The UK has a legally binding obligation to reduce its net carbon emissions to zero by 2050. Currently, heating our homes, businesses and industry is responsible for a third of the UK’s greenhouse gas emissions. We need to find a low or zero-carbon way of heating if we are to meet our target.

The March 2020 Budget had some encouraging announcements on decarbonising heat, as we reported in our article Budget 2020 is good news for green heat. Two recent consultations and an outline of changes to the RHI schemes build on those announcements.

Renewable Heat Incentive (RHI) schemes

In the March 2020 budget, the government announced:

  • an extension to the domestic RHI for a further year to 31 March 2022

  • the introduction of a flexible, third allocation of tariff guarantees on the non-domestic RHI and that the non-domestic RHI will close to new applications on 31 March 2021

At the end of April, BEIS published a consultation on the Non-domestic Renewable Heat Incentive: ensuring a sustainable scheme and an outline of Changes to the Renewable Heat Incentive (RHI) schemes, providing more detail on the Budget announcements.

The domestic RHI will continue as is, other than the deadline being extended by a year.

The introduction of a third allocation of tariff guarantees on the non-domestic RHI means projects have to have submitted Stage 2 information evidencing financial close before 31 March 2021, but will be able to set a date for submission of Stage 3 commissioning evidence up to 31 March 2022. Payments will begin from the point of commission and end 20 years after submission of the Stage 2 information. For example, if a plant submits Stage 2 information on 28 February 2021, has a tariff granted on 20 April 2021 and commissions on 28 February 2022, it will be paid from 28 February 2021 and receive 19 years of payments from the point of commissioning (no payments will be made after 31 March 2041).

There is good news for any heat plant that has an existing tariff guarantee but has not yet been able to commission due to disruption caused by COVID-19. The Government intends to bring forward legislation that effectively buys all projects at least an extra 6 to 7 weeks to commission and also to make sure that projects that are unable to meet the extended commissioning deadline can apply for the third flexible allocation of tariff guarantees and commission after the non-domestic RHI has closed.

The reforms to the Non-domestic RHI seek to future-proof the scheme for accredited applicants. As it lasts for 20 years, the final applicants to the scheme will be eligible to receive payments up to 2041. We suggest you read the consultation for the detail.

Future support for low carbon heat

So what happens once the RHI schemes close to new applicants? That's where the Future support for low carbon heat consultation comes in.  This consultation sets out proposals for:

  • a Green Gas Support Scheme: increasing the proportion of green gas in the grid through support for biomethane injection (we are writing a separate briefing on this)

  • a Clean Heat Grant: support for heat pumps and in certain circumstances biomass, through an upfront capital grant to help address the barrier of upfront cost

Clean Heat Grant

In a nutshell, instead of a new tariff-based scheme, the Non-domestic RHI and domestic RHI schemes will be replaced by an upfront Clean Heat Grant of £4,000 for heat pumps.  This puts the onus on the market to find which technology is most cost-effective for each property, but it is likely to be mainly air-source heat pumps. 

The Government have chosen to deliver support through an upfront grant scheme, rather than a tariff, as they believe this is likely to widen access to the scheme since the upfront costs of installing a heat pump are high. A flat-rate grant, rather than a tariff based on the heat produced, also avoids need to meter heat production, so makes the scheme simpler. However, the Government still want to require that an electricity meter is installed for all heat pump installations ('metering for performance' was introduced in Domestic RHI to help people better understand their heat pump's electrical usage and efficiency). This accords with the rationale for smart meters: people are likely to use less heat if they can see how much heat they are using at any one time.

Eligibility

The grant will be available for domestic and non-domestic heat installations up to a capacity of 45kW (which is the MCS limit). Larger installations will be able to apply for funding under the IETF and potentially the future Green Heat Network scheme (see below for further details on these).

The grant is a flat-rate grant of £4,000 for all eligible technologies (air source, ground source and water source heat pumps). The average off-grid air source heat pump installation costs £10,300 so the consumer would still have to pay around £6,300.

Biogas boilers will be eligible but only if: they are in properties not served by the gas grid; they comply with certain emissions limits; and they are limited to hard-to-treat properties where a minimum heat loss value has been exceeded and the installation of biomass over a heat pump is justified.

The grant would be in the form of a voucher, which the consumer applies for. It can only be redeemed by proof of installation and technical information which the installer will provide. The voucher gets paid to the installer, and the voucher value is discounted from the consumer's invoice. This is similar to the way the Electric Vehicle Homecharge Scheme works.

Technologies not supported

The Clean Heat Grant will not be available for:

  • Process heating – although this was eligible for support under the Non-Domestic RHI, it will not be eligible for the Clean Heat Grant. Instead, industrial process heating projects will be able to apply for funding under the IETF (Industrial Energy Transformation Fund), to be launched spring 2020.

  • Biogas combustion – according to the consultation, "the strategic fit and decarbonisation opportunity offered by biogas consumption is not clear".

  • Solar thermal – this will instead be supported under the Green Heat Network scheme (see below).

  • Hybrids (heat pump plus a fossil fuel boiler) – the Government thinks it should direct funding towards technologies that offer the greatest carbon savings, not those that play a transitional role.

  • Heat networks – these will get support through the new £270m Green Heat Network scheme as announced in the March 2020 Budget – see our article Budget 2020 is good news for green heat. 

Cost controls

The Clean Heat Grant is only open for two years, to 2024. The amount of grants issued will be limited against a pre-agreed budget cap. Vouchers will be issued on a first come first served basis. Grants will be allocated through quarterly windows, each with a budget cap, to ensure smooth deployment over the two years of the scheme.

As for the RHI, BEIS will regularly review deployment data and will review the grant levels if uptake falls substantially outside the expected range. 

Wider policy context

BEIS mention in the consultation that a new Heat and Buildings Strategy will be published later this year, which will set out the immediate actions the government will take to reduce emissions from buildings, including the deployment of energy efficiency measures and low carbon heating. BEIS have also consulted on the Future Homes Standard and will be consulting on regulations to phase out the installation of fossil fuel heating in new and existing buildings off gas grid during the 2020s. The Clean Heat Grant will lay the ground for these regulations. The Clean Heat Grant is a transitional scheme, only lasting two years, and will allow the heating and green finance industry to build and refine a "retail offer" to work alongside regulation.

Ofgem will be the administrator of both the Clean Heat Grant and the Green Gas Support Scheme, which will support biomethane production in place of the Non-domestic RHI once that ends. There will be a separate consultation to follow on the Green Gas Levy to fund this biomethane support.

Comment

There has been a mixed response from industry to the proposals.  The impact assessment accompanying the Clean Heat Grant consultation estimates it would support nearly 11,000 heat pumps per year (and bear in mind there are only two years of funding). The Committee on Climate Change's Net Zero report however suggests the UK may need to install 19 million heat pumps by 2050. The cap on the scheme is also likely to act as a brake on the number of installations.

Even a grant of £4,000 still leaves the consumer to find a lot of money upfront and there is an argument that the early adopters have already got renewable heat systems, so leaving it to the market may have limited impact. The new Heat and Buildings Strategy may provide some welcome policy guidance.

Overall, it is encouraging that the government acknowledge the need to decarbonise heat and have started to make steps in the right direction, but the policy needs to ramp up quickly if we are to meet Net Zero carbon emissions by 2050.

 

Key Contacts

Richard Goodfellow

Richard Goodfellow

Partner, Head of Infrastructure, Projects & Energy Group
United Kingdom

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Paul Dight

Paul Dight

Partner, Energy and Utilities
United Kingdom

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Oliver Carruthers

Oliver Carruthers

Partner, Project Finance
London, UK

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