Government subsidies for low-carbon installations

Renewable energy subsidies and how they work: updated 6th July 2020

There is currently one major government subsidy available in the UK for low-carbon heat generation. It’s called the Renewable Heat Incentive (RHI). The equivalent subsidy regime for power generation ceased in 2019.

Here we explain how the RHI operates and why it is important that anyone new to all this finds out about the detail as quickly as possible.

The Nub of the Issue:

  • The RHI is a subsidy, not a grant. It does not avoid the capital outlay. However, the scale of payment is sufficiently high that over the 20 years it is paid out it will generally recover the capital outlay. Furthermore, an estate on oil or LPG deploying the right technology is likely to see a substantial net gain over the 20 years.
  • (Note that finance schemes are available to avoid any capital outlay impacting on college cashflow: this is explained later in the report).

RHI Categories

The RHI scheme is administered by Ofgem on behalf of the government. Subsidies are available for domestic and non-domestic heating installations. In ReEnergise we focus on the Non-Domestic RHI (NDRHI) because that’s what is required for the scale of projects we are engaged to deliver.

Scale of Subsidy

Under the NDRHI, Ofgem will pay a tariff for all heat generated for the first 20 years of operation of a qualifying system, in a tiered rate mechanism designed to prevent abuse of the subsidy (i.e. just burning fuel in order to harvest the subsidy). The tiering mechanism has an impact on sizing of systems: likely run hours for each technology need to be carefully considered in order to optimise the RHI revenue whilst keeping the estate warm. Current rates for installations are:

Biomass

  • Tier 1. 3.11p/kWh is paid for the first 3,066 Full Load Equivalent (FLEQ) run hours of usage on each installation per year, equating to 35% of the available hours in a year.
  • Tier 2. 2.18p/kWh is paid for each additional kWh of heat generated after the Tier 1 limit has been reached.

GSHP

  • Tier 1. 6.98p/kWh is the Tier 1 rate since 1st July 2020 for a GSHP at 100kW and above, which caters for the scale of capacity required to serve schools and similar large estates. Tier 1 is paid for the first 1,314 Full Load Equivalent (FLEQ) run hours of usage on each installation per year, equating to 15% of the available hours in a year.
  • Tier 2. 2.08p/kWh is paid for each additional kWh of heat generated after the Tier 1 limit has been reached.

Index-Linking

The tariff rates are index-linked to the CPI over the 20-year life of the subsidy, to protect the subsidy against the impact of inflation.

Degression

There is a limited pot of government money set aside to meet RHI payments. In order to avoid overspending during the life of the scheme (i.e. still another 20 years to be considered by Ofgem) the starting rates for each technology are reviewed quarterly and may be reduced: usually by no more than 5%, but the tariff for GSHPs at over 100kW reduced by 10% on 1st April this year and then by a further 20% on 1st July.

Tariff Guarantee

The application to Ofgem for the RHI is submitted after an installation has been completed and commissioned. However, in order to provide some financial assurance before committing to any major capital outlay, a tariff guarantee can be secured before commencing the installation. To qualify for a tariff guarantee a project must meet the following criteria:

  • If the technology is GSHP it must be at a scale of 100kWs or over.
  • If the project is biomass it must be at a scale of 1MW or over.
  • It must be ready for installation in all respects. This means:
    • All the technical risk reduction and project definition needs to have been completed.
    • The design needs to have been completed.
    • Planning permission needs to have been granted.
    • Finance to cover the capital outlay needs to be available.

N.B. It takes between 4 to 6 months to get all this done for most projects.

Net Effect

The surest way to gain access to the RHI in the current economic climate is to opt for a tariff guarantee. This does incur an additional processing fee but that is trivial compared to the potential net gain and degree of risk reduction achieved.

RHI Closure

The scheme is only open for new applications for new installations until 31st March 2021, except as explained below under Tariff Guarantee 3. This means that a system commissioned on 31st March 2021 will receive the index-linked 20-year subsidy. A system commissioned on 1st April 2021 will not be eligible, with the exception explained below.

Tariff Guarantee 3

On 28th April this year the government confirmed:

  • Beyond the RHI it is going to use regulation to phase out the installation of fossil fuel plant for estates off the gas grid during this decade, as opposed to the current financial incentive of the RHI.
  • It will permit a qualified extension to the NDRHI entry deadline until 31st March 2022. This one-year extension is dependent on having first secured a tariff guarantee. This is being called Tariff Guarantee 3 (TG3). However, the NDRHI 20-year payment period will still start no later than 31st March 2021, therefore if the TG3 route is selected the eventual total RHI payment will be up to one year less. There will be no NDRHI payments beyond 31st March 2041.
  • Other than this dispensation the NDRHI will close for new entrants as forecast on 31st March 2021.
  • The domestic RHI entry deadline will also be extended to 31st March 2022, but this is not relevant for most school buildings: it is the NDRHI that matters.
  • Allowing for all the preparation required to submit a tariff guarantee application, that really means that any school or rural estate wishing to secure the NDRHI needs to be starting all the preparatory work by September/October this year at the very latest.

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