The Government’s Plan for Low Carbon Heating

United Kingdom

On 28 April 2020, the Government department for Business, Energy and Industrial Strategy (“BEIS”) published two consultations regarding the decarbonisation of heating. These were its proposals for future proofing the Non-Domestic Renewable Heat Incentive (“NDRHI”) scheme, timetabled to close on 31 March 2021 (“Scheme Closure”), and on future support for certain low carbon heating options. The latter was updated on 29 May 2020.

The Climate Change Act commits the UK to achieving ‘net zero’ by 2050. This means that all emissions must either be eliminated, captured or offset by that point.

Currently, around twenty per cent of UK carbon emissions stem from heating buildings, so decarbonising heat will play a fundamental role in achieving net zero. From 2025, gas boilers will be banned in new homes and replaced with ‘greener’ alternatives such as heat pumps. While this is positive, it does not address the issue of decarbonising heat for UK’s existing real estate.

Overview of Proposals

  • BEIS proposes a new round of tariff guarantees under the NDRHI.
  • Accredited heat pump systems will be able to add capacity following Scheme Closure and a £4,000 grant for the installation of new domestic heat pumps is proposed under the new Clean Heat Grant Scheme.
  • Biomass will also be eligible under the Clean Heat Grant Scheme, but only in the case of “hard to treat” properties. Biomass will also be subject to fuel quality requirements.
  • Biomethane accreditations will now be transferable between people and tariff payments will be available under the new Green Gas Support Scheme.

Further details of the proposals are set out below.

While the Government’s continued support of low carbon heating is welcomed, failure to properly engage with the NDRHI’s shortcomings may hamper the success of the new schemes.

Since the scheme was opened in 2011, about 20,000 applicants have been accredited under the NDRHI (with biomass boilers making up nearly eighty-five per cent of these accreditations). Although they recognise the need to continue supporting accredited applicants, and attempt to remedy certain issues with the scheme’s functionality, the consultations do not examine reasons for low consumer uptake of the NDRHI. Like the NDRHI, the new proposals offer financial incentives for injection of biomethane into the grid and adoption of certain low carbon heating alternatives, but do not tackle consumer sentiments that might be a barrier to adoption. Failure to address these issues could result in the new schemes suffering from the same low uptake.

The Clean Heat Grant Scheme is expected to run for just four years, while the Green Gas Support Scheme will close to new applicants two years after it opens. These short time periods add to the risk of low uptake.

The Clean Heat grant has been viewed as preferable to the tariff model, however some commentators feel that the £4,000 proposed is too low to remove the financial barrier to installation. BEIS have also been criticised for not extending the NDRHI beyond the existing Scheme Closure date.

BEIS highlight the possibility of extending the Green Gas Support Scheme to cover hydrogen in the future. It cannot be assumed that a programme designed for biomethane will work effectively in respect of other green gases.

Failure to learn from the previous scheme may lessen the potential positive impact that could otherwise be achieved. When published, the Energy White Paper, originally scheduled for publication in summer 2019, will provide much needed guidance on the Government’s holistic energy strategy going forward. 

The Non-Domestic Renewable Heat Incentive: Ensuring a sustainable scheme Delivering value for money and robust management beyond 2021 (“NDRHI Consultation”)

Following Scheme Closure, NDRHI installations already accredited would continue to participate in the scheme but on amended terms.

Under the NDRHI, successful applicants receive a tariff guarantee, fixing the tariff rate that their installation will receive from the point of commissioning. To benefit, the applicant must submit an initial application, financial close evidence and proof of commissioning (which must be before 31 January 2021).

BEIS proposes a new round of tariff guarantees prior to Scheme Closure, with a lower eligibility threshold. To secure the guarantee, applicants would only need to provide financial close information i.e. evidence that funds are available and formally committed to completing construction. Evidence of commissioning could be provided up to a year after the tariff guarantee is granted. The guarantee and the start of the applicant’s 20-year tariff period will commence upon the receipt of financial close information, however tariff payments at the guaranteed amount will not begin until the point of commissioning.

BEIS also makes a number of technology specific proposals addressing how accredited applicants would continue to benefit from the NDRHI following Scheme Closure.

Future support for low carbon heat

The consultation sets out the following two proposals:

  1. The Green Gas Support Scheme – aimed at placing green gas on the grid via support for biomethane injection; and
  2. The Clean Heat Grant Scheme – aimed at decarbonising heat in domestic and small non-domestic buildings via upfront grants for heat pumps and, in limited circumstances, biomass.

The Green Gas Support Scheme is expected to run for just four years, from the financial year 2021-2022 to 2025-2026.

The Clean Heat Grant Scheme is expected to run for fifteen years; opening in April 2022 and closing to new applicants in March 2024.

The following technologies are not supported, either because support is available elsewhere or because they are not aligned with the strategic aims of the proposals:

  • Process heating
  • Biogas combustion
  • Solar thermal
  • Hybrid heat pump systems
  • Heat networks

Technology

Technology specific proposals contained in BEIS’ April 2020 Low Carbon Heating consultations

 

Heat Pumps

NDRHI Consultation

 

Ground source, water source and air-to-water heat pumps are currently supported under the NDRHI.

 

In the case of ground source heat pumps, some participants have developed shared group loop (“SGL”) systems (more than one heat pump forming part of the same system). Under the NDRHI, participants are not required to bring all heat pumps online at the point of accreditation. Heat pumps brought online later will be added to the accreditation. The 20-year period of NDRHI payments commences for all elements of the SGL at the initial accreditation date – including for those added after that date.

 

BEIS recognises that enabling accreditation and resulting NDRHI payments to start before an entire SGL system is built can benefit larger projects, by easing cash flow during development.

 

BEIS proposes to allow SGLs accredited prior to Scheme Closure to add (or modify) heat pumps to the SGL after the scheme closes.

 

To ensure that the financial implications are understood prior to accreditation, BEIS suggests that new applicants and participants wishing to modify their SGL be required to provide evidence of total intended capacity and the plans for connecting further heat pumps at the point of accreditation.

 

BEIS does not give details of any sanctions for providing incorrect information as to SGL capacity or the development timeline.

Low Carbon Heat Consultation

 

The Clean Heat Grant Scheme would support heat pumps in domestic and non-domestic buildings, up to capacity of 45kW or less. It will only support systems providing space and water heating, not process heating, and will not support hybrids installed alongside fossil fuel systems.

 

BEIS recognises upfront costs as a barrier to investing in heat pumps. An initial grant is therefore proposed instead of a tariff, which would be paid directly to the heat pump installer following installation and then deducted from the customer’s invoice.

 

A £4,000, technology neutral grant is proposed, placing the onus on the market to identify the most cost-effective low-carbon technology.

 

It is proposed that the grant be applied for and awarded via a two-stage process. First, the customer wishing to install a heat pump at their property would apply for the grant, providing basic details about themselves, their property and the proposed heat pump. Following installation, the heat pump installer would redeem the grant by providing evidence of installation, commissioning and building eligibility.

 

Interplay between Consultations

 

It is unclear from the consultation whether there will be an overlap between the Clean Heat Grant Scheme and the NDRHI. While the NDRHI is scheduled to close on 31 March 2021, it is not clear whether NDRHI accredited SGL installations could benefit from the grant in order to add further heat pumps after the introduction of the Clean Heat Grant Scheme.

 

Biogas Combustion and Biomethane Injection

NDRHI Consultation

 

Biomethane injection and onsite biogas combustion are supported under the NDRHI.

 

Registration under NDRHI is personal to the biomethane producer. Under the current scheme, the NDRHI registration for a biomethane producer, and the resulting ability to receive payments, cannot be transferred to another person, even when the biomethane plant it sold.

 

BEIS proposes to allow biomethane registration to transfer in the same way as accreditation of other relevant technologies.

 

The NDRHI is unclear as to whether Anaerobic Digestion is subject to provisions restricting contamination of feedstocks with fossil fuels. BEIS proposes to update the regulations to clarify that the same restrictions apply to Anaerobic Digestion as apply to gasification and pyrolysis.

 

Biomethane producers are currently prevented from making partial claims for NDRHI payments in a given quarter. This means that they cannot claim under both the NDRHI and the Renewable Transport Fuel Obligation Scheme (“RTFO”) in the same quarter, removing the ability to benefit from diversified revenue streams – from injection of biomethane onto the grid and from provision of biomethane to transport fuel suppliers.

 

BEIS proposes amending the NDRHI payment calculations to enable biomethane producers to claim under multiple schemes during the same quarter.

 

BEIS proposes to make it a formal requirement that producers are not compensated twice for the same consignment of biomethane, with Ofgem empowered to take enforcement action where double compensation is suspected. Producers would report to Ofgem on the amount of biomethane to be injected onto the grid, and this information shared with other relevant scheme administrators.

 

Capacity added to biomethane plants after Scheme Closure will not benefit from NDRHI payments.

 

Low Carbon Heat Consultation

 

The Green Gas Support Scheme is only intended to support biomethane produced through Anaerobic Digestion, although may extend to other green gases such as hydrogen in the future.

 

BEIS proposes retaining a tiered tariff system for biomethane producers, with producers receiving highest payments for the first designated amount of methane injected into the grid and reducing payments for subsequent amounts.

 

This recognises the fact that the cost of production falls as methane production increases. BEIS proposes to increase the amount of Tier 1 biomethane from 40,000MWh to 60,000MWh, increasing the amount of gas attracting the highest level of tariff payment.

 

The proposed tariff amount under the scheme is:

Tier 1

4.9-5.5 p/kWh

Tier 2

3.25-3.75 p/kWh

Tier 3

1.5-2.75 p/kWh


BEIS suggests a tariff length of fifteen years, compared to the twenty-year tariff available under the NDRHI scheme.

 

On 29 May, BEIS proposed green gas tariff review mechanism to facilitate tariff reduction for new applicants based on market signals. The aim is to ensure that the tariff continues to reflect true industry costs. BEIS have confirmed that the tariff reduction would not apply to existing recipients.

 

BEIS have also suggested requiring more detailed applicant costing information and the implementation of an annual review.

 

Interplay between the Consultations

 

BEIS does not intend to allow interaction between the Green Gas Support Scheme and the NDRHI scheme.

 

Biomass

NDRHI Consultation

 

The NDRHI does not currently mandate for fuel quality.

 

BEIS proposes a fuel quality standard, whereby all suppliers of fuel used on the NDRHI scheme must ensure that their product fulfils particular specifications and burns efficiently.

 

Under the NDRHI, accredited boilers of below 1000kW must use fuel suppliers featured on the Biomass Suppliers List. (“BSL”). Installations of 1000kW or greater would need to self-report to Ofgem. BEIS proposes to extend BSL’s responsibility to include checking against the relevant fuel standards. Ofgem would assume this role in respect of larger boilers.

 

The introduction of fuel quality standards may have a one-off cost to suppliers, who may need to upgrade their processes to check that fuel complies with the specifications and/or introduce quality testing systems.

 

Low Carbon Heat Consultation

 

Biomass boilers would potentially be eligible under the Clean Heat Grant Scheme, however only in the case of “hard to treat” buildings. These suffer from high levels of heat loss that cannot cost-effectively be reduced through energy efficiency improvements, rendering them unsuitable for a heat pump. They are likely to include buildings constructed towards the start of the twentieth century and earlier.

 

To obtain the grant for a biomass boiler, BEIS proposes that a heat loss assessment should be undertaken and submitted by the installer or another qualified assessor, to demonstrate that the building suffers from the required level of heat loss.