A Hot Topic – England, Scotland and Wales to switch up their renewable heat subsidies

 

The UK has met its first and second carbon budgets and is currently on track to meet its third carbon budget (2015-2022). The UK’s success in meeting its carbon budgets to date has largely been attributed to the spectacular decline of coal-powered generation – coal accounted for only 1.6% of the electricity mix in 2020 compared with almost 25% in 2015. However, the UK’s reliance on fossil fuel-derived gas during the same period has remained almost unchanged. Currently, the UK is set to fall short of its fourth and fifth carbon budgets (2023-2027 and 2028-2032 respectively) and the government’s target to reach net-zero by 2050 has amplified the scale of the task set significantly. As the UK can no longer meaningfully reduce its emissions profile through reduction of coal-powered generation, the government will need to ramp up efforts to reduce the UK’s reliance on fossil fuel-derived gas, especially in regards to heating. This article sets out how the government is currently incentivising the transition to low-carbon heat in England, Wales and Scotland through the Renewable Heat Incentive, the transition to the proposed successor schemes and the opportunities for investors, businesses, local authorities, private house builders and landlords.

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The Renewable Heat Incentive (RHI)

Overview The RHI was introduced in 2011 and replaced the Low Carbon Building Programme. The RHI is a government-funded incentive which encourages the use of renewable heat generation equipment. The RHI is split into two separate schemes: Domestic RHI (DRHI) and Non-Domestic RHI (NDRHI). Both schemes are administrated by Ofgem.
DRHI	NDRHI
Grants homeowners and landlords (excluding most new-build properties) payments towards the initial cost of installing renewable heating technologies such as biomass boilers, solar water heating and certain heat pumps over a period of 7-years based on the output of the heating system installed.	Grants businesses, public sector and non-profit organisations payments to install renewable heat technologies such as biomass, heat-pumps, deep geothermal, solar thermal collector, biomethane and combined heat and power (CHP) systems. The payments are made over a 20-year period and are based on the heat output of the system installed.
FAQs
Have the schemes closed?The NDRHI closed to new applicants on 31 March 2021. As part of the Spring Budget, the deadline for new applications for the DHRI was extended by one year to 31 March 2022.
Has the RHI been a success?At the inception of the RHI, the Department for Business Energy and Industrial Strategy (BEIS) predicted that by 2020 there would be around 500,000 renewable heating systems installed under the schemes. However, reportedly only around 22% of this original estimate ended up being installed and the heating market is still completely dominated by the installation of new gas powered boilers. The RHI also supported the installation of over 28,000 wood-burning biomass boilers, which have been damaging to the RHI scheme’s green credentials. Given the £23bn cost of the scheme, BEIS have also come under fire for not delivering value for money for the taxpayers footing the bill.
How will renewable heat be incentivised in the future?Due to the shortcomings of the RHI scheme set out above, the government has proposed its replacement in England, Wales and Scotland. The initial detail of the successor schemes was set out by BEIS in their consultation, “Future support for low carbon heat”. All of the successor schemes will be administrated by Ofgem.NDRHI: The government is intending to introduce two new schemes to replace the NDRHI: (i) a new subsidy, the Green Gas Support Scheme (GGSS) and (ii) the Green Gas Levy (GGL). Both schemes are currently expected to launch in autumn 2021 and BEIS has issued a response to the initial consultation on these schemes setting out some clarifications and further operational detail.DRHI: The government proposes to replace the DRHI with the Clean Heat Grant scheme (CHG) which is due to start in April 2022 following the cessation of the DRHI scheme. BEIS have issued a further consultation on the scheme, “Clean Heat Grant: further policy design proposals”, and we are currently awaiting their response. Stay tuned to our website https://www.freeths.co.uk/sectors/energy-waste-and-sustainability/  for further updates.

The Green Gas Support Scheme

What is the GGSS?	How Does it Work?
The GGSS supports the production of biomethane produced solely through anaerobic digestion (AD), as this is currently the only commercially viable way of creating green gas at scale in the UK. The door has however been left open to support other gasses in the future, such as hydrogen. The key aims of the scheme are to: encourage deployment of new AD biomethane plants in order to increase the proportion of green gas being injected onto the grid, create “green jobs” and attract private investment; ensure value for money; minimise a market hiatus for the biomethane industry; and contribute to a reduction in the UK’s emissions profile to meet the fourth and fifth carbon budgets.	The GGSS will be funded by the GGL (discussed below) and will be open to applications for 4 years from autumn 2021-2025. The support for operators will come in the form of a 15-year tariff. The level of tariff is tiered to reflect production at different scales: Tier 1 – First 60,000 MWh of eligible biomethane (at a rate of 5.51 p/kWh) Tier 2 – Next 40,000 MWh of eligible biomethane (at a rate of 3.53 p/kWh); Tier 3 – Remaining eligible biomethane (at a rate of 1.56 p/kWh).
FAQ’s
What is the GGL?The GGL is a proposed levy collected from all designated fossil fuel suppliers of gas (save for gas suppliers who can evidence that they have serviced 95% to 100% of their gas portfolio with green gas for the entirety of the levy scheme year (1 April to 31 March) for that year). The levy will be imposed to fund the injection of biomethane into the gas grid through the GGSS and is also expected to launch in autumn 2021 with the first levy payment being collected in April 2022.
How will the GGL be imposed on suppliers?The GGL will be launched with a flat ‘per meter point’ levy design, meaning that levy costs will be distributed amongst suppliers in accordance with the number of gas meters that they supply. The government have chosen this initial approach in order to minimise any hiatus in support for biomethane production following the end of the NDRHI scheme in March 2021. However, the government intend to transition to a volumetric design (i.e. levied in accordance with gas consumed by a supplier’s consumers) as soon as possible thereafter (subject to feasibility), such that the costs of the levy will be more closely aligned with individual gas consumption and alleviate growing concerns surrounding fuel poor consumers. The government have stated that, assuming a transition to a volumetric design approach by 2025, the impact of the GGL on consumer bills will peak at around £4.70 by 2028.The levies will be set three months in advance of each scheme year, with the exception of the first two levy rates which will be set 6 months in advance of the first collection in April 2022. Collection of the levy payments is intended to take place quarterly along with an obligation to supply Ofgem with meter point data to verify that the correct levy has been paid.
Will there be any interaction between the NDRHI and the GGSS?The GGSS will only be available to support the construction of new AD plants and not the expansion or improvements of older plants which may have already had the benefit of the NDRHI as this could risk overcompensation. Therefore, there will be no interaction between the NDRHI and the GGSS.
Will there be any interaction between GGSS and the Renewable Transport Fuel Obligation (RTFO) scheme?Under the RTFO scheme, suppliers of fuel for transport and non-road mobile machinery (above 450,000 litres) in the UK must be able to show that a percentage of their fuel comes from renewable sources. Obligated suppliers receive Renewable Transport Fuel Certificates (RTFCs) for each litre of renewable fuel supplied. Double RTFCs will be awarded per litre for certain fuels such as biofuels derived from wastes and energy crops. Fuel suppliers show that they are meeting the RTFO by redeeming RTFCs or by paying a fixed sum for each litre of fuel if they wish to buy out their obligation. If a supplier has spare RTFCs the spare RTFCs can be traded on the open market.There is obviously an overlap between the two schemes. In the government’s response to the BEIS consultation, it has been made clear that biomethane producers will be able to operate under both schemes. However, an individual consignment of biomethane will not be permitted to be supported twice and that double claiming will be legislated against under the GGSS as it has already been under the RTFO.

The Clean Heat Grant (CHG) Scheme

What is the CHG?	How Does it Work?
The CHG is a proposed subsidy for the instalment of low-carbon heating technologies including air source heat pumps, ground source heat pumps, and water source heat pumps up to a capacity of 45kW. The scheme also proposes to offer a subsidy for the installation of biomass boilers, however, following the criticism of this aspect of the RHI, this will only be permitted in relation to ‘hard to treat’ buildings in which a heat pump would not be appropriate.	The CHG subsidy will be provided up-front in the form of a £4,000 voucher to spend on installing eligible heat technologies. The CHG scheme will run for a period of 2 years from April 2022 to March 2024.The CHG will be available to eligible domestic and small non-domestic buildings. From the recent consultation on the CHG scheme, BEIS have made clear that the subsidy will not be available to properties without an Energy Performance Certificate (EPC) or where a property’s EPC contains a recommendation for loft or cavity wall insulation. The scheme will also not be available for the majority of new-build homes.
FAQ’s
What has happened to the Green Homes Grant?In addition to the DHRI, the government had been operating the Green Homes Grant (GHG) scheme in England, which provided an upfront subsidy in the form of a £5,000 voucher (per person, subject to a maximum of two per household) for installing energy improvements to homes. On 27 March 2021, the government announced that the GHG would be scrapped on 31 March 2021. £300m of the funds allocated to the GHG have now been diverted into Local Authority Delivery Scheme which allows local authorities to target low-income households for energy efficiency improvements.

Conclusion

The proposed successor schemes to the RHI, appear to all be narrower in scope, to reduce the possibility of unintended consequences and deliver on the government’s promise of net-zero by 2050, by reducing the UK’s reliance on fossil fuel gas and reducing the UK’s emissions profile. The relatively short period for the successor schemes perhaps reflects the level of government-funded research and development that is currently underway for green and blue hydrogen production and application. Hydrogen is currently being touted as a future frontrunner in the race to replace fossil fuel gas and it is likely that biomethane is being used by the government as a stop-gap due to the fairly sizeable existing generation capacity, depth of current expertise and its compatibility with existing gas infrastructure. It is definitely worth keeping an eye on the progress of the ongoing hydrogen technology trials, as the results will undoubtedly impact the investability of biomethane technology after the end of the proposed successor subsidies.

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Energy, Waste and Sustainability