uptake and evidence of purchasing power reducing installation costs could be monitored to guard against overcompensation or the budget being exceeded. Added costs on schemes While housing associations remain firmly committed to environmental investment, they require increased certainty and realistic timescales in order to proceed with projects, due to the fact that projects take time to get off the ground due to the need for agreements with lenders, consultations with tenants, legal agreements, board approvals and many other considerations. Certainty and long lead in time is key as well as the need for the domestic scheme to be designed to ensure administration is fairly simple. Housing associations experience with the rapid and dramatic reductions in FITs for PV resulted in many schemes being abandoned and significant abortive costs at times. If an attractive domestic RHI tariff was not made available for social housing schemes, low income tenants and communities may not be able to benefit from these renewables at any scale. We strongly suggest that tariffs are attractive for social housing providers in order to support the social housing business model and stop the scheme becoming regressive in its application. Many projects that housing associations are planning are very costly as housing associations have the added expense of: The cost of finance i.e. interest and loan arrangement fees The cost of due diligence, operational, financial and legal Tax, both corporation and vat (and that the income is taxable without any capital allowances) Costs of long term project management (costs of consent, etc) and maintenance. Consultations with tenants/legal agreements. To give an example, housing associations would usually be required to borrow in order to undertake certain schemes with the cost of capital amounting to around 6%, meaning that if social housing schemes were to receive low tariffs or no incentives at all to install renewable heating systems, then it would make it difficult for the scheme to cover costs. From past experience, if an association did

5 happen to buy products at scale, then savings may be lost in the time and resources that have to be put in to staff training and tenant engagement and follow up in order to ensure that the system is correctly operated and achieves the intended goals of reduced bills and lower carbon emissions. Many of our members have commented that lenders are unlikely to consent to low incentive and tariff rates because of the increased financial risk and the lower profit margins. Therefore, it is vital that financial analysis reflects the social business model of schemes in the HA sector. The balance of responsibility for energy costs between landlord and tenant needs to be taken into account when designing an appropriate tariff model for landlords. RSLs and community schemes present what is likely to be the only opportunity for low income communities to access the tariffs that they pay for. We suggest it is vital that DECC introduce a mechanism to ensure a level of benefit to low income households so far as the community and social housing sectors are concerned as RSLs can target those most in need. Do you think that the proposed 7 year period for tariff payments would be appropriate for social landlords too or would another timeframe within the assumed 20 year life of equipment be more appropriate? This depends upon the anticipated payback of the renewable option chosen, although feedback we have received from members is that seven years is a reasonable timescale for the tariff to operate. The proposed seven years is more attractive than the system used for the feed in tariff as it would allow RSLs to recuperate their investment and the additional profit to invest into another scheme. CHC believes that it is also important that existing replacement renewable heating installations should be included because those organizations who have been innovators have been key to developing renewable heating and should be rewarded, and access to the RHI payments for these innovators was committed to during the original RHI consultation. Do you have any evidence on the percentage differences to costs/benefits of fitting individual renewable heating systems into social housing? Without sufficient subsidy, it would be difficult to justify installing more expensive renewable heating systems given the greater cost of renewable heat technologies compared to traditional solutions such as gas central heating, electric storage heaters and wet electric systems. There are also limits on access to cheaper finance because associations are constrained by the amount of on-balance sheet funding they can accept. Housing associations would have to make the additional capital investment to fund these installations without benefitting from reduced bills directly and so require support if they are to fund installations on a significant scale. One of our members reported that they have currently completed an option appraisal at one of their estates with failed solar thermal that was installed at the time of construction. The results of their study concluded that without any subsidy, the most financially viable scheme to proceed with was solar PV.

6 In cases where a renewable technology will not meet a heat need, backup heating is needed in case of failure. These costs of back up heating facilities (biomass mentioned specifically by one member) taken together with issues such as Acceptable Cost Guidance restrictions, make the challenge of installing renewable heating installations uneconomical without an RHI incentive. Heat pumps could be specified with solar PV or solar thermal to compensate for the increased demand for electricity or demand on the heat pump when heating is not required, as heat pumps are less efficient when used for heating hot water. CHC recommends that further consideration be given to tariffs for solar thermal to make it an economically viable technology, particularly when used in combination with other renewable heating systems to improve performance and efficiency. CHC would be happy to provide further evidence and discuss further. CHC has received a range of figures regarding the costs for Air Source Heat Pump systems. An example can be seen in a report that one of our members has published which states that the ASHP system cost 7,200 per house and it was expected to make an annual saving of 500 and 5 tonnes of carbon 2. The report concluded that it was easy to use the air source heat pump incorrectly but if used correctly, the system is an efficient and comparatively inexpensive one to run, but used incorrectly it is very expensive to run. Is there an alternative way in which you think we should incentivise renewable heat in the sector? If the same tariff as individual homeowners was applied to social housing installations, this would be the most sensible approach and would make the process easier to administer. If there was to be an alternative approach, the sector would be happy to discuss the option for social landlords to receive an up-front payment (similar to RHPP) and a lower tariff over the 7 years to cover significant additional capital costs. Whichever tariff design is adopted, the social landlord tariff should be designed to be equivalent to the overall amount for the individual domestic tariff. Additional points to questions Do you agree that deeming, as opposed to metering, is the most appropriate approach on which to base the calculation of RHI payments? If not, why not? One of our members commented that although this method is simpler and would give greater stability for RSLs to plan to reinvest payments into other schemes, it is vital that it does not lead to false understanding of actual performance of such installations and fail to ensure that the installation is being used correctly. 2

7 Energy Efficiency Requirements We agree in principle that where there is scope to install straightforward and affordable measures then this should be required before RHI can be provided. At present many RSL properties are achieving the minimum standards set by the Welsh Government through the Welsh Housing Quality Standard by managing their assets effectively and reducing tenants fuel bills. There needs, however, to be scope for exemption from this requirement where there are valid reasons why measures cannot be installed for example, in flats where other owners prevent completion of communal works, where properties are hard to treat or where planning guidance prevents the installation of measures. The requirement to Install 'green tick' Green Deal measures such as loft and cavity wall insulation before proceeding with RHI may cause RSLs an issue in places since some tenants have refused loft insulation due to the loft being used for storage or repeated no access. Similarly the EPC may recommend cavity fill; however, the installer has advised it is not suitable. So while many RSLs may already meet the proposed energy efficiency requirements to be eligible for RHI, there are still many which need substantial energy efficiency improvements. Community Housing Cymru Group 7 December 2012

Renewable Heat Incentive (RHI) Opportunities for Social Landlords in the RHI

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