The Renewable Heat Incentive (RHI)
The Renewable Heat Incentive (RHI) is a new payment being introduced in the UK for generating heat from renewable sources. It is very similar to the Feed-in Tariff and was introduced through the same legislation - Energy Act 2008. The Renewable Heat Incentive is payable to anyone who installs renewable heat – homeowners, tenants, businesses, schools, hospitals, farmers or landlords.
The RHI is scheduled to go live on June 1, 2011. The new Coalition Government confirmed its support for the RHI in the October 2010 Spending Review.
How it works
Through the Renewable Heat Incentive, generators of renewable heat will be paid a figure which has still to be confirmed but thought to be around 18p for the hot water and heat they generate and use themselves. The RHI tariff depends on which renewable heat systems are use and the scale of generation. As such, users will earn enough money from the tariffs to pay off their installation costs in about five to nine years.
Clean Energy Cashback for heating
Renewable heat installations commissioned since July 2009 will receive a cash-back subsidy, based on the deemed heat requirement of a building, for the lifetime of the equipment used.
Almost half of the final energy consumed in the UK is in the form of heat. Its generation accounts for 47% of UK CO2 emissions. Renewable Heat currently satisfies less than 1% of heat demand.
Renewable Heat as part of the Government's commitment to aim for 15% renewables by 2020 and is introducing the Renewable Heat Incentive.
For the Renewable Heat technologies included, the energy ultimately comes from the sun. The sun provides planet earth with more energy each hour than human civilisation uses over a whole year. The challenge is how to make use of this vast supply of incoming radiation to provide solar space heating and hot water.
The DECC press release of 20 October 2010 said: The Spending Review ensures that the UK can meet its environmental goals, including the 2020 targets for a 34% reduction in greenhouse gas emissions and for 15% of energy to be from renewable sources, while improving efficiency, supporting growth and facilitating a private sector led transition to a green economy.
There will be £860 million of funding for the Renewable Heat Incentive which will be introduced from June 2011. This will drive a more-than-tenfold increase of renewable heat over the coming decade, shifting renewable heat from a fringe industry firmly into the mainstream.
“Like the rest of the public sector we have taken some tough decisions, but we remain on course to deliver on our promise to be the greenest government ever”, said Chris Huhne, Climate Change Secretary at DECC.
Comment on the Renewable Heat Incentive
From the DECC website: To meet our 2020 15% renewable energy target, we need to develop new ways of generating renewable energy in all sectors, including heat. Heat generated from renewable sources accounts for approximately 1% of total heat demand – this may need to rise to 12% to hit our binding EU targets. We will not be able to expand renewable heat without some form of financial assistance because other forms of heat are currently cheaper. Such support will enable more people to afford renewable heat and, by expanding the market, help bring costs down more quickly.
An investment in renewable energy usually means payment of a higher capital cost to achieve lower annual running costs (and also a lower carbon emission for the benefit for the community at large).
The RHI is calculated to offer a 12% return on initial investment. The introduction of the RHI offers a financial reward for lower carbon emissions over the deemed life of the renewable heating technology installed. The tariffs for the Renewable Heat Incentive have been calculated to offer a rate of return of 12% on the initial investment across the tariff bands.
The introduction of the RHI coincides with a time of increasing wealth and demand for fossil fuels from an increasing world population: many pundits expect the price of oil and gas to increase much more sharply than general inflation over the next three years.
The RHI provides a positive step change in the business case for delivering on-site renewable heat, not only to reduce energy bills and carbon emissions, but also to deliver a energy related cash flow into your building.
Tony Grayling, head of Climate Change and Sustainable Development at the Environment Agency said: "Ground source heating is a rapidly growing technology that has the potential to produce at least 30 per cent of the country’s renewable heat needs, but it needs financial support in order to grow. We would like to see this technology given adequate financial support through the new renewable heat incentive to meet its full potential in the UK."
RHI Tax free income
Tariffs will be exempt from income tax. This means that domestic users and other income tax payers will not be taxed on any income received from the Feed-In Tariffs or the Renewable Heat Incentive.
Green Deal Scheme
What is the Green Deal Scheme?
The Green Deal is the coalition Government’s flagship carbon emissions reduction project. It is a Conservative idea but has the full backing of the Liberal Democrats. The purpose of the Green Deal is to encourage as many people as possible to take measures to make their homes more energy efficient and it will achieve this by providing all of the upfront finance for such measures by way of a loan.
New legislation is required, in the form of the Energy Security and Green Economy Bill, is to allow the project to commence and this bill is expected to be laid before Parliament in the autumn of 2010 with the scheme due to actually commence late in 2012.
Who Can Apply for Green Deal Finance and How?
It is the Government’s intention that there be no restrictions on who can apply for finance through the Green Deal so potentially all of the UK’s 26 million households could take advantage. It is not means tested in the way that most benefits are and neither an applicant’s current credit commitments nor his past credit history will be taken into account. Applicants do not need to own their home to benefit and where a property is rented, either the landlord or the tenant could apply.
There are no details as to the process for making an application at the moment but what is known is that an assessment of your home, to establish what measures would be most effective, will be required. The cost of this should be included in the loan.
How Much Will Be Available From Green Deal?
The Conservatives originally anticipated around £6,500 per home in their election manifesto however the Liberal Democrats would like to see the figure rise to £10,000. Of course, a home will only receive as much as it actually needs.
What Can Be Purchased With Green Deal Finance?
At present the focus seems to be on energy efficiency measures such as insulation, draught proofing and perhaps double glazing, and certainly these will be part of the package, but it is not impossible that the list could be extended to include some microgeneration measures as well.
Currently the incentives for microgeneration installations (i.e. solar panels, wind turbines, heat pumps etc) are the renewable heat incentive and the feed in tariff. Although profitable investments, the major problem with these incentives is that a substantial cash outlay is required which many people simply don’t have. Depending on take up therefore, or if the government is looking for an alternative to what is, after all, a Labour project, it could potentially include microgeneration, though the amount allocated to each household may need to be increased.
Who Will Finance the Loans?
The Government is in talks with some major national retailers, in particular B & Q, Tesco, Marks & Spencer and Virgin, with a view to these or other private sector firms providing the finance and so lessening the burden on the Treasury. It may need to underwrite the loans though in theory because the scheme makes applicants better off, levels of default should be negligible.
It is not known whether the private financiers will profit directly from the loans, in terms of interest payments, or whether they will have to relying on the marketing advantages and the opportunities that will inevitably arise from such things as sales of insulation products or referral fees paid by installers.
How Will the Loan Repayments Be Made?
The loan will be attached to the property’s energy bill and the repayment schedule will be calculated to ensure that the repayments for a given period are less than the resulting energy bill savings, so that from the outset the household will be financially better off.
It is likely that repayments will be collected by the household’s energy provider via the gas/electricity bill, though the details have yet to be finalised. Because of the necessity of ensuring that the repayments are kept below the cost savings, repayment terms will vary in length depending on the amount borrowed and the resulting savings.
How Will the Loans Be Secured?
The loans will attach to the property and not the individual. This get around the problem of a homeowner having to continue repaying the loan after he has sold up and moved on. Unlike a mortgage however the loan does not need to be repaid upon sale.
Homeowners should be cautious about this. The effect is that when purchasing the property he will be taking on responsibility for the loan and whilst this in itself is not onerous since he will also take the greater benefit of lower fuel bills, there will no doubt be other properties on the market where similar measures have been installed but with Green Deal finance. These properties are unlikely to be any more expensive as a result and so may be more attractive to a potential purchaser, particularly in a buyer’s property market which we have at present.
Can I Install Measures Now and Apply for the Loan Retrospectively?
Although as yet we don’t know anything for certain, it is extremely unlikely that this will be possible. Certainly those who installed microgeneration systems before the introduction of the fees in tariff have been unable to benefit from that scheme and there is no reason to believe this will be any different. Anyone thinking of installing energy saving measures at the moment may therefore wish to consider holding on to see what the Green Deal brings.
Feed-In Tariffs – FiTs
Clean Energy Cashback Financial Incentives
The UK government has introduced Feed-In Tariffs for microgeneration of electricity from April 2010. The tariff levels for the electricity financial incentives are calculated to offer between 10-12% return on initial investment. The tariff levels for photovoltaic (is 41.3 pence per kWhour) is set at a higher level per kWh than for the Renewable Heat Incentives to compensate for the high capital costs and lower efficiencies of these technologies.
FiTs provide a positive step change in the business case for delivering on-site renewable electricity generation, not only to reduce electric bills and carbon emissions, but also to deliver an electricity related cash flow into your building.
Feed-In Tariffs for microgeneration of electricity
On 1 February 2010, DECC published the tariffs which apply from April 2010. Renewable electricity installations commissioned since July 2009 are due to receive a cash-back subsidy for the lifetime of the equipment used.
DECC's publications show the eligible technologies, the subsidy to be received and the deemed lifetime of each technology. This provides a major incentive for owners to invest in renewable electricity generation. The feed-in tariffs are based on pence/kWh of renewable electricity delivered. The rates and lifetimes will vary with the technology and scale used.
Feed-In Tariffs - Rates
"Feed-In Tariffs" are a form of Clean Energy Cash-back which are paid based on metered electricity generated - whether or not the electricity is fed back to the Grid. If the electricity is paid back to the Grid, the consumer receives a further 3 pence /KWatt hour.
Tax free income from Feed-In Tariffs
Tariffs will be exempt from income tax. This means that domestic users and other income tax payers will not be taxed on any income received from the Feed-In Tariffs or the Renewable Heat Incentive.
In Summary - How the FIT scheme works
If you are eligible to receive the FIT then you will benefit in 3 ways:
Generation Tariff
A set rate paid by the energy supplier for each unit or kilowatt hour of electricity you generate is set at 41.3pence for the next 25 years.
Export Tariff
You will receive a further 3p per kilowatt hours from your energy supplier for each unit that you export back to the grid, that is when it is not being used on site. The export rate is the same for all technologies.
Energy Bill Savings
You will be making savings on your electricity bills because generating electricity to power your appliances mean you don’t have to buy any from your suppliers. The amount you save will vary depending upon how much electricity you use on site.