Kensa reviews the RHI and its future
In this blog, Kensa’s Commercial Director, Chris Davis, outlines the current RHI position and the impact of any RHI reforms, and Kensa’s predictions on any VAT changes.
Since the announcement in DECC’s Comprehensive Spending Review (CSR) back in November 2015 that the RHI would continue until 2020/21, many installers and potential heat pump customers have been patiently waiting for a little more clarification from DECC on the future of the policy with a particular interest in the nature and timing of the promised ‘radical reforms’.
Well, despite the lack of any specific detail emerging from DECC, the news is promising but let’s start with a quick re-cap. The CSR confirmed:
- The RHI would receive a new injection of funding from 2016-2021, rising to a total of £1.15bn by 2021;
- This represents an increase of more than 250% over the spending period up to April 2016. Of course the new budget must also cover the costs of the existing RHI obligations, but DECC believe this new budget is sufficient to heat the equivalent of 500,000 homes;
- Both the Domestic and Non-Domestic strands of the scheme will continue but reforms will be introduced to improve value for money and budget management.
Clearly then, Government recognises that the RHI has an important contribution to make towards the UK’s carbon and renewables targets. In DECC’s own words, “Heat accounts for around one third of UK greenhouse gas emissions. We will not meet our climate change commitments without a stronger long-term plan to drive forward a transition to low carbon heating.”
Great, so what next?
So the headline news is good, but what does this mean in real terms, what will these “reforms” look like and what happens next?
Well first of all, despite the clear indication that the RHI will be reformed, don’t expect to see anything much change in the immediate term. There has certainly been lots of engagement between industry and Government over the past few months – and Kensa has been central to those discussions – but what is clear is that both the Domestic and Non Domestic schemes will continue for at least the next 12 months in broadly their current form subject only to a few minor tweaks that tidy up some legislative detail.
So, to be clear, the format, eligibility and tariff levels (subject to existing degression rules of course), will remain largely the same.
One noteworthy change to the Domestic RHI at the end of March is a new method for establishing the Renewable Heat element of the deemed heat consumption figure; this will now be based on product specific efficiency levels rather than the technology wide defaults previously taken from the Heat Emitter Guide. MCS will be releasing more details for installers on this in due course.
Reforming the RHI
The nature of any proposed reforms that might be included in a consultation document has been the subject of much discussion between DECC and industry, but what is clear is that:
- Nothing is likely to change before Spring 2017 (at the earliest);
- Any proposed changes can only be introduced after a consultation (probably published in late Spring/early Summer this year)
There are a number of proposals that are likely to be consulted upon, which include:
- Possibility of deeming for shared ground arrays (a topic close to Kensa’s heart!);
- Third party ownership;
- Tariff guarantees (for non-domestic projects, extending the current scope to other technologies, including ground source heat pumps);
- Index linking using the CPI (rather than the current RPI);
- Possible caps on the maximum amount of Renewable Heat (kWh/yr) that the RHI will be paid against for larger, domestic installations;
Whether the consultation might extend to any tariff increases is open to debate, but probably unlikely given that DECC’s mantra is to improve value for money and “do more for less”.
For certain, anybody looking at a renewable heating scheme would be well advised to do so sooner rather than later, as the status quo for the next 12 months provides a great deal of certainty – “better the devil you know!”.
Is it likely Ground Source RHI tariffs will degress soon?
Each month, DECC publishes details on the current scheme uptake compared with the “trigger points” for degression. Deployment of ground source heat pumps – while now starting to steadily increase now that degression of biomass tariffs is starting to have some impact – is running well below the targets initially predicted, so deployment would need to accelerate at a staggering rate in order for degression to be triggered under the current scheme arrangements. The graph below shows the current situation with regard to monthly spend under the Domestic RHI, which is clearly significantly short of the trigger points.
The picture is very similar for the Non Domestic RHI, details of which can be found here.
OFGEM Consultation – installations generating heat using ground source heat pumps and recovered heat
Ofgem is currently proposing a change to its operational approach in relation to installations using ground source heat pumps so that, in order to be eligible for Non-Domestic RHI support payments, recovered heat will no longer be required to be stored in the ground prior to circulating the heat pump.
Details of this consultation can be found here.
The consultation is particularly significant for GSHP installations where there is opportunity to utilise waste heat.
Changes to low rate VAT eligibility
A consultation on the way ground source heat pumps (and other energy saving materials) are treated with regards to VAT has recently closed. As a result of an EU ruling last year, the UK Government has been required to reconsider when and where the low rate of VAT can be applied.
The good news for ground source heat pumps is that, in most instances, we expect the 5% rate to continue to apply. In particular, for social landlords or where heat pumps are installed by customers over 60 years old, it is virtually certain that the low rate will apply. Other, private sector customers looking to upgrade their heating to a ground source heat pump may however be subject to VAT at 20%, unless the cost of the materials can be demonstrated to be less than the labour element. Self build of course continues to be exempt from VAT.
Some other renewable technologies, particularly electricity producing solutions such as wind turbines and solar PV have been less fortunate and 20% VAT is likely to be levied on all installations.
You can find more information on these proposals here.