FAQs
Are renewable energy installations eligible for Enhanced Capital Allowances (ECAs)?
At present some are, but the Treasury intends to remove this privilege from all equipment eligible under the Renewable Heat Incentive and the Feed-In Tariffs. There is a consultation on this issue which closes on 31st August 2011.
The government justifies this move, saying:
the tariff levels for FITs and RHI are carefully set to provide a sufficient investment incentive, and any extra incentives to invest in these technologies is not appropriate
Are Feed-In Tariffs eligible for EIS and VCT tax breaks?
Yes at present, but for many this is to be stopped from 2012, further to an announcement in paragraph 2.38 of the 2011 Budget.
This says:
The Government will consult on options to provide further support for seed investment, simplification of the EIS rules by removing some restrictions on qualifying shares and types of investor and refocusing both EIS and VCTs to ensure they are targeted at genuine risk capital investments. Feed in tariffs businesses will be added to the excluded activities list.
However some concessions were made in the Treasury consultation in July 2011. This sets out the proposals for the exclusion in sections 4.16 to 4.21, including:
4.19: Based on the discussions with stakeholders, the legislation ensures that community interest companies, co-operative societies, community benefit societies and Northern Ireland industrial and provident societies will continue to qualify, as will trades generating electricity by hydro power or anaerobic digestion.
How often are tariff payments made?
Quarterly.
Chapter 2 of the government’s RHI announcement says
Payment frequency
A participant will receive payment for a quarterly period following the submission of the required periodic information.
The late submission of data to Ofgem may cause a delay in payment.
How are the tariff payments calculated?
Easy – multiply the energy produced during the period (from the meter reading) by the eligible tariff.
Small and medium biomass systems need to be adjust for the tiered tariffs.
Chapter 2 of the government’s RHI announcement says
Payment calculation
Payments will be calculated by multiplying the appropriate tariff, depending on the technology and type and size of the installation, by the amount of eligible heat. Payments will be made over a period of 20 years.
Is the RHI a grant scheme?
No; it is a tariff scheme, making regular payments for every kilowatt hour of heat produced by the system.
The government believes that this income stream should enable the system owners to finance the upfront capital costs and (within limits) we agree with them.
Chapter 2 of the government’s RHI announcement says
Financing
RHI tariff support will be delivered in the form of payments made over a number of years rather than as an upfront payment.
Options for financing the cost of installations will therefore be an important issue for those considering a switch to renewable heat. A number of stakeholders have highlighted this as a problem, that even if a business or organisation wanted to take part in the scheme, they could not raise the initial capital cost. We accept that this could sometimes be an issue, however, we expect the RHI will stimulate the market to provide a number of different financing options, which could cover both the capital costs and ongoing operational costs for the lifetime of the installation.
Why can’t payments be assigned to others?
Beats us! The government seemed to find it too difficult (though they did it easily enough for the FITs).
Chapter 2 of the government’s RHI announcement says under:
Who can claim the RHI?
A number of stakeholders have argued that participants should be allowed to assign and transfer payments to another person, as allowed under the Feed-in Tariffs (FITs) scheme, in order to help reduce the credit risk to lenders. The current legislation only allows payments to be made to the owner of the equipment. Therefore, in order to allow this form of assignment, the primary legislation (Section 100 of the Energy Act 2008) would need to be amended. While we appreciate these concerns, we are not convinced that the legislation should be changed, given the delays to implementation that this would cause.
We are also not convinced that assigning payments would fully reduce the risk to lenders, as ultimately they would still be reliant on the ‘owner’ of the equipment meeting their obligations under the scheme (e.g. maintenance, allowing inspections). In addition, the RHI payments cover the on-going costs of running the equipment (maintenance, fuel etc), which would still have to be met by the person operating the system.
Who will receive the RHI payments?
The owner of the system. These payments cannot be assigned to others.
Chapter 2 of the government’s RHI announcement says
Who can claim the RHI?
RHI payments may only be made to the ‘owner’ of the installation used or intended to be used for the renewable generation of heat or a producer of biomethane, in accordance with the legislation underpinning the scheme
Can payments be adjusted retrospectively?
In some cases, yes.
Chapter 8 of the government’s RHI announcement says
Recouping and adjusting payments
Where a participant has been overpaid, either as a result of non-compliance (e.g. incorrect meter reading), or due to a mistake, Ofgem will have the option of either asking the participant to repay the money through a repayment notice or allow for the over-payment by adjusting the future payment accordingly, or a combination of both.
Where a participant fails to repay an over-payment, Ofgem can look to recover it through the civil courts.
Can Ofgem suspend payments?
Yup – it looks like they can do just about anything!
Chapter 8 of the government’s RHI announcement says
Power to suspend RHI payments
Ofgem will also have the power to suspend RHI payments where it believes there is a failure to meet one or more of the eligibility criteria or obligations. This sanction will only be used where Ofgem believes the participant could again meet the eligibility criteria or obligations (hence them not being excluded from the scheme). The suspension may be imposed where Ofgem discover non-compliance or where a participant voluntarily reports that it will be unable to meet the eligibility criteria or obligations for a period, but still wishes to use the equipment e.g. unable to source eligible fuel, or perhaps where due to staff shortages with required expertise, the participant is unable to guarantee compliance.
Ofgem will only be able to lift the suspension once it is satisfied that all eligibility criteria and obligations are being met. Where the participant fails to ensure that the eligibility criteria and obligations are met within a specified time period, they risk being subjected to other sanctions within the scheme, including exclusion.
Can Ofgem reduce the amount of payments?
Yes they can do that too.
Chapter 8 of the government’s RHI announcement says
Power to reduce future payments
Ofgem will also have the power to reduce future RHI payments. Again, we envisage this power being used for the more serious or repeated cases of non-compliance, where Ofgem considers it necessary to apply a stronger sanction. This should help deter further abuse from the participant and other participants in the scheme, who will know that they risk losing money if they fail to comply with the rules of the scheme.
Can Ofgem withhold payments permanently?
Yes in serious cases.
Chapter 8 of the government’s RHI announcement says
Power to permanently withhold payments
For more serious or repeated cases of non-compliance, Ofgem will also have the power to permanently withhold a payment which is due but which has not yet been paid out. Ofgem will be able to withhold payment for the period of non-compliance. Unlike the temporary withholding provision, where a payment is permanently withheld, a participant will lose that payment, and it will not be paid even when a participant later meets all eligibility criteria.
Can Ofgem withhold payments?
Yes it can withhold payments temporarily or, in serious cases, permanently.
Chapter 8 of the government’s RHI announcement says
Power to temporarily withhold payment
Ofgem will be able to temporarily withhold RHI payments where a participant has failed to comply with one or more eligibility criteria or obligations or where it has reason to suspect they have failed to comply, and needs to investigate further. In such cases we do not believe it would make sense to make the payment where there is a chance that the money may have to be recouped at a later stage. Ofgem will only make the payment once it is satisfied that all eligibility criteria are being met.
Will installations under construction be affected if reviews or degression change tariffs?
The government accepts that the principle of grandfathering should also apply to such projects, but won’t incorporate this aspect until 2012.
Chapter 6 of the government’s RHI announcement says
Treatment of installations under construction during a review
Whilst grandfathering is intended to provide certainty to installations already accredited under the RHI, we are aware that the lead-in time for some projects can be a number of years and that changes to tariff levels between financial close and completion could mean that the financial assumptions upon which they would have started the project would no longer hold. Equally, if as a result of a review, tariff levels will be raised it could result in projects, which are due to come on line ahead of the review being implemented, stalling until the tariff levels are raised so that they can take advantage of the higher level of funding. This could result in a hiatus in projects coming on line so affecting the levels of renewable heat generation in the short term.
However, we need to balance decisions on the levels of support for such projects against controlling costs for the scheme as a whole and the impacts that this could have on other projects coming forward. As the first scheduled review is not due to start until 2014 with implementation in 2015 we intend to consider this matter further with a view to any appropriate measures being included from 2012.
Will existing installations be affected if reviews or degression change tariffs?
No; the principle of ‘grandfathering’ will apply. Once an installation is registered for the RHI its tariff is fixed, apart from index-linking for inflation.
Chapter 6 of the government’s RHI announcement says
Fixed levels of support following review changes (Grandfathering)
In order to provide the certainty required for sustained growth in renewables the Government is committed to the principle of ‘grandfathering’, where support levels for existing installations are guaranteed. The intention of grandfathering is to provide certainty to those investing in renewable heat installations about the level of support they will receive under the RHI.
This means that any changes to support levels resulting from a review would only affect new projects accredited on or after the date that new tariff levels are implemented. For example, if an installation is accredited from March 2015 and the tariff level received for that technology is changed in April 2015 following a review, that installation will continue to receive the same tariff level regardless of any change made. However, an installation accredited in May 2015 would be given the new tariff level.
What is degression?
Degression is an automatic reduction in tariff levels for systems installed in the future as described here.
Chapter 6 of the government’s RHI announcement says
Degression
Under the degression approach, once triggered, support levels would automatically drop by a given percentage for new projects accredited under the scheme. Existing projects would retain their current level of support and so would be unaffected.
Degression will be built into the legislation and so allow tariff levels to be reduced in a controlled but timely manner in order to, as far as possible, manage costs.
Degression will only be triggered when a particular pre-set point is reached, for example, megawatt hours of generation or megawatts of installed capacity. This means that, should the renewable heat market need more time to develop, degression would not start prematurely; but equally, should uptake be higher than expected, degression will start sooner and will help ensure costs are controlled.
We intend to introduce degression in 2012 and the details of how it will work will be subject to consultation. The use of degression may need to vary between the different tariffs as the impacts of this approach may be different depending on the size and technology which it is applied to.
Will specific tariffs for CHP be considered in the future?
Yes, in conjunction with the Renewable Obligation, which has its own tariffs for combined heat and power (CHP).
Chapter 6 of the government’s RHI announcement says
Interaction with the Renewables Obligation and Feed-In Tariffs
For combined heat and power (CHP) installations, the Renewables Obligation (RO) currently provides support for both renewable electricity and heat. We have been considering whether we should phase out heat support under the RO and support it under the RHI instead, with effect from the next review of RO support levels (bands) in 2013.
We intend to consider whether we should provide different, specific RHI tariffs for renewable heat from CHP. However, any decision on tailored RHI support for renewable heat from CHP cannot be taken in isolation from decisions on the RO and the CHP uplift in the RO, and will therefore be taken along the same timeline as that set out above for the RO Banding Review.
Are the published tariffs those that will apply in the first year of the scheme?
No – the published tariffs are those that would have applied in 2010-11. The first year’s tariffs will be higher because they will be adjusted by the annual inflation factor
Chapter 6 of the government’s RHI announcement says
Inflation
The tariff levels set out are based on 2010 prices, and will be updated to reflect 2011 prices before the start of the RHI. After the start of the scheme, tariff levels will be adjusted automatically each year in line with the Retail Price Index (RPI). This adjustment will be applied both for new and existing projects.
Are the tariff adjusted for inflation?
Yes the tariff levels will be adjusted annually in proportion to the change in the Retail Price Index (RPI) in the previous year
Chapter 6 of the government’s RHI announcement says
Inflation
After the start of the scheme, tariff levels will be adjusted automatically each year in line with the Retail Price Index (RPI). This adjustment will be applied both for new and existing projects.
Have the tariffs been designed to accommodate heat networks?
The tariffs are available to renewable heating through district networks, but have not been specifically calculated to take into account heat network costs
Chapter 6 of the government’s RHI announcement says
Renewable combined heat and power (CHP) and district heating
The RHI tariffs will also apply both where heat is used on-site or where it is exported and used off-site, for example where the heat from a combined heat and power station is used in a factory nearby, or where a district heating system supplies a variety of domestic, commercial or public sector properties.
The tariffs have been calculated on the basis of dedicated heat generation costs only. We recognise that the cost of district heating (or other off-site use of heat) will often be higher than the cost of using the heat from a similarly sized installation on-site (due to the costs of pipe-work to transport the heat, and other cost factors).
There will be no specific ‘uplift’ for district heating installations. Whilst we recognise that the cost of district heating (or other off-site use of heat) will often be higher than the cost of using the heat from a similarly sizes installation on-site (due to the costs of pipe-work to transport the heat, and other cost factors), further consideration is needed before any additional cost is provided, to ensure this is necessary and represents good value for money.
Have the tariff levels been set to accommodate CHP plant?
The tariffs are available to combined heat and power (CHP) plant, but have not been specifically calculated to take into account CHP costs.
However this may change in the future.
Chapter 6 of the government’s RHI announcement says
Renewable combined heat and power (CHP) and district heating
The RHI tariffs will also apply to the heat output from renewable combined heat and power.
The tariffs have been calculated on the basis of dedicated heat generation costs only. We recognise that the cost of heat from CHP may not be the same as that of dedicated heat generation. For CHP, there will be a coordinated review of the support available both for the electricity and heat output from CHP, and we will align this work with the ongoing ‘Banding Review’ of the Renewables Obligation (RO).
What do the ‘tiered’ tariffs mean?
See the description on this page
Chapter 6 of the government’s RHI announcement says
Tariff boundaries
A further, different type of tariff boundary applies within the small and medium-scale biomass tariffs. We are providing “tiered” tariffs in these two segments. This means that biomass installations covered by these tariffs will, each year, receive a higher tier 1 tariff for the initial proportion of their generation, followed by a lower tier 2 tariff for any generation exceeding the amount of heat covered by tier 1. We are adopting this approach to avoid any incentive to generators to generate excess or wasteful heat purely to maximise RHI payments.
The “Tier Break” – i.e. the point at which the tariff switches from tier 1 to tier 2 – is set at the amount of heat corresponding with a 15 per cent load factor of the installation. This means that if an installation generates over the year a quantity of heat equal to running the installation at full capacity for 15 per cent of the year, it receives the tier 1 tariff for this quantity of heat; any additional heat would be compensated by the tier 2 tariff. A 15 per cent load factor corresponds with 1,314 peak load hours (i.e. running the installation at full, or peak capacity for 1,314 hours over the year), and represents our estimate of a reasonable minimum level of usage that we would expect from a renewable heat installation used for space heating.
How have the size bands been set?
Government has said it has aimed to set size ranges to reflect the differential costs of installations at various sizes.
Chapter 6 of the government’s RHI announcement says
Tariff boundaries
For most technologies, a number of tariffs for different sizes of installations have been set, and the boundaries between these tariffs have been set primarily to reflect the economies of scale, but also to align more generally with the typical sizes of installations.
A number of stakeholders have warned that this approach could lead to a ‘cliff-edge’ effect, where the change in tariff levels between tariff bands, if too steep, could act as a disincentive to larger-scale installations or encourage ‘gaming’ (i.e. under-sizing of equipment to avoid falling into the larger-size tariff). In response to these concerns, we have increased the number of tariffs and set the boundaries in a way we believe will help to reduce this risk.
What rate of return were the tariffs calculated to deliver?
About 12% (except for solar heating, which is lower). This is therefore higher than the 5-8% used for the Feed-In Tariffs for electricity.
Chapter 6 of the government’s RHI announcement says
Rate of return
Tariffs have been calculated on the basis of a required return on additional capital invested of 12 per cent for technologies and fuels except solar thermal.
This reflects the fact that renewable heat is still relatively unknown in the UK and that from this low starting position, the renewable heat market needs a kick-start in order to encourage high growth quickly. The Government believes a 12 per cent rate of return represents the likely level of compensation that professional and commercial market participants will look for with this type of investment.
Is the tariff intended to cover the total cost of the system?
No - it is only designed in principle to cover the differential cost of renewable (compared to traditional) heating systems
Chapter 6 of the government’s RHI announcement says
Compensation for cost difference
The tariffs are calculated to compensate for the additional cost of renewable heat. This means that they do not compensate for the full cost either of the renewable heat equipment or any fuel used by the renewable heat equipment, but only for the additional cost of such equipment and fuel above that of the fossil fuel alternative. We refer to the fossil fuel alternative as the ‘counterfactual’ fuel. We have assumed that the counterfactual fuel would be gas and have calculated the tariffs accordingly.
How were the costs of each technology assessed?
By looking at a number of ‘reference installations’ considered to be typical of each technology and size.
Chapter 6 of the government’s RHI announcement says
Reference installation
The tariffs vary depending on technology and size in order to match actual cost levels as closely as possible. Nevertheless, even within the range of installations covered by any one tariff, the level of support that each installation actually needs will still differ, sometimes significantly. Differences arise, for example, depending on whether the building is a rural or urban building, or whether the building would use oil, coal or gas if it did not switch to renewable heat (e.g. if the alternative to renewable heat is oil or coal, which are relatively more expensive than some other fossil fuels, it would need less support in order to make the switch to renewable heat attractive than if the alternative is gas, which is cheaper). In order to find a compromise between these cost differences, we have calculated each tariff on the basis of a so-called ‘reference installation’, which represents (in most cases) roughly the mid-point of all the installations covered by the tariff in question
How have the RHI tariff levels been set?
The approach adopted has been to review the cost of each technology at various scales and to set tariffs that deliver an adequate return on investment
Chapter 6 of the government’s RHI announcement says
Cost-based approach
We have adopted the principle of ‘cost-based’ tariffs, where tariff levels vary depending on the cost of the technologies at different scales. In particular, the tariffs are calculated to:
- compensate for the additional cost of the renewable technology over fossil fuel heating;
- provide an incentive to overcome non-financial barriers; and
- provide a return on the additional capital invested.
Within the range of renewable technologies, we expect the cheaper sectors (i.e. large-scale commercial and industrial installations) to deliver the largest proportion of overall renewable heat generation.
Is there specific support for heat networks?
There was talk of a specific ‘uplift’ for district or community heating, but this has not been taken up.
Chapter 4 of the government’s RHI announcement says
Renewable district or community heating
District heating will be eligible for the RHI, where the heat is produced by an RHI-eligible installation. District heating will be treated in the same way as an installation for that technology and fuel type providing heat for on-site use. For example, a district heating system served by a 600kWth biomass boiler will be treated the same way as a 600kWth boiler heating a single building in terms of RHI eligibility and support levels.
There will be no specific ‘uplift’ for district heating installations. Whilst we recognise that the cost of district heating (or other off-site use of heat) will often be higher than the cost of using the heat from a similarly sized installation on-site (due to the costs of pipe-work to transport the heat, and other cost factors), further consideration is needed before any additional cost is provided, to ensure this is necessary and represents good value for money. See the Support Levels chapter for more information about support for district heating.
Why are solar thermal systems supported at a lower level?
The government says it’s because they are more expensive. It has also argued in the past that it is better known, so doesn’t need so much incentive.
Chapter 6 of the government’s RHI announcement says
Solar Thermal
For reasons of cost-effectiveness, a different approach has been applied in order to determine the solar thermal tariff. Solar thermal heat is, at present, more costly per unit of energy than other technologies. If solar thermal received support in accordance with those costs plus a rate of return (as for the other technologies), we would risk dedicating significant proportion of the RHI budget to solar thermal, to the possible detriment of support available for more deployment of cheaper technologies. On the other hand, the costs of renewable heat across the sector are lower than those of renewable electricity, so the fact that solar thermal is expensive as a renewable heat technology should as such not lead to the conclusion that solar thermal should not be supported. The Government has therefore concluded that the tariff for solar thermal installations will be set at a level which is roughly equivalent, in terms of financial support per unit of energy output, to the level allocated to what is currently considered to be the marginal cost effective technology required to deliver the UK’s 15 per cent renewable target, offshore wind. This results in a support level of 8.5p/KWh.
Why would the Spending Review look at tariffs?
The tariffs come from energy users not the Treasury, so are not ‘public spending’ as such.
However, it has been decreed (by the Audit Commission, we believe) that government must be mindful of the impact of any regulatory measure that has a financial impact on the public. Clearly the Tariffs legislation has added to the cost of energy bills, so this is something the Treasury can consider.
Do I have to pay tax on my Tariff income?
It was announced in the Pre-Budget Report 2009 that the income from the Feed-In Tariffs will be free of income tax for householders who install systems primarily for their own use. See the details here. Similarly, it was announced in the March Budget that the Renewable Heat Incentive will also be Income Tax exempt.
Is the Tariff subject to inflation?
The Feed-In Tariffs are index-linked to the Retail Price Index (RPI). It is currently proposed that the Renewable Heat Incentive will not be index-linked. See more information on the page for durations and variations for the RHI.