heat-policy

With budget cuts and reform approaching, is it time to fundamentally think the RHI?

The RHI has been incredibly successful at delivering biomass and biomethane. The graph below produced using DECC data shows this extreme technology split by looking at heat generated (GWh) under the non-domestic scheme since it began (biomass is the orange chunks). Small commercial biomass and domestic biomass have delivered beyond expectations and biomethane has also grown much quicker than most of the industry expected and as a results the tariff has been reduced a number of times. This is all good news when we consider it’s contribution to the 2020 renewable target however the renewable target is a means to an end for reducing reliance on fossil fuels and cutting carbon.

Over the longer term, in order to meet decarbonisation targets in the heat sector a shift to more electric forms of heat including heat pumps is required alongside major growth in district heating rather than major increases in the use of biomass. This is not simply a matter of opinion but is reflected in every energy model run looking at the the future of the heat system that I’ve seen (here’s a good reference). While all of these projections could of course be wrong, I’m yet to see anyone come up with a compelling argument or model showing something else, so I think I’ll stick with the models.

It’s worth saying here that I’m not necessarily anti-bioenergy but there are issues with biomass sustainability. Current RHI requirements require a 60% carbon saving compared to the EU fossil fuel average. While this is a saving, it’s not at a level which gets us near to the almost complete decarbonisation required from space heating to meet our climate change goals. So unless the industry can ensure it reaches much higher carbon savings, biomass and biomethane is not going to be part of the long term solution. It’s a bit like finding a leak but only fixing a part of it.

There is also the air quality issue associated with burning biomass. DECC estimated the cost of the the air pollution on health and the environment at £2.8 billion for a high biomass scenario (RHI Impact Assesment) and that’s enough to have a huge impact on the carbon benefits of the scheme. Clearly there are geographical and operational factors associated with this but, when you burn biomass, a range of pollutants are released. For these reasons we need to be careful that we’re not subsidising biomass just because it’s ‘cheap’.

This comment is very timely because as of the 31st March, the RHI regulations pretty much expire and the whole budget can be re-shaped. Whilst the budget for the RHI has been reduced by the chancellor, there is still a fair whack of money available:

Year Total RHI budget Effectively available to new plants:

2016-17 £640m, 2017-18 £780m, 2018-19 £900m, 2019-20 £1,010m , 2020-21 £1,150m

This therefore represents a good time to reform the RHI scheme to ensure that it delivers for the long-term rather than purely delivering capacity that helps meet the 2020 renewables target. Unless the Government wants to go down the route of a full renewable heat auction type model (as they have in The Netherlands) which would have some cost discovery within it (which I believe over the longer term may be a better option) now is the time to re-think the RHI.

For ground and air-source heat pumps which have high capex and low opex, a grant scheme similar to the RHPP makes sense from a financial point of view. As we have seen, tariffs are not a good option even if they are generous because investors will go for a much more simple biomass installation which requires minimal internal works and has lower capex and higher ongoing opex costs.

For biomass, whilst a tariff makes sense, only the most cost effective and sustainable projects should be supported. Banding should be removed to ensure that projects only go into sensible applications, not for example chicken sheds or thousands of small houses as a result of gaming. The sustainability criteria for new projects should be tightened to ensure that only projects than have value for their lifetime are included.

For biomethane, like biomass, the Government needs to make sure it represents good value for money. It currently takes up just under half of the total RHI budget and rather than supporting fuel poor households the financial returns have gone to institutional investors. That’s not necessarily a bad thing but it doesn’t tick the energy affordability box. Instead of funding biomethane from general taxation, the costs of biomethane should be paid for by gas consumers as a levy on each unit of gas used. It would be possible for DECC to control the type and number of biomethane projects going forward to ensure that sustainability goals and budget are met. This also goes along with the polluter pays principle and ensures that gas consumers (on the cheapest fossil form of energy) do their bit for a product that they are themselves using. More of the direct Government spend from the RHI can then go to fuel poor, off grid consumers.

While these proposals may seem radical, clearly changes in the scheme are required if the heat sector is to be decarbonised. My only concern is that the divvying up of budgets could lead to a greater opportunity for industry to employ lobbyists to manipulate the scheme and tariffs but unless we go for a much more competitive auction type approach, I’m not sure there is another option.

I’d be keen to hear people’s thoughts on my views so please get in touch.