Heat incentive unveiled, but questions remain

Plans to pay households and businesses for generating heat from renewable sources were issued for consultation by the energy and climate change department (DECC) in February.¹

The renewable heat incentive will, from April 2011, pay those who install equipment such as solar hot water heaters and biomass boilers a tariff per kilowatt hour of heat generated. These vary depending on technology and size (see table). But DECC says they should give a 12% rate of return over the tariff’s life (10-23 years, depending on technology) or 6% for solar thermal.

DECC has created the incentive to ensure the UK meets its target under the EU Renewable Energy Directive to obtain 15% of its energy from renewables in 2020. Currently, only 0.6% of the UK’s heat comes from renewables. This needs to rise to 12% by 2020. Achieving that would save 17 million tonnes of carbon dioxide a year, or 2.6% of UK emissions.

Householders and small and medium enterprises will be paid according to the amount of heat units they are expected to produce. This is because heat metering is not well established and so more expensive than electricity metering. Units will not be allowed that are larger than a building’s heat demand if it had adopted basic energy efficiency measures. DECC wants to avoid incentivising heat production in excess of need.

Larger installations will require meters. DECC says this will include biomass heat plants over 500kW peak capacity, ground-source heat pumps over 350kW and all plants injecting biomethane into the gas grid. The incentives will be periodically reviewed, from 2013.

The incentive has been in the making for 18 months (ENDS Report 402, pp 38-39), but it still contains many gaps.

DECC has not set tariffs for air-source heat pumps above 350kW, solar thermal equipment above 100kW or biogas combustion above 200kW. It says this is due to a lack of data on costs and asks consultees for any evidence they have.

It also intended to provide an extra payment for firms installing district heating networks alongside boilers. However, it has not been able to ascertain costs and the consultation includes a call for evidence, which is surprising. Only last year, DECC published a report by consultants Pöyry that included cost estimates (ENDS Report 412, pp 12-13).

The government has also yet to decide how the incentive will be paid for. The Energy Act 2008 enables the government to introduce a levy on fossil fuel suppliers (ENDS Report 407, pp 52-53). But the consultation says energy companies have raised "potential practical problems [around] implementing a levy equitably, transparently and efficiently." The powers in the Energy Act "could make its enforcement and administration complex and… potentially costly". A further announcement will be made in the Budget.

Some of the consultation’s proposals are likely to draw criticism. The incentive for anaerobic digestion plants that inject biomethane into the gas grid will be 4p/kWh. This level has been set to provide an equal rate of return to the feed-in tariff for electricity generation from anaerobic digestion plants, DECC says. "We want to avoid a comparison between support levels… determining generators’ choices between electricity generation and biomethane injection," it adds.

This seems perverse, given that the CO₂ savings achieved by biomethane injection are significantly higher than using biogas for electricity (ENDS Report 404, pp 30-33). It also suggests the rate of return for biomethane injection will be far below 12%. The electricity feed-in tariffs only give a rate of return of 5-8%.

DECC is likely to face further criticism for its decision to lower pollution limits for biomass boilers. The renewable energy strategy said boilers would not be allowed to emit more than 20 grams per gigajoule particulate matter and 50g/GJ nitrogen oxides (ENDS Report 413, pp 20-21).

Following discussion with boiler makers, it has decided to raise these limits to 30g/GJ and 150g/GJ respectively. The consultation’s impact assessment says the health impacts of this will cost £145m per year by 2020.²

The impact assessment also reveals the heat incentive will cost up to £4bn per year in 2020. This would give a cost of carbon saved of £237 per tonne - several times higher than the government’s shadow price of carbon. It will increase domestic gas bills by 12% and industrial bills by 20% by 2020.

The consultation runs until 26 April.