Government subsidies for low-carbon installations
Renewable energy subsidies and how they work: updated 1 Feb 2018
In a nutshell:
- There are two different regimes: one for domestic properties and one for non-domestic organisations in the public and private sector. This text is all about non-domestic subsidies.
- Contrary to popular opinion, Renewables are still an excellent Government-backed investment option. Returns on investment of 12-20% per annum remain typical, in the right situation.
- The general idea is that renewable energy subsidies reduce as technologies mature and become cheaper to install.
- Guaranteed 20 year rates. Once you’re in – you’re in! Non-domestic subsidy rates are guaranteed for 20 years from the moment they are awarded to a given installation. So even if a given subsidy ends in principle in the next 10 years, those who installed qualifying systems in 2017 will continue to draw the appropriate subsidy at their qualifying 2017 rate until 2037. The rate is also index-linked with the CPI.
- Applications for renewable energy subsidies are made to Ofgem once a system has been installed and commissioned.
- Ofgem have the final say whether or not a system qualifies: it’s essential to comply with Ofgem’s published installation standards. We strongly recommend you get professional help with this, either with us or some other trusted professional agency.
- Good system; works well. But it’s complex and professional advice is essential to avoid the Pooh-traps.
- The system has historically been abused by some investors, who have milked it without really caring about the end-effect for the consumer. The Government has taken steps to stop that.
- It’s worth remembering that each time there has been a major reduction in a popular subsidy regime there has also been an adjustment in the market, so that installation prices have reduced.
The rest of this section gives a lot more detail about the non-domestic subsidy regime, such as would apply in schools or similar large estates. Read on if you’re very keen, but really it’s our job to brief you on the detail at the appropriate time in a project.
How Government Policy Works
- Two types of subsidy:
- The Feed in Tariff (FiT) promotes power generating technologies.
- The Renewable Heat Incentive (RHI) promotes heat-generating technologies.
- Subsidies are allocated from the appropriate budget, as installations are registered with Ofgem.
- Adjustment of Subsidy Rates. There are two mechanisms for adjusting the subsidy rates:
- The Budget. The Chancellor determines the overall subsidy budget in his annual spending rounds.
- Quarterly Degression. Rates may decrease slightly each quarter (called ‘degression’ in the trade) if a budget for a particular technology is being overspent.
- Budget Caps. Budget caps are an additional control mechanism. Once the budget for a quarter has been reached there will be no further new subsidy allocations for that technology until the next quarter.
The FiT: Process
- There are two types of FiT:
- Generation Tariff is a payment for all power generated by an installation.
- Export Tariff is a payment for any power not used on site but exported to the grid. For installations above 30kW this exported power is measured and paid for precisely. At 30kW and below it is deemed that 50% of the power generated will be exported to the grid, whether it actually is or not. Note that this means that for a 29kW installation, for example, a building might be using 100% of the power on site, but would still get an additional export tariff payment for 50% of the power generated – even though it had not exported that 50%.
- The FiT is available for electricity generated by solar PV, wind, hydro, anaerobic digestion (AD) and micro Combined Heat and Power (CHP) units.
The FiT: Latest News
- A Government consultation on the FiT scheme ended in December 2015, concluding that the scheme had been more successful than anticipated, hence the budget had been overspent from 2012 to 2015. However, the Government was intent on continuing to promote the wide-scale deployment of power generating technologies and would continue the FiT scheme for new installations until April 2019.
- The rates of renewable energy subsidies are nowhere near as high as they were in 2012; but they remain high enough to make systems like solar PV a very good investment under the right circumstances, partly because the installation cost has also reduced steadily.
- Quarterly rate reductions (degression) have been published out to Q2 2019. Schools typically install solar PV arrays within the 10-50kW range. The current FiT rate for that range is 4.25p/kWh. This will reduce steadily per quarter until 2019, by which time it will be 4.03p/kWh (plus any annual adjustment for inflation).
- The export tariff is 5.24p/kWh for all installations. Comment: with grid prices at 10-15p/kWh it makes sense to size installations so that as much as possible of the electricity generated is used on site rather than exported to the grid.
- Budget cap. If the budget in a quarter has been reached, any outstanding applications have to wait until the next quarter. Comment: this suggests that once you’ve decided to go for solar PV in principle it makes sense to get on with the project.
The Non-Domestic RHI: Process
- The RHI is available for biomass boilers, air source and ground source heat pumps, solar thermal systems, deep geothermal, biogas combustion systems, combined heat and power (CHP) systems using a range of renewable fuels and sources, and the production of biomethane for injection into the gas grid. Rates vary per technology (see table below for details of current and forthcoming rates).
- Some systems have two tiers of subsidy rate. This is to prevent users abusing the renewable energy subsidies system by running an installation just to earn subsidies. Tier 1 is the rate available for a system run at full capacity for a percentage of the hours in a year. Tier 2 is the rate for any further usage. For biomass, Tier 1 was set at 15%, until 20 September 2017 when it was raised to 35% for new systems installed since 20 September 2017. This represents a significant change to the subsidy regime for biomass and has an impact on how best to size systems.
RHI: Latest News
The Government announced in the 2015 Autumn statement that the RHI budget would increase every year out to 2021. This means that any new systems installed between now and then will still be eligible in principle for the 20-year subsidy, provided they qualify in all the required ways. In December 2016 the Government concluded a consultation about the future of the RHI. Most key changes were intended to happen in April 2017, but for various reasons – not least a General Election – these changes were postponed until September 2017. The changes include:
- Budget cap: has been in place since April 2016. Once the budget for that FY/heat technology has been reached there will be no further new allocations of that subsidy until the next quarter.
- Uniform Biomass Rate. From 20 September 2017 biomass has one rate irrespective of size.
- Heat pumps in favour. Rates for heat pumps, particularly water and ground source, remain high. Comment: heat pumps are such a great technology – low cost, low maintenance, minimal logistics. It would be good to see them being used much more often, where the circumstances are right.
- Pre-accreditation. To remove one level of risk for potential investors, it is expected that pre-accreditation will soon be introduced for some of the larger systems. For example, if the intended installation was to be a biomass system above 1MW then it would be possible to get the installation registered and qualified in principle prior to committing to the investment, and therefore know the rate of subsidy in advance. As at 20th September 2017 this change had not yet been introduced into the legislation. It’s expected in early 2018.
The table below gives a summary of old categories and rates (i.e. just prior to 20th September 2017) and the equivalent new categories and rates – for those technologies most commonly deployed in our key markets:
Note that rates and tiers apply according to the date a system was accredited by Ofgem. So, if you have a system that was accredited prior to the change in Tier 1 and 2 thresholds then it will continue to operate as per the old Tier 1 and 2 and the tariff you were awarded at the time. In other words, these latest changes to rates and tiers are only for new systems qualifying after 20th September 2017.
If in doubt, call us!