environmental & economic analysis into the impact of rhi
TRANSCRIPT
Environmental & Economic Analysis into the Impact of RHI Options
Renewable Heat Association Northern Ireland
April 2021
Contents
Key Observations............................................................................................................................... 1
1. Introduction & Background ..................................................................................................... 4
2. How has Renewable Heat usage in NI evolved? ................................................................ 9
3. What are the rural economy/socio-economic benefits of RHI? ................................... 14
4. What are the Environmental and Social Impacts of Biomass?.................................... 20
5. How has DfE developed the consultation process? ....................................................... 28
6. Do the assumptions behind DfE’s options hold? ........................................................... 36
7. What option represents the best balance of fairness and public spending? .......... 49
0
Key Observations
1
Key Observations
This report reflects Grant Thornton’s independent assessment of the various assumptions and
calculations applied to determine the financial implications of the non-domestic Renewable Heat
Incentive (RHI) Options presented by the Department for the Economy (DfE) as part of their 2021
‘Northern Ireland Non-Domestic Renewable Heat Incentive Scheme – Future of the Scheme’
consultation1. Based on our assessment, which notes what we regard as a series of omissions and
missteps in calculating tariffs and compensation rates, the report concludes with a proposal on the most
appropriate way forward for the RHI scheme. The analysis undertaken to produce this report leads to
the following key observations.
There is a clear societal and political imperative to controlling climate change. Not all of the options put forward in the 2021 Consultation paper are conducive to that position – indeed, whilst two would have an immediate opposite effect, the uncertainty that this process has created, will, in our opinion, have a damaging effect upon confidence in government and the acceptability of renewable energy alternatives.
That the Department knew, or might reasonably have been expected to know the accurate cost of heat generation from biomass, from LPG and from oil and might reasonably have been expected to use those costs in the calculation of the tariff payable .
That the positive effect of the cultivation and use of bioenergy crops is acknowledged by the UK Committee for Climate Change. Cultivation of sustainable forestry and bioenergy crops is widely accepted as positive for the environment. The options proposed in the consultation, if enacted, could have a significantly damaging economic impact on these enterprises – to a point that, without demand, there is no point in investment in them.
Considerable progress has been made in establishing a green economy for Northern Ireland. It is our opinion that this progress is at risk of being reversed if the Scheme is terminated. We estimate that if all participants in the non-domestic RHI scheme reverted to kerosene, this will generate 120,557 tonnes of CO2 in comparison to 16,629 tonnes for wood pellets per annum. The longer term dis-benefits will continue beyond the 15 years remaining of the Scheme
The Department had estimated that 480 boilers would, on the post 2019 tariffs fail to receive 12% RoR and thus, could be party to the voluntary buy-out arrangements. It is difficult to reconcile this statement with the assertion that a 12% RoR is available and impossible to reconcile this position with the Buglass assessment that case studies which he had analysed had a negative rate of return.
That the Department for the Economy, knew or, might reasonably have been expected to consistently identify the appropriate counter factual fuel, fuel volume and fuel price when instructing external consultants to make recommendations as to rebate tariffs.
For fairness, consistent, objective valuation of CAPEX and OPEX costs need to be the baseline for any calculation. We have concerns that, in this instance, they were not.
We have concerns that CAPEX cost analysis omits relevant and appropriate costs. These omissions make decision-making on the basis of such analysis, unsound.
We express concern regarding the accuracy of the cost-capture methodology. Without an accurate and sound baseline, calculation of an appropriate rate of return is not feasible.
1 https://www.economy-ni.gov.uk/consultations/northern-ireland-non-domestic-renewable-heat-incentive-scheme-future-scheme
2
As with appropriate and accurate CAPEX & OPEX cost capture, the use of discount factors for the purpose of deployment in legislation, must be on a sound and reasoned basis. We note that the approach proposed is inconsistent with previous calculations.
The counterfactual fuel and price of that fuel is a key element in the calculation of an appropriate rebate tariff and will have a significant impact in determining behavioural change (from fossil fuels to renewable energy) is encouraged. If calculated incorrectly, it could have long-term implications.
We judge fuel pricing to be a significant element in driving tariff mis-calculation. As may be seen from the graph below, selection of a (known) atypical price reference point exacerbates and compounds this matter.
System efficiency is a critical factor in the calculation of the cost of generation of heat. A mis-step in this calculation will compound other mis-steps in counterfactual fuel type/volume and therefore price calculation. The compounding effect may result in the theoretical (and incorrect) rebate calculated differing from the real-world experience of participants.
By using real-world data and applying a consistent discount rate, we have determined that the required compensation to terminate the DfE/participant relationship for systems accredited in 2015 is as follows, effective April 2020:
o 99 kWh boiler - £122,927
o 199 kWh boiler - £146,702
A key aim of the RHI scheme was carbon reduction. This is best achieved by keeping the
scheme open. Should the scheme continue a tariff calculation suggests an appropriate Tier 1
tariff of 9.06p/Kwh and a Tier 2 tariff of 2.95p/Kwh for a 99kw boiler and 6.43p/Kwh for a Tier 1
199 Kwh boiler.
3
1. Introduction & Background
4
1. Introduction &
Background
1.1 Introduction
Grant Thornton were commissioned by the Renewable Heat Association for Northern Ireland (RHANI)2
to carry out an economic review and analysis into the non-domestic Renewable Heat Incentive (RHI)
Options presented by the Department for the Economy (DfE) as part of their 2021 ‘Northern Ireland
Non-Domestic Renewable Heat Incentive Scheme – Future of the Scheme’ consultation3.
This report reflects Grant Thornton’s independent assessment of the various assumptions and
calculations applied to determine the financial implications of the RHI scheme options. Based on our
assessment, which notes what we regard as a series of omissions and missteps in calculating tariffs
and compensation rates, the report concludes with a proposal on the most appropriate way forward for
the RHI scheme.
Interestingly, during the course of writing this report, the GB non-domestic RHI scheme closed (on 31st
March 2021). ‘Closed’ in the GB context relates to new entrants rather than termination of the whole
scheme. This is a noteworthy and different context to the various NI options that have been proposed.
1.2 Background
The RHI scheme has been subject to two acts of primary legislation and a series of significant other
events. Table 1 summarises these key events.
Table 1: Non-Domestic RHI Chronology and key events Event Significance
2010: Strategic Energy Framework The Strategic Energy Framework, aimed to achieve a more secure and sustainable energy system where:
energy is as competitively priced as possible alongside robust security of supply
much more of our energy from renewable sources and the resulting economic opportunities are fully exploited
energy efficiency is maximised. 2012: The Renewable Heat Incentive Scheme Regulations (Northern Ireland) 2012
https://www.legislation.gov.uk/nisr/2012/396/contents/made
Regulations provided for the payment of a set tariff for a fixed period of 20 years to participants. As at 31 March 2019, there were 2,128 installations.
NI Audit Office4 notes that 564 of these applications were made between November 2012 and March 2015. Applications begin to
2 We are grateful to Balcas Timber Limited who also provided a financial contribution to the research. 3 https://www.economy-ni.gov.uk/consultations/northern-ireland-non-domestic-renewable-heat-incentive-scheme-future-scheme 4 https://www.niauditoffice.gov.uk/sites/niao/files/media-files/Final%20CAG%20Report%2028%20June%202016%20%28after%20typo%20correction%29.pdf
5
Event Significance
spike in 2015 (see below). Of greater importance are the 788 boilers admitted between April and October 2015 when the DFP authority to operate the scheme had lapsed, leading to the Comptroller and Auditor General to qualify the Department’s accounts5.
2015 –The Renewable Heat Incentive Schemes (Amendment) Regulations (Northern Ireland) 2015 (legislation.gov.uk)
https://www.legislation.gov.uk/nisr/2015/371/contents/made
The key point arising from these Regulations was that they introduced a tiering system and a cap on the heat eligible for tariff payments to all installations accredited after that date, in line with the GB scheme.
Between April 2015 and March 2016, 1,564 RHI applications were made, bringing the total to 2,128.
2016: Scheme Suspension
https://www.ofgem.gov.uk/publications-and-updates/suspension-northern-ireland-rhi#
The Renewable Heat Incentive (RHI) scheme was suspended to new applicants on 29 February 2016.
2016 Public Accounts Committee, Northern Ireland Assembly commence an inquiry into the actions of the Department for the Economy
The long-term environmental and economic impacts of curtailing the DfE RHI Scheme were fully understood in 2016 with evidence noting ‘that the consequence of what happened is very detrimental to growth.’6
2017 The Renewable Heat Incentive Scheme (Amendment) Regulations (Northern Ireland) 2017
https://www.legislation.gov.uk/nisr/2017/32/regulation/5/made
'Tiered' tariff system introduced for a reclassified (sub-100 kWh) band. The regime introduced an “initial,” 1st tier of 15% load, 1,314 hours of operation, followed by a lower valued tier to a maximum total number of operating hours for which payment would be made.
The 2017 Regulations were to have effect for 12 months; on expiry, the legislative construct was such that there was no authority to make payment to this cohort beyond 31 Mar 18. This gave rise to the need for the 2018 legislation passed by Westminster in the absence of a sitting Executive and Assembly.
2017: Public Inquiry A Public inquiry into the RHI scheme, chaired by Sir Patrick Coghlin, begins hearing evidence.
2018: Northern Ireland (Regional Rates and Energy) Act 2018
https://www.legislation.gov.uk/ukpga/2018/6/section/2/enacted
A 12-month continuation of the 2017 tariff for the small/medium cohort of approximately 1,900 systems (all sub 100 kWh).
2018: The future of the Non-Domestic Renewable Heat Incentive Scheme | Department for the Economy
Consultation sets out the Department's proposals for the future of the Non-Domestic Renewable Heat Incentive. 8 Options were proposed in the consultation, with the preferred option being to establish a new set of tariffs for all small and medium sized biomass boilers accredited to the scheme. The intention was to bring forward legislation to effect these changes. The Department’s proposed options are informed by Ricardo Energy and Environment (‘Ricardo’). The Ricardo Report identified “the extent to which the current NIRHI biomass tariffs are set at too high a level and suggested three main alternative tariff scenarios. Ricardo also estimated the projected cost to DfE and the rate of return to participants for each of the tariff scenarios compared with the current and previous tariff structures on the NI and GB RHI Schemes. Ricardo indicated that a subsidy was not required in respect of the CHP plants which applied to the NIRHI Scheme and suggested that it would now be appropriate to switch from the use of the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) when calculating the annual inflationary uplift of tariff levels.” (DfE)
5 https://www.economy-ni.gov.uk/sites/default/files/publications/economy/DETI-Annual-Report-2015-16.pdf 6 https://www.youtube.com/watch?v=VF5PqC97rOU
6
Event Significance
Apr 2019: Northern Ireland (Regional Rates and Energy) Act 2018
https://www.legislation.gov.uk/ukpga/2019/13/crossheading/renewable-heat-incentive-scheme/enacted
Amended the Principal Regulations in order to provide for a long-term tariff structure for small and medium biomass boilers set at a level to provide a 12% prospective internal rate of return.
While it was expected that the revised tariffs would provide a prospective internal rate of return of 12% for the typical installation over the 20 year period, the Department acknowledged that there would be a small group of participants (200) who would see a lower return. For this reason, the 2019 Act made provision for the Department to prepare and publish voluntary buy-out (VBO) arrangements in respect of the financial year beginning 1 April 2019 and each of the two financial years immediately following.
Lord Empey, speaking in the House of Lords7, noted concerns: “banks responded to the Minister, loaning money on the undertaking that the rights were being grandfathered and there was a 12% return. Some people got these boilers, calculated the income that they had received from them over the 20 years of the scheme, put that into business plans and perhaps went on to borrow money for other related projects…They now find that the premiums they are in receipt of are a mere fraction of those they had put into their business plans and were promised by the Stormont Government at that time. They also find themselves in the bizarre situation that the Republic of Ireland is about to introduce a similar scheme for 15 years, while the scheme that exists here (i.e. GB), which pre-dated the Northern Ireland version, will be continuing for its 20-year period. So the competitiveness for the person using one of those boilers in Northern Ireland compared with in the Republic or the rest of the United Kingdom is totally destroyed”.
April 2019: House of Commons NI Affairs Select Committee Inquiry
https://publications.parliament.uk/pa/cm201719/cmselect/cmniaf/2070/207003.htm
The 2019 Regulations went through Parliament in one day. This prompted the House of Commons NI Select Affairs Committee to conduct an inquiry. The report outlines concerns that the Department for Economy could have made oversights in its calculation of the costs associated with becoming a participant in the RHI scheme, and investment decisions of businesses. The Committee is concerned that, in comparison with a similar scheme in GB, the repayment rate for the NI scheme is based on unrealistically low costing which results in unfair payments for participants. The Committee states that the Department must account for the fact that people have made investment decisions in the belief the scheme would provide reasonable returns, and urges the Government to revisit the payments on this basis. Committee is calling on the Department to recognise the costs participants have committed to and revisit urgently its calculations.
The report suggests that the Department may have miscalculated wider costs such as planning permission, the cost of wood pellets vs fossil fuels and wider investments that have been made following the introduction of the scheme. The Committee urge the Department to revisit the payments to include parity with the schemes in Great Britain or the Republic of Ireland where possible, and to consider the wider investment decisions participants have made.
2019: Buglass Report commissioned (published in April 2020)
The Buglass report addressed the issue of ‘hardship’ and shows that the tariffs that were brought forward in 2019 legislation led to a challenging reduction in cash flow for some. The Department acknowledged that many have made wider investment decisions and have ongoing financial obligations beyond the scope of the tariff.
7 https://www.theyworkforyou.com/lords/?id=2019-07-15b.94.1
7
Event Significance
2020: RHI Inquiry Findings Published
https://wayback.archive-it.org/11112/20200911092828/https:/www.rhiinquiry.org/report-independent-public-inquiry-non-domestic-renewable-heat-incentive-rhi-scheme
RHI inquiry report published 13 March 2020
Northern Ireland Renewable Heat Incentive Scheme – 2020 Tariff Review
https://www.economy-ni.gov.uk/consultations/northern-ireland-renewable-heat-incentive-scheme-2020-tariff-review
Following a review by energy consultants Cornwall Insight of the variables which underpin the tariff structure for medium biomass boilers (20 – 199kW) on the Northern Ireland non-domestic RHI Scheme, the Department proposes to increase tariffs in line with the consultants’ recommendations. The approach by Cornwall Insight forms a significant element of our assessment.
2020: New Decade, New Approach The New Decade, New Approach8 document leads to the restoration of the NI Executive and indicates that “RHI will be closed down and replaced by a scheme that effectively cuts carbon emissions”. Unlike the New Decade, New Approach document (which is an agreement rather than legislative commitment), the draft outcomes framework Programme for Government consultation makes no reference to RHI9.
2021: Northern Ireland Non-Domestic Renewable Heat Incentive Scheme – Future of the Scheme consultation
In January 2020 the New Decade, New Approach (NDNA) document, published by the UK and Irish Governments, provided the basis for restoration of devolution in Northern Ireland. NDNA included a commitment for reform to take account of the findings of the Independent Public Inquiry into the Non-Domestic Renewable Heat Incentive (RHI) Scheme and, in relation to the Executive’s potential Programme for Government strategic priority of addressing climate change, a specific commitment to closure of RHI itself and replacement with a scheme which effectively cuts carbon emissions. This consultation seeks views on options for the future of the Non-Domestic RHI Scheme.
1.3 Project Scope
The following sections present Grant Thornton’s opinion on the four options proposed in the current
consultation document. In forming this opinion, we have focussed on the Environmental Impact, Rate
of Return, Employment/Economic Impact as well as the appropriateness of the cost assumptions that
underpin the tariff calculations for each of the options considered.
The report answers the following questions:
- Chapter 2: How has Renewable Heat usage in NI evolved?
- Chapter 3: What are the rural economy/socio-economic benefits of RHI?
- Chapter 4: What are the Environmental and Social Impacts of Biomass?
- Chapter 5: How has DfE developed the consultation process?
- Chapter 6: Do the assumptions behind DfE’s options hold?
- Chapter 7: What option represents the best balance of fairness and public spending?
8 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/856998/2020-01-08_a_new_decade__a_new_approach.pdf 9 https://www.northernireland.gov.uk/sites/default/files/consultations/newnigov/pfg-draft-outcomes-framework-consultation.pdf
8
2. How has Renewable Heat usage in NI evolved?
9
2. How has Renewable
Heat usage in NI
evolved?
2.1 Climate Change prompts greater action
Action to combat climate change and to reduce carbon emissions has shifted up the agenda for national
governments and public bodies, with agreement that carbon emissions have increased global
temperatures. Observations suggest that the global average temperature has now increased by more
than 1 degree Celsius since the pre-industrial era, resulting in rising sea levels and reductions in both
the snow and ice caps across both the Arctic and Antarctic.
In response to this pressing issue, 196 National Governments agreed to reduce their overall carbon
emissions, signing up to the Paris Agreement which commits signatories to a legally binding
commitment to limit global warming to 1.5 degrees Celsius compared to pre-industrial levels.10. The UK
Government has set the aim of reducing carbon emissions by 68% compared to 1990 levels while also
setting a target of complete carbon-neutrality by 205011. Similarly, the Northern Ireland Strategic
Framework for Energy committed the direction and future of Northern Ireland to the development and
commitment of renewable energies i.e. “to create relevant conditions for an increase to 40% electricity
consumption from renewable sources by 202012”.
The devolved countries of the UK have developed, or are developing, similar targets on climate change.
Carbon neutrality and zero-carbon aims feature predominantly in the NI Executive’s Programme for
Government (PfG) consultation.13. Unlike the New Decade, New Approach document, the draft
outcomes framework PfG consultation makes no reference to RHI.
2.2 What has the trend in Carbon Emissions in NI
been?
Across the UK, the overall level of greenhouse gas emissions in 2019 were significantly lower, by
45.2%, than they were in 1990. In a similar vein, NI greenhouse gas emissions have declined by 21.3%
since 1998. This decline is against the backdrop of growth of 111% in the NI economy over the same
period. Figure 1 below shows the trend in greenhouse gas emissions across NI since 1998. While the
10 The Paris Agreement; United Nations Climate Change; https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement 11 UK sets ambitious new climate target ahead of UN Summit; GOV.uk (2020); https://www.gov.uk/government/news/uk-sets-ambitious-new-climate-target-ahead-of-un- 12 Energy: A Strategic Framework for Northern Ireland; Department for Enterprise, Tarde and Investment (2010); https://www.economy-ni.gov.uk/sites/default/files/publications/deti/sef%202010.pdf 13 Programme for Government Draft Outcomes Framework: Consultation Document; Northern Ireland Executive (2021); https://www.northernireland.gov.uk/sites/default/files/consultations/newnigov/pfg-draft-outcomes-framework-consultation.pdf
10
reduction in emissions appears successful, meeting 2030 targets will require a further 31% reduction in
the UK14.
Figure 1: Greenhouse Gas Emissions (ktCO2e), NI, 1998-2018
Source: Department of Agriculture, Environment and Rural Affairs & Grant Thornton Analysis
2.3 Has the trend in RHI accreditation mirrored the
move to renewables?
Mirroring the shift in preference to renewable energy generation has been a shift towards renewable
heat generation across the business community. The RHI scheme drove much of this shift. 2,102
boilers, 19 Ground Source Heat pump, 6 Solar Thermal and 1 Water Source Heat Pump were installed
prior to the scheme suspension to new applicants, with in total 2,12815 installation occurring under the
Non-Domestic scheme and an additional 2,509 on the Domestic scheme as of 31 March 201916. The
Department of Agriculture, Environment & Rural Affairs (DAERA) estimate that the number of
installations increased by 336% between 2014/15 and 2015/1617. While this is an impressive rate of
growth, it was from a low base of 381 installations in 2014/15 to 1,663 in 2015/16.
While the RHI scheme was ambitious in promoting a reduction in the use of fossil fuels, significantly
more progress would be required to shift Northern Ireland further towards environmental targets. The
RHI scheme uptake was insufficient to deliver on the target of 10% renewable heat by 202018. 29,000
systems would need to be installed and operating to achieve this target according to the business case.
More significantly, since February 2016, when the scheme was suspended to new applicants, no new
installations have taken place. This stalled progress highlights that without any incentivisation or
support, the preference is to remain on fossil fuels given the cost differentials between the two options.
As of 31 March 2019, there was a total of 2,128 installations, with 2,031 receiving payment through
RHI. Figure 2 below shows the distribution of RHI Non-Domestic plants across NI. However, it should
be noted that since then there are examples of participants reverting to fossil fuels, decreasing the
14 Analysis: UK’s CO2 Emissions have fallen 29% over the past decade; Carbon Brief (2020); https://www.carbonbrief.org/analysis-uks-co2-emissions-have-fallen-29-per-cent-over-the-past-decade 15 NI Non-Domestic RHI Scheme Analysis 31 March 2019; Department for the Economy (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/statutory-information-non-domestic-rhi-analysis.pdf 16 NI Domestic RHI Scheme Analysis 31 March 2019; Department for the Economy (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/Domestic-Annual-Report-RHI-Scheme-Analysis.pdf 17 Northern Ireland Carbon Intensity Indicators 2020 report; Department of Agriculture, Environment & Rural Affairs (2020); https://www.daera-ni.gov.uk/sites/default/files/publications/daera/Northern-ireland-carbon-intensity-indicators-2020-report.pdf 18 A Strategic Framework for Northern Ireland: Energy; Department for Enterprise, Trade and Investment (2010); https://www.economy-ni.gov.uk/sites/default/files/publications/deti/sef%202010.pdf
0
5,000
10,000
15,000
20,000
25,000
30,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gre
enh
ou
se g
as e
mis
sio
ns
(ktC
O2e
)
11
above installation figure of 2,128. This was highlighted as part of Buglass’s research, which showed
that many had reversed to fossil fuels due to the viability of biomass boilers following the tariff cuts, or
were thinking of doing so. The majority of installations are in rural areas and the majority of installations
(53%19) occur in the Agriculture sectors. A further 8.4% of installations are in the forestry and wood
processing sector20. The Department’s Rural Needs Impact Assessment21 acknowledges a greater
impact of changes on rural areas but that change proposals are ‘not likely to impact on people in rural
areas differently from people in urban areas, i.e., the effect on participants will be the same regardless
of the area they live in.’ To be clear, the hardship and business risk issues are the same in urban and
rural areas but the uptake in predominantly rural areas weights the impact to those areas.
Figure 2: Distribution of Non-Domestic RHI Accreditations, NI, 2019
Source: Department of Agriculture, Environment and Rural Affairs & Grant Thornton Analysis
Under the Domestic Scheme, around 2,509 accredited RHI technology were installed, with 1,106 of
these being biomass boilers22. Analysis23 conducted by the Department for Environment Agriculture
and Rural Affairs on 2015/16 domestic installations found that oil was the main source of fuel displaced.
The main fuel displaced in the Non-Domestic Scheme was LPG (having been used by poultry farmers
to heat poultry houses24). This observation was noted by the Department in a footnote to the European
Commission as part of a State Aid document, which stated “the Northern Ireland authorities have
explained that liquid petroleum gas was the appropriate counterfactual fuel for most biomass
installations because it was the original fuel being used by the majority of RHI scheme participants25”.
19 1,124 NI Non-Domestic RHI boiler installations occurred in the Agriculture sector [NI Non-Domestic RHI Scheme Analysis 31 March 2019; Department for the Economy (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/statutory-information-non-domestic-rhi-analysis.pdf] 20 NI Non-Domestic RHI Scheme Analysis 31 March 2019; Department for the Economy (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/statutory-information-non-domestic-rhi-analysis.pdf 21 https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Draft-rural-needs-impact-assessment-future-non-domestic-rhi-scheme.pdf 22 NI Domestic RHI Scheme Analysis 31 March 2019; Department for the Economy (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/Domestic-Annual-Report-RHI-Scheme-Analysis.pdf 23 Northern Ireland Carbon Intensity Indicators 2020 report; Department of Agriculture, Environment & Rural Affairs (2020); https://www.daera-ni.gov.uk/sites/default/files/publications/daera/Northern-ireland-carbon-intensity-indicators-2020-report.pdf 24 State Aid SA. 47501 (2017/NN) – United Kingdom Northern Ireland Renewable Heat Incentive Scheme 2017-18 (Footnote 6); European Commission (2017) 25 State Aid SA. 47501 (2017/NN) – United Kingdom Northern Ireland Renewable Heat Incentive Scheme 2017-18 (Footnote 6); European Commission (2017)
12
This is in conflict to both Ricardo, Cornwall and Department, with Cornwall stating that “there is little
overall transparency of the number of consumers using LPG and coal in Northern Ireland26”.
As part of the accreditation and audit process, participants need to provide fuel records historically on
both current wood pellets and the displaced fossil fuels.
Additionally, correspondence between the Department’s Permanent Secretary and a then MLA
referenced “A figure of 30p per litre for LPG has been provided to DfE by some NIRHI participants as
the discounted LPG price afforded to poultry farmers through a supply arrangement”. This figure of 30p
per litre remains valid at the time of preparing this report.
The Department does/has access to knowledge about the costs and availability/usage of LPG and
should apply this information in its calculations.
The effectiveness of the RHI scheme in driving change to more environmentally favourable fuels is
clear, although since the scheme was suspended to new applicants in 2016 the pace of change ceased.
As noted within the ‘New Decade New Approach27’ document, it is the stated aim of the NI Executive
to close the scheme permanently and replace it with another suitable scheme which ‘effectively’ cuts
carbon emissions. However, the GB RHI scheme also closed permanently on midnight of the 31 March
2021 but will continue for current participants28. Current participants will receive the tariff guaranteed to
them on their accreditation date, with these tariffs being index linked.
It is worth noting that installations peaked at 2,128 at 31 March 2019. No additional installations have
taken place since 2016 and due to tariff revision, etc. this number has in fact slowly decreased as boiler
owners revert to fossil fuel. The closure or termination of the scheme will see all support being removed
and likely prompt a dramatic reversion to fossil fuels due to the unviability of biomass boilers without
support.
The options proposed by the department for the future of the Non-Domestic RHI Scheme are the subject
of the assessment which follows.
26 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf 27 New Decade New Approach; UK & Irish Governments (2020); https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/856998/2020-01-08_a_new_decade__a_new_approach.pdf 28 NDRHI Closure; Ofgem (2021); https://www.ofgem.gov.uk/environmental-programmes/non-domestic-rhi/about-non-domestic-rhi/ndrhi-closure
13
3. What are the rural economy/socio-economic benefits of RHI?
14
3. What are the rural
economy/socio-
economic benefits of
RHI?
3.1 The Economic Benefits of RHI to NI’s Rural
Economy
As part of the consultation on the future of the Non-Domestic RHI scheme, the DfE outlined two of the
proposed four options that involve the closure of the scheme with/without compensation. The economic
impact of the scheme closure in rural areas of NI was of particular concern (recalling that 53% of
installations relate to agriculture). These impacts were highlighted as part of the 2019 Consultation
responses, in which the opinion was offered that there had been a negative economic impact through
job losses and cash flow issues due to amendments to the RHI scheme, and that less than 30% of
installers were still operating.29 Many applicants had to sell off assets, lay off staff, postpone investments
or divert funds from other elements of the business having factored in contractually expected returns
into business plans for other business activities. Strikingly, many of the participants stated “they would
not have installed a biomass heating system under the tiered tariffs30”, as the tiered tariffs had made
their businesses ‘uncompetitive’ in comparison to counterparts in the rest of the UK. In addition, the
2017 tariff changes also had wider impacts on installers with many installers stating there “has been a
major loss of jobs in their companies”, while also seeing “many of their former competitors are no longer
operating31”. As such, it can be seen that through first-hand consultation responses that the change in
scheme under the 2017 tariffs have had a negative economic impact on both installers and participants,
with both having seen business fall and job losses occur. Whereas those that entered the scheme post-
November 2015 noted that while the 2017 and 2018 legislation didn’t have immediate impacts, they did
note that if the scheme were to close this would have ‘severe’ financial impacts upon their businesses32.
29 The Future of the Northern Ireland Non-Domestic Renewable Heat Incentive Scheme: Consultation Report; Department for the Economy (2019); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/rhi-non-domestic-consultation-report.pdf 30 The Future of the Northern Ireland Non-Domestic Renewable Heat Incentive Scheme: Consultation Report; Department for the Economy (2019); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/rhi-non-domestic-consultation-report.pdf 31 The Future of the Northern Ireland Non-Domestic Renewable Heat Incentive Scheme: Consultation Report; Department for the Economy (2019); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/rhi-non-domestic-consultation-report.pdf 32 The Future of the Northern Ireland Non-Domestic Renewable Heat Incentive Scheme: Consultation Report; Department for the Economy (2019); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/rhi-non-domestic-consultation-report.pdf
15
The Agriculture sector in NI is significant in the context of the overall regional economy. The sector
supports 3.6% of total workforce jobs in NI33. In comparison, Agriculture in the UK as a whole only
supports 1.2% of total workforce jobs34. Overall, out of all Non-Domestic RHI installations 53% of these
occurred in the Agriculture sector, with many of these installations being a single or double boiler
installation.
The closure of the RHI scheme will not only impact directly on users and installers of RHI boilers, but
also impact indirectly on the wider rural economy. For boiler owners, the Buglass Energy Advisory35
report notes that participants are experiencing negative cash flow impacts due to reduced tariffs whilst
carrying debt obligations which were entered in to based on 2012 tariffs. The Buglass report also noted
that these impacts around cash flow stress and debt repayment will ultimately lead to “impairment of
competitive position” as well as ”reduction in business scale – closure of business lines, staff closures
or premature closures”. In addition, the Buglass report also noted that has been significant opportunity
costs incurred, with businesses having to forego investment opportunities in order to service their debt
on the loan taken out as well as meet the businesses “overall cash flow obligations”. The Buglass report
included a ‘high level’ Rate of Return analysis on respondents, concluding that the 2017 changes
resulted in negative Rates of Return for participants. This point was further illustrated in evidence
submitted to the NI Affairs Select Committee where one respondent stated that his current business
has no “call for employees” having had initially “20 employees at peak”. This downsizing was due to
difficulties meeting the financial commitments (undertaken on the basis of RHI guarantees. The same
respondent noted that, “one of my customers, is replacing his Biomass Boilers with Oil Boilers, if this
trend continues along with all the other pressures that we are facing I cannot see a future in my business
which will result in defaulting in over £1 million of borrowings36”.
Boiler operation creates demand for wood pellets/support services and the rebate payments received
bring a monetary benefit into the local economy. In a scheme closure scenario, or indeed, under the
current scheme operation structure, the hardships being felt by participants, as identified in the Buglass
report, can be reasonably assumed to lead to redundancies and business closures (partial or complete)
– see above for evidence submitted to the NI Affairs Select Committee. These impacts will be more
widely felt through the supply chains with a multiplier effect, leading to potential further
closures/redundancies at wood pellet and installation providers.
Grant Thornton have calculated the economic impact of the installations on the rural economy. As
mentioned in Section 2, 1,124 boilers are installed in business related to the Agriculture sector37. Many
more installations are in rural areas (Figure 2). Analysis of installation quotations and invoices from
boiler installers supports a conclusion that a 99Kwh boiler cost an average of £47,21338 excluding VAT.
The total direct economic contribution of boiler installations therefore equates to £57.32m (for the
purposes of calculation, all boilers are assumed to be 99Kwh39). It should be noted, that the above
figure only focusses on the installation undertaken in the Agriculture sector and so the impact across
the whole rural community will be larger than these figures.
Converting this impact figure from turnover to GVA is achieved through application of a Turnover/GVA
ratio produced via the NI Annual Business Inquiry (ABI). For this analysis, Grant Thornton have used
the Manufacturing Turnover to GVA ratio between 2008 and 2018 (47%), due to the repair and
maintenance of non-domestic central heating systems categorised within this broad SIC code. The
result is GVA of £27.15m, with this being generated over the period 2013 to 2016.
33 Workforce Jobs by Industry (SIC 2007) - Seasonally Adjusted; NOMIS (September 2020); https://www.nomisweb.co.uk/query/construct/submit.asp?forward=yes&menuopt=201&subcomp= 34 Workforce Jobs by Industry (SIC 2007) - Seasonally Adjusted; NOMIS (September 2020); https://www.nomisweb.co.uk/query/construct/submit.asp?forward=yes&menuopt=201&subcomp= 35 Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research. 36 Written evidence submitted to the NI Affairs Select Committee 37 NI Non-Domestic RHI Scheme Analysis 31 March 2019; Department for the Economy (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/statutory-information-non-domestic-rhi-analysis.pdf 38 Installation cost above based upon receipts compiled from installers and invoices from participants 39 There have been 1,761 installations for boilers sized 20 to 99Kwh out of a total 1,991 accredited installations [Non-Domestic Renewable Heat Incentive Scheme: Future of the Scheme Consultation Document; Department for the Economy (2021); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/RHI-scheme-future-consultation-document.pdf]
16
Beyond this direct impact, there will be wider economic benefits through supply chain purchases and
other activity generated via boilers. We estimate these indirect effects using the NI Supply Use Tables
produced by NISRA. Using the ‘Repair and installation of machinery and equipment’ multiplier, the total
economic contribution of an installation of RHI boilers in the rural economy will result in a total GVA
generation of £33.06m. This assessment is an illustrative impact of the installation of boilers only.
Subsequent to the installation, there is an ongoing need for fuel i.e. wood pellets, etc. and maintenance.
Applying the same economic calculator approach to these operational costs will generate GVA of
£7.08m per annum. If the scheme was to terminate with no further payments, this would represent a
significant amount of GVA forgone to both installers, participants and the wider NI economy.
3.2 Promotion of the Circular Economy
Having established the direct economic contributions of the RHI scheme to the economy, it is also
important to highlight the economic contribution of RHI boilers in the move towards a ‘circular economy’.
Recently, the move to adopt and implement a ‘circular economy’ has received widespread traction and
has prompted many countries or economic blocs to adopt this ethos. Indeed, the EU recently adopted
a ‘Circular Economy Plan’ as part of their wider ‘Climate Action Plan’, which sets out the aim to recycle
55% municipal waste by 2025, 60% by 2030 and 65% by 2035 respectively40. Similar action has been
taken by the UK Government41 , which will drive towards an economic system in which all resources
are used for as long as possible, reducing wastage and any unnecessary resource wastage.
Many reports and studies have pointed towards the link between biomass boilers and the burning of
wood pellets to the overall ‘circular economy’, This point is captured well in ‘Biomass for the Circular
Economy’ which notes that Biomass is ‘essential for achieving a circular economy’42. Wood pellets are
manufactured from ‘wood co-products’ such as saw dust and bark, essentially the waste product of
other wood products. Turning this by-product (which would otherwise be disposed of) into usable
renewable energy sources is consistent with promoting the movement towards a ‘circular economy’.
This is in stark contrast to what some would consider to be the ‘linear economy’ and the use of fossil
fuels, where “fossil fuels, are generally used just once” meaning this “raw material from the earth can
no longer enter the cycle”. As such, the “extraction of fossil raw materials can be curbed in various ways
by, for instance, using renewable raw materials (biomass)”, which will promote and create a “closed”
cycle of carbon with these cycles having a short circulation time. For example, wood harvested under
a willow plantation used as fuel will release carbon dioxide, however within years the same quantity of
carbon expelled will be reabsorbed and stored in wood.
Additionally, as outlined by Balcas, the UK and Ireland’s largest wood pellet provider, to enable carbon
capture and promote sustainability, for every 1 tree cut down it is replaced with 4 additional trees. This,
via Photosynthesis, which captures the released carbon dioxide, converts it to sugars used for plant
growth and releases oxygen back into the atmosphere and replaces the carbon burnt by wood pellets,
thus promoting a sustainable carbon capture system. Figure 3, which has been taken from a Committee
on Climate Change report on ‘Biomass in a low-carbon economy’, shows the global carbon cycle and
the important role biomass plays in this. Biomass such as woodland, etc. will be vital in the future
regulation of carbon release and thus future global temperature impacts.
40 EU Circular Economy Action Plan, European Commission (2019); https://ec.europa.eu/environment/circular-economy/ 41 Circular Economy Package policy statement; GOV.UK (2020); https://www.gov.uk/government/publications/circular-economy-package-policy-statement/circular-economy-package-policy-statement 42 Biomass for the Circular Economy; van Groenetijn et al; https://biobasedeconomy.nl/wp-content/uploads/2019/11/Biomass-for-the-circular-economy-EN-site.pdf
17
Figure 3: Sustainable Biomass within the global carbon cycle
Source: Committee for Climate Change43
However, it should be noted that while biomass will play an important role in the future to ‘net-zero’, the
Committee on Climate Change report does highlight the need for carbon capture storage and use to
ensure compliance with the ‘net-zero targets’.44 However, as noted above wood pellet production
prompts the carbon capture through the utilisation of Photosynthesis to capture carbon burnt by wood
pellets and expend Oxygen as a consequence, with Balcas leading the way on this through their
sustainable approach to wood pellet production.
Similar to the research presented above, analysis conducted by Energy Saving Trust (2019)45, states
that when biomass is derived from waste sources it will have a key component of waste management
as well as help with the move towards a circular economy. In addition, an academic analysis into the
combustion efficiency, conducted by Molina-Morena (2016)46, found that emissions, while these are a
consequence of the combustion process, were found to be below those legally required under European
legislation, making biomass systems perfectly feasible for both energy use and within a circular
43 Biomass in a low-carbon economy; Committee on Climate Change (2018); https://www.theccc.org.uk/wp-content/uploads/2018/11/Biomass-in-a-low-carbon-economy-CCC-2018.pdf 44 Biomass in a low-carbon economy; Committee on Climate Change (2018); https://www.theccc.org.uk/wp-content/uploads/2018/11/Biomass-in-a-low-carbon-economy-CCC-2018.pdf [as cited by the Zero-IN on NI-Heat report produced by the Ulster University (2020)] 45 What role does biomass have to play in our energy supply?; Energy Saving Trust (2019); https://energysavingtrust.org.uk/what-role-does-biomass-have-play-our-energy-supply/ 46 Pellet as a Technological Nutrient within the Circular Economy Model: Comparative Analysis of Combustion Efficiency and CO and NOx Emissions for Pellets from Olive and Almond Trees; Valentín Molina-Moreno (2016); https://www.mdpi.com/1996-1073/9/10/777/htm
18
economy. All accredited boilers in the RHI scheme meet both EU and the Department for Environment,
Agriculture & Rural Affairs emission standards.
If the scheme terminates with no further payments to boiler owners, reversion to fossil fuels will reverse
progress outlined above.
19
4. What are the Environmental and Social Impacts of Biomass?
20
4. What are the
Environmental and
Social Impacts of
Biomass?
4.1 The Carbon Impact
Given the RHI scheme’s cost issues and subsequent focus of the RHI Inquiry around public monies, it
is important to remember that environmental goals were at the core of the RHI scheme. Having
considered the economic rationale for biomass boilers, arguably it is more pertinent to confirm the
environmental rationale. While the burning of wood pellets will produce both carbon dioxide and
nitrogen dioxide, the amount of carbon dioxide and nitrogen dioxide produced over the lifetime of a
boiler is the same amount reabsorbed by plant life, resulting in net-zero emissions47. A Life Cycle
Analysis (LCA) study was conducted by Jeswani et al (2019)48, which found that solid biomass boilers
could reduce “global warming potential as well as depletion of fossil resources and the ozone layer by
>90%”. However, the authors do note that while the biomass boilers provide significant environmental
benefits in terms of carbon reduction, etc. the price differential is substantial, with the cost of biomass
heat being 23% more expensive than heat from gas boilers. As such, they recommend the continued
incentivisation of biomass heat.
The adoption of biomass energy and heat has seen significant expansion across the whole of the UK.
To highlight this trend, the Office for National Statistics (ONS) conducted analysis49 into the adoption of
biomass between 2010 and 2017, noting that the proportion of energy generated from renewable and
waste sources increased to more than 10% of the total in 2017; more than the energy produced by oil
and coal. Figure 4 shows the trend in total energy consumption across the UK between 2010 and 2017.
47 How Does Green Boiler Technology Affect The Environment?; Green Journal (2016); https://www.greenjournal.co.uk/2016/12/how-does-green-boiler-technology-affect-the-environment/#:~:text=Environmental%20Impact%20of%20Biomass%20Boilers,emissions%20(CO2%20and%20NO2).&text=With%20proper%20use%20of%20biomass,can%20be%20used%20as%20compost. 48 Environmental and Economic Sustainability of Biomass Heat in the UK; Harish Kumar Jeswani, Andrew Whiting & Adisa Azapagic (2019); https://onlinelibrary.wiley.com/doi/full/10.1002/ente.201901044 49 A burning issue: biomass is the biggest source of renewable energy consumed in the UK; Office for National Statistics (2019); https://www.ons.gov.uk/economy/environmentalaccounts/articles/aburningissuebiomassisthebiggestsourceofrenewableenergyconsumedintheuk/2019-08-30#:~:text=In%202017%2C%20greenhouse%20gas%20emissions,20%20million%20tonnes%20in%202017.
21
Figure 4: UK Total Energy Consumption by Fuel Type, UK, 2010-17
Source: Office for National Statistics (ONS) & Grant Thornton Analysis
Of the ‘renewable and waste sources’ energy generation, almost 40% has been provided by biomass
related sources, showing the significant contribution of biomass to the UK and EU’s strategy in reducing
their usage of fossil fuels to generate both heat and energy i.e. electricity. All fossil fuels used in NI are
imported. A North-South Inter-Parliamentary Association report assessed this position and noted the
island of Ireland’s dependence on imported energy noting that oil accounted “for 59% of final energy
consumption in Ireland, all of which is imported”. The report also goes on to state that increasing
renewable sources specifically for Northern Ireland “may reduce its reliance imported fuels therefore
enhancing security of supply50”.
The increased popularity of wood pellets has translated to the significant importing of wood pellets to
the UK (Figure 5). There has been a substantial increase in wood pellet imports between 2010 and
2018 with current wood pellet imports amounting to 7.8m tonnes, up from 0.6m tonnes in 2010. In NI
the market demand for wood pellets was mostly satisfied by both Balcas and Doherty, together
supplying more than 70% of the demand at peak with the remaining being satisfied by imports from the
rest of Europe. As for wood chip, all of this demand was met from indigenous forest and SCR Willow
plantation. It should be noted however, that NI has some of the sparsest level of woodland among all
of Europe, with only 6.5% being covered compared to 37% for the EU51. To address security of supply
and to ensure the continued promotion of renewable heat attraction, etc. the Strategic Framework for
Energy committed to the “increased growing of energy crops” to promote environmental impact and “to
ensure that biomass production can be optimised”52.
This scale of importing of wood pellets has received significant criticism as it is viewed by critics as
being counter to sustainable energy (the DRAX power station in England is a live example of how
importing wood pellets can undermine carbon reduction aims). However, the ONS do illustrate that
biomass can be considered a renewable energy source, as the growth of plants/trees help to remove
50 Energy Security; North South Inter-Parliamentary Association (2013); http://www.niassembly.gov.uk/globalassets/documents/raise/publications/2013/north_south/13213.pdf 51 Inquiry into the Adaptation of Agriculture and Forestry to Climate Change: The EU Policy Response: Supplementary Memorandum: EU Woodland; House of Lords; https://www.parliament.uk/globalassets/documents/documents/upload/wtd10.pdf 52 A Strategic Framework for Northern Ireland: Energy; Department for Enterprise, Trade and Investment (2010); https://www.economy-ni.gov.uk/sites/default/files/publications/deti/sef%202010.pdf
0
5
10
15
20
25
30
35
40
45
2010 2011 2012 2013 2014 2015 2016 2017
% o
f En
erg
y P
rod
uce
d b
y Fu
el
Renewable and waste sources Coal Natural gas Oil Other
22
greenhouse gases from the atmosphere. In addition, the development of carbon capture and storage
will have a role in contributing to the UK’s aim to move towards a ‘net-zero’ emissions.
Figure 5: Wood Pellet Imports, UK, 2010-18
Source: Office for National Statistics (ONS) & Grant Thornton Analysis
The issue around the importing of wood pellets into NI appears to be less of an issue. Balcas, the main
seller of wood pellets in NI, produce local wood pellets, eradicating any need for imports (and associated
travel carbon footprint). As part of their commitment to sustainability, Balcas plant and harvest
sustainable trees which are used to produce wood pellets. It is estimated that for every one tree used
for pellets four trees are planted in its place.
4.2 The Social Impact
The promotion of sustainable and environmentally friendly fuels will not only have an impact
economically and environmentally, but there will also be wider social impacts.
A Sustainable Energy Source
Unlike the counterfactual fuels such as oil and gas, renewable energies such as biomass are more
widely available and accessible locally. Fossil fuels are much more unevenly distributed throughout the
globe, with some countries having a higher concentration compared to others, resulting in high levels
of fossil fuel importing. For example, since 2005, the UK has generally been an energy importer53.
As such, the ability to be able to produce energy at ‘home’ and not need to be reliant on importing
energy from other countries is a significant boost to future sustainability and green objectives.
Additionally, the potential to produce your own energy provides additional economic opportunities
through the development of R&D and innovation as well as potential employment creation.
However, as noted within the 2018 DfE consultation report, many participants showed a preference to
revert to the original 2012 tariffs as it was felt that the proposed 2017 tariffs would make the running of
biomass boiler unviable to operate beyond the tier 1 threshold in comparison to LPG. It was stated that
53 UK energy: how much, what type and where from?; Office for national Statistics (2016); https://www.ons.gov.uk/economy/environmentalaccounts/articles/ukenergyhowmuchwhattypeandwherefrom/2016-08-15
0
1
2
3
4
5
6
7
8
9
2010 2011 2012 2013 2014 2015 2016 2017 2018
Mill
ion
To
nn
es
23
many had ‘already’ reverted to LPG or that the ‘unattractive’ disparity between LPG and biomass has
the potential to lead to RHI participants to revert to fossil fuels54.
The cost of LPG fuel was quoted in correspondence55 between the then Permanent Secretary of the
Department and a then MLA, with the cost of LPG stated as 4.5p/KwH, in comparison to the wood fuel
cost used by Ricardo of 3.26p/KwH (boiler efficiency of 93%). Ricardo’s wood fuel costs were based on
£150 per tonne for wood pellets.
However, biomass boiler efficiency averages 77% (net)56, resulting in an actual wood pellet price of
4.2p/KwH – assuming £150 per tonne of wood pellets (the £150 per tonne figure is used here solely for
ease of comparison to Ricardo). The findings in the Buglass Report reflect how, due to the cuts in tariffs
and debt obligations, biomass boiler owners are now starting to think about reversion to oil or LPG gas
as the cost of maintaining and feeding the biomass boiler has become too much to bear in the absence
of meaningful incentives57.
Such a scenario could lead to the reversal of self-sustainability and the provision of fuels which can be
sourced nearby. In comparison, a reversion to fossil fuels will only heighten import dependency. To
highlight this point, estimates provided by wood pellet producers suggest that they sell 119,889 tonnes
of wood chip/pellets/firewood/logs per year. If the NI RHI scheme is closed, or if tariffs render biomass
unviable, demand for these 30,000 tonnes of firewood, c.90,000 tonnes of wood pellets/chip and
110,000 tonnes of logs will be significantly, perhaps completely, replaced by fossil fuels, if low tariff
rates remain in place.
In a worst-case scenario, carbon emissions will rise significantly. Analysis conducted by the UK
Government58 estimate that under biomass fuel the FuelMixCO2Factor is zero, whereas with the use of
Fuel Oil it stands at 0.27. This highlights the potential climate and emissions effect of replacing biomass
with Oil as some installers have proposed.
To illustrate the carbon impact, Grant Thornton have calculated the total carbon that could be emitted
under fossil fuel consumption if, as some have suggested, they revert to fossil fuels. The Buglass
Energy Advisory report noted that 23% of respondents to the survey had already switched or were close
to switching back to fossil fuels59. This reversion to fossil fuels started when the 2017 tariffs were
introduced. The 2019 tariff review accelerated this and scheme closure would in all likelihood see a
further rapid acceleration. Our assessment sets out a range of scenarios based on different reversion
rates and across a 99Kw and 199Kw boiler range.
The total KwH per annum for each boiler size is 208,280.2KwH (99Kw boiler) and 261,665.1KwH
(199Kw boiler). To provide context on the total requirement in wood pellets to fuel these boilers we have
divided by the Net Calorific Value (NCV) for wood pellets as presented by the ENplus requirements for
wood pellets60 (4,600 KwH/tonne), which gives a requirement of 45.28 tons per annum (99Kw boiler)
and 56.88 tons per annum (199Kw boiler). We note that boiler efficiency rates vary by season and real
world operation (see section 6.7) but we do nott adjust for efficiency rates here.
Table 2 below shows current wood pellet usage across all of the boilers currently in operation in NI,
with total pellet consumption amounting to 90,000 tonnes per annum. If all biomass boilers were
54 The Future of the Northern Ireland Non-Domestic Renewable Heat Incentive Scheme; Department for the Economy (2019); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/rhi-non-domestic-consultation-report.pdf 55 Impact of Changes to Renewable Heat Subsidy; Department for the Economy; Reference: SCOR-0246-2019 56 Measurement of the in-situ performance of solid biomass boilers; KIWA (2018); https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/831083/Full_technical_report.pdf 57 Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research. 58 2019 Government Greenhouse Gas Conversion Factors for Company Reporting; Department for Business, Energy & Industrial Strategy (2019); https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/904215/2019-ghg-conversion-factors-methodology-v01-02.pdf 59 Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research. 60 Net Calorific Value stated as 4.6KwH/kg [Quality Certification Scheme For Wood Pellets, ENplus (2015); https://enplus-pellets.eu/en-in/component/attachments/?task=download&id=103]
24
replaced by kerosene boilers this would result in 35,000 tonnes of kerosene oil being used per annum.
In addition, we have calculated the amount of carbon emissions produced based upon a range of
reversion to fossil fuel rates (e.g. 30% of participants reverting through to 90% reverting to fossil fuels).
To do this we used conversion factors sourced through DEFRA and provided by the Wood Sustainability
Paper to calculate carbon emissions, with carbon factors of 0.04kg/CO2/KwH (wood pellets) and
0.29kg/CO2/KwH (oil)61 being used. We estimate that if all participants (1,948) reverted to kerosene,
this will generate 120,557 tonnes of CO2 in comparison to 16,629 tonnes for wood pellets. Grant
Thornton have used kerosene oil as the basis for reversion to fossil fuels, as this is the counterfactual
fuel used in the Department’s tariff calculations. We do not agree that Kerosene is the appropriate
counterfactual but it is applied here to drive the comparisons. Across each scenario in Table 2, if
participants revert to kerosene oil, they will generate more carbon compared to burning wood pellets.
For example, if 30% of RHI participants reverted to kerosene this would see carbon emissions be
36,167 tonnes compared to only 11,640 tonnes for those that continue to burn wood pellets per annum.
Table 2: Impact of Oil displacing Biomass Wood Pellet Usage & CO2 Emissions, NI
Wood Pellets replaced by Fossil Fuels (Tons per annum)
Boiler Size
100% of Participants
remain on Wood Pellets
70% of Participants
remain on Wood Pellets
40% of Participants
remain on Wood Pellets
10% of Participants
remain on Wood Pellets
99Kw 79,735 55,815 31,894 7,974
199Kw 10,637 7,446 4,255 1,064
Total 90,372 63,261 36,149 9,037
Lost Pellet sales
-27,112 -54,223 -81,335
Carbon Emissions from Wood Pellets (0.04kg/CO2/KwH) Tonnes
100% of Participants
remain on Wood Pellets
70% of Participants
remain on Wood Pellets
40% of Participants
remain on Wood Pellets
10% of Participants
remain on Wood Pellets
99Kw 14,671 10,270 5,869 1,467
199Kw 1,957 1,370 783 196
Total 16,629 11,640 6,651 1,663
Carbon Emissions from Kerosene Oil (0.29kg/CO2/KwH) Tonnes 100% of
Participants revert to Kerosene
30% of Participants revert
to Kerosene
60% of Participants revert
to Kerosene
90% of Participants revert
to Kerosene
99Kw 106,367 31,910 63,820 95,730
199Kw 14,190 4,257 8,514 12,771
Total 120,557 36,167 72,334 108,501 Source: Department for the Economy, Wood Sustainability Paper & Grant Thornton Analysis
61 Delivering the UK’s renewable heat objectives through wood fuel Sustainability Position Paper; CPL Renewables et al (2014); https://www.land-energy.com/wp-content/uploads/2018/10/sustainability.pdf. We understand that carbon emissions associated with delivery of wood pellets is included in those carbon calculations but not included in carbon emission calculations for oil.
25
Improvement of Quality of Life
While biomass will help reduce Greenhouse Gas Emissions, this is dependent on the production of
Carbon Capture technologies or the provision of sustainable forestry (biomass stock)62. However, under
the process of wood chip/pellet generation, sustainable afforestation will occur, as highlighted by
Balcas. Carbon emissions generated under biomass combustion will/could, therefore, be reabsorbed
by the additional trees implanted through the natural carbon capture and storage process –
photosynthesis.
The production and burning of biomass fuels can help reduce the level of Greenhouse Gas emissions,
through absorption by newly planted trees, potentially resulting in no new increase in atmospheric
carbon63. This is a key feature of short cycle carbon process, in which plants/trees play a key role in the
absorption of carbon dioxide from the atmosphere, converting this into oxygen. Typically, the short
carbon cycle occurs over a period of decades to centuries while the long carbon cycle carbon is passed
between the Earth’s surface through rocks and oceans and the atmosphere over a period of millennia.
Fossil fuels contribute to the continuation of long cycle carbon by releasing carbon emissions from
carbon stores that have been held on the Earth’s surface for millions of years. In comparison, wood
pellets are part of the ‘biogenic’ cycle (Figure 3 above). Additionally, biomass is part of the ‘biogenic’
cycle which gets reabsorbed, ‘maintaining’ current levels in comparison to adding to carbon levels, as
occurs under the combustion of fossil fuels64.
Additionally, demand for wood pellets production reduces the potential for trees to rot in forests. As
tress or plants rot, methane is produced, which is a significantly more “potent” emission than carbon
dioxide.65.
Areas of ‘Unintended Consequence’
There is the potential for ‘unintended consequences’ if the scheme is closed. For example, the UK retail
sector recently agreed to commit to “reach net zero carbon emissions by 2040”, with both retail and
their “supply chains” being the focus66. As many as 63 retailers including Aldi, Lidl, M&S, etc. have
already pledged their support. Morrison’s the UK’s fourth largest supermarket chain in March set out
the aim to ensure a net zero target across all supply chains by 203067. This is directly relevant to RHI
participants. If the scheme is removed, the intention of a significant proportion of RHI participants would
be to revert to fossil fuels (as stated in the Buglass Report), but this may cause an issue should they
wish to accept contracts to supply with the UK retailers who are committed to net zero. To highlight this
point Figure 8b below shows the tariff rates for the GB scheme over by each accreditation date.
If the scheme is closed and a compensatory figure is provided to participants, the tax treatment of this
award will have a further impact on cash flow and will have a further detrimental impact upon the future
sustainability of businesses/projects. This needs to be considered in the calculation of any
compensation package, bearing in mind debt servicing and related costs. It should be noted that for
those that had taken a loan out during the latter years of the scheme, the post-tax lump sum may be
insufficient to cover any debt serviced.
What should also be noted is that while the compensation figure is to be paid to all groups/accredited
boilers, the determination of the compensation rate varies by group. For example, the proposal is that
medium boilers (20-199Kw) will be paid a compensation based upon the 2021 tariffs, while all other
62 Biomass in a low-carbon economy; Committee on Climate Change (2018); https://www.theccc.org.uk/wp-content/uploads/2018/11/Biomass-in-a-low-carbon-economy-CCC-2018.pdf 63 Societal Benefits of Biofuels in Europe; ETIP Bioenergy; https://www.etipbioenergy.eu/sustainability/societal-benefits-of-biofuels 64 Fossil vs. Biogenic CO2 emissions; IEA Bioenergy; https://www.ieabioenergy.com/iea-publications/faq/woodybiomass/biogenic-co2/ 65 Methane: The other important greenhouse gas; Environmental Defence Fund; https://www.edf.org/climate/methane-other-important-greenhouse-gas#:~:text=In%20the%20first%20two%20decades,more%20potent%20than%20carbon%20dioxide.&text=While%20methane%20doesn't%20linger,how%20effectively%20it%20absorbs%20heat. 66 UK retail launches target of net zero emissions by 2040; The Grocer (2020); https://www.thegrocer.co.uk/stores/uk-retail-launches-target-of-net-zero-emissions-by-2040/650181.article 67 Morrison’s makes 2030 net zero farm produce pledge; James Sillars: Sky News (2021); https://news.sky.com/story/morrisons-ploughs-2030-net-zero-farm-produce-pledge-12239733
26
installations will be based on the original grandfathered tariffs, uprated by inflation. It is unclear from the
consultation document as to the rationale for the differing compensation rates. It is also worth
considering that if the scheme is terminated for all participants then this could generate an additional
120,557 tonnes of long-carbon cycle emissions per annum, resulting in 1.8m tonnes over next 15 years.
27
5. How has DfE developed the consultation process?
28
5. How has DfE developed
the consultation
process?
5.1 Introduction
This section of the report will focus on the consultation document proposed by the Department. More
specifically this section/chapter of the report will examine how the options proposed for the ‘future’ for
the Non-Domestic RHI scheme have been arrived at. The four options proposed for the future of the
Non-Domestic RHI scheme in the Departmental Consultation document are;
- Option 1: Scheme remains operational for current participants with present tariffs for all
technologies (status quo);
- Option 2: Scheme remains operational for current participants with all tariffs subject to review
and adjustment as necessary;
- Option 3: Scheme closure with no further payments made to participants; or
- Option 4: Scheme closure with compensation paid to legitimate current participants.
5.2 Option 1 – ‘Status Quo’
Under Option 1, the Department propose the continued usage of 2019 tariffs. While this Option is
referred to as the ‘status quo’, the 2019 tariff proposals are subject to judicial review, with hearings to
begin in April 2021. The use of 2019 tariffs as the ‘status quo’ seems inappropriate, given their
challenged status. ‘Status quo’ tariffs might be more accurately defined as the tariffs that are
operational, or more fairly based on the original 2012 ‘grandfathered tariffs’.
Under this option all participants would be subject to ongoing obligations and regulations as set out in
the 2019 tariff act. However, these tariffs will differ to the tariff agreements entered into based on the
2012 tariff. To show the current tariff rate that would have been in place if the 2012 tariffs remained
applicable, we have increased the original 2012 tariff rates by inflation (RPI), as per the 2012 legislation.
Table 3 below shows the tariff rates in 2012 and 2020 (estimated) for all technologies.
29
Table 3: 2012 Tariff Rates by Technology, 2012 & estimated 2020
Technology Capacity Tariff Rate (p/Kwh)
2012 2020
Small Biomass <20Kwth 6.2 7.5
Medium Biomass >=20Kwth and <100Kwth 5.9 7.1
Large Biomass >=100Kwth and <1,000Kwth 1.5 1.8 Small Heat Pumps <20Kwth 8.4 10.2 Medium Heat Pumps >=20Kwth and <100Kwth 4.3 5.2 Large Heat Pumps >=100Kwth 1.3 1.6 All Solar Collectors <200Kwth 8.5 10.3 Biomethane and Biogas Combustion <200Kwth 3.0 3.6
Source: The Renewable Heat Incentive Scheme Regulations (Northern Ireland) 2012; Legislation.gov (2012);
https://www.legislation.gov.uk/nisr/2012/396/schedule/3/made], ONS (RPI All Items: Percentage change over 12 months: Jan
1987=100) & Grant Thornton Analysis
The Northern Ireland (Regional Rates & Energy) Act 2019 delivered a reduction in tariff rates and thus
RHI Non-Domestic Tariff Payments. The effect of the 2019 changes relative to the position in 2017 was
highlighted in a House of Commons report which reported that “hundreds of scheme participants will
see their RHI payments reduced from approximately £18,000 per year to a maximum of £2,200 per
year68”. This represents a decrease in incentive payments of almost 88% per annum.
Table 4 shows the tariff rates proposed under the 2019 tariff change (these tariff changes having been
informed by the Ricardo analysis)69. Table5 shows the tariff rates proposed through the Cornwall
Insights work, with these proposed to have been implemented from 1 April 2020. As yet, these tariff
rates have not been implemented. It is important to note that the Cornwall analysis was only examining
the ongoing barrier and fuel costs to participants, and so they did not consider a review of any capital
costs70”.
Table 4: Tariffs for Small and Medium Biomass Installations from the NI (Regional Rates &
Energy) Act 2019, NI
Technology Capacity Tariff Rate (p/Kwh)
Tier 1 Tier 2
Small Biomass <20Kwth 7.4 1.8
Medium Biomass (lower capacity) >=20Kwth and <100Kwth 1.7
Medium Biomass (upper capacity) >=100Kwth and <200Kwth 1.2 Source: Northern Ireland (Regional Rates and Energy) Act 2019; Legislation.gov (2019);
https://www.legislation.gov.uk/ukpga/2019/13/schedule/enacted
68 Changes to the Northern Ireland Renewable Heat Incentive Scheme Payments; House of Commons (2019); https://publications.parliament.uk/pa/cm201719/cmselect/cmniaf/2070/2070.pdf 69 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf 70 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf
30
Table 5: Medium Biomass Boiler Tariffs from 1 April 2020 (Not Currently Implemented)
Source: Department for the Economy [Non- Domestic Renewable Heat Incentive Scheme: 2020 RHI Tariff Review Consultation Report; Department for the Economy (2021); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Annex-B-rhi-tariff-review-consultation-report.pdf] Note: The full breakdown of tariff rates by technology can be seen on Appendix 1
The Department stated in submissions for the House of Commons report that the need for the cut in
tariff rates was to ensure compliance with EU State aid regulations. The Scheme had been granted
State aid approval based upon a rate of return of 12%; however the Department stated that, as part of
the Ricardo tariffs,71 some participants have received far in excess of this figure72. As such, this
prompted the review into tariff rates and proposals for the 2019 Act. This review was undertaken by
Cornwall Insights who did not re-examine the capital costs. The reason given for this was highlighted
as part of a letter exchange between the Department and a participant, “Examination of capital costs
did not form part of Cornwall Insight’s tariff review, having previously been considered as part of
Ricardo’s work73”. However, as mentioned, the Ricardo analysis focussed on the installation cost of
boilers (£35k), and not on the significant associated capital costs. The full costs of installation would
have been available via the Department’s auditing process and should have been available for the
Cornwall review.
The House of Common’s NI Affairs Select Committee Inquiry honed in on this 12% rate of return and
several other points of concern, noting ‘The matter of what the European Commission approved in 2012
is a crucial one. The Department has maintained that its hands were tied and that it had to reduce
payments in order to comply with the Commission’s state aid approval. We acknowledge that the
Department has had to balance the reduction in payments with the risk of further detrimental action by
the Commission. The EU Commission stated, in December 2018, that there was insufficient evidence
at that stage to approve a higher rate of return. If there is now scope to challenge the Commission on
its interpretation and offer further evidence then we encourage the Department to do so…A major
concern for scheme participants has been that the Department’s methodology for calculating the new
NI RHI tariffs is incorrect... In calculating the new tariffs, the Department for the Economy has focused
on a narrow range of costs to participants, such as the cost of a boiler and some associated costs. The
Department has also used kerosene as the only counterfactual for fuel costs. The NI RHI scheme was,
from the outset, different to the GB scheme and to the proposed RoI scheme. However, we are deeply
concerned about the stark difference in payments over the lifetime of the GB and NI schemes… We
are deeply concerned by the differing payments between GB, NI and RoI Renewable Heat schemes.
The contrast between the Northern Ireland and Republic of Ireland schemes may prove to be the most
damaging… It may be, however, that the costs involved in the Irish scheme are correct, which would
suggest that there are costs within the Northern Ireland scheme that need revisiting. In any event, this
must be investigated as a matter of urgency.’
71 Review of the biomass tariff structure for the Northern Ireland RHI Scheme; Ricardo Energy & Environment (2018); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/9.NIRHI-Biomass-Tariff-Review-Final-Report-22-May-2018-FINAL-for-publication.pdf 72 Changes to the Northern Ireland Renewable Heat Incentive Scheme Payments; House of Commons (2019); https://publications.parliament.uk/pa/cm201719/cmselect/cmniaf/2070/2070.pdf 73 Consultation on Future of Non-Domestic Renewable Heat Incentive (RHI) Scheme; Letter between Department and Participant (March 2021)
31
Findings by a report commissioned by DfE undertaken by Buglass Energy Advisory found through
consultation with participants that the 2019 review will have a devastating effect on their current
business potential, with the reduced 2019 tariff receipts being lower than the incremental costs reported
(by respondents) to operate and fuel biomass boilers74. Some of the respondents/consultees illustrated
the difference in their cash flow as a result in the 2019 cut, with some commenting that while the 2017
cut was “painful” it was “survivable” (the implication being that the 2019 cut was not “survivable”)75.
5.3 Option 2 – Cornwall and Department Adjustments
Option 2 proposes the continuation of the Non-Domestic RHI Scheme with the implementation of
different tariffs, as illustrated in Table 4a below. Tariff and incentive payments would continue until 2036.
For context, Table 4b presents the tariffs available through the GB scheme.
Table 6a: Medium Biomass Boilers 2021 Proposed Tariffs, NI
Source: Department for the Economy [Non- Domestic Renewable Heat Incentive Scheme: 2020 RHI Tariff Review
Consultation Report; Department for the Economy (2021); https://www.economy-
ni.gov.uk/sites/default/files/consultations/economy/Annex-B-rhi-tariff-review-consultation-report.pdf]
Table 7b: Tariff Rates (2020/21) GB Scheme Small Biomass (<200kWth)
Technology Accreditation Date Tariff Rate (p/Kwh)
Tier 1 Tier 2
Small Biomass (<200Kwth)
Prior to 1 July 2014 10.26 2.69
Between 1 July and 30 September 2014 9.79 2.59
Between 1 October and 31 December 2014 8.87 2.33
Between 1 January and 31 March 2015 7.91 2.09
Between 1 April and 30 June 2015 6.73 1.80
Between 1 July and 30 September 2015 5.05 1.34
Between 1 October and 31 December 2015 4.80 1.28
Between 1 January and 31 March 2016 4.32 1.14
Between 1 April and 30 June 2016 3.94 1.05
Between 1 July and 30 September 2016 3.55 0.94
Between 1 October and 31 December 2016 3.37 0.89
Between 1 January 2017 and 31 March 2017 3.21 0.85
Between 1 April and 30 June 2017 3.06 0.80
Between 1 July and 19 September 2017 2.91 0.76
On or after 20 September 2017 3.17 2.22 Source: Ofgem Non-Domestic RHI tariff table; https://www.ofgem.gov.uk/publications-and-updates/non-domestic-rhi-tariff-table
74 Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research. 75 Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research.
32
As can be seen from Option 1 and 2, the tariff rates vary, with the Tier 1 tariff for a lower capacity
medium boiler having increased by 1.1p per KwH. The reason for this more generous tariff was noted
by the Department as being due to a significant decrease in oil prices over the previous year. In
adjusting the calculation, the Department used the time period July 2019 to June 2020 whereas
Cornwall used the period January to December 201976.
Data produced by the OBR which tracks the cost of a barrel of oil suggests the cost of oil fell by 34.3%77
in 2020. In comparison, when using the cost per 1,000 litres as part of Price Inflation series produced
by the ONS, the cost of heating oil per 1,000 litres fell by 32.5% between July 2019 and June 202078.
However, it should be noted that cost of oil used to calculate the change relates to domestic costs rather
than non-domestic costs. This point will be examined in more detail in the following section.
5.4 Option 3 – Permanent Closure of Scheme
Option 3 proposes the immediate closure of the scheme without any compensation. This option has
been proposed by the Department based upon the commitment within the New Decade New Approach
document that outlined the aim to close the scheme and replace it with a suitable alternative.
“RHI will be closed down and replaced by a scheme that effectively cuts
carbon emissions79”
- New Decade New Approach
In this option, current participants will no longer be obligated to follow the regulations, etc. set out by
the scheme. However, under this option no current participant will receive any further incentive
payments. In addition, no current participant will receive a compensatory figure for all the outlays the
participants have made regarding to capital, ongoing or fuel costs. We believe it is important to be more
explicit in terminology. For example, the GB scheme has closed but participants will continue to receive
payments for 20 years. The option described here is termination.
This is deemed the most ‘unlikely’ scenario to be selected given the wider impacts around business
sustainability, redundancies and supply chain impacts. This Option would further impact participants
that are currently facing ‘issues’ from the 2019 tariff cut as highlighted as part of the Buglass Economic
Advisory report which highlights anecdotal evidence of closure (in part or full) of businesses, and
redundancy of some staff as a result of the 2019 tariff cut80. This proposed Option would further
negatively impact these businesses.
5.5 Option 4 – Permanent Closure of Scheme with
Compensation
Option 4 proposes the immediate closure of the Non-Domestic RHI Scheme with compensation paid to
current participants. This Option, like Option 3, satisfies the aim within the New Decade New Approach
Document to close the scheme and replace it with another that will “effectively cut carbon emissions”.
It should be noted that this is the Department’s and the Northern Ireland Executive’s preferred Option
for the future of the Non-Domestic RHI Scheme. The proposed ‘buy-out’ costs for each boiler size can
76 Non- Domestic Renewable Heat Incentive Scheme: 2020 RHI Tariff Review Consultation Report; Department for the Economy (2021); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Annex-B-rhi-tariff-review-consultation-report.pdf 77 Economic and Fiscal Outlook – March 2021; Office for Budget Responsibility (2021); https://obr.uk/efo/economic-and-fiscal-outlook-march-2021/ 78 RPI: Ave price - Heating oil, per 1000 litres; Office for National Statistics (January 2021); https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/kj5u/mm23 79 New Decade New Approach; UK & Irish Governments (2020); https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/856998/2020-01-08_a_new_decade__a_new_approach.pdf 80 Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research.
33
be seen in Table 8 below. It should be considered however, under the compensation schedule for
boilers accredited in the financial year 2015/16, that there is a distinct difference in the compensation
received between a <200Kwh boiler (£40,500) and a boiler that is 200kwh and above (at least
£111,500). The main driver of this difference is the application of RPI inflation rates to tariffs for boilers
over 199Kwh as per the 2012 regulations. 199Kwh and 99Kwh boilers have seen their tariffs reviewed
based upon costs, etc. as outlined in both Ricardo and Cornwall. This inconsistency, or discrepancy, in
the compensation methodology across systems should be addressed for fairness and equity.
Table 8: Proposed Closure Compensation Payments, NI
Source: Department for the Economy [Non- Domestic Renewable Heat Incentive Scheme: 2020 RHI Tariff Review
Consultation Report; Department for the Economy (2021); https://www.economy-
ni.gov.uk/sites/default/files/consultations/economy/Annex-B-rhi-tariff-review-consultation-report.pdf]
Only boilers that have been ‘fully accredited, audited and compliant’ to the scheme will be eligible for
compensation. The Department estimate there are 1,991 accredited installations across the 2012 to
2017 period compared to total installations of 2,12881 across NI as at 31 March 2019. 2,031 of these
are in receipt of payment currently. Current accredited participants will receive a lump sum based upon
payments for the next 12 to 15 years, with a discount rate of 15%. However, it should be noted that in
both the Cornwall & Ricardo analyses a discount rate of 12% was considered appropriate (such that
the inclusion of 15% may be considered a deviation). The difference in discount rate applied is
particularly pertinent given that the initial EU State Aid agreement made for the 2012 legislation states
that a 12% discount rate will be applied to the calculations as this is noted by the Commission as being
rate applied in the mainland UK scheme82.
Furthermore, there is evidence to suggest that use of a discount rate of 15% is a significant departure
from that typically used on renewable energy projects. A report conducted by Grant Thornton83 in 2019
showed various discount rates applied across different jurisdictions. The report found that biomass
projects in the UK apply a discount rate of 8% if unlevered and 10% if levered, which is significantly
81 NI Non-Domestic RHI Scheme Analysis 31 March 2019; Department for the Economy (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/statutory-information-non-domestic-rhi-analysis.pdf 82 State aid SA.34140 (2012/N) – United Kingdom Renewable Heat Incentive (RHI) scheme (Northern Ireland); European Commission (2012); https://ec.europa.eu/competition/state_aid/cases/244651/244651_1375577_58_1.pdf 83 Renewable energy discount rate survey results – 2018; A Grant Thornton and Clean Energy Pipeline initiative (2019);
https://www.grantthornton.ie/globalassets/1.-member-firms/ireland/insights/publications/grant-thornton---renewable-energy.pdf
34
less than the proposed 15%. The results for Ireland were similar, coming in at 9% unlevered and 11%
levered.
Figure 6: Discount rates applied to Renewable Energy Projects (Levered & Unlevered), UK
Source: Renewable energy discount rate survey results – 2018; A Grant Thornton and Clean Energy Pipeline initiative (2019);
https://www.grantthornton.ie/globalassets/1.-member-firms/ireland/insights/publications/grant-thornton---renewable-energy.pdf
Should the scheme be terminated, the methodology for calculating lump sum compensation varies
across technologies. The differences are presented in Table 8, which shows that compensation will be
£40,500 for a medium biomass boiler and £111,500 for a large biomass boiler. The large biomass boiler
is modelled as receiving compensation based upon the original 2012 tariffs, while the medium
compensation is based on 2019 tariffs. This finding evidences an unnecessary inconsistency in
methodology applied across technologies. All technologies should have their compensation based on
consistent and fair calculations.
Additionally, our analysis suggests that the 15% discount rate is excessive when compared to real world
applications. As per Figure 6, discount rates more typically average between 8 to 10% depending on
the project being levered or not.
35
6. Do the assumptions behind DfE’s options hold?
36
6. Do the assumptions
behind DfE’s options
hold?
6.1 Introduction
This section will review and comment upon the key assumptions that underpin the calculations
associated with the Options. Option 3 is not considered here, as it proposes the immediate closure of
the scheme without any compensation.
6.2 Capital Cost Inputs
Under the 2012 scheme, capital costs were accounted for as part of the tariff payments, with these
being considered as the marginal difference between kerosene boiler installation and biomass boiler
installation. The original CEPA report estimated these annualised costs (over 20 years) to be £3,636
for biomass and £634 for kerosene. This £3,002 difference fed into an annualised tariff of 4.008 pence
per Kwh84.
Capital costs were re-examined by Ricardo in the 2017 review (in total Ricardo reviewed 63
installations). These considered only ‘direct costs’, i.e. those costs which are attributable to the core
installation as eligible, excluding any costs related to heat distribution work, heat emitters, civil works,
etc. As such, the Ricardo analysis presented the median capital installation cost of a 99Kwh boiler as
£34,028.
Ricardo’s assessment, however, did include some costs that are not directly attributable to the purchase
and construction of the physical plant such as planning fees.
Ricardo costed these ‘upfront barrier costs’ including development hassle, regulatory approvals,
administration and metering report & schematics at £987.08 for a boiler between 20 and 200KwH. As
these costs were considered as part of the 2017 review, they were not considered as part of the 2019
review undertaken by Cornwall, which stated, as “capital costs have already been invested, the fixed
components of the tariff relating to these elements have not been assessed. Within this report, only the
variable components are considered85”. Upfront barrier costs were not considered in the 2021
consultation..
84 Review of the biomass tariff structure for the Northern Ireland RHI Scheme; Ricardo Energy & Environment (2018); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/9.NIRHI-Biomass-Tariff-Review-Final-Report-22-May-2018-FINAL-for-publication.pdf 85 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf
37
For clarity, the 2021 tariffs are being based on costs from 2016 which are now more than 5 years out
of date and exclude a period which has seen economic shock and uncertainty emerge through Covid-
19 and Brexit. It would be logical that any new tariff should be representative of current prices and not
related to 2016 prices. For context, the cost of steel has seen significant movement with the ONS
Producer Price Inflation series showing the cost of iron and steel86 for Domestic Markets growing by
73.2% between February 2016 and February 2021. As such it would seem prudent to examine all
relevant costs to reflect the current position.
Further, initial capital costs borne by boiler owners appear to be far in excess of those considered by
Ricardo/Cornwall. Our analysis, based upon invoices received by accredited installers and applicants
relating to over 100 boilers, shows us that the boiler installation is only a part of the overall capital costs
of installation. The ‘all in’ installation cost of a boiler, inclusive of all costs associated with installation
amounted to on average £47,21387 excluding VAT for a 99KwH boilers. While the installation cost of
the 99KwH boiler itself amounted to £35,000, the £47,213 includes decommissioning costs of previously
used Oil/LPG boilers and various other elements such as electricity connection and sub-contractor
costs, which are otherwise not included as part of a kerosene installation. Construction costs for a
concrete base, container unit and a pellet bin are also included. It is our view that the initial capital costs
estimated in the 2017 review significantly under-represented, to the detriment of owners, the costs to
install and operate a biomass boiler under the RHI scheme.
A further important point to note is that the consideration of capital costs and upfront barrier costs in
tariff calculation is considered on a marginal difference basis i.e. the difference between the cost of
installation of a biomass and a kerosene boiler. While this is a feature of the NI scheme, it is not a
distinct feature of neighbouring schemes in Ireland or GB. In Ireland, full capital costs are included, with
one reason for this cited as being the ‘urgent need’ for action in order to meet 2020 RES-H targets88.
Similarly, the GB scheme includes the full capital cost of a renewable boiler installation, as stated by
Element Energy in conjunction with NERA Consulting. The average CAPEX costs for Commercial
boilers between 107Kw and 907Kw (the equivalent to a 99Kw and 1Mw boiler under the NI scheme)
are set out within a report by Element Energy and NERA as being between £331/Kw (minimum) for a
999Kwh boiler and £600/Kw (maximum) relating to a 107Kwh boiler89. Under the NI scheme, the
Cornwall report notes the median CAPEX for a 99Kw boiler stands at £362/Kw and £241/Kw for a 199
Kw boiler, with these costs including the difference between biomass and counterfactual kerosene
boilers. As the Department (in the 2021 consultation) are only updating the cost of fuels, given the fall
in oil prices as a result of Covid and lockdown, the CAPEX costs remain as outlined as part of the
Cornwall analysis. However, it is our understanding that Cornwall were instructed not to review CAPEX
costs but rather to focus on variable barrier costs. CAPEX costs therefore remained similar to the
Ricardo costs, which we believe underestimate the true capital cost.90.
We draw further rationale for the inclusion of ‘all in costs’ from EU information and notices to agencies,
bodies, etc. which stated that the inclusion of capital costs that have a direct impact on environmental
protection should be included in any calculation of ‘operating or capital cost’. Specifically, the
information note91 defines operating costs to mean “for the purposes of calculating eligible costs, in
particular additional production costs such as maintenance costs flowing from the extra investment for
environmental protection.” As such the inclusion of all installation infrastructure is critical for boiler
performance and thus environmental performance.
86 Basic Iron and Steel and of Ferro-Alloys for Domestic Market; ONS (2021); https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/ew6t/mm22 87 It should be noted that this figure has been calculated net of interest. However, many of the installers had taken bank loans, etc. out in order to fund the installation of their biomass boiler/s. 88 Delivering a Renewable Heat Incentive for the Republic of Ireland; IREBEA (2015); http://www.irbea.org/wp-content/uploads/2016/03/IrBEA-Renewable-Heat-Incentive-Report-final.pdf 89 Element Energy & NERA Consulting; Achieving Deployment of Renewable Heat (2011) 90 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf 91 Official Journal of the European Union: Information and Notices; European Union (2014); https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:C:2014:200:FULL&from=EN
38
6.3 Operating Cost Inputs
Similar to capital costs, the calculation and inclusion of various elements in operating costs have been
disputed, with specific reference to these being made within consultation responses. A key area of
dispute with Ricardo’s work appears to be that there is no cost consideration for meter readings. We
understand that many participants sub-contract meter reading submission to Ofgem, adding an
additional cost that they would have otherwise not had, if they weren’t on the Non-Domestic RHI
scheme. Nor is the administration required for audit and compliance included in any tariff calculations.
This matter was raised during the initial 2017 tariff review consultation phase.
The Ricardo review cited the inclusion of ‘ongoing barrier costs’ which they attributed to service and
maintenance, fuel delivery hassle (to which they attributed no cost), ash clearance/cleaning and
additional insurance premiums – for the increased insurance for biomass boilers over and above that
of fossil fuel boiler insurance. Ricardo estimated that the annual cost of service and maintenance
amounted to £735 for a 20 to 99Kwh biomass boiler and £600 for a 100 to 199KwH biomass boiler,
while the remaining costs of ash cleaning and additional insurance premiums amounted to £468.96 and
£150 respectively92.
However, unlike for capital costs, the updated 2019 tariff review conducted by Cornwall has made
adjustments to ‘ongoing barrier costs’. It should be considered that following a review of ongoing barrier
costs it was deemed appropriate to retain the costs analysed by Ricardo. Under the Cornwall analysis
the median service costs were estimated to have increased since the 2017 review by between 6% (20
to 99KwH) and 19% (100 to 199KwH) depending on boiler type, with costs now being estimated at £780
and £711 per annum. These figures were based on data provided to Cornwall by the DfE. Additional
insurance premiums and ash clearing costs had also been assumed to increase since the 2017 report,
by 7% (£159.96) and 5% (£490.36) respectively.
As the insurance premium cost is a commercially sensitive issue between the participant and their
respective insurance provider, Grant Thornton cannot comment on the appropriateness of this cost and
so have accepted the cost proposed by Cornwall.
However, with respect to the provision of ash clearing estimates, Ricardo and Cornwall apply an hourly
rate sourced from the NI Annual Survey of Hours and Earnings. While the hourly estimate will include
the cost of taxes, national insurance contributions, etc., it will not include the wider benefits that an
employee will receive from employers via ‘contributions-in-kind’ and “rates of pay whose pay was
unaffected by absence during the survey period and relates to gross pay before tax, National Insurance
or other deductions, and excludes payments in kind93”.
In addition, the Ricardo and Cornwall reports note that ‘hassle costs’ or ongoing barrier costs have been
linked to a 15% load factor: “Cornwall Insight have linked the hassle costs to the difference between
the output based on a 15% standard load factor and the actual median annual output to reflect how the
costs will vary with the actual load factor94”. However, additional insurance premiums and hourly rates
are unrelated to load factors and will continue to be borne regardless of load. The full cost of insurance
and hourly cost of cleaning should therefore be factored into the calculation of tariffs.
Additionally, we consider that “hassle costs” are not capturing all of the additional ‘hassle’ needed to
maintain a biomass boiler. For example, as part of the regulation and ongoing administration of the
scheme, participants are expected to undertake meter readings and retain fuel invoices for submission
and review by the administering body. These costs were not taken into account as part of the initial
costing for the 2017 review. Ricardo noted that “we have difficulties with the inclusion in incentive
payments of some compensation for participants’ time in taking and submitting heat meter readings,
92 Review of the biomass tariff structure for the Northern Ireland RHI Scheme; Ricardo Energy & Environment (2018); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/9.NIRHI-Biomass-Tariff-Review-Final-Report-22-May-2018-FINAL-for-publication.pdf 93 Northern Ireland Annual Survey of Hours and Earnings; NISRA (2017); https://www.nisra.gov.uk/sites/nisra.gov.uk/files/publications/4xu-NI-ASHE-Bulletin-2017.PDF 94 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf
39
since this is something that should be carried out for any energy plant as part of good energy
management practice95”. We contest that these readings and submission or ‘additional admin’ time
would occur if boiler owners had remained on their previous heating fuel system. As such, the inclusion
of a potential opportunity cost should be considered. We do not accept that the preparation time and
administration time related to audits is immaterial, with the Buglass Energy Advisory report noting
feedback which “massively underestimated time spent on administration for the scheme96”.
Comparing the Irish scheme to that of the NI Scheme highlights that the Irish scheme considers many
of the areas which the DfE scheme does not. For example, the Irish scheme considers administration
time under ‘relevant hidden costs’. The Irish scheme also includes the provision of ground space
compensation, which is included as an opportunity cost for the space that would have otherwise been
used for storage or operations but has now been used as a platform for a biomass boiler. The
comparative difference between the DfE and Irish scheme is highlighted as part of Sam McBride’s
investigation into the RHI Scandal, which stated;
“In getting to its 2019 figure, the Department stripped out multiple
expenses involved in installing RHI boilers. Yet the Republic of Ireland
scheme, which also got state aid approval, allowed for all sorts of other
costs, […], the concrete on which it sat, building in which its housed, a
pellet bin97”
‘Burned’ (Sam McBride)
Sam McBride makes specific reference in the above to the provision of a pellet bin being included as
part of the ROI scheme, but not considered as part of the DfE NI Scheme. We understand that the NI
tariff rates include for bulk purchase of wood pellets at a £183.27 per tonne yet do not consider any
allowance for where this scale of pellet delivery would be stored. A pellet bin – which ranges from
£3,000 to £4,000 – should be included in any calculation. A logical alternative to allowing for a pellet
bin would be to eschew bulk purchases in favour of regular small scale purchases which would not
require bespoke storage. However, small purchases are less efficient (e.g. domestic pricing, akin to this
scale, would cost approximately £240 per tonne) and would impose significantly higher hassle costs
compared to a bulk bin and automatic delivery to the boiler.
6.4 Rate of Return or Internal Rate of Return?
The rate of return (RoR) or internal rate of return (IRR) has been an area of contention in the operation
of the RHI scheme. Initially, the RHI scheme aimed to provide a rate of return on capital of 12% for
participants, with this receiving EU state aid approval. While the initial 12% rate of return was based
upon an approach communicated to the EU for State Aid approval,98 a new calculation was applied in
order to maintain a 12% rate of return in the prospective 2019 tariff calculation. This calculation applied
a different methodology in comparison to the 2012/17 calculations, with “wholly different counterfactual
fuels used”. As pointed out in a letter from RHANI to the EU Commission, this change in methodology
represents a change in the scheme for which the Department should seek fresh approval99.
For context, it is worth noting that an independent report produced as part of the GB RHI scheme stated
the necessary rate of return to incentivise the uptake of renewable heat ranges between 8% and 22%.
95 Review of the biomass tariff structure for the Northern Ireland RHI Scheme; Ricardo Energy & Environment (2018); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/9.NIRHI-Biomass-Tariff-Review-Final-Report-22-May-2018-FINAL-for-publication.pdf 96 Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research. 97 Burned Page 313; Sam McBride (2019); Merrion Press; 98 State aid SA.34140 (2012/N) – United Kingdom Renewable Heat Incentive (RHI) scheme (Northern Ireland); European Commission (2012); https://ec.europa.eu/competition/state_aid/cases/244651/244651_1375577_58_1.pdf 99 RHANI Letter to European Commission; Reference: RHANI/3/EU/SA
40
12% was intended to be an average100. It should be considered that the scheme received the EU State
Aid approval on the basis of the 12% average rate of return. However, 12% now appears to have
become a maximum permissible in DfE’s considerations. As noted in the most recent consultation
“many small and medium biomass installations continued to receive internal rates of return significantly
above the 12% target101”.
The initial calculation of tariffs for the NI scheme was estimated to give an internal rate of return of 12%
for applicants based upon cost of capital which included interest rates and any capital repayments
required. In the IRR methodology undertaken as part of the 2017 and 2019 reviews, the 12% IRR was
included as a discount rate and was not based upon cost of capital, but on all costs associated, bearing
in mind the capital included only amounted to the boiler installation of £35,000. The re-estimations of
tariffs, which further stripped out costs (as highlighted above) were also shown to have a 12% rate of
return on investment. This point was highlighted as part of Sam McBride’s investigation in to RHI;
“its initial scheme – offering payments of up to £56,000 – represented a
12% return. It then argued that the 2017 cuts – offering payments up to
£13,000 – offered 12% return. So there was scepticism about the claim
that the 2019 rates – offering payments of little over £2,000 a year –
somehow were the only way to offer a 12% return102”
‘Burned’ (Sam McBride)
Analysis conducted by Buglass Energy Advisory found that many participants had experienced a
negative rate of return as a result of the tariff reviews. Through the report’s analysis of respondents’
financial information, it was found that respondents had seen their cash flows fall as a result of the tariff
review. Table 9, which presents a case study of a boiler owner’s cash flow position to 2036 under
previous and proposed tariffs, shows a significant worsening. A 12% rate of return appears out of reach
in this case. This loss making and negative rate of return will inevitably make it more appealing to revert
back to the use of LPG or other fossil fuels dampening any environmental impacts saved from using
biomass boilers.
100 State aid SA.34140 (2012/N) – United Kingdom Renewable Heat Incentive (RHI) scheme (Northern Ireland); EU Commission (2012); https://ec.europa.eu/competition/state_aid/cases/244651/244651_1375577_58_1.pdf 101 Non- Domestic Renewable Heat Incentive Scheme: 2020 RHI Tariff Review Consultation Report; Department for the Economy (2021); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Annex-B-rhi-tariff-review-consultation-report.pdf 102 Burned Page 313; Sam McBride (2019); Merrion Press;
41
Table 9: Respondent Cash flow based upon 2017 & 2019 Tariff Changes
2017-18 2018-19 2019-25 2025-36
RHI Income £12,313 £13,210 £2,200 £2,200
Wood pellets incremental cost vs. LPG
-£5,237 -£4,668 -£2,048 -£2,048
Maintenance incremental costs vs. LPG
-£851 -£851 -£851 -£851
Electricity costs incremental cost vs. LPG
-£1,474 -£1,314 -£566 -£566
Debt service -£6,792 -£6,792 -£6,792 £0
Net Cashflow per annum -£2,042 -£415 -£8,057 -£1,265
Source: Northern Ireland Non-Domestic Renewable Heat Incentive: Research into Hardship; Buglass Energy Advisory (2020); https://www.economy-ni.gov.uk/sites/default/files/publications/economy/buglass-report-rhi-non-domestic-hardship-research. Note: 2017-19 represent the RHI income achieved under the 2017 tariff. 2019-36 represent the RHI income and net cashflow
position under the proposed 2019 tariff change.
Additional Note: Post 2025 the 10-year maturity loan have been repaid
To illustrate the impact that changing the tariff rates has had on the rates of return experienced by
participants, we conducted analysis based upon data provided by RHANI members who had previously
examined the rate of return. The analysis can be seen in Table 10 below. Note that the capital costs
presented in Table 10 are net of the counterfactual.
As can be seen from the note to Table 10, the calculations surrounding the IRR have been made on a
post-tax basis. This approach is endorsed in EU Commission communication103”. Without knowledge
of the tax status of boiler owners (i.e. whether payments are made to an individual or a business) we
have assumed that all positive cash flow equates to profit, taxed at a 19% Corporation Tax rate.
It is not clear to us from the analysis conducted by Cornwall or Ricardo as to whether the IRR of 12%
included or excluded tax. This could have a material impact on returns.
103 State Aid SA.38967 (2014/NN-2) – Greece – National operating aid scheme for renewable energy sources and highly efficient combined heat and power installations; European Commission (2018); https://ec.europa.eu/competition/state_aid/cases/256169/256169_2027092_202_2.pdf
42
Table 10: IRR by Boiler Type 2012 to 2021 Tariff Rates
Tariff Rates by Introduction
Boiler Size
2012 Tariffs 2017 Tariffs 2019 Tariffs 2021 Tariffs
99KwH
Capital Cost Input (including interest 4% APR)
£51,168 £51,168 £51,168 £51,168
Annual Net Cash Flow
£12,944 £4,422 -£3,516 -£899
IRR (%) 25.01% 5.89% - -
199KwH
Capital Cost Input £60,909 £60,909 £60,909 £60,909
Annual Net Cash Flow
£16,738 £9,542 -£3,879 -£1,533
IRR (%) 27.26% 14.65% - -
Source: RHANI, RHANI Member Analysis & Grant Thornton Analysis
Note: In accordance with EU State Aid Regulations IRR is to be calculated post-tax104. With heat usage based upon annum
output of 320,000KwH as stated in DfE oral evident given to NIAC. In addition, all load factors have been set at 15% as per the
reviews and Cornwall and Ricardo analysis
Additional Note: Grant Thornton has assumed that all net positive cash flow in any given year will be subject to 19%
Corporation Tax rate (not all RHI applicants will be subject to Corporation Tax; some will instead be subject to a higher level of
Income Tax)105.
As illustrated above it is unlikely that proposed tariffs will deliver a 12% rate of return. However, if the
scheme is to close to all current participants who would be released from any obligations under the
scheme and compensated, the consultation document indicates compensation will be discounted at a
rate of 15%106. The consultation document further notes that the calculation of compensation will be
based upon the methodology used to calculate the tariffs, with the Department stating;
“Proposed compensation payments are based on the future tariff
potential for the time remaining on the Scheme. They are based on
installations with specific reference capacities, taking account of
appropriate load factors and tariffs specific to each technology,
allowance for inflation, and are discounted in line with recognised
economic principles to take account of the payment being received
earlier than would otherwise have been expected.”
-Department for the Economy107
104 State Aid SA.38967 (2014/NN-2) – Greece – National operating aid scheme for renewable energy sources and highly efficient combined heat and power installations; European Commission (2018); https://ec.europa.eu/competition/state_aid/cases/256169/256169_2027092_202_2.pdf 105 Corporation Tax charge and rates from 1 April 2022 and Small Profits Rate and Marginal Relief from 1 April 2023; GOV.UK (2021); https://www.gov.uk/government/publications/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023#:~:text=Corporation%20Tax%20charge%20and%20main,year%20beginning%201%20April%202023 106 Non-Domestic Renewable Heat Incentive Scheme – Future of the Scheme Consultation Document: Annex A Calculation of Non-Domestic RHI Scheme Early Closure Compensation Payment – Proposed Approach; Department for the Economy (2021); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Annex-A-calculation-nondom-rhi-early-closure-compensation-payments-proposed%20approach.pdf 107 Non- Domestic Renewable Heat Incentive Scheme: 2020 RHI Tariff Review Consultation Report; Department for the Economy (2021); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Annex-B-rhi-tariff-review-consultation-report.pdf
43
The only difference between the continuation of the scheme and the effective closure of the scheme
with immediate effect is the discount factor used. The Cornwall Insight paper108 highlights the discount
rate applied of 12%, but under the compensation package a discount rate of 15% is considered
“reasonable”. We have seen no clear rationale for this, other than to further reduce payments that
participants are expected to receive. This rate of return does not align with our experience, evidenced
in the findings of the Grant Thornton 2019 report on discount rates applied to renewable projects, the
results of which are presented in Figure 10. That report indicates that the typical discount rate applied
to biomass investment projects is between 8% (unlevered) and 10% (leveraged). A15% discount rate
appears out of alignment with these findings. However, maintaining the long established 12% return
rate, a rate which received EU state aid clearance, would appear reasonable, albeit that the Department
should consider reviewing the discount rates methodology.
6.5 Counterfactual Suitability
A significant element that applies to the calculation of both tariff rates and any compensation figure is
the inclusion of appropriate counterfactual fuel prices. Under the Non-Domestic Scheme, the
development of tariffs was aimed at incentivising a move away from the use of ‘traditional’ fossil fuel.
As such, as part of the construction of tariffs, there was account taken to reflect the differential price
between fossil fuels and renewable fuels.
The NI RHI Guidance noted the need “to encourage the uptake of renewable heat technologies by
compensating for barriers to their adoption, including the current higher upfront costs and operational
expenditure for these technologies as compared to those using traditional fossil fuels109”. However, the
appropriate rate for the counterfactual has been the subject of change in terms of the construction of
the tariffs.
In both the Cornwall Insight and Ricardo tariff calculation the counterfactual fuel that has been used
has been kerosene oil. Kerosene is also used as the counterfactual fuel in the current 2021 consultation
document. The Cornwall report noted the rationale for the inclusion of kerosene oil as the counterfactual
as “it is estimated that 68% of homes are heated by oil-fired boilers”, whereas only 33% of homes are
connected to the gas network110”. It is clear from this statement that domestic rather than non-domestic
context is being applied, which renders it sub-optimal. In both the GB and the Irish equivalent schemes
natural gas is the counterfactual fuel, with the Irish scheme highlighting that the reason this fuel has
been chosen as the counterfactual is because in “the targeted industrial and commercial sectors, natural
gas is the dominant fuel and delivers 44% and 54% of thermal heat requirements respectively111”.
With a significant proportion of RHI installations undertaken in the Agriculture sector (52.8%), and with
a significant proportion of these in the poultry sector (where LPG gas is a key fuel), there is merit in
consideration of LPG gas as a counterfactual. Critically, DfE reported to the EU Commission as a
footnote to state aid submissions that the majority of fossil fuel displacement by RHI scheme
participants was LPG, with the majority of these being poultry houses which traditionally used LPG as
fuel, and so was deemed the most appropriate comparator for this type of installation112. The direct
footnote used as part of Department submission to the European Commission can be seen below;
“The Northern Ireland authorities have explained that liquid petroleum
gas was the appropriate comparator for most biomass installations
108 See tables 14 and 15 which shows the discount rate of 12% (interest rate) in the calculation of tariff rates [Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf] 109 Non-Domestic Northern Ireland Renewable Heat Incentive – Guidance; Department for the Economy (2019); https://www.economy-ni.gov.uk/sites/default/files/publications/deti/NIRHI%20Guidance%20Volume%201%20-%20August%202019%20update.PDF 110 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf 111 Delivering a Renewable Heat Incentive for the Republic of Ireland; IRBEA (2015); http://www.irbea.org/wp-content/uploads/2016/03/IrBEA-Renewable-Heat-Incentive-Report-final.pdf 112 State Aid SA. 47501 (2017/NN) – United Kingdom Northern Ireland Renewable Heat Incentive Scheme 2017-18 (Footnote 6); European Commission (2017)
44
because it was the original fuel being used by the majority of RHI
scheme participants. At the time the November 2015 changes were
made, biomass heating systems in the 21-99kW band made up 97% of
all applications received. Many of these installations were poultry houses
which traditionally used liquid petroleum gas air blown heaters before
the introduction of the scheme. As such, liquid petroleum gas was the
most appropriate comparator for this type of installation.”
-Submission to the EU Commission113
6.6 Domestic or Non-Domestic oil?
In the determination of the fuel tariff element of the calculation, the Department has used the difference
between domestic kerosene prices and wood pellets. The Cornwall research applies a price per litre for
900 domestic litres as being “the most reflective of the bulk deliveries received by RHI participants in
the two tariff bands114”. We have estimated the impact that changes in kerosene prices will have on
tariff rates and consider that a 1p/litre fall in Kerosene will result in a widening of the tariff of 0.19p/Kwh.
This analysis draws on the calculation illustrated in Table 14 of the Cornwall report as well as using the
efficiency (92%) and fuel costs (£183.27 per tonne for wood pellets and 45.97p/litre for Kerosene oil)115.
It should be noted that the preceding figures on efficiency and fuel costs are those quoted as part of the
Cornwall Insight work, with efficiency of 92% being based upon manufacturer’s recommendation. The
price per litre of oil quoted by Cornwall as 45.97p/litre for Kerosene is difficult to reconcile (accepting
that oil prices are volatile). Our assessment of the Average Price of Heating Oil per 1,000 litres from the
Office for National Statistics over the calendar year 2020 shows the price fell moving from 54.77p/litre
in January to a low of 30p in May before closing the year at 39.20p/litre. Figure 7 below shows the UK
trend over the calendar year 2020. To ‘sense check’ these figures, we assessed the local context via
‘Boilerjuice’, an online NI price tracker. Their figures were consistent with Figure 7. Further, we have
sighted invoices and price lists submitted to the Department in 2019 which indicated that, whilst LPG
had consistently been available at sub 30p/litre, pellets had reached £200/tonne (both ex VAT).
113 State Aid SA. 47501 (2017/NN) – United Kingdom Northern Ireland Renewable Heat Incentive Scheme 2017-18 (Footnote 6); European Commission (2017) 114 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf 115 Review of Tariff for NI Non-Domestic RHI Scheme; Cornwall Insight (2020); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/Cornwall-Insight-NIRHI-tariff-review.pdf
45
Figure 7: RPI Average Price Heating Oil (p/litre), UK
Source: ONS (RPI: Ave price - Heating oil, per 1000 litres) & Grant Thornton Analysis
The usage of this delivery size and the use of domestic kerosene oil as a proxy is considered
inappropriate. Through our engagement with key stakeholders, it was noted that the most appropriate
level of delivery for non-domestic kerosene use was 12,000 litres, as this amount of kerosene has the
same kilowatt basis as a 26 tonne delivery of wood pellets. 12,000 litres work out at 5p per litre cheaper
than the cost per litre of a 900 litre delivery116. These issues have been highlighted as part of
submissions to the House of Commons NI Select Affairs Committee, with it being noted that the “price
of fuel and for biomass boilers selected for the Ricardo report are not representative117”.
Turning to wood pellet costs, the Ricardo report uses a cost of £150 per tonne based on data from July
2016 to June 2017118. Figure 8, which was submitted as part of the House of Commons NI Inquiry
suggests that cost during this period were at a ‘temporary low point’. In comparison, the Cornwall Insight
report used the price of £183.27 per tonne, showing an increase in the spot price. The issue remains
that using non-domestic wood pellet prices in comparison to domestic kerosene oil (900 litres) prices
for payments or compensation does not accurately reflect the operating context that boiler owners face.
A submission made by RHANI to the Department119 outlined the costs of wood pellet delivery, using
price lists provide by both Balcas and Premium Pellets, at between £190-£220 per tonne. Additionally,
RHANI’s letter to DfE also shared recent invoices for a scheme member showing average wood pellet
deliveries cost between £205-£220 per tonne, significantly higher than was being presented and used
as part of the Ricardo and Cornwall analysis. As the Ricardo and Cornwall prices are not reflective of
current pricing, tariffs based on their analysis will not reflect current costs faced by scheme participants.
Figure 8: Industrial Wood Pellet Spot Price in US Dollar ($)
116 Correspondence was received and analysed between a Fuel Supplier and Customer that showed the cost of 12,000 litres of Kerosene equated to 42.77 pence per litre plus VAT. While a 900 litre delivery costed 47.62 pence per litre plus VAT 117 Changes to the Northern Ireland Renewable Heat Incentive Scheme Payments; House of Commons (2019); https://publications.parliament.uk/pa/cm201719/cmselect/cmniaf/2070/2070.pdf 118 Review of the biomass tariff structure for the Northern Ireland RHI Scheme; Ricardo Energy & Environment (2018); https://www.economy-ni.gov.uk/sites/default/files/consultations/economy/9.NIRHI-Biomass-Tariff-Review-Final-Report-22-May-2018-FINAL-for-publication.pdf 119 RHANI Letter to DfE dated 19 December 2019; Reference: RHANI/3/DfE/BIOME/55
0
10
20
30
40
50
60
2020JAN
2020FEB
2020MAR
2020APR
2020MAY
2020JUN
2020JUL
2020AUG
2020SEP
2020OCT
2020NOV
2020DEC
p/l
itre
46
Source: Northern Ireland Affairs Committee Response Submission
6.7 The Efficiency conundrum?
Assumptions about boiler efficiency are a further element that can influence tariffs. Boiler efficiency can
depend on the fuel, seasonality, age of the boiler etc.
In the Cornwall and Ricardo reports, efficiency rates for a medium size boiler (20-99Kwh) are assumed
to be 92% and 93% respectively. However, a report conducted by KIWA for the Department for
Business, Energy & Industrial Strategy120 in which they surveyed and audited 65 boilers between July
2016 and July 2017 suggested that the efficiency rates of biomass boilers in the field were 77% net and
70% gross. Boilers also displayed seasonal variations in efficiency across the year. As Figure 9 below
shows, boiler net efficiency is slightly lower in the summer months, with performance being 75% net in
summer and 78% net in winter.
120 Measurement of the in-situ performance of solid biomass boilers; KIWA (2018); https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/831083/Full_technical_report.pdf
Import price point
used in Ricardo Nov
17 DfE review
47
Figure 9: Seasonal Variations in Efficiency measured across all Field Sites
Source: Department for Business, Energy & Industrial Strategy [Measurement of the in-situ performance of solid biomass boilers; KIWA (2018); https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/831083/Full_technical_report.pdf]
In addition, analysis conducted by the Sustainable Energy Authority of Ireland (SEAI) outlined seasonal
efficiencies121 showing that the typical variation in seasonal efficiency of wood pellets was between 55%
and 87% whereas kerosene Oil (the counterfactual under the NI scheme) had an efficiency range of
between 60 and 75%122.
Efficiency is a key element in tariff calculation so these variations in efficiency are important. Cornwall
and Ricardo report efficiencies for a 99Kwh boiler to be 92% and 93% respectively, based upon
manufacturer specifications. However, as we have established, this is not the case in the ‘real-world’.
An appropriate analogy is the difference between the Miles per Gallon stated by car manufacturers
versus the actual experience in real world settings.
To contextualise the differential, 1 tonne of wood pellets has a Gross Calorific Value of 4,800Kwh with
a net value of 4,600Kwh123 per tonne at 96% efficiency. Under the efficiency assumptions of Cornwall
(92%) and Ricardo (93%) this would result in between 4,416Kwh per tonne and 4,464 Kwh per tonne
(net). In reality the net Kwh per tonne produced stands at 3,696. The average cost per heat produced
is 3.36p per KwH heat (£150 per tonne) and 4.15p per KwH (£183.27 per tonne). In reality, the cost
KwH heat produced will be 5.54p per KwH based upon a wood pellet delivery of £205 per tonne124. The
price of wood pellets has been considered lower than would have been expected in reality, thus
affecting fuel costs and thus tariff calculation.
6.8 Summary
From the preceding analysis we note a series of matters around capital and operational costs,
counterfactual fuels, efficiency and rates of return that that warrant reconsideration to ensure a full and
fair representation of the costs associated with owning and operating a biomass boiler. The following
section works through the logic of our assessment of the methodological flaws to present a proposed
alternative.
121 Which they define as the ratio of heat output from the heat pump and the electricity supplied to the heat pump over the heating session [Domestic Fuels: Comparison of Useful Energy Costs for Space Heating (2021); https://www.seai.ie/publications/Domestic-Fuel-Cost-Comparison.pdf] 122 Domestic Fuels: Comparison of Useful Energy Costs for Space Heating (2021); https://www.seai.ie/publications/Domestic-Fuel-Cost-Comparison.pdf 123 Net Calorific Value stated as 4.6KwH/kg [Quality Certification Scheme For Wood Pellets, ENplus (2015); https://enplus-pellets.eu/en-in/component/attachments/?task=download&id=103] 124 This figure is based upon a RHANI member delivery of wood pellets invoices of between £205-£220 per tonne. See, letter sent from RHANI to Department; RHANI Letter dated 19 December 2019; Reference: RHANI/3/DfE/BIOME/55
48
7. What option represents the best balance of fairness and public spending?
49
7. What option represents
the best balance of
fairness and public
spending?
7.1 The fairest Option?
Having reviewed all documentation and invoices related to installation, the calculation of Non-Domestic
RHI tariffs and having considered each of the assumptions that underpin the options presented in the
2021 Consultation process, we conclude that the tariff calculations do not represent all of the
appropriate cost requirements needed to install and maintain a biomass boiler. We believe that the ‘all-
in’ costs should be included in tariff calculations. Further, we agree with the view that, following the
2017 and the 2019 tariff reviews, many participants are not seeing a positive rate of return.
Drawing the various strands of our analysis together prompts the presentation of a proposed solution.
Table 11 reflects the tariff schedule that we believe best reflects the relevant costs that should be
included. In addition, if the aim of the Department is to continue with its recommended option, i.e. Option
4: Closure of the Scheme with compensation, we have prepared an assessment of what we believe an
appropriate compensation payment should be.
50
Table 11: Stylised example of Capex and Opex costs and breakeven incentive required for a
99Kw & 199Kw boiler
Costs (£)
CAPEX Costs 99KwH Boiler 199KwH Boilers
Direct Costs £35,000 £48,000
Essential Costs £10,000 £10,000
Planning Permissions £1,213 £1,213
Meter report & schematic £500 £500
Other barrier costs £500 £500
Sub Total £47,213 £60,213
Interest Accruing on loan 4% APR (10 years) £9,995 £12,696
OPEX Costs 99KwH Boiler 199KwH Boilers
Annual Service and repair costs £780 £711
Additional Fuel Cost (2020) pellets @ £183/tonne vs. Kerosene @ 33p/litre
£3,274 £4,113.16
Hassle Factor £490.36 £490.36
Admin Paperwork (annual) £780 £780
Additional Insurance Premium £159.96 £159.96
Fuel Store Maintenance £300.00 £300
Electricity £490.49 £490.49
Ground Space Compensation £700.00 £700
Total Annual OPEX per annum £6,974.81 £7,744.97
Tariff Rates Required (IRR 12%) 99KwH Boiler 199KwH Boilers
Tier 1 (p/kw) 9.06p/Kwh 6.43p/Kwh
Tier 2 (p/kw) 2.95p/Kwh Source: Documentation provided by Renewable Heat Association of Northern Ireland (RHANI) and critically assessed by Grant Thornton Note: The table has been assessed under the annual heat output of 208,280Kwh for a 99Kw boiler and 261,665Kwh for 199Kw boiler. Load factors are 24% and 15% respectively. Analysis has been conducted on the basis of a IRR/Discount rate of 12% as per EU State Aid legislation. The assumed load factors for 199Kwh boiler would not prompt a tier 2 tariff.
We understand that the costs presented in the table above are based on invoices and experience from
installers. In addition, all of the costs presented above are representative of the overall ‘reality costs’
that are associated with maintaining a boiler. In the initial calculation of tariffs by Ricardo & Cornwall,
electricity costs (for example) were not considered. There are several electricity motors for the auger,
heat pumps and fans to generate the heat within a biomass boiler that are not present in a
“counterfactual” kerosene boiler. Therefore, the inclusion of electricity costs needs to be considered in
tariff calculations, as this is a cost that would not be incurred under the fossil fuel system.
The above table presents the full cost of a boiler rather than the differential costs between a kerosene
and biomass boiler. The figures provide for participants to cover the loans they had taken out under the
initial tariff basis, together with the potential to see a return of 12%. It should also be considered that
under this example there is no differential in costs between the biomass boiler installation and the
counterfactual as, prior to the installation of biomass heating, there was already an existing heat source
being used. The full cost of retrofitting and boiler installation has been included in the above.
However, the above should only be deemed appropriate where the scheme is continued for current
participants. It should be noted that this Option should be considered an Option 2 hybrid where the
scheme continues but has all costs including fuel costs, set-up costs, etc. included, ensuring that all of
the costs used in the tabulation/calculation of tariffs are reflective of ‘real-world costs’.
51
Based on the stylised example and tariff rates proposed in Table 11 we have calculated a ‘buyout’ figure
which would be relevant in a scheme termination with compensation scenario. Table 12 shows the buy
out figure for both a 99kw and 199Kw boiler based on a 15 year remaining term.
Table 12: Compensation Payment Required for a 99Kw & 199Kw boiler
99Kwh Boiler 199Kwh Boilers
Compensation (£) £122,927 £146,702 Source: Documentation provided by Renewable Heat Association of Northern Ireland (RHANI) and Grant Thornton Analysis Note: Figures have been discounted at 12% in line with IRR of 12%
7.2 Conclusion
Our analysis has concluded that the tariff calculation process undertaken by Ricardo, Cornwall and the
Department do not adequately reflect the full costs associated with boiler installation and operation. An
accumulation of flawed assumptions has had a material impact in the calculation and interpretation of
tariffs.
Having tracked through the various cost calculation assumptions, our assessment concludes that,
should Option 2 be pursued, the recommended tariffs are:
99kw/h boiler: Tier 1: 9.06p/Kwh
99kw/h boiler: Tier 2 tariff of 2.95p/Kwh
199 kw/h boiler: Tier1 6.43p/Kwh
It should be remembered that the ultimate ambition of the scheme was to drive carbon reduction. Keeping the scheme operational would continue to support this aim. However, if scheme termination (i.e. Option 4) is pursued, the compensation payments required are £122,927 for a 99Kwh boiler and £146,702 for a 199Kwh boiler.
0