The Road to Smarter Renewable Energy
The UK has reached a stage where it’s critical to make renewable energy technology truly accessible for residents and business owners alike. The issue is one that faces all developed countries that aspire to base their economy on renewable energy.
How can the UK government improve on their renewable energy incentives?
Existing property infrastructure is both a barrier to renewable energy uptake and an opportunity wherever new building projects and large renovations are planned. But, however appealing the new building plans may be, cost remains an issue for anyone making the switch.
Most people understand the benefits of renewable energy. Firstly, it reduces carbon emissions. Secondly, it cuts utility bills. Thirdly, it is often more comfortable. But the plain truth is that humans are often motivated by their pocket. If switching to a greener energy supply doesn’t make economic sense, mass uptake simply won’t happen.
The government has done a decent job in terms of incentives. Most notably, the domestic and non-domestic Renewable Heat Incentive (RHI) schemes, designed to increase the impact of renewable heating. In addition, the Feed-in Tariff scheme was launched for electricity purposes. These are the flagship schemes, and the two that I’d like to address here.
What the incentives do for renewable energy adoption
The Renewable Heat Incentive (RHI) is split into “Domestic” and “Non-domestic” schemes. Multiple technologies qualify, including biomass boilers, biomass stoves, air source heat pumps, ground source heat pumps, solar thermal panels, and hybrid heating systems.
The Domestic RHI is, as the name suggests, designed for single residential properties. It pays tariffs to the homeowner on a quarterly basis, over a period of 7 years. The rates are subject to change, depending on application date and introduction of new regulations.
The Non-domestic RHI scheme is designed for commercial buildings; offices, hospitals, schools, and the like. Non-domestic also applies to district heating schemes, whereby a heat pump might provide heating to multiple homes on the same housing estate. These payments are made over 20 years. Rates are also subject to occasional review, although they’re fixed according to the time of the agreement. Both schemes are subject to annual inflation.
There have been a number of benefits so far.
For the Domestic RHI, uptake has been steady. According to Ofgem reports, the number of renewable heating systems approved for the Domestic RHI scheme doubled between April 2015 and October 2017, reaching 60,000. Reports suggest that by December 2017, there were over 78,000 new installations. Whilst this is positive movement compared to pre-RHI, the initial target was 513,000 installations by 2021. At the moment, the National Audit Office (NAO) estimates that we will reach around 111,000 by that date – just 22% of the target.
Obviously, this is not enough.
Air source heat pumps (ASHPs) lead the way in terms of chosen technology in the UK, after overtaking biomass in early 2016. This is due to their suitability for most homes and homeowners. ASHPs are smaller, cheaper, and easier to install than other systems, although not always the most efficient solution – depending on property size and heat demands.
The Non-domestic RHI numbers are also steady. Between March 2013 and December 2017, over £1 billion was paid out in Non-domestic RHI incentives. By the start of 2018, around 18,000 accredited installations had been approved. Ground source heat pumps (GSHPs) are typically the most popular choice for Non-domestic RHI applications, due to bigger property sizes, increased heat demand, and the capacity for outdoor installation.
The Feed-in Tariff (FiT) has experienced more of a rollercoaster ride, which I’ll address later. This scheme is available for people who use solar PV, wind, hydro, micro combined heat and power, or anaerobic digestion systems.
In a nutshell, you are paid for the excess electricity that your system generates, by feeding it into the grid. Uptake has fluctuated wildly, due to inconsistent regulations, confusion, and plummeting costs of solar technology.
The cumulative benefits
Overall, these incentives have increased renewable energy uptake, which is certainly a positive step. However, as we’ve seen through the NAO report on RHI, the number of renewable heating installations are not meeting ambitious targets.
What the incentives have done is to prepare the industry for a general mass uptake. This will occur over time, as old fossil fuel boilers die, new housing estates are constructed, and major renovations are initiated. Furthermore, these incentives have paved the way for renewable energy to enter the public conversation as something accessible and realistic, rather than alien.
In essence, it could be argued that the current incentives have got the ball rolling and given the industry a chance to mature. Manufacturers, suppliers, installers, and engineers are dealing with a consistent increase in demand. These stakeholders are training new recruits, developing new support networks, and creating new finance packages. Architects and construction companies recognize the inherent benefits of renewable energy and prioritize its installation as a result.
An evolving industry ecosystem will help in the long-term, and the incentives are a facilitator. As I’ll outline in the next section, the Feed-in Tariff has been hectic, but has provided key learning points and ultimately succeeded in driving down the cost of renewable electricity technologies.
In terms of positive environmental impact, we’re yet to see whether these incentives will help the UK meet its target for 80% reduction in carbon emissions by 2050. In 2016, the UK’s carbon emissions were 42% less than those recorded in 1990.
Of course, only a combination of tactics in society, industry, and economy will deliver results. Using renewable energy to power the buildings in which we live and work is just one piece of the puzzle.
What’s wrong with the renewable energy incentives
Whilst the incentive schemes are admirable, they haven’t been plain sailing.
In Northern Ireland, the term “RHI” is synonymous with scandal. Indeed, it caused ructions in the government. After its launch in 2012, the RHI scheme was subject to widespread abuse. In one instance, a farmer was set to receive £1 million over 20 years to heat an empty shed. There was no cap to the payments, meaning that the more heat produced, the more cash was paid to the property owner.
The scheme will overspend by hundreds of millions of pounds.
No such scandals occurred in England, Wales, or Scotland, where the schemes are more tightly regulated. The situation in Northern Ireland renders the flaws in mainland RHI schemes trivial in comparison, yet there have certainly been mistakes…
As I mentioned earlier, the Feed-in Tariff has been particularly troublesome. This was a “boom and bust” situation, whereby the initial scheme (launched in 2010) was revised multiple times in quick succession, cutting tariff rates and enforcing strict regulations. The 2016 cut saw a 74% drop in the capacity deployed by small solar PV installations, and over the course of the past few years many solar companies have gone out of business.
The reason for the government’s FiT cuts was primarily the generous initial rates, a faster than expected uptake, and a steady fall in cost of solar tech. There has been a 61% drop in the price of installing solar since 2010, proving the scheme successful but rendering it unsustainable. Ultimately, cheaper tech is a good thing, but the rollercoaster ride to date is bad for building a consistent and reliable industry.
With regards to the RHI schemes in England, Wales, and Scotland, critics have pointed to delays in getting started. At the outset of the Non-domestic RHI, there was an overreliance on biomass due to inflated tariffs, but this was fixed in 2014. In both schemes, there has been a narrow view on which technologies qualify, and this is claimed to have stunted innovation.
Potential for improvements
The FiT rollercoaster has taught important lessons, which were implemented for RHI. But there are areas in which the UK government could improve on renewable energy incentives, notably to improve uptake and meet targets.
I asked Karl Drage, the CEO of Smart Renewable Heat who has worked in renewable energy for 14 years, how he would improve the current schemes, and his feedback was conclusive:
“Firstly, there is a clear obstacle for homeowners who want to switch to a renewable heating system; the initial capital outlay. The RHI payments are made over 7 years and provide economic efficiency when combined with utility bill savings.
However, when a homeowner needs to pay thousands of pounds to install a system in the beginning, it becomes more difficult. I would advocate an upfront contribution by the RHI scheme, in order to clear the route for property owners to switch.”
This improvement could also be implemented for the Non-domestic RHI scheme, for which payments are made over a period of 20 years. Whilst upfront payment for the full system is likely out-of-scope, there is a case for helping property owners get on board at the outset.
For future schemes, this upfront contribution could be offset by reduced payments further down the line. If a balance can be found whereby the property owner still sees clear financial benefits over time, switching to renewable heating is a no-brainer. From my own experience, I know that funding or financing the installation is certainly a barrier to increased uptake.
In Scotland, the Energy Saving Trust launched a renewable loans scheme, which was replaced by the Home Energy Scotland Loan. The first scheme provided a maximum loan of £10,000 at 0% APR. The updated version offers £17,500 for renewable energy systems, and a maximum of £32,500 per home for a range of energy efficiency improvements. There’s no reason why similar loan schemes can’t be rolled out across the rest of the UK.
The government has recognised the problem and has acted by introducing the “assignment of rights”. This alteration, as outlined by Ofgem, allows the homeowner to nominate an investor to receive their RHI payments, as repayment on an initial loan for installation of the technology.
It remains to be seen whether this helps uptake, or whether it adds another layer of complexity.
There have also been problems with non-compliance and fraud, as complex regulations allow for mistakes and gaming of the system. As discussed in the aforementioned NAO report, Ofgem has been criticized for not tackling this robustly.
Although the scope of this problem is not to the levels of Northern Ireland, RHI is said to have overspent by £3 million.
In his interview for a Utility Week article about the future of RHI, Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit (ECIU) said:
“Problems of gaming will persist as long as the system is not effectively monitored. It was a failure to identify this from the start, and a failure to act, that led the NAO to their conclusions. If there is another incarnation of the renewable heat incentive, thorough monitoring is vital.”
One final recommendation for incentive scheme improvements is to reduce the administration. Once a renewable heating system is installed, there can be a lot of paperwork for the system owner to claim RHI payments. The scheme is set by Ofgem, but there isn’t much support for applicants.
From personal experience, I know that installers spend a lot of time explaining the RHI process to customers. This isn’t the hallmark of a simple scheme designed for mass uptake.
Looking to the future of renewable energy: What needs to be fixed
- The current flagship incentive schemes in the UK have done a decent job, but the chaotic revisions of the Feed-in Tariff have not been helpful in terms of building a sustainable industry. Solar has boomed, busted, and is slowly recovering.
The expectations were set too high due to the generous tariff rates, and this may have impacted the perception of returns on heating tech.
The RHI schemes are certainly facilitating growth in heat pumps and biomass, and the government is starting to recognize that uptake won’t skyrocket unless upfront costs can be mitigated.
The trend is positive, and the cost of technologies is gradually dropping. We will eventually reach a point whereby support isn’t necessary, although that is still some way off.
However, the brutal truth is that the government is failing to meet targets. In my mind, this is for two reasons:
- Firstly, there is a lack of funding infrastructure for initial installation costs;
- Secondly, the current process involves too much red tape and paperwork – with little support.
The schemes are not marketed smartly, and even when the principles seem appealing, potential applicants are dissuaded by complicated regulations and compliance standards.
To quote Albert Einstein, “the definition of genius is taking the complex and making it simple.”
Editors Note: The opinions expressed here by Impakter.com columnists are their own, not those of Impakter.com