More updates following recent RHI consultation

Published: February 02 2018

It has been quiet for a while now in terms of the changes Renewable Heat Incentive (RHI) scheme. We had been keeping you up-to-date with the proposed reforms when we last discussed changes proposed for the RHI and that the RHI was yet to reform and also when the Parliament was presented with new RHI legislation. If you, like us, have also been sitting at the edge of your seat waiting for more updates on the proposal, we have some news for you.

In relation to the definition of eligible heat within the RHI, the Department for Business, Energy & Industrial Strategy (BEIS) has published the government's response to chapter 2 of the September 2017 RHI consultation. The government intends to implement these eligible heat use changes alongside the implementation of the remainder of the RHI reforms announced in December 2016, which is currently anticipated for spring 2018.

Summary

The government does not intend to remove all drying practices as eligible heat uses.

However, the government will:

not remove all drying practices as eligible heat uses;
remove wood-fuel drying as an eligible heat use other than where the renewable heat installation is replacing a fossil fuel heat source. A transition period will be included to allow wood-fuel drying plant that are in development to be accredited;
remove the drying, cleaning or processing of waste as an eligible heat use; and
further tighten the eligibility of swimming pools so that only swimming pools that are used for a municipal or commercial purpose receive non-domestic RHI support.

These changes will apply to new participants (or existing participants who add capacity on or after the date the reforms come into effect) or where a participant otherwise begins to use heat generated by the installation for an ineligible heat use on or after the date the reforms come into effect. New participants are those who apply for accreditation after the new rules come into force.

Additionally, the government will amend RHI scheme rules so that installations where heat is produced predominantly for a single domestic premises will no longer be eligible under the non-domestic RHI.
The government will not, at this time, amend the eligible heat use criteria in relation to any other heat uses.

In response to the September 2017 consultation, the government received a number of responses that supported the introduction of further evidence requirements to ensure that non-domestic RHI applicants have a genuine, economically justifiable use for the heat they propose generating. It therefore intends to develop more options in this area with a view to introducing further changes in future.

Drying

Wood-fuel drying

The December 2016 government response stated that there would be further work to assess whether wood fuel drying should remain as an eligible heat use, as concerns about the value for money of RHI support for this heat use were raised in a number of the responses to this consultation, including from industry organisations.

Further to this, the September 2017 consultation asked whether or not the non-domestic RHI should continue to support the drying of wood fuel. The government received a wide range of responses to this question. In summary, the two main arguments put forward for retaining wood-fuel drying were that:

dried wood-fuel is necessary to ensure the efficient operation of biomass boilers; and
growth in the production of wood-fuel, and particularly wood pellets, is dependent upon continued RHI support.

However, the government remains concerned that supporting wood-fuel drying does not provide good value for money and intends to remove it as eligible heat use within the non-domestic RHI.

Having considered the impact that this amendment to the scheme rules will have on the future growth of the wood-fuel market, it is clear that the non-domestic RHI was designed to bridge the difference in cost between fossil fuel heating and sources of renewable heat only. It is designed to support non-domestic heat uses that, without RHI support, would exist through using a fossil fuel heat source. It is not intended to provide a wider subsidy or, by itself, make a business economically viable. This would not represent value for money, nor would it contribute to carbon reduction. The government also
remains concerned that some wood fuel-drying would not be viable in the absence of RHI support.

Other drying: drying of crops, animal bedding and animal feed

One of the proposals was to restrict or remove the drying of other biomass (e.g., crops) as an eligible heat use. Around 70% of responses to this proposal argued that other drying uses, and particularly crop drying, should be retained as eligible heat uses on the non-domestic RHI scheme.

As the consultation noted, there is much less evidence of inefficient and uneconomical drying in these areas, but the government wanted to use this consultation to gather evidence on this point. The responses to the consultation did not suggest that there were systemic issues in these sectors and evidence was provided of the requirement to dry crops, including where renewable heat was replacing fossil fuel heating. On this basis the government is content to retain the drying of other, non-woody, biomass as an eligible heat use.

Aquaculture

During the consultation period, around 22% of respondents supported the government's position to remove aquaculture as an eligible heat use. However, strong evidence for removing aquaculture as an eligible heat use was not provided. Whilst the Government does not propose to remove aquaculture as an eligible heat use, it will continue to monitor scheme data on all of these eligible heat uses and work with Ofgem to take early action if evidence of scheme abuse emerges.

Swimming pools

Swimming pools only receive non-domestic RHI support where they are enclosed and where they have either a non-domestic purpose or form part of a system supplying heat to more than one domestic property. In the consultation, the government proposed ending support for heating swimming pools on the non-domestic RHI where the swimming pool is within a domestic premises. Over half of those who responded to this question supported the proposal to further tighten eligibility in this area. As a result, the government intends to amend the regulations so that RHI support will only be provided where a swimming pool has a municipal or commercial use (for example, hotels, leisure centres, schools, commercial holiday lets, etc.).

This will ensure that the non-domestic RHI budget is being spent on non-domestic heat uses. It will also align the non-domestic RHI rules on domestic swimming pools with those of the domestic RHI scheme, where domestic swimming pools are not eligible for support.

Non-domestic RHI support for single domestic properties

The non-domestic RHI excludes installations where the heat is being generated solely for the use of one domestic property. However, currently an installation is eligible for the non-domestic scheme where it provides heat for an eligible non-domestic use as well as to a single domestic property. As set out in the consultation, the government is concerned that this has allowed some installations to accredit onto the non-domestic RHI where the minority of the heat generated is being used for an eligible non-domestic purpose, whilst the majority of heat is being used to heat a single domestic property. This is not in line with the policy intent.

In addition, the government is concerned that the introduction of heat demand limits may cause some applicants to attempt to avoid the heat demand limits on the domestic RHI by accrediting to the non-domestic RHI on the basis of a nominal non-domestic heat use. In response to these issues, the government proposed limiting the proportion of heat that may be provided to the single domestic property to between 30%-50% of total eligible metered heat produced in a single reporting year. Around 60% of those who answered this question agreed with this approach.

When will these changes take effect?

The government intends to lay a set of regulations shortly that will implement the remainder of the reforms announced in December 2016 and implementing the decisions set out in this document. They will come into force once the parliamentary process is complete. This is currently anticipated for spring 2018.

What does this mean for me?

These changes will apply to new participants (those who apply after the new rules come into force), or existing participants who add capacity from the date the reforms come into effect. This is currently anticipated for spring 2018.