April 2016

RHI: A Smarter Approach

Executive Summary

• The November 2015 RHI spending forecast represents a cumulative reduction in expenditure of approximately£1.5billioninthenextfiveyears.

• BiomasshasdominatedthefirstfewyearsoftheRHI.Giventheexpressedintentionof developingsustainablesupplychainsandpreparingforthemassrolloutoflowcarbonheat,the schemeneedssignificantreforminordertopromotethedeploymentofnon-biomass technologies.

• TheRHIpresentsasignificantongoingcosttotheGovernment.Ifitisassumedthatthemajority (82%)ofthebudgetcontinuestobespentonthenon-domesticscheme,thentheRHIwill committheGovernmenttoongoingcostsintheregionof£1billionperannumforthenexttwo decades.

• Evenunderthemostfavourableassumptionsoftheanalysisundertakenforthisreport,the domesticRHIwillmerelyresultinanadditional90,000renewableheatingsystems,generating 5TWhofrenewableheatoverthenextfiveyears.Toputthesefiguresintocontext,itisexpected that8milliongasboilerswillbesoldinthissameperiod.

• Itisunlikelythatinstallingrenewableheatingsystemsinjust0.3%ofUKhomeswillresultinthe UKmeetingits2020renewableheattarget,evenaccountingfornon-domesticgenerationof renewableheat.

• The key recommendations of this paper are that the RHI should be focussed on three areas:

1)Theinstallationofrenewableheatingsystemsinhomeswheredirectelectricheatingis currently found.

2)TheincrementaldecarbonisationoftheLPGsectorusingbiopropane.

3)Increasinginvestmentintheuseofbiomethaneandbiogas,inordertoreducethecarbon intensity of grid gas.

Background and Rationale for Intervention

According to modelling undertaken by the Department of Energy and Climate Change (DECC)1,heatrelatedactivitiesaccountfornearlyathirdofallgreenhousegasemissionsintheUK.Consequently,thedecarbonisationofheatisavitalissuethatmustbeaddressediftheUKistomeetits2050emissionstargets.Intheshorterterm,theUKhasacommitmenttomeetingaEuropeanUnionmandatedrenewableenergytarget,includinganindicativetargetofproducing12%ofheatfromrenewablesourcesby2020.Althoughprojectionsforheatdemandin2020arenotmadereadilyavailablebyDECC,their“FutureofHeating”documentstatesthatnearly712TWhofheatwasconsumedintheUKin2009.Assumingthatheatdemandremainsnearits2009level,the12%targetequatestoapproximately85TWhofrenewableheateachyear.

The2020renewablestargetformspartoftheUK’slongertermcommitmentofreducingUKgreenhousegasemissionsbyatleast80%by2050.Althoughrenewableenergyisinherently‘lowcarbon’,itisimportantnottoconflatethetwoterms.TheexplicitfocusofGovernmentschemesshouldbecarbonreduction,inordertobedirectlyalignedwiththeultimategoalofan80%reductionincarbonemissions.Atpresent,theRenewableHeatIncentive(RHI)istheprimarypolicymechanismthatDECChaveimplementedinordertoachievethe2020heattarget.Bysupportingtherenewableheatingindustryinitsinfancy,itishopedthattheRHIwilllaythegroundworkforthetransitiontolowcarbonheatingby2050.Thus,thefailureofRHItodeliveronitsintentionscouldhaveseriouslongtermramificationsaswellasshortertermconsequences.

SinceNovember2011,theRHIhasprovidedanincentivefortheinstallationofrenewableheatingsystemsinnon-domesticbuildings.BetweenAugust2011andMarch2014,theprimarysupportmechanismforthedomesticsectorwastheRenewableHeatPremiumPayment(RHPP)scheme.TheRHPPencouragedtheuptakeofrenewableheating,byprovidinghouseholdswithone-offgrantstohelpwiththecostsofinstallingsuchsystems.TheRHPPprovedtobeamoderatesuccess,leadingtotheinstallationof15,586renewableheatingsystems.InApril2014,incentivestoinstalldomesticheatingsystemswereincludedintheRHIscheme.TheRHIschemeoperatesbyprovidingatariffpaymentforeachunitofgeneratedrenewableheat.Itishopedthatthesetariffpaymentswillreducesomeofthebarrierstouptakeofrenewableheatingsystemsandpreparethesupplychainforthemassrolloutoflowcarbon heat.

Towardstheendof2015,thefutureoftheRHIwasuncertain,withthesizeofthebudgetunknownbyindustry.TheAutumnStatement2015providedtheheatingindustrywithadegreeofclarityaboutthefutureoftheRHI.Despitepositiveheadlines,theannouncedbudgetrepresentedadecreaseinexpenditurewhencomparedwithpreviousforecasts.The“headline”figureofanannualbudgetof£1.15billionin2020/2021representedadecreaseof£690millionfromtheOfficeforBudgetResponsibility’sestimateof£1.84billionmadeinJuly2015.Tounderstandthescaleofthesereductions,thechangestothe forecast budget2arepresentedinthetablebelow:

£ billion2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Cumulative

July2015forecast

0.43 0.67 0.88 1.15 1.47 1.84 6.44

Autumn Statement 2015 measure

0 -0.03 -0.1 -0.25 -0.46 -0.69 -1.53

November 2015 forecast

0.42 0.64 0.78 0.9 1.01 1.15 4.9

Atfirstglance,abudgetof£640millionin2016/2017,risingto£1.15billionin2020/2021mightseemgenerous,particularlyconsideringthecutsthathavebeenmadetoothergovernmentenergypolicies.However,asoutlinedinthetable,theNovember2015representsacumulativereductioninexpenditureofapproximately£1.5billioninthenextfiveyears.

Tocompoundmatters,asignificantproportionofthebudgethasalreadybeen“spent”onexistinginstallations.Domesticinstallationsreceivetariffpaymentsfor7yearsafteraccreditation,whilenon-domesticinstallationsreceivepaymentsfor20years.Atpresent,domesticinstallationsreceivepaymentsonthebasisof“deemed”heatdemand–anestimateoftheproperty’sexpectedannualheatusage.Ontheotherhand,non-domesticinstallationsreceivepaymentsbasedonactual,meteredheatoutput.Initially,thismayappeartobeafairersystem.However,itdoescreateaperverseincentive,wherebyrecipientsareencouragedtogeneratemoreheatthanisstrictlynecessary.

Any assessment of future deployment potential needs to take into account installations that are already receiving payments. DECC publish monthly statistics outlining the current deployment through the RHI. Asat31stJanuary2016,therewere59,825accreditedinstallations–45,971ofthesearedomesticinstallations,whiletheremaining13,854arenon-domesticsystems.Thegraphsbelowdetaildeployment,brokendownbytechnologytype:

Ascanbeseen,deploymentunderthenon-domesticschemeisdominatedbybiomass,accountingfor94%ofnon-domesticaccreditations.

Itisworthnotingthatmore58%oftheinstallationsrepresentedinthegraphaboveareactually“legacy”installations–systemsthatwereinstalledbeforethelaunchofthedomesticRHIschemeinApril2014.ThissuggeststhattheRHIhasn’tbeenparticularlyeffectiveinencouragingtheinstallationofnewsystems.Onfirstglance,itappearsthatthedomesticschemehasbeenskewedtowardsairsourceheatpumps(ASHPs).However,adifferentpictureispaintedwhenonefocussessolelyonnewinstallations.

BiomasssystemshavebeenthemostpopulartechnologysinceApril2014,representing42%ofnewinstallations.Inthesameperiod,therehavebeen7,461installationsofASHPs,1,608GSHPsand2,202solar thermal systems.

DECCalsopublishquarterlyexpenditureforecastsfortheRHIwhichestimatethespendingoneachtechnologytypeoverthenext12months.Thesefiguresprovidesomeinterestinginformationaboutthesuccessofthescheme,aswellasbeingusefulforestimatinglongtermcommittedexpenditureTheforecastasat31stJanuary2016gavetheestimatedannualexpenditureas£444millionforthenon-domesticschemeand£50millionforthedomesticscheme.Theforecastnon-domesticanddomesticexpenditureisdetailedinthegraphsbelow:

ThegraphabovepresentsDECC’sestimatesoftheamountofmoneythatwillbespentthroughtheRHIoneachtechnologytypeinthenext12months.Biomassinstallations(ofanysize)areexpectedtoreceivepaymentsof£213millionbetween31stJanuaryand30thJanuary2017.

Despiterepresentingonlyaquarterofaccreditations,itisexpectedthatbiomasssystemswillaccountfornearlythreequartersofdomesticexpenditureinthenextyear.Thisisinpartduetothegeneroustariffsthatearlybiomassinstallationsreceivedaswellasreflectingthelargerheatdemandoftheaverage biomass installation.

The deployment and expenditure figures suggest that biomass has dominated the first few years of the RHI. Given the expressed intention of developing sustainable supply chains and preparing for the mass rollout of low carbon heat, it is clear that the scheme needs significant reform in order to promote the deployment of non-biomass technologies.

Scheme ReformChangestotheschemewereexplainedinMarch2016,withtheannouncementofaconsultationconcerningtheGovernment’splansforthefutureoftheRHI.Insummary,theconsultationproposedthefollowingchangestothescheme:

- Cappingpaymentsatapre-determinedlevelofannualheatuse.- Anticipatedlowerbiomassdeployment,givenitsdominanceoftheRHItodate.- Thepromotionof“strategicallyvaluable”technologies,i.e.heatpumpsandbiogas.- Theremovalofsolarthermalinstallationsfromthescheme,- Theintroductionofabudgetcap,wherebytheschemecanbetemporarilyclosedtonew applicants. - Financeoptionsforfuelpoorandlow-incomehouseholds.

It is expected by DECC that the above reforms and budget could lead to an indicative annual deployment3of1,000(domestic)biomasssystems,13,700ASHPsand2,500GSHPsby2021.The primarypurposeofthisreportistoassesstheviabilityofthisdeploymentestimate,aswellasestimatingthesizeofthedomesticRHImarketintheinterveningperiod.Oneoftheprimarybarrierstouptakeofrenewableheatingsystemsisthehighinitialupfrontcosts.Toalleviatethis,ithasbeensuggestedbysomeintheindustrythatavoucherscheme–similarindesigntotheRHPP-couldstimulatehigherdemandbyreducingtheeffectivecosttothehomeowner.Thisreportalsoestimatethepotentialdeploymentofrenewableheatingsystemsifanindicativevoucherschemeweretobeadopted.

Estimated Budget Thissectionconsidersthedeploymentpotentialofrenewabletechnologies,takingintoaccounttheNovember2015budgetforecastandtheMarch2016consultationreforms.

Asmentionedabove,thedesignoftheRHImeansthatthereisalargeamountofcommittedexpenditure,evenwithoutnewinstallations.UsingtheJanuary2016forecast,itispossibletobuildupamorecompletepictureoftheestimatedexpenditureonexistinginstallationsinsubsequentyears.

Weconsidertwoschemedesigns.Inthefirst,theRHIcontinuesasbefore–newinstallationsreceiveapaymentforeachunitofdeliveredrenewableheat(deemedormetered)andcontinuetodosofor7yearsaftertheaccreditationoftheirinstallation.Asaresult,anyexpenditureinoneyearimposesanadditionalburdenonsubsequentyears.

Itisassumedthatthereissufficientdemandtouseuptheentiretyoftheavailablebudgetfornewinstallationsineachyear.AsoutlinedinDECC’sconsultationdocument4,82%ofspendtookplaceundertheNon-Domesticschemeattheendof2015,and18%undertheDomesticscheme.Forthepurposeofthisanalysis,itisassumedthatthisexpenditureratiocontinues.(Fulldetailsofthealgorithmused to estimate the available budget can be found in the appendix to this document.)

The estimated budget for each year of scheme one (tariff payment) is:

Date RHIBudget-November 2015

Forecast

Totalpre-committedexpenditure

(existingandnew)

BudgetforNewInstallations

BudgetforNewDomestic

2016/2017 640 499.4 140.6 25.32017/2018 780 641.4 138.6 24.92018/2019 900 781.4 118.6 21.42019/2020 1010 901.2 108.8 19.62020/2021 1150 1,011.1 138.9 25.0

Thisstructureprovidesbetween£19.6millionand£25.3millionoffundingfornewinstallationsineachofthenextfiveyears.Inthesecondscheme,itissupposedthattheRHIisusedtoprovideanupfrontcontributiontowardsthecapitalcostsofinstallingarenewableheatingsystem.Consequently,onlyexisting(indexlinked)expenditurehastobecarriedforwardintothenextyear’sbudget.

Theestimatedbudgetforeachyearofschemetwois:

Date RHIBudget-November 2015

Forecast

Totalpre-committedexpenditure

(existingandnew)

BudgetforNewInstallations

BudgetforNewDomestic

2016/2017 640 494.5 135.647 24.42017/2018 780 494.5 275.647 49.62018/2019 900 494.5 395.647 71.22019/2020 1010 494.5 505.647 91.02020/2021 1150 494.5 645.647 116.2

Schemetwo,bydesignresultsinmore“new”moneybeingavailabletobespenteachyear-£116millionin2020/2021,comparedwith£25millioninthefirstscheme.However,thisextramoneydoescomeatacost.Inschemeone,thehomeowner’sincentivetoinstallarenewableheatingsystemisspreadoutoversevenyears.Inschemetwo,alloftheincentiveispaidoutatthestartofthescheme.However,thevoucherschemewouldnotcommittheGovernmenttoanyadditionalfutureexpenditure.Asmentionedpreviously,non-domesticinstallationsreceivetariffpaymentsfor20yearsanddomesticinstallations receive payments for 7 years. Asaresult,theRHIpresentsasignificantongoingcosttotheGovernment.Ifweassumethatthemajority(82%)ofthebudgetcontinuestobespentonthenon-domesticscheme,thentheRHIwillcommittheGovernmenttoongoingcostsintheregionof£1billionperannumforthenexttwodecades.

However,theupfrontcontributionwouldcircumventsomeofthedrawbacksoftheexistingscheme.Firstly,thehighinitialcostsofrenewableheatingsystems–comparedwithfossilfuelalternatives–excludeasignificantproportionofUKhouseholdsfromthescheme.IntheRHIEvaluationSynthesisreport,itisnotedthat“upfrontcostsremainabarrierandRHIapplicantstendtousetheirownfinances”.Thisshouldcomeasnosurprise,particularlywhenoneconsultstheOfficeforNationalStatistics’“FinancialWealth:WealthinGreatBritain”dataset5.

ThemodalBritonlivesinahomewithanetfinancialwealthofbetween£500and£4,999–muchlowerthanthecapitalexpenditurerequiredtoinstalleventhecheapestrenewableheatingsystemincludedintheRHI.Tomakemattersworse,theregionaldatasuggestthatfinancialwealthislowestinareasofBritainwithahighproportionofoff-gridhouseholds.IntheNorthWestandNorthEastofEngland,medianhouseholdwealthis£3,500and£2,600respectively.

AlthoughtheRHIisn’tlimitedtooff-gridhouseholds,theeconomiccaseforinstallingarenewableheatingsystemisn’tparticularlycompellingwhenmainsgasistheexistingfuel.Asaconsequence,itislikelythattheabilitytopayforarenewableheatingsystemislowestinareaswhererenewableheatingwouldmostbehelpful.Thisfearispartiallyborneoutbytheevidence-thefigurebelowdetailsthenumberofdomesticRHIaccreditations,weightedbythesizeofthepopulationineachregion.

Scotlandhasthehighestnumberofaccreditationspercapita,with1.72accreditationsforevery1,000inhabitants.Thisisnodoubttheresultofthepreponderanceofoff-gasheatinginScotland,comparedwithotherareasofGreatBritain.OfconcernisthepooruptakeofrenewableheatingtechnologiesintheNorthWest(0.40)andNorthEast(0.53),whereahigherproportionofhomesareoffthegasgrid.

Current SchemeNext,weconsiderthedeploymentpotentialfromthetwoscenarios.Thecurrenttariffsforeachtechnology are:

- Airsourceheatpump:7.42p/kWhofgeneratedrenewableheat- Groundsourceheatpump:19.10p/kWh- Biomass:5.14p/kWh

Degressiontriggersforpost-2017areyettobepublished,sothesehavebeenestimatedbyfittingalinear regression model to historical triggers and extending this model to 2021. It is assumed that exceeding the trigger leads to a tariff reduction of 10% and exceeding the super trigger leads to a reduction of 20%.

Asmentionedearlier,oneofthemostsignificant–andwelcome-changestotheDomesticschemeistheintroductionofacaponpayments.ASHPinstallationswillreceivetariffpaymentsforthefirst20,000kWhofrenewableheatinanyyear.PaymentstoGSHPandbiomassinstallationswillbecappedat25,000kWh.Anysubsequentgenerationwillnotreceiveanytariffpayments.TheRHIImpactAssessment(March2016)outlinestheeffectthatthiswillhaveontherateofreturnforhouseholders,comparedwithaflattariffstructure.Thisisdemonstratedinthegraphbelow:

Underaflattariffstructure,theexpectedrateofreturncontinuestoriseashouseholdheatdemandincreases.Consequently,thisschemeprovidesadisproportionateincentivetopeoplewithlargeorenergyinefficienthouses.Consideringthehighinstallationcostsofrenewableheatingtechnologies(£8,000andupwards),itseemsinjudiciousfortheGovernmenttobeprovidingcapital-richhomeownerswithaninvestmentopportunitywitharateofreturninexcessof10%.Acappedtariffstructurewouldgosomewaytowardscorrectingthisinequity.Householdsabovetheheatdemandcap(20,000kWh)willstillreceivearateofreturninexcessof10%,butexcessivereturnsshouldnolongerbepossible.

Heat Demand ScenariosThisanalysisconsiderstwoheatdemandscenarios.Inthefirst,theheatdemandforeachtechnologyis assumed to match the reference heat demand (i.e. the heat demand of the “typical” installation) as estimated by DECC6.Thiswillbereferredtoasthe“ReferenceScenario”.IntheReferenceScenario,thefollowingaverageheatdemandvaluesareassumed:

- ASHP:14,000kWh- GSHP:17,000kWh- Biomass:24,500kWh

Inthesecond,theheatdemandforeachtechnologyisassumedtomeetthecap–the“CapScenario”.Inthisscenario,thefollowingaverageheatdemandvaluesareassumed:

- ASHP:20,000kWh- GSHP:25,000kWh- Biomass:25,00kWh

Thefinalassumptionrelatestohowmuchoftheavailablebudgetfornewinstallationsisspentoneachtechnology.Thisisimpossibletopredictintheabsenceofring-fencedbudgetsforeachtechnology,sothesehavebeenchosentobeillustrative.Inthefirstinstance(ScenarioOne),itisassumedthateachtechnology receives a third of the overall Domestic budget. The second has been chosen to approximatelymeetDECC’sindicativemarketsizesin2021of1,000domesticbiomasssystems,13,700ASHPsand2,500GSHPs.Assumingthatthesameproportionofthebudgetisspentoneachtechnologyineachyear,thissuggeststhat50%ofthebudgetisspentonASHPs,45%onGSHPsand5% on biomass boilers.

Deployment – Reference ScenarioGiventheinitialtariffslistedintheprevioussection,theReferenceScenarioheatdemandsleadtothefollowingaverageannualpaymentsforeachtechnology:

- ASHP:£1,039- GSHP:£3,247- Biomass:£1,259

Basedontheestimatedexpenditure,availablebudgetfornewinstallationsandthetwoexpenditurescenariosthefollowingdeploymentisestimated:

Year Scenario One Scenario TwoASHP GSHP Biomass ASHP GSHP Biomass

2016/17 8,043 2,573 7,445 12,064 3,474 1,1172017/18 7,847 2,511 8,152 11,771 3,389 1,2232018/19 6,650 2,127 7,752 9,974 2,872 1,0362019/20 6,040 1,932 7,902 9,060 2,609 9412020/21 7,634 2,442 9,988 11,451 3,297 1,190Total 36,213 11,586 41,240 54,320 15,640 5,507

89,038 75,467

Evenusingthemostfavourableassumptions,merelyanadditional90,000renewableheatingsystemswouldbeinstalledthroughtheRHI,generating5,075GWhofrenewableheatinthenextfiveyears.However,thiswouldincludealargenumberofbiomasssystems.ScenarioTwobetterreflectsDECC’sintentionsfordeployment2021andwouldresultintheinstallationof75,000renewableheatingsystems,withjust3,562GWhofrenewableheat.Toputthesefiguresintocontext,itisexpectedthat8milliongasboilerswillbesoldinthissameperiod.Usinganillustrativevalueof12,500kWhofheatperhousehold,theseboilerswouldproduce100,000GWhofheatinasingleyear.

Deployment - Cap ScenarioGiventheinitialtariffs,theseheatdemandsleadtothefollowingaverageannualpaymentsforeachtechnology:

- ASHP:£1,484- GSHP:£4,775- Biomass:£1,285

Basedontheestimatedexpenditure,availablebudgetfornewinstallationsandthetwoexpenditurescenariosthefollowingdeploymentisestimated:

Year Scenario One Scenario TwoASHP GSHP Biomass ASHP GSHP Biomass

2016/17 5,630 1,750 7,296 8,445 2,362 1,0942017/18 5,493 1,707 7,989 8,240 2,305 1,1982018/19 4,655 1,447 7,597 6,982 1,953 1,0152019/20 4,228 1,314 7,744 6,342 1,774 9222020/21 5,344 1,661 9,788 8,016 2,242 1,166

Total 73,364 54,056

IntheCapscenario,maximumestimateddeploymentisonly73,462renewableheatingsystemsand5,075GWhofgeneratedrenewableheat.ScenarioTwowouldonlyresultintheinstallationof54,056systemsand3,562GWhofheat.

Voucher SchemeAsoutlinedabove,analternativeschemewouldinvolvethedomesticbudgetbeingusedtoprovideanupfrontvouchertohomeowners,inasimilarfashiontotheRHPP.Todeterminethevalueofthisvoucher,itisnecessarytofirstestimatethecostofanaverageinstallationofeachofthetechnologies.Todothis,weuseinformationprovidedinthe“SectoralscenariosfortheFifthCarbonBudget–TechnicalReport”concerningcapitalcosts.Themid-pointofthecapitalcostrangeisused.SincethesefiguresarepresentedintermsofpriceperkWofinstalledcapacity,isalsonecessarytotakeintoaccount the average capacity of installations.

DECC’smonthlyRHIstatisticsprovidesomeinformationabouttheaveragecapacityofinstallations.Foreach of the technologies the median installation capacity is greater than the mean. This is indicative of a number of very large installations having a disproportionate effect on the mean. In the case of biomass installations,themeancapacityismorethantwiceaslargeasthemediancapacity,suggestingthattherearesomeexceptionallylargeinstallations.Giventheskewnessofthedistribution,themediancapacitywillprovideabetterdescriptionofthe“typical”householdandisthereforeusedforcalculating the average installation cost.

Usingthesetwofigures,itispossibletoestimatetheaverageinstallationcostofeachtechnologytype.Theresultsarepresentedinthetablebelow:

Domestic capital costs (£/kW)

Average capacity of installation (kW)

Average installation cost (£)

Mean MedianAir source heat

pump750-1250 9.9 8.5 8,500

Groundsourceheatpump

1500-2500 13.9 10 20,000

Biomass 710-1190 26.6 11.5 10,925

Althoughitcouldbearguedthatamoresophisticatedmodelwouldincorporateareductionincostsastimegoeson,itisassumedthattheinstallationcostofeachofthetechnologiesremainsconstantuntil2021.Areductionincostscouldbeeasilyincluded,butitisfeltthattheintroductionofsuchaninherentlyuncertainvariablewouldaddlittletotheaccuracyofourfindings.Furthermore,DECC’ssupplementaryassessmentoftheASHPandGSHPmarkets7suggestthatthescopeforsignificantreductions in the installation cost of these technologies is limited.

50% VoucherItisassumedthattheGovernmentprovidesavoucherforhalfofthecostofeachinstallation.ThiswouldbringtheinstallationpriceofASHPs,GSHPsandbiomasssystemsto£4,250,£10,000and£5,463respectively.Usingthesameexpenditureproportionsasabove,theestimateddeploymentfromthisschemeispresentedinthetablebelow:

Year Scenario One Scenario TwoASHP GSHP Biomass ASHP GSHP Biomass

2016/17 1,915 814 1,189 2,873 1,099 1782017/18 3,891 1,654 2,417 5,837 2,233 3632018/19 5,586 2,374 3,469 8,378 3,205 5202019/20 7,139 3,034 4,434 10,708 4,096 6652020/21 9,115 3,874 5,662 13,673 5,230 849

Total 27,646 11,749 17,171 41,469 15,862 2,57656,566 59,907

25% VoucherNext,theeffectondeploymentofprovidingavoucherforaquarterofthecostofeachinstallation.ThiswouldbringtheinstallationpriceofASHPs,GSHPsandbiomasssystemsto£6,375,£15,000and£8,194respectively.Usingthesameexpenditureproportionsasabove,theestimateddeploymentfromthisschemeispresentedinthetablebelow:

Year Scenario One Scenario TwoASHP GSHP Biomass ASHP GSHP Biomass

2016/17 3,830 1,628 2,379 5,745 2,197 3572017/18 7,783 3,308 4,834 11,674 4,465 7252018/19 11,171 4,748 6,939 16,757 6,409 1,0412019/20 14,277 6,068 8,868 21,416 8,191 1,3302020/21 18,230 7,748 11,323 27,345 10,459 1,698

Total 55,291 23,499 34,342 82,937 31,723 5,151113,133 119,812

A25%voucherwouldactuallypermithigherdeploymentthanthecurrenttariffstructure,withdeploymentintheregionof120,000underthemostfavourableassumptions.Itisnotthepurposeofthispapertodetermineifa25%voucherwouldprovetobeasufficientincentive,butitshouldbereiteratedthatthisschemewouldnotcommitfuturegovernmentstoanyadditionalexpenditure.

Deployment - ConclusionsThis analysis demonstrates that the current RHI budget is unlikely to cause any meaningful change to theUKheatingmarket.Thebestcasescenariounderthecurrenttariffstructureresultsintheinstallationof90,000renewableheatingsystemsoverthenextfiveyears.Giventhatthevastmajorityofthe27millionhouseholdsintheUKcurrentlyheattheirhomesusingfossilfuels,itisclearthatinstallingrenewableheatingsystemsinjust0.3%ofthesehomeswillbarelybegintohelpthecountrymeetits2020renewableheattarget.InlightoftheinsufficientfundingavailabletotheRHI,wechangeourfocustoidentifyinghowthelimitedRHI budget can be put to best use.

Existing Heating SystemsTounderstandhowtomaximisetheimpactoftheRHI,itisusefultoexploretheprevalenceofdifferentheatingsystemsthroughouttheUK.FromthelatestEnglishHousingSurvey,itisknownthatprimaryheatingfuelsarefoundinthefollowingproportionsthroughoutEngland(figuresforScotlandandWalesarenotpublishedasfrequentlyortothesamelevelofdetail):

- Gas:86.9%- Oil:3.7%- Solidfuel:0.7%- Electricity:8.7%

Forsimplicity,itisassumedthattheseproportionscontinuetobetruethroughoutScotlandandWales.Inreality,thisprobablyoverestimatesthenumberofgasfiredcentralheatingsystems,sincethegasgridislessprevalentinthesecountries.Consequently,thenumberofoilfired,solidfuelandelectriccentral heating systems is likely underestimated.

Giventhe(approximate)27millionhomesintheUK,thissuggeststhefollowingpopulationlevelsforeach of these heating fuels.

- Gas:23.46millionhomes- Oil:1millionhomes- Solidfuel:0.19millionhomes- Electricity:2.35millionhomes.

Household carbon savings

OneoftheprimarybenefitstotheUKofincentivisingtheinstallationofrenewableheatistheresulting reduction in carbon emissions. Air and ground source heat pumps use electricity as their fuel –currently,gridelectricityhasacarbonfootprintof0.494kgCO2eperkWh(plusanadditional0.043kgCO2efromtransmissionanddistributionlosses).Thiscomparesunfavourablywithnaturalgas(0.185kgCO2e/kWh),LPG(0.215kgCO2e/kWh)andoil(0.245kgCO2e/kWh).However,thehighefficiencyofheatpumpsoffsetsthegreatercarbonintensityofthefuel,thereforeleadingtocarbonsavings.Althoughthecombustionofbiomassdoesreleasecarbondioxideintotheatmosphere,asustainableapproachtoplantingreplacementtreesdoescreatea“closedcarboncycle”.Consequently,theneteffectisnear-zerocarbonemissions.AnalysisconductedbyDEFRAhasresultedinbiomassbeingassignedacarbonfootprintof0.012kgCO2e/kWh.8

Thegraphbelowillustratesthecarbonsavingsthatwouldbemadebyswitchingfromeachexistingheatingsystemtoeachoftherenewabletechnologies.

Thegreatestsavingswouldbemadeinsituationswheredirectelectricheatingisreplacedbyarenewa-ble heating system. Inlightofthecurrentcarbonintensityofgridelectricity,thefiguresabovesuggestthatthereplacementofamainsgasboilerwithaheatpumpwouldhaveanugatory effect on carbon emissions.

ThegraphabovesuggeststhatawholesaleswitchtobiomasswouldbetheeasiestwayofdecarbonisingUKheatdemand.However,giventhattheUKisnowburning33%oftheworld’swoodpelletimports,thereisgrowingconcernaboutthesustainablecredentialsofthisfuelsource9. Although technically“renewable”,itshouldbecleartomostthatheatingUKhomesusingwoodisnotasustainable solution to our long term goals. That this behaviour has been incentivised using public funds is symptomatic of the dysfunctional decision making that underlies the RHI.

Recommendations

Forthe23millionBritishhouseholdswithagasboiler,thegridinjectionofbiomethane(andotherbiogases)wouldbethemostappropriateoptionfordecarbonisingtheirheat. The Impact Assessment document indicates that biomethane and biogas are a more cost effective option than heat pumps10. In2020/2021,itisexpectedthat4.04TWhofrenewableheatwillbegeneratedbybiomethane/biogasthroughtheRHI,atacostof£48.8m/TWh.Thiscomparesfavourablywiththe1.075TWhofrenewableheatfromheatpumps,atacostof£119m/TWh.

Crucially,thewidespreaduseofbiogaswouldnotrequirethetypicalBritishhouseholdtochangetheirbehaviourinanywayandwouldnotjustbenefithouseholdswhoareabletoaffordexpensivenewheating systems. GiventheapathyforrecentGovernmentenergyschemes,themostpracticabledecarbonisationstrategy–wherepossible-wouldappeartobetheoneinwhichthedecisiontoreducetheircarbonemissionsistakenoutoftheconsumer’shands.

Asexplainedintheprevioussection,thegreatestsavingswouldbemadeinsituationswheredirectelectricheatingisreplacedbyarenewableheatingsystem.However,thetechnologiesincludedinthedomesticRHIarenotsuitableforallpropertytypes.Heatpumpsoftencompriseasizeableoutdoorunitaswellasanindoorcomponent,whilebiomasssystemsrequiremoresignificantstoragespace.

Asaresultitisunlikelythatthesetechnologiesaresuitableforflats.Excludingflats,theEnglishHousingSurveyestimatesthatthereareover750,000propertiesinEnglandwhereelectricityistheprimaryheatingfuel.WorkconductedbyConsumerFocussuggeststhatafurther400,000homesthroughoutScotlandandWalesuseelectricheating,althoughitisnotknownhowmanyofthesewouldbesuitablefortheserenewableheatingsystems.ThesefiguressuggestthatthereareenoughelectricallyheatedhouseholdsintheUKsothatthissectorshouldbeconsideredapriorityfortheinstallationofnewrenewableheatingsystems.

Furthertothis,asdetailedinEUA’sreport“Biopropanefortheoff-gridsector”,itisrecommendedthatbiopropane should be included in the RHI.BiopropaneisarenewablealternativetoLPGthatcouldprovideaneffectivesolutiontothecarbonreductionrequirementsofthe170,000UKhomesthatcurrentlyuseLPG.UsingtheheatdemandvaluesfromtheReferencescenario,switchingfromLPGtobiopropanewouldreducehouseholdcarbonemissionsby2,506to4,386kcCO2erespectively.Aswithbiomethaneformainsgascustomers,biopropanewouldrequirenobehaviouralchangefromconsumersandwouldallowthemtocontinueusingtheirexistingappliances,therebygreatlyincreasingthe chances of meaningful decarbonisation.

DECCshouldviewthelast24monthsoftheRHIasalearningexperience.Manyoftheposited“pathways”tomeetingtheUK’slongtermtargetsincorporatevastnumbersofheatpumpsinretrofitscenarios.However,theestimateddeploymentinthisanalysisandDECC’sfindingthatheatpumpsareunlikelytoseesignificantpricedecreases,makethesescenariosseemincreasinglyunlikely.Inlightofthis,EUA/HHICwouldadvocateamoretargetedstrategy,wheretheRHIisusedtofundthemostappropriate solution for each sector of the heating market.

Withlimitedresources,itislogicaltospendmoneywherethemarginaleffectishighest.Asaresult,thekey recommendations of this paper are that the RHI should be focussed on three areas:

1) The installation of renewable heating systems in homes where direct electric heating is currently found.

2) The incremental decarbonisation of the LPG sector using biopropane.

3) Increasing investment in the use of biomethane and biogas, in order to reduce the carbon intensity of grid gas.

Itisimportanttoemphasisetherolethatheatpumps(bothelectricandgas-driven)willhaveinthenewbuildheatingmarket.Newbuildhomestypicallyhavethermalpropertiesthatbettersuittheoperationalcharacteristicsofheatpumps.Inaddition,thehigherinstallationcostscanbemoreeasilysubsumedwithinthebuildcostsandsubsequentsaleprice,ratherthannecessitatingsignificantoutlayfromanexistinghomeowner.Assuch,itisrecommendedthattheinstallationofheatpumpsshouldbestronglyencouragedfornewbuildhomes.

Ratherthanadoptingablanket,one-size-fits-allapproachtothedecarbonisationofheat,itisprudentintheshorttermtofocuslimitedGovernmentresourcesonthesectorsoftheheatingmarketwherethemost progress can be made.

Appendix

Bibliography

1.EmissionsfromHeat;DepartmentofEnergyandClimateChange;page3;availableathttps://www.gov.uk/gov-ernment/uploads/system/uploads/attachment_data/file/140095/4093-emissions-heat-statistical-summary.pdf

2.Supplementaryforecastinformationrelease;RenewableHeatIncentive;OfficeforBudgetResponsibility;avail-ableathttp://budgetresponsibility.org.uk/docs/dlm_uploads/Renewable-heat-incentive_November2015.pdf

3.TheRenewableHeatIncentive:Areformedandrefocusedscheme;p17-18;availableathttps://www.gov.uk/gov-ernment/uploads/system/uploads/attachment_data/file/505972/The_Renewable_Heat_Incentive_-_A_reformed_and_refocussed_scheme.pdf

4.TheRenewableHeatIncentive:Areformedandrefocusedscheme;p15;availableathttps://www.gov.uk/govern-ment/uploads/system/uploads/attachment_data/file/505972/The_Renewable_Heat_Incentive_-_A_reformed_and_refocussed_scheme.pdf

5.WealthinGreatBritain;OfficeforNationalStatistics;availableathttps://www.ons.gov.uk/peoplepopulationand-community/personalandhouseholdfinances/incomeandwealth/compendium/wealthingreatbritainwave4/2012to2014

6.ImpactAssessment-TheRenewableHeatIncentive:Areformedandrefocusedscheme;DECC;availableat:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/505132/Consultation_Stage_Im-pact_Assessment_-_The_RHI_-_a_reformed_and_refocussed_scheme.pdf

7. Thescopeforcostreductionsinamassmarketforlowcarbonheatingtechnologies;DECC;availableathttps://www.gov.uk/government/publications/the-scope-for-cost-reductions-in-a-mass-market-for-low-carbon-heating-technologies

8. Carbonconversionfactors;DEFRA;availableathttp://www.ukconversionfactorscarbonsmart.co.uk/

9.DoestheUK’sbiomassburninghelpsolveclimatechange;TheCarbonBrief;http://www.carbonbrief.org/inves-tigation-does-the-uks-biomass-burning-help-solve-climate-change

10.TheRenewableHeatIncentive:Areformedandrefocusedscheme;p62-63;availableathttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/505972/The_Renewable_Heat_Incentive_-_A_re-formed_and_refocussed_scheme.pdf

Procedure for estimating available budget

Thefollowingalgorithmisusedtocalculatetheavailablebudgetforeachyear:

1) The available budget for a year is calculated by taking the forecast budget and subtracting the amount that has been committed to be spent on existing installations.

2) Newexpenditure(equaltotheavailablebudgetforagivenyear)iscarriedforwardintothenextyearandaddedtopre-committed(pre-2016)expenditure.

3)Anynewexpenditureisassumedtoincreaseby1%,asanestimateofindexationbytheConsumerPriceIndex(CPI).Pre-2016accreditationsreceivetariffpaymentsthatincreaseinlinewiththeRetailPriceIndex(RPI).RPIistraditionallyhigherthanCPI,sohasbeenassignedanestimatedvalueof2%inthisanalysis.

4)RepeatSteps1-3foreachsubsequentyear.

EUAhassixorganisationaldivisions-

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Usingourwealthofexpertiseandover100yearsofexperience,weacttofurtherthebestinterestsofourmembersandthewidercommunity,inworkingtowardsasustainable,energysecureandenergyefficientfuture. One voice, united, to influence change.

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