Green energy is at the top of the agenda for all the major political parties, but the challenge for the current government, self-styled the “greenest government ever”, is to demonstrate that its policies can deliver green growth in an affordable and sustainable manner.
In this context, the Renewable Heat Incentive (RHI) aims to stimulate greater use of renewable energy for heating. Phase 1 was introduced in 2011 and is restricted to heat users in the industrial, business and public sectors. Phase 2, coming this year, extends the scheme to the domestic market.
The latest consultation on the RHI in the domestic sector closed on 7 December 2012. The results of this will be announced in March. Combined with the completion in the autumn of 2012 of the consultation on non-domestic RHI, the government’s plan to launch the domestic scheme this summer is still on target.
So what impact will these consultations and the resulting RHI scheme really have on consumers and providers of heat energy in 2013?
The original intent of the RHI was to stimulate growth in the renewable heat sector to help the UK meet its target of producing 15 per cent of energy from renewable sources by 2020. Heat represents the UK’s single biggest use of energy, equating to an annual spend of more than £30 billion, and is responsible for a third of the UK’s greenhouse gas emissions.
Another key purpose of the scheme is to reduce costs and increase innovation in the field of home-based renewable heat technology to create a level playing field between renewable and traditional heating technologies. The plan is to achieve this by increasing demand for renewable heat across both commercial and domestic markets, creating economies of scale in the process.
Finally, it is hoped the RHI will increase our energy security by reducing our reliance on fuel sources from outside the UK, which are often susceptible to a range of political and economic threats.
If the RHI achieves a genuine shift in the source of the heat we rely on, then the implications for the conventional utility market will be significant. The government has estimated that by 2020, 57TWh of renewable heat will be generated as a result of the RHI scheme across the domestic and commercial sectors. This in turn is expected to equate to 12 per cent of the UK’s energy demand being met by renewable heat by 2020. In addition, the government expects to see 500,000 jobs created in the renewables sector by the end of the decade, with the RHI stimulating £4.5 billion of capital investment (although this will be offset by investment and jobs in the traditional fuel
market falling).
If these estimates are anywhere near accurate, traditional utility providers will either need to realign their interests with the renewables market (many are already doing just that), or suffer the consequences as the UK’s demand for fossil fuels contracts.
This prompts the question, how realistic are the estimates? A key issue that will restrict the success of the RHI and which continues to hold back investment in the renewables sector is uncertainty about the level that subsidies will be set at, and about their longevity. If the subsidy is too low, take-up of the scheme will also be low and the RHI will fail to achieve its primary purpose. If it is too high, the government will be forced into subsequent cutbacks or will be required to limit the scheme due to higher than expected costs – replicating the recent experience suffered by the UK’s solar industry, where high take-up led to dislocating cutbacks.
The RHI operates on a flexible digression based system, meaning tariff levels can be reviewed as take-up increases. Against this backdrop of uncertainty, banks will continue to be turned off by the prospect of low, unsecured returns in a sector characterised as being high risk and subsidy dependent. Our own experience in the non-domestic sector is that funders will simply move away from projects that are dependent on the RHI for financial viability, sticking instead with more tried and tested secured lending propositions in a range of other sectors.
To secure the backing of lenders, it will be essential for any project team to demonstrate it is made up of committed partners who fully understand the technical and financial limitations of their technology and can demonstrate the financial viability of their project. If income streams are unreliable or dependent entirely on RHI payments, then it is inevitable that lenders will back away.
The long-term objective of the RHI is to enable renewable heat to compete with conventional fossil fuels. The harsh reality at the moment is that the majority of both domestic and non-domestic projects will rely on the RHI to be economically viable. In many ways, this is good news for conventional utility providers.
The crucial issue as the government finalises its consultations ahead of this summer’s rollout is tariff security. If the government succeeds in providing definitive parameters in relation to tariff levels (if not definitive tariffs themselves), then the nervousness of institutional lenders will be abated and large-scale growth in the renewable heat sector will inevitably follow. Conversely, if tariff security is not achieved, growth and investment will continue to be cautious.
Indeed, public anger at rising home energy costs may do more to stimulate interest and growth in the UK’s renewable heat market than the government’s limited financial inducements. For the more determined consumer, the prospect of home-based power generation backed up by the RHI subsidy may present an increasingly appealing option.
Ben Halfpenny is an associate in the energy team at solicitor Dickinson Dees
This article first appeared in Utility Week’s print edition of 11th January 2013.
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