HM Insights

What does the future hold for renewable heat incentives in the UK?

By Joshua Hale and David Bone

Since 2011 the UK Renewable Heat Incentive (RHI) has provided financial support to low carbon heating and biomethane production for injection into the gas grid.

The scheme has made a real contribution to reducing UK carbon emissions by incentivising and rewarding consumption of heat from renewable sources. Despite the RHI's relative success, the UK faces a substantial challenge to meet legally binding emissions targets; heat represents the majority of our energy demand but as at 2019, only 4.5% of heat demand was being met by low-carbon heating. The RHI has been criticised in the past for not going far enough in tackling some of the upfront cost barriers to wide-spread adoption of renewable heat technology. That said, there is no doubt that the RHI has benefitted industry and consumers alike over the past decade and that continuing government support will be critical in achieving the UK's emissions targets.

The non-domestic RHI scheme was due to close in March 2021, but the UK Government announced in August that applicants will now have a further 6 months to 30 September 2021 to apply for the scheme. The domestic scheme is due to close in March 2022. The UK Government's department for Business, Energy and Industrial Strategy (BEIS) had been consulting until 7 July on the replacement to the RHI. The consultation, entitled "The Future of Low Carbon Heat Support" does not contain any legislative or regulatory framework, but seeks views on two relatively narrow policy proposals: the Green Gas Support Scheme and the Clean Heat Grant. We examine the key features of the current proposals.

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Green Gas Support Scheme – Biomethane

The decarbonisation of gas supply is a key component in the wider strategy to meet the UK's 2050 net-zero emissions targets (2045 in Scotland).

The proposed Green Gas Support Scheme aims to increase the share of low carbon gas supplied to the grid, through support for injection of biomethane produced through anaerobic digestion. This support would not extend to other types of gas production at this stage, although the consultation hints that support may be widened in the longer term. The scheme will run from autumn 2021 until financial year 2025-2026.

The scheme proposes a tiered tariff regime similar to that in the RHI tariff mechanism. Tiers will be based on the volumes of gas injected into the grid from Anaerobic Digestion plants, so that the level of support reflects the different costs of producing different volumes of biomethane:

  • Tier 1 support at 4.9-5.5 p/kWh for the first 60,000 MWh of eligible biomethane. This is 20,000 MWh higher than under the RHI so as to encourage the deployment of larger AD plants; industry feedback suggested that the lower RHI tier 1 limit reduces the likelihood of economies of scale, so the new upper limit is designed to unlock this;
  • Tier 2 support at 3.25-3.75 p/kWh for the next 40,000 MWh; and
  • Tier 3 support at 1.5-2.0 p/kWh for the remainder.

Despite the higher Tier 1 limit, support will only be available for 15, or perhaps only 10 years, rather than the 20 offered under the RHI, potentially undermining some of the benefits of the higher limit. In order to control spending, there will be an overall annual budget cap and a tariff guarantee budget cap to temporarily halt new approvals; the proposals assume that AD plants producing biomethane will be receiving income for their gas at market rates alongside support provided under the scheme.

In terms of fuel, the proposals stress the emissions saving benefits of using food waste as feedstock for AD plants as opposed to purpose-grown "energy crops". It is noted that use of food waste can also compliment targets such as those set by the Scottish Government to reduce food waste by 35% by 2025. While not currently proposed, the consultation seeks information on the breakdown of feedstock mix currently employed by AD plants and asks whether a 50% minimum waste feedstock requirement would be suitable, so reducing the potential energy crop percentages.

Eligibility requirements will be generally as for the RHI (as relevant to biomethane).

An interim measure

The scheme is only expected to run until financial year 2025-2026. While the paper contemplates that support could be extended beyond biomethane produced from anaerobic digestion to other forms of green gas sources such as hydrogen blending, the scheme can be viewed simply as an interim measure to minimise any hiatus in support after closure of the RHI until any longer-term scheme is introduced.

The consultation states that the basis for any future support beyond 2025/2026 will focus on market-based mechanisms "which leverage competitive forces to drive down costs to ensure cost-effectiveness". It raises the possibility of a "supplier obligation" scheme like the Renewables Obligation for electricity (under which licensed suppliers are required to purchase quantities proportionate to their share of supply), and a Contracts for Difference model which is already used for low carbon electricity. Any such scheme would of course be subject to further consultation.

Clean Heat Grant – heat for buildings

The Clean Heat Grant will replace the RHI in so far as it represents a demand-side subsidy for heat pumps and biomass heating of buildings. Unlike the RHI, which operates a tariff model whereby payments are made per kWh of heat once an installation is up and running, the Clean Heat Grant will take the form of an upfront, flat-rate grant of up to £4000 for households and small non-domestic buildings to install ground, water and air-source heat pumps and in limited circumstances biomass. No other technologies or uses such as process heating or district heat networks will be supported.

The scheme therefore addresses some of the criticisms that the RHI did little to assist with the upfront capital costs of installing renewable equipment, but the flat-rate funding being offered is likely to mean that it will be of little benefit in scaled projects and industrial /commercial settings. Another downside is that support will only be offered from April 2022, representing a 12-month gap in support after the closure of the Non-Domestic RHI. The scheme will therefore likely be of most relevance in the domestic setting. That said, BEIS say they would review grant levels "if uptake falls substantially outside the expected range".

It is proposed that installation eligibility will be assessed by the efficiency of the system or building (for heat pumps and biomass heating) and impact on air quality (for biomass heating), with a 45kW capacity limit per installation. Where multiple installations under 45kW are used to heat one building unit, then only one installation will be eligible for funding. However, individual installations used to heat individual units within a building, such as a block of flats, would be eligible. Individual pumps installed as part of shared ground loop systems will also be eligible for support. Budget controls will be introduced so that the number of grants allocated will be subject to a pre-agreed overall cap for each quarter, supporting applicants on a "first come first served" basis.

A narrow focus

Limits to the grant scheme will attract criticism from the heat industry, as will the apparent lacuna of support for industrial and commercial buildings once the Non-domestic RHI closes in September 2021. BEIS insist that the Clean Heat Grant is only one part of a "broader package of commitments", with a "Heat and Buildings Strategy" to be published later this year. However, it is not clear at this stage what form further commitments will take, so the heat industry is faced with the frustrating situation of having to respond to a consultation on a narrow set of proposals without the benefit of seeing the full picture. Consultees may well appeal to government that any future grant support should also be accompanied by some form of continuing tariff mechanism similar to the RHI if government ambitions as to deployment are to be met.

Key takeaways

The Future for Low Carbon Heat Support consultation has now closed. We await what changes, if any, BEIS will make to its proposals in light of consultation responses from the heat industry.

While BEIS insist that these proposals form only part of a broader strategy, there will be disappointed voices from the heat industry over an apparent lack of ambition or clarity over what broader support might entail. The economic context in which consultation responses will now be considered by BEIS is markedly different to that of even four months ago. It remains to be seen whether the "new normal" and changed priorities within government will result in a greater appetite for more far-reaching support, as the heat industry will undoubtedly be calling for.

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