2020 renewable heat and transport targets Contents

3Heat and transport: to 2020

15.The Renewable Heat Incentive and Renewable Transport Fuel Obligation are the principal policies designed to meet the 2020 renewable targets in heat and transport, respectively. We analyse their performance in this chapter, before considering the wider, longer-term policy framework in the next.

The Renewable Heat Incentive

16.The Department described the Renewable Heat Incentive (RHI), a subsidy system, as “the key policy mechanism that DECC has put in place for heat’s contribution towards the EU Renewable Energy Directive Target”.31

Box 3: The Renewable Heat Incentive

The Renewable Heat Incentive (RHI) is a unit subsidy from HM Treasury for producers of renewable heat. It comprises two schemes: the Non-Domestic RHI for industry, businesses and public-sector organisations, and the Domestic RHI for homeowners, landlords and self-builders.

Both schemes support the following technologies:

biomass boilers
air- and ground-source heat pumps
solar thermal

In addition, the Non-Domestic RHI includes biogas, biomethane, water-source heat pumps and geothermal. The Non-Domestic scheme is the larger, accounting for 82% of RHI spending.

Participants in each scheme are paid a tariff per unit of energy produced. Tariffs vary between technologies and are subject to ‘degression’ mechanisms, whereby they fall (for new applicants) when total spending on that technology reaches a pre-determined level.

Sources: DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016; House of Commons Library, Briefing Paper 6328, Renewable Heat, August 2016; Ofgem, Domestic RHI, Essential Guide for Applicants, Version 3.0, March 2016; Ofgem, Non-Domestic RHI, Easy guide to eligibility, March 2016

17.The Government consulted on proposed reforms to the RHI earlier this year.32 Major changes include:

An overall spending cap (across both schemes), rising from £430 million in 2015–16 to £1.15 billion in 2020–2133
Spending more on heat pumps and less on biomass34
Focusing on large (rather than small or medium) biomass in the Non-Domestic RHI
More support for biomethane35
Tariff guarantees for large projects36

The Government has not yet finalised these changes. We discuss their impacts in the context of meeting the 12% renewable heat sub-target, and also wider challenges for the RHI.

A reformed and refocused scheme?

Biomass

18.Biomass dominates the RHI. 92.9% of installations under the Non-Domestic scheme are biomass boilers,37 which also take 55.6% of Domestic RHI spending.38 According to Billington Bioenergy, a biomass supplier, “biomass has delivered 93% of the RHI’s capacity and 98% of the heat delivered (excluding biomethane) from only 43% of the installations”.39

Table 1: Non-Domestic RHI: Biomass tariff changes

	Current tier 1 tariff (p/kWh)	Proposed tier 1 tariff (p/kWh)	Current tier 2 tariff (p/kWh)	Proposed tier 2 tariff (p/kWh)
Small biomass	3.76	2.03–2.90	1.00	1.80–2.03
Medium biomass	5.18	2.03–2.90	2.24	1.80–2.03
Large biomass	2.03	2.03–2.90	2.03	1.80–2.03

Source: DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016

19.There are currently three biomass tariffs under the Non-Domestic scheme; the Government has proposed contracting these to a single tariff for all sizes. Boilers receive a ‘tier 1’ tariff for each unit of heat produced up to an annual threshold, and a ‘tier 2’ tariff per unit thereafter. As Table 1 shows, the changes shift support from small and medium to large biomass installations.

20.This would reduce small and medium biomass. In its consultation, DECC was concerned that currently “the higher tariffs for small and medium biomass mean these systems offer poorer value for money in subsidy terms compared to large biomass”.40 However, the National Farmers Union (NFU) told us “it is hard to see how the biomass boiler supply chain can adapt at the pace now proposed”.41 Billington Bioenergy claimed the reforms would “completely close down the small and medium non-domestic biomass installation industry”.42 It is unclear that gains in large biomass will compensate: Dr Nina Skorupska, Chief Executive of the REA, warned that “large biomass is a very difficult market to unlock and is not likely to be achieved”.43 British Gas concluded:

There is a strong case for biomass support levels to be retained at their current level to support deployment of the most cost effective technologies, else we believe the RHI budget will be underspent and the supply chain will contract.44

21.If the Government confirms the proposed changes for biomass in the Renewable Heat Incentive, it must consider what support needs to be given to the supply chain for it to adapt at sufficient speed.

Heat pumps

22.Heat pumps “capture ambient heat from the air or the ground and transfer it inside a building”.45 They can use electricity or gas, though all RHI-supported heat pumps are electric. Good Energy, a supplier, describes them as “the most effective way of using electrical heating”.46 60.9% of Domestic RHI, but only 4.7% of Non-Domestic RHI, installations are heat pumps.47

23.The Government has proposed increasing Domestic RHI tariffs for heat pumps.48 This contributes, overall, to “proportionately lower spend in biomass, where growth has already been strong compared to the other technology groups, and proportionately higher spend for heat pumps”.49 Lord Bourne told us “there is massive potential for heat pumps”.50

24.Citizens Advice noted “heat pumps in Great Britain suffer from under-performance in-situ when compared with their design performance”.51 The Government agrees:

Recent reports on in-situ performance of heat pumps installed in the UK show a continued mixed picture of performance, with some heat pump systems operating at a level such that they are unlikely to be providing significant bill savings to the users and are providing less renewable heat than expected.52

DECC argues “we need to support the deployment of heat pumps now to reduce costs and improve performance over time”,53 and is considering new approaches to linking performance and payments.54

25.Heat pumps perform best in well-insulated buildings.55 Their general underperformance may therefore be symptomatic of energy inefficiency. In 2014, the Committee on Climate Change (CCC) estimated that 10 million easy-to-treat lofts could benefit from additional insulation, 7 million solid walls were still without any insulation and 4.5 million cavity walls remained un-insulated in the UK.56 The Energy Research Accelerator, an academic partnership, stated “there are currently over 20 million houses in the UK that require retrofit and therefore this is the most significant area for investment and innovation”.57 Citizens Advice agreed that “delivery of a greater number of energy efficiency measures would support the delivery of renewable heat as well as reduce emissions from existing fossil fuel heating systems”.58 We argued, in our Home energy efficiency and demand reduction report, that “driving demand for energy efficiency measures should therefore be one of Government’s top priorities”59 and made detailed recommendations as to how this might be achieved. Energy efficiency is a precondition for heat-pump success: adequate (and adequately-funded) energy-efficiency policy should therefore be prioritised over heat-pump promotion.

26.Heat pumps may be particularly appropriate for off-gas-grid buildings—often in rural areas. SGN, a gas network operator, suggested:

The electrification of heat may be the most appropriate solution to decarbonise heat in certain areas. This could be for households off the gas grid who currently rely on high carbon fuels such as heating oil or LPG, and have sufficient space for an air or ground source heat pump. In off gas grid areas, the disruption caused by the work that would be required to upgrade the electricity network to meet the large increase in demand, may also be more acceptable to customers.60

However, Calor Gas claimed “the average network reinforcement cost per heat pump in rural areas is approximately four times higher than on a GB-wide basis”.61

Biomethane

27.Our recent Low carbon network infrastructure report explained:

Biomethane is produced by extracting CO2 and other impurities from biogas, which is a mixture of methane and CO2 created by anaerobic digestion of organic material. As biomethane is chemically similar to natural gas, it can be used with or instead of natural gas in the gas grid without pipeline modification. However, its CO2 emissions are approximately 90% lower than natural gas, as the process of anaerobic digestion used to generate it absorbs CO2 from the atmosphere.62

28.Witnesses were enthusiastic about biomethane. Ecotricity, a supplier, claimed “bio-methane has the highest potential for providing additional renewable heat in the UK by 2020”;63 the Energy Networks Association added that “biomethane has the potential to meet over 10% of domestic UK heat demand” by 2020.64 “In 2015, the UK was the fastest growing biomethane to grid market in the world”, according to Dr Skorupska.65 SGN, a gas network company, argued “the RHI has enabled the UK to become the fastest growing and most innovative biomethane market in Europe”.66

29.The Government is considering resetting the biomethane tariff—which has suffered from successive reductions (called ‘degressions’)—to its January 2016 level,67 amidst fears over the subsidy. SGN was “extremely concerned about tariff degressions” and believed that soon, “the biomethane tariff [would] be so low that biomethane projects will be uninvestable”.68 The REA continued “it is likely the biomethane tariff will fall below a commercially viable level by 2017”.69

30.The Government’s proposed reforms to the Renewable Heat Incentive (RHI) are not the optimal pathway to the 2020 renewable heat target. Heat pumps have proven unsatisfactory in actual use, yet are being prioritised over biomass—which has been successful. Sudden realignment from small to large biomass will damage the former’s supply chain, and the latter is unlikely to be taken up at scale. Above all, biomethane is crucial to meeting the 2020 target and must remain a funding priority. The Government should revise its RHI reforms to reflect these priorities, especially in protecting biomethane support.

Underlying problems with consumer engagement

31.Households and businesses have their own heat systems, and only they can change them—unlike electricity supply, which suppliers can decarbonise through generation changes with which the public is not directly involved. Therefore, consumer engagement is critical to any success the RHI might have, but it has been poor. Philip Sellwood, Chief Executive of the Energy Saving Trust, explained:

The level of awareness in the public is so low. This is potentially a programme that we are going to be spending £1 billion on and the latest evidence suggests that there is probably a 5% awareness of [the RHI], and about a 12% awareness of things like ground source heat pumps, so unless we align some form of public awareness campaign between now and 2020, frankly, apart from those who were early adopters and those who really want to get involved, I think the impact will be pretty low because people do not know that it exists now.70

Citizens Advice agreed that “information and advice on low-carbon heat that is accessible for all types of consumers seems particularly lacking”.71

32.Insufficient information means insufficient uptake. Citizens Advice noted:

When customers are looking to replace their heating system the lack of understanding of new systems can mean people either default to what they are familiar with, meaning fewer low-carbon systems are chosen, or choose inappropriate systems for their needs, which can lead to higher bills.72

The Solar Trade Association stated “improved marketing of the RHI by Government would improve the UK’s contribution to the renewable heat targets”.73 Our report on Home energy efficiency and demand reduction concluded that the benefits of home energy efficiency “have not been clearly communicated to households, which is a principal reason behind the failure of previous schemes to drive demand”;74 it is evident that there are parallel problems in heat.

33.We considered how to improve engagement. Philip Sellwood suggested a focus on system-wide benefits over technical detail:75 consumers “want to know whether or not if they have this technology it means their house is warmer, their bills are lower, and they have greater comfort and better health outcomes”.76 So far there has been little focus on the environmental benefits of renewable heat: Citizens Advice could see “no overarching narrative for consumers about the need to decarbonise our energy system”, meaning “people fail to see the importance of such a policy and are also unable to understand their part in it”.77 Good Energy reported that “around 1.6 million gas boilers are installed in the UK each year”.78 Boiler replacements are often distress purchases,79 but the churn would be sufficient for progress to be made if information was available to consumers at the point they made decisions on their heat.

34.The Renewable Heat Incentive (RHI) cannot succeed without consumer engagement, which has so far been inadequate. An improved marketing strategy, explaining the comfort, health, environmental and financial benefits of RHI installations—rather than technicalities—and targeted at the actual patterns of heat-system replacement, must be made central to RHI reform. Biomethane injection is the only RHI-supported technology that does not require individuals to choose it: this strengthens our case for the RHI to focus on biomethane until consumer engagement is addressed.

The Renewable Transport Fuel Obligation

35.Transport biofuels include bioethanol (blended into petrol) and biodiesel (blended into diesel). The Department for Transport expects biofuels to provide 90% of the 10% transport sub-target by 2020 (road and rail electrification will contribute the final 10%).80 3% of transport fuels are currently biofuels—this will need to “more or less double” to 5–6% by 2020 (double-counting biofuels will bring this to an effective 9%), according to Rob Wakely, Head of Low Carbon Fuels at the DfT.81

36.‘E5’ (95% petrol, 5% bioethanol) and ‘B7’ (93% diesel, 7% biodiesel) are currently the biofuel blends in UK transport. A roll-out of E10 (90% petrol, 10% bioethanol) will be needed to meet the 2020 target: Dr Skorupska urged that “we need to see the introduction of E10 as soon as possible”.82 E5 is universally compatible with cars, but E10 is not—approximately 9% of registered petrol cars are incompatible with E1083 (mostly older vehicles).84 This should fall to 3% by 2020.85 Jonathan Murray, Policy and Operations Director at the Low Carbon Vehicle Partnership (LCVP), explained that if E10 were introduced, “there will need to be a public information campaign to explain which vehicles cannot use E10 successfully”.86 Introducing E10 would bring the UK one percentage point closer to the 10% transport target, he estimated.87 E10 has been rolled out in the USA, Brazil, France, Germany and Finland.88 The Transport Energy Task Force believes that “achieving the required uptake of E10 in the remaining timeframe would be a significant challenge”, anticipating 6–12 months for prerequisite infrastructure and a further 6–12 months for “an effective co-ordinated communication campaign”.89 The LCVP recommended “if the UK decides to introduce E10 … an early roll-out with government support may lead to higher penetration levels and greater chance of success in meeting the targets in 2020”.90 Andrew Jones MP stated “people will see the consultation that we hope to launch very shortly and see that this is about providing some certainty into the marketplace for E10 and all other biofuels”.91

37.It is one thing to introduce E10, and another for it to be used widely. Dr Skorupska noted that fuel duty forms “a large proportion” of pump prices92 (on average, 64.1%–68.3% is tax):93 a duty differential between E10 and other fuels might thus stimulate uptake. A similar move, from leaded to unleaded petrol, was fuelled by a duty differential.94 ePURE, an ethanol trade association, insisted “for E10 introduction, the UK could take inspiration in France where E10 is taxed less than E5”.95 Other stakeholders have also suggested the Government should “offer a fuel duty incentive”.96 On non-financial incentives, the UK Petroleum Industry Association (UKPIA) argued the DfT should, in the event of E10 introduction, “amend the label on dispensers to be reworded to a more positive message (the current one being ‘Not suitable for all vehicles: consult vehicle manufacturer before use’)” and “lead a consumer information campaign”.97

38.Introducing E10 fuel would help the UK reach its 2020 transport target. The Government must begin laying the groundwork for an E10 introduction as soon as possible, including a strong public information campaign. There is evidence that a duty differential would help, and the Government should produce an Impact Assessment to quantify this claim.

39.The Renewable Transport Fuel Obligation (RTFO) is the main policy encouraging biofuel use in the UK. It sets a minimum quota (currently 4.75%) for the proportion of biofuels in the sales of major transport-fuel suppliers, who can trade obligations with each other; smaller suppliers are exempted. So far, the RTFO has “achieved greenhouse gas savings from the biofuels supplied of 60%, compared to fossil fuels, and the emissions savings for 2013/14 alone were the equivalent of taking 1.35m average cars off the road”.98

Figure 2

RTFO stuck at 4.75%

Source: DfT, Renewable Transport Fuel Obligation statistics: obligation period 7, 2014/15, report 1, November 2014

40.The RTFO has been capped at 4.75% since 2013: this is well below the level needed to meet the 2020 target. The CCC lists the RTFO as “at risk of failing to deliver”.99 Jonathan Murray warned that “unless the RTFO is changed—and there will be a consultation we understand this summer with a view to changing it next year—it will remain at that level and we will miss the target on the transport side”.100 The frozen RTFO has already chilled the biofuel supply chain. Ensus’ bioethanol plant on Teeside “has been mothballed for nearly half its life”, according to the Financial Times101: Ensus told us “we are currently not operating due to a lack of demand for our bioethanol mainly because the UK has failed to increase [the RTFO]”.102 Vivergo, another bioethanol producer—based in Hull—also expressed concerns:

The capping of the RTFO target since 2013 has undermined investments, including our own, by suppressing the market. Plans for biofuels production in the UK have been shelved and investors have fled.”103

41.There are widespread calls to increase the RTFO. The REA recommended “the RTFO target must be raised in 2017 to at least 6.5% and a straight line trajectory set thereafter, if the 8.9% is to be reached by 2020”.104 The NFU went further: “we believe the UK Government must immediately raise the [RTFO] with a clear trajectory to 10% by 2020”.105 Jonathan Murray believed “if the changes are brought in, in the task force that we help DfT lead the consensus was [the 10% target] was achievable even given that timeframe”.106 Andrew Jones MP told us “we have been working up a very comprehensive biofuel policy” and “we are almost ready to go with this”, though we are yet to see any proposals for RTFO reform.107

42.The level of the Renewable Transport Fuel Obligation (RTFO) must be raised to approximately 9% by 2020; the Government must begin doing so without delay. It is clear that the 2020 renewable transport target will not be met without rapid progress on the RTFO.

31 DECC, The Renewable Heat Incentive: A reformed and refocused scheme, Impact Assessment, March 2016, p7

32 DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016

33 DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016, p3

34 DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016, para 2.27

35 DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016, para 6.17

36 DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016, para 11.8

37 Ofgem, Non-Domestic RHI, Public reports and data, accessed 11 August 2016

38 Ofgem, Domestic RHI, Public reports and data, accessed 11 August 2016

39 Billington Bioenergy Ltd (HAT0033)

40 DECC, The Renewable Heat Incentive: A reformed and refocused scheme, March 2016, para 8.2

41 NFU (HAT0009)

42 Billington Bioenergy Ltd (HAT0033)