Renewable Heat Incentive in Great Britain Contents

2Monitoring the scheme’s progress

Developing Great Britain’s supply-chain of renewable and low-carbon heat

11.One of the objectives of the Renewable Heat Incentive (RHI) is to develop Great Britain’s supply-chain of renewable and low-carbon heat. The Department for Business, Energy and Industrial Strategy (the Department) told us the RHI had contributed to the creation of a thriving biomethane sector. The Department told us that it had spent £328 million on developing the biomethane sector as part of the RHI, which had helped to create a supply-chain and a successful industry where there was none before. The non-domestic RHI scheme has funded 80 new biomethane installations which generate the same amount of heat as 50,000 to 60,000 installations on the domestic scheme.22 It also told us that installation costs for non-domestic biomass boilers have fallen by 46% between 2010 and 2016, which has made them more attractive to potential participants in the scheme.23 However, Andigestion Ltd wrote to us highlighting that at current available gate fees (revenue typically accrued by biomethane plant operators upon receipt of food waste), and levels of support under the RHI, no new biomethane plants are being constructed.24 Although the Department told us that its view of the biomethane market did not match this assessment, it does plan to increase tariff rates in this sector by 70%.25 Andigestion Ltd told us that new plant developments receiving these higher rates will have a profound impact on existing plants which do not benefit from such subsidy. This is because all plants compete for a fixed, or even declining, total food waste feedstock.26

12.The Department accepted that it has had less success with developing the market for heat pumps, a strategically important sector for the future.27 While the Department accepted that the market for heat pumps was currently flat, the Ground Source Heat Pump Association went further and described the RHI as “shrivelling and unappealing”. The Association told us that the size of the market for ground source heat pumps reduced following the launch of the RHI and has remained, every year since, below the levels recorded in the three years leading up to the launch of the RHI in 2011.28 To try to address this, in September 2017, the Department increased tariff rates available for heat pumps on the domestic scheme with the aim of boosting take up. It told us it is too early to tell whether this change has worked in stimulating take up in the heat pump sector.29

13.The Department told us that it collects a range of information to determine the state of Great Britain’s supply-chain of renewable and low-carbon heat, and that it had commercial experts in the team who gather intelligence on the renewable and low-carbon heat market. It told us that it uses data from Ofgem to monitor patterns of new applications and how that is changing over time, and that it has an industry advisory group that meets regularly. However, the Department accepted that it does not use this information to assess progress against specific goals, trajectories or milestones.30

14.Clearly defined objectives are essential for major programmes so that an objective assessment of progress can be made and remedial action triggered when necessary. The Department accepted this and that having this information would allow it to make a better assessment of whether the RHI was on track.31 We asked the Department what assurances it could provide on how it will ensure greater clarity in the future to enable an objective assessment of progress in developing the supply-chain. The Department confirmed that a new scheme which follows the RHI will have clearly defined objectives for the supply-chain that enable an assessment of whether it is on or off track. The Department also told us that it is looking to use this approach in a parallel scheme on heat networks, systems which generally take hot water, heated from a central source and deliver it to homes and businesses which are connected via a network of insulted pipes.32

Improving air quality

15.The Department estimates that over 1 million homes and businesses currently use oil for heating, with many more using coal.33 Burning oil and coal for heat produces smoke which can damage air quality. According to the Department’s RHI deployment statistics, the domestic RHI has supported over 21,000 homes switch from oil and coal heating to a low-carbon alternative up to February 2018. This includes 13,000 households who decided to install a heat pump or solar thermal system, heating systems which produce no direct emissions which can damage local air quality, and 8,000 households who installed a biomass boiler. Equivalent data on the non-domestic scheme is not available.34 Biomass boilers are a popular technology within the RHI. Across the non-domestic and domestic schemes, there are over 28,000 biomass boilers accredited to the RHI.35 Biomass boilers burn wood to produce heat. A by product of this process is smoke which is emitted to the atmosphere and can damage local air quality.

16.RHI regulations set maximum emissions levels for equipment installed as part of the scheme. These limits apply to all participants who joined the scheme from September 2013, and they require a RHI emissions certificate for the biomass boiler installed.36 RHI emission certificates are typically provided by manufactures. They contain the results of emission testing for each type of biomass boiler, under standard test conditions from an accredited laboratory. Ofgem told us it checks these certificates as part of its site audit and inspection process.37 However, Ofgem also told us that it does not measure actual emissions from sites funded by the RHI, or the impact on local air quality. It relies on Local Authorities to do this, as they have statutory responsibility for maintaining air quality and handling air quality complaints in their area. Yet Ofgem does not proactively share its data to assist Local Authorities in these activities. Ofgem told us that it will cooperate more effectively with other bodies, particularly Local Authorities, to allow them to maintain air quality.38

17.We asked the Department to clarify how biomass boilers fit into the government’s wider, long-term plans for clean air. The Department told us it was talking to the Department for Environment, Food and Rural Affairs on the developments of its Clean Air Strategy. It also told us that it has commissioned a study of how biomass boilers operate in reality, rather than relying solely on factory/test environment data and it is reviewing how it can work with the Environment Agency to address the challenge of air quality.39

Reducing fraud, non-compliance and gaming

18.Ofgem is responsible for approving new RHI applications, making payments and ensuring participants’ heating systems comply with RHI regulations over the lifetime of the scheme. Ofgem reviews all applications for the RHI and accredits those which pass its initial checks and are ready to join the scheme. It told us it visits around 10% of all sites at the application stage, and nearly 12,000 applications to the RHI have been rejected or withdrawn prior to accreditation because applicants could not meet Ofgem’s application criteria.40 Ofgem told us it has a zero tolerance approach to fraud within the scheme. Once participants are accredited to the scheme, Ofgem starts making quarterly payments and inspects some sites, including over 500 in 2016–17.41 Through this activity, Ofgem told us it has suspended payments on 3,000 accounts whilst it investigated issues of non-compliance and has removed 600 recipients from the scheme. It told us that in 2016–17 it recovered £360,000 of payments as a result of non-compliance and has made 30 referrals to Action Fraud which has led to one successful prosecution.42

19.The Department has set guidelines on tolerable levels of non-compliance within the schemes, which are 1% and 3% of annual spending on the non-domestic and domestic RHI schemes respectively. Current rates of overpayments as a result of non-compliance with the scheme’s rules are estimated at 4.4% and 2.5% of total scheme expenditure (on the non-domestic and domestic RHI schemes respectively).43 Ofgem accepted that this was too high, but asserted that it has sufficient powers and resources to deal with the problem. It aims to bring rates of non-compliance down to tolerable levels within two to three years and continue to enforce the rules until the end of the current scheme in 2041.44

20.Gaming is where participants are generating and using heat which is technically compliant with the regulations, and so the Department is required to make payments under the scheme, but is in a way that does not meet the intentions or spirit of the scheme. The Department and Ofgem explained the use of multiple boilers to take advantage of more generous tariff rates and people using heat generated under the RHI to dry wood, waste or other materials, to then feed back into the boiler to burn it again are two examples of gaming for which it is aware and has taken action.45 Ofgem told us that it manages this problem by sharing intelligence of gaming in a central register, and having a regular dialogue with the Department. Ofgem also told us that it does not estimate the financial impact of gaming but accepted that it should do and plans to do so in the future.46

The cost-effectiveness of the scheme

21.In nearly 4 years 60,000 new renewable appliances were installed under the Domestic RHI alongside 6.2 million gas boilers in the same period.47 Consumers tend to replace gas boilers at the time they break down or if they are extending or remodelling their homes. The Department appears to have given little thought to the reasons for consumer heat choices and develop a heat strategy that is inclusive and flexible. To achieve this there must be an effective heat strategy which joins up policy making across heat networks, energy efficiency, heat decarbonisation research and development, product quality and building regulations. It maybe that for many homes and families heat pumps or biomass boilers are not the answer and other alternatives should be considered by the department.

22.The cost-effectiveness of the RHI can be measured in different ways, but the most straightforward is to calculate the amount of tax-payer subsidy that is spent to achieve one megawatt hour of renewable heating (£/MWh) and/or reduce carbon emissions by one tonne (£/tCO2e). The Department’s estimates of cost-effectiveness based on this approach are uncertain, and likely to overstate the actual cost-effectiveness of the RHI. Using the Department’s assumptions, the NAO estimated renewable heat cost-effectiveness was £49/MWh, compared to the Department’s latest target of £51/MWh.48 The Department uses a different approach to measure carbon cost-effectiveness.49 Using this approach, it told us its estimate of carbon cost-effectiveness is £56/tCO2e compared to a benchmark of £68/tCO2e. However, the Department confirmed the RHI has funded installations which would have been built regardless of whether the scheme was in place or a financial incentive was available.50 These deadweight costs, alongside overpayments made to participants as a result of fraud, non-compliance and people gaming the rules of the scheme for financial gain, have not been factored into the Department’s estimate.51 This means the actual cost-effectiveness of the RHI is likely to be more expensive than the Department’s current estimate. The Department agreed with written evidence submitted by the University of Exeter’s Energy Policy Group that the cost-effectiveness of the RHI is skewed by the higher than anticipated take-up of biomass. This makes the scheme appear cheaper than if it had delivered additional progress on heat pumps, a more expensive but strategically important heating technology for the future.52

Future strategy for decarbonising heat

23.The Department is now rethinking its heat strategy. In March 2018, it published a call for evidence on a Future Framework for Heat In Buildings. The consultation is clear that the government intends to close the RHI scheme in its current form to new applicants on the 31 March 2021. It seeks views on what framework should follow on from 2021 through to the 2030s.53 The Department told us the call for evidence is feeding into a review of its overall strategy for low-carbon heating and what technologies are to be supported in the future. It expects this review to be completed by the end of 2018.54

24.It is crucial that valuable, low-carbon heating funded by the RHI and future schemes isn’t allowed to escape buildings through poorly insulated roofs, walls and windows. We asked the Department if energy efficiency was likely to be part of its future plans. The Department told us that the cheapest energy is the energy you do not use and it would look at what people say on this as part of its call for evidence.55 The Department then went on to explain that ministers are yet to decide on what the new strategy and framework will look like. They are however mindful of the need to preserve the benefits of the RHI achieved so far and ensure a smooth transition to the new framework.56 It expects to complete its review by the end of 2018, with any update on a new scheme provided as part of the 2019 Spending Review.57

22 Qq 27, 65–66, 75

23 Q 66, C&AG’s Report, Figure 6 & 12

24 Andigestion Ltd (RHI0012) page 1

25 Qq 91–92, The Renewable Heat Incentive Scheme Regulations 2018, Schedule 6, Tariffs

26 Andigestion Ltd (RHI0022) pages 1 & 2

27 Q 67

28 Ground Source Heat Pump Association (RHI0017) page 2

29 Qq 72–73

30 Q 74

31 Q 74

32 Qq 76–77

33 Department for Business Energy & Industrial Strategy, A Future Framework for Heat In Buildings: Call for Evidence, 19 March 2018, para 2.1

34 Department for Business Energy & Industrial Strategy, Renewable Heat Incentive Deployment Data, February 2018

35 C&AG’s Report, Figure 6

36 C&AG’s Report, para 3.18, footnote 26

37 Qq 50, 54

38 Q54; C&AG’s Report 3.19

40 Qq 16, 20

41 Qq 7; C&AG’s Report Figure 16

42 Qq 7, 16, 20

43 Qq 9, 17

44 Qq 16, 18, 21

45 Qq 21, 93

46 Q 21

47 C&AG’s Report; Heating and Hotwater Council (RHI0007)

48 C&AG’s Report, Figure 13

49 The Department estimate carbon cost-effectiveness using a method based on the net ‘resource cost’ to the economy. This compares the cost of installing and running the technology with an estimate of the monetary value (to society) of the carbon saved and renewable heat generated.

50 Qq 64–65, 71

51 C&AG Report, Para 2.22

52 Q 66, University of Exeter Energy Policy Group (RHI0020) para 1.9

53 Department for Business Energy & Industrial Strategy, A Future Framework for Heat In Buildings: Call for Evidence, Ministerial Foreword and Executive Summary

54 Qq 47–48

55 Qq 68–71

56 Qq 15, 72

57 Q 88

Published: 16 May 2018