The Renewable Heat Incentive: A successful UK carbon policy?

Like the Climate Change Act the Renewable Heat Incentive (RHI) was a world first, showing the UK’s leadership in the decarbonisation sector and the benefits that come with it such as stimulating a new sector, and strengthening security of supply. But has it been successful? Constantly in the news at present, with fears mismanagement of the scheme may well be the trigger cause of the breakdown of the Northern Irish government in Stormont. But behind the headlines and some obvious mismanagement and criticism, it did successfully target a much-neglected sector and has delivered effective results.

One of the main reasons the renewable heat incentive is such important policy is its reflection of the need to decarbonize heat. The majority of emphasis and focus is put on decarbonizing electricity, perhaps because there are so many alternative supply options in renewables. But electricity is the smallest sector of our energy use. As this graph from Policy Exchange using data from Energy Consumption UK shows, heat is our biggest source of demand, followed by transport and then “Other” which includes most of our electricity (though small amounts will be used in heat and transport too.)

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Whilst we have made great progress on decarbonised electricity, the success reduces drastically in significance when compared with the larger picture of energy. DUKES 2016 reported renewables were 25% of electricity in 2015 but that is only 8.3% of total energy supply. Fossil fuels are still accounting for 82%. Although the 30% by 2020 target for renewable electricity is likely to be exceeded, the 12% target for heat and the 10% target for transport will be significantly missed, with transport actually going backwards.[1] On balance this means we will miss our overall target of 15% renewable energy target by 2020. As the biggest sector of demand it is imperative the UK tackles decarbonizing heat.

The renewable heat incentive was introduced in the 2008 Energy Act along with feed in tariffs. It launched in 2011 and replaced the carbon building program that ended in 2010. Originally it only applied to non-domestic consumers and buildings, but in 2014 after multiple consultations it was expanded to include domestic buildings.

The objective is to replace fossil fuel heating with a renewable heat supply. Payments are made in quarterly installments for 20 years to non-domestic buildings and 7 years to domestic buildings (though payments are larger for domestic scheme). These payments are expected to cover costs of installation over 5 – 8 years. Technologies include solar thermal panels, ground source heat pumps, water source heat pumps, biomass boilers, biomethane (and most recently) air to water heat pumps and deep geothermal.

It was envisioned by then Energy Sec Chris Huhne that the RHI will reduce emissions by 44 million tonnes of carbon to 2020, equivalent to the annual carbon emitted by 20 typical new gas power stations. Uptake was far greater than other policy from the energy act such as the Green Deal and as of 31 October 2016, over 65,000 renewable heat installations have been accredited onto the schemes, including more than 50,000 on the Domestic scheme and over 15,000 on the Non-Domestic scheme. As Table 1 shows, the projections for emissions savings have been increased as the scheme has outperformed expectations. Of the policies assessed by DECC, it was one of the top 5 for emissions savings, beaten only by road vehicle efficiency and building standards policy.

Budget 2 (2013-17) Budget 3 (2018 – 22) Budget 4 (2023-27) Budget 5 (2028-32)
2015 Projections 6.6 9.2 9.2 9.2
2014 Projections 5.2 5.9 5.6 5.2
Difference 1.5 3.3 3.5 4.0

 

But it has not just been a success in terms of emissions, it has also been a success for industry. The tariffs proposed for the Renewable Heat Incentive have been calculated to offer a rate of return of 12% on the initial investment across the tariff bands. These tariffs are tax exempt and index linked, adjusted for inflation on 1 April each year. The good rate of return means economic competitiveness has not been compromised to allow decarbonisation. The RHI also has very high customer satisfaction. High customer satisfaction; 93% would recommend their renewable heat technology to others, 92% believe their renewable heat system is reliable and 90% are satisfied with their new installation (data from non domestic RHI evaluation, 2014).

However it is not without its criticism. Firstly there are problems with the technology neutrality of the scheme. High values for certain tariffs meant almost all the installations were biomass at the start, which has other sustainability issues. Sustainability criteria and tariff changes have been introduced to address this. Second here was the issue of cost to the treasury. The scheme is very expensive with critics saying 82% of the budget is spent on the non-domestic scheme which will commit the Government to ongoing costs in the region of £1 billion per annum for the next two decades. Thirdly there is the issue of scale as the domestic RHI will likely result in an additional 90,000 renewable heating systems over the next five years. To put these figures into context, it is expected that 8 million gas boilers will be sold in this same period. Finally, there is the clear mismanagement of the scheme that has occurred in Northern Ireland. With no limits, the more you burned the more you were paid leading to a “cash for ash” scandal.

The scheme is however, constantly being adjusted to deal with some of these issues. The Head of ADE Tim Rotheray said there were safeguards for the UK system including a “Step down system” where revenues declined after first 15% of boilers anticipated annual output – meaning after a certain point, burning more does not pay anymore. New legislation in UK also set heat demand limits for all technologies except solar thermal. There is also a “desgression” policy to manage costs which allows the tariffs to be reduced if uptake.

Though the RHI has clearly had its failings, it has had a significant impact on emissions whilst also delivering high customer satisfaction and good returns on investment to consumers. The key issue with the government’s policy to decarbonizing heat however, is its overreliance on the RHI. Following the scrapping of the Green Deal, it is the only real heat energy policy, with the UK continuing to ignore large swathes of the EU’s Energy Performance of Building’s Directive. Although a good policy, the RHI is no silver bullet, and more needs to be done to address the decarbonisation of heat in the UK.

[1] Energy and Climate Change Committee, 2020 Heat and Transport Targets, September 2016.

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