(Updated Version) 24 th September 2012 Renewable Heat Incentive: Proposals for a domestic scheme Introduction This consultation on the long awaited domestic Renewable Heat Incentive (RHI) follows the launch of the non-domestic component of the scheme in November 2011. The Renewable Heat Premium Payment (RHPP) scheme, a system of one off payments, has been introduced to support the market during the interim period until domestic RHI introduction. The main aims of the domestic RHI will be to: Contribute towards renewables targets under the Renewable Energy Directive Develop supply chains by boosting deployment Promote improved renewable heating technology performance This consultation will close on 7th December 2012, after which DECC is aiming to publish a response in early 2013. Pending Parliamentary approval, it is hoped that the scheme will be open to applicants in summer 2013. Eligibility DECC is intending for the domestic RHI to be available to any householder wishing to replace their existing heating system with a renewable technology, or who has installed an eligible renewable heating system since 15 th July 2009. It is proposed that the following technologies should be eligible to receive the domestic RHI: Air to water heat pumps (ASHPs) Biomass boilers Ground source heat pumps (GSHPs) Solar Thermal
Other eligibility requirements include MCS (or equivalent) certification and installation of all thermal efficiency measures, identified as green ticks through the Green Deal assessment. (Government is currently proposing to remove Solid Wall Insulation (SWI) from this category of measure.) In the case of private homeowners, it will be assumed that the person who owns the property owns the heating system and they would therefore be the recipient of the RHI payments. In the case of private rental properties, it is proposed that the landlord would be the recipient, although it is recognised that there may be some issues around split incentivisation. Second homes would not be eligible. General scheme design The proposals outline a scheme consisting of 7 year tariff payments which would be made on the basis of deemed heat usage (a calculation of the expected heat usage for the property). Metering requirements A certain proportion of the installations would be metered for the purposes of evaluating the success of the scheme but it is proposed that householders should generally be required to remove their fossil fuel system in order to be eligible for the RHI. Some householders would be allowed to retain their fossil fuel system alongside their renewable system under certain circumstances depending on the technology (detailed in the consultation document), but a meter would have to be installed and metered payments could not exceed the relevant deemed amount. Deeming options The consultation refers to two different approaches to deeming the heat usage of a property for the purposes of the domestic RHI: 1. Via the heat load figure produced by the Green Deal assessor through an RdSAP calculation (as part of the Green Deal Assessment process) 2. Via the energy consumption assessment carried out by the MCS (or equivalent) certified installer as part of the system design process DECC is minded to look into the adoption by MCS of a standardised deeming calculation for the average annual heat load. This does not currently exist and would need to be developed. 2
Tariffs Given that the domestic RHI is intended to be a boiler replacement scheme, proposals on tariffs have been designed to compensate for the additional upfront and ongoing costs of renewable heat, compared to the fossil fuel alternative, and other non-financial barriers, including the hassle factor. Evidence used to calculate the tariffs will be updated on an ongoing basis to ensure accuracy. Initial Tariff Analysis DECC has proposed the following tariff ranges for each technology: DECC has set out a detailed methodology for setting tariffs. For each technology, they are aiming to incentivise take up in target house type. Annex 10 of the Impact Assessment presented different tables illustrating ranges of household types and specific renewable heating technologies suitable to them. The household types differ in building characteristics, levels of heat demand and their conventional heating systems. The tables give an idea about the magnitude of the costs and the subsidy the households face. The Targeted Households figures (see next page) were adopted by DECC in designing the RHI tariffs. 3
1 Many consumers and installers in this sector will now be calculating what the return on a renewable heat investment may look like under different circumstances. Looking at the above pricing information, we have some concern that the baseline assumptions will not correlate with industry experience. Therefore, we are interested in exploring the updated data set that is currently being collected by DECC and due to be reported in October. We ran our in-house tariff model to calculate the rate of return on the proposed tariffs using DECC house types and cost assumptions the accuracy of which we wish to reserve judgment. Using the DECC technology pricing figures and household specification data, our model yields the below rate of return. We also presented the return of the midpoint of each proposed tariff range and calculate the required tariffs to yield 7.5% for each technology. In the case of most technologies supported under the scheme, a tariff increase above the proposed range is required. 1 DECC Impact Assessment, DECC0099, dated 3 rd August 2012, available on DECC website on 20/09/2012 4
Figure 1 Rate of Return According to Tariff Level2 DECC is also looking at deviating from strictly tariff based support under some circumstances, when more effective support can be provided using an alternative structure. For example, DECC anticipates that any householder wishing to install solar thermal would be able to receive an additional subsidy. Furthermore, the consultation explores ways in which the domestic RHI can be used to improve performance: for example, one of the options being consulted on is to vary RHI tariffs for heat pumps according to the SPF. Treatment of social housing and new build properties New build: DECC is consulting on whether it is appropriate to introduce a tariff to support installation of renewable heat technologies in new build housing. If the conclusion, following closure of the consultation, is that a new build tariff should be introduced, it is proposed that if houses have been classified as new build (Part L1A of Building Regulations) or a renovation has been carried out that is large enough to qualify under Part L1B, a Green Deal Assessment will not be required. Any tariff would only be available on new developments after the launch of the domestic RHI in summer 2013 and where the renewable heat installation is over and above that required in order to comply with Building Regulations. Social housing: DECC is currently undecided on whether social landlords installing individual renewable heating systems should receive an RHI. Whilst the current position is that they should not, the consultation document emphasises the untapped potential of the social housing sector in terms of scaling up domestic renewable heat deployment. In view of 2 Note: The DECC assumptions on house type and cost data require further examination. 5
this, DECC is consulting on whether a reduced tariff (compared to that offered to individual householders) paid over a reduced timeframe should be made available. Legacy installations & grandfathering of RHI payments DECC will be adhering to previous commitments that installations installed since 15 th July 2009 will be eligible for support once the domestic RHI is introduced, provided that they meet the eligibility criteria of the scheme. Installations falling into this category will include: Householders who have installed renewable heating systems since 15 th July 2009 but have not received any Government support for the installation Those who have received RHPPs, either individually, as part of the RHPP social landlord competition or the RHPP Community Scheme Those who have received a Home Renewables Loan from the Scottish Government Legacy applicants will need to meet all the eligibility criteria of the scheme, which will involve getting a Green Deal Assessment and potentially having additional energy efficiency improvement measures implemented. Amongst other requirements, they will be obliged to declare all state funding already received for their installation. The key point to note is that proposals state that any Government funding already received will be deducted from the amount of RHI payable. It is proposed that the duration of the tariff payments should be adjusted to reflect this rather than the tariff payments themselves. It is not proposed that grandfathering of RHI payments should apply to new build installations. Budget management DECC is proposing that the budget management mechanism for the domestic RHI takes a similar approach to that proposed for the non-domestic scheme, based on a system of tariff degression. Proposals include the following elements: As with the non-domestic RHI, degression would only occur if deployment (and costs) exceeded pre-defined triggers Tariffs would degress by fixed percentages if individual tariff triggers are met Tariffs would also reduce if total domestic deployment hits an overarching trigger point 6
Deployment levels would be monitored at regular intervals and advance notice given before degression kicks in There would be potential to build in greater flexibility so that tariffs do not automatically degress if the overarching trigger has not been reached Periodic reviews would take stock of the scheme as a whole Coexistence of ECO and Green Deal alongside domestic RHI ECO Affordable Warmth DECC is proposing that a household should be able to benefit from both the ECO and the domestic RHI, provided that the installation meets the additionality requirement within the ECO (i.e. it can be shown that the measure would not have been implemented in the absence of the ECO funding). Green Deal The consultation document recognises that some householders may be able to obtain some Green Deal finance to contribute towards the upfront cost of their renewable heating installation. It is currently DECC s intention to allow these householders to also claim the RHI, provided that this complies with State Aid rules. It is clearly stated that DECC does not consider that there is likely to be any material double subsidy issue in practice. Conclusion: This consultation has been given a warm initial welcome by the industry and demonstrates that Government has clearly listened in terms of budget management, tariff duration and alignment with other policies. However, this consultation also raises many crucial questions around the precise details of tariff design to ensure that technologies receive the required boost. Informed engagement with the consultation process will be vital in order to produce an effective policy. Please contact James Higgins on 07500 331836 if you would like to discuss the contents of this briefing in more detail. 7