Joining up the incentives

Ideal Commercial Heating, renewable energy
Cautious optimism — Nick Stevenson

The Government has created a complex tapestry of incentives to try and boost the uptake of renewables across the built environment. Nick Stevenson likes the principle, but is cautious about the lack of detail.

With the recent announcement of the Renewable Heat Incentive (RHI), the Government appears to have put the final piece of the jigsaw in place. Along with the Feed-in Tariff (FiT) scheme, the Green Deal and the Renewables Obligation (RO) we should now be able to chart the growth of a coherent and substantial renewable energy market.

It could happen, but may not be that simple.

The RHI has been timed to coincide with the launch of the Green Deal finance scheme next October (2012) so that domestic energy efficiency and the use of renewable-heating technologies are developed in tandem. That makes sense and looks ‘joined up’.

Meanwhile, FiTs have been giving the micro-generation market a major boost since their introduction in April 2010. Over 22 000 schemes have registered for the tariffs since they were launched last April — leading to a 5-fold increase in the number of solar photo-voltaic (PV) panels installed in the UK. Also, according to research carried out by the Renewable Energy Association, the growth in PV will create 17 000 new jobs this year. So FiTs seem to be very effective.

Question of scale

However, the Government is currently undertaking a review of tariff schemes because what was seen as primarily a small-scale residential incentive has attracted a great deal of interest from investors looking to benefit from the tariffs on a commercial scale. It is now possible that projects generating over 50 kW of electrical power may lose some or all of their tariff allocation.

This sends a rather confused message to commercial-scale renewable operators. The Secretary of State for Climate Change, Chris Huhne, is keen to close what he considers to be a loophole being exploited by so-called ‘solar farms’, but he is also in danger of undermining perfectly acceptable renewable projects by setting the boundary for review so low.

Solar farms, where PV arrays are set up in fields and disused spaces, are an example of pushing the spirit of the FiT scheme to the limit, but a clamp down on them could also scupper some perfectly acceptable community-based schemes in schools, hospitals, and other municipal buildings. Clearly, the financial incentive is attractive for PV, with the FiT set at three times the going rate for buying electricity from the grid.

However, the idea was that the tariff would fall as the market volume grows and brings down the cost of the technology. By moving the goalposts in this way, the Government risks upsetting that market economics model and missing its own micro-generation targets.

Ideal Commercial Heating, renewable energy
The solar photo-voltaic market has taken off like a rocket, but is the revised Feed-in Tariff too low? With the minimal RHI tariffs for heat produced by large-scale biomass plant, it is hard to see a huge market transformation being created.

At the same time as the FiT review was getting underway, details about the RHI were announced. This is designed to complement the Renewables Obligation (RO) in the industrial and commercial sectors.

The RO sets targets for energy utilities to invest in large-scale renewable energy, and the RHI will promote production of heating and hot water from renewable sources at the individual building level. They should work well in tandem.

The Government hopes the RHI will lead to 13 000 new renewable installations in industry and 110 000 installations in the commercial and public sectors by 2020. Together this could produce up to 25% of the heat demand in these areas and would represent a 7-fold increase in the renewable heating market.

Biomass boilers, ground-source heat pumps and solar-thermal systems are the main product beneficiaries from the RHI funding, which will also support community projects that provide heat to more than one house or commercial consumer. The tariffs will be paid for 20 years to eligible technologies that have been installed since 15 July 2009.

Mechanism

The Renewables Obligation (RO) is the current main mechanism for supporting large-scale generation of renewable electricity and currently provides about £1.4 billion a year in incentives via utilities. The Government has stated that this support will be maintained and claims that it has been responsible for more than trebling the amount of renewable electricity in the UK from 1.8% to 6.64% of total demand.

By looking at all these incentives together, we can build up an overall picture of how the Government is seeking to support the market for renewable power and heating — and there is no denying that the theory looks good. However, there is still a tremendous amount of detail to be worked out here, and the RHI tariffs look rather small. It is no surprise that PV has taken off like a rocket as the incentive is clear, but the Government needs to smooth out the funding model and make sure each technology can play its part.

We can only applaud the principle, but with minimal tariffs such as 2.6 p per kW of heat produced by a large scale biomass plant and 3 p for large ground-source heat pumps it is hard to see the huge market transformation that the Government is look­ing for being created. Some of the large-scale commercial and industrial heating technology is expensive, and investors will need a little more en­courage­ment.

The structure is promising, but the detail needs clarification and the Government must draw on the expertise of the renewable-heating industry to get this right.

Nick Stevenson is new energy director at Ideal Commercial Heating.

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