The energy market in the UK has had a tumultuous time over the last few years. Changes to the Government’s subsidy regimes for renewable energy have been central to this. Feed-in Tariffs, Embedded Benefits and the Capacity Market have all undergone significant shifts in recent times, which have not always been good news for developers and investors.
In contrast to other support mechanisms, the Renewable Heat Incentive (RHI) scheme has remained comparatively stable. Whilst there have, of course, been some questions over the impact of the scheme since its revamp in 2018, it still remains the foundation for many heat-based generation projects in the UK (including anaerobic digestion and CHP).
In line with its Clean Growth Strategy and its commitment to Net Zero, the Government last month provided some further certainty for those looking to develop projects off the back of RHI. As a part of its response to COVID-19, the Government made two announcements which will have been welcomed by asset owners and investors in the energy market. This article provides some background on the RHI scheme and those recent announcements.
Before delving into the detail, a quick recap of the RHI scheme and how it works.
The RHI scheme is a Government scheme providing financial incentives to increase the uptake of renewable heat projects. The inherent complexity of renewable heat projects means these are prone to high initial (capital) costs, high ongoing (operational) expenditure and complex revenue models. Much like other subsidy regimes, the Government’s aim with the RHI scheme is to promote and increase the viability of financing such projects by providing a source of stable secured revenue throughout the life of a project. The recent budget showed that the current Government sees renewable heat as a crucial piece in the complex puzzle that the Government must solve if it is to achieve its Net Zero target.
The RHI scheme is comprised of domestic and non-domestic components. The non-domestic RHI (the NDRHI) is directed at installations in the industrial, business and public sectors.
The NDRHI provides two separate revenue streams for accredited projects:
Tariff Guarantees (TGs) were included in the scheme in 2018. TGs enable applicants to secure a rate that they will be paid per amount of renewable heat created before their installation has been commissioned or fully accredited. As recognised by the Government in its recent announcement, “TGs provide investment certainty to larger, better value for money installations“. TGs support the financing of projects that have reached shovel-ready stage and effectively “lock-in” RHI payments for the project once it is commissioned.
On 28 April 2020, the Government announced that it would be introducing a flexible third allocation of TGs under the NDRHI scheme and extending the commissioning deadline for projects currently holding TGs under previous allocations.
The first component of the announcement essentially provides a new round of potential funding for RHI-supported projects. Provided that an application submits its “Stage 2 information” evidencing financial close prior to the closing date of the NDRHI scheme on 31 March 2021, guaranteed tariffs for payments for renewable heat produced by the plant may be secured for circa 20 years, subject to the mechanics below. Notwithstanding the 31 March 2021 deadline, the applicant will be able to set a date for Stage 3 commissioning evidence up to 31 March 2022. This is in keeping with current TG rules.
The mechanics of the New Allocation are as follows:
This announcement also provides a buffer for projects that have had difficulty in meeting the pre-determined commissioning deadlines under previously-obtained TGs. A number of projects are set to miss commissioning deadlines due to the impact of COVID-19. As it stands, if the commissioning deadline for a project to be completed is not met, the project no longer qualifies for the TG secured before installation.
Currently, such projects have a commissioning deadline of the earlier of:
To help ease the burden on plant with existing TGs to meet their predetermined commissioning deadlines, the Government intends to do two things:
The first measure above would give all current TG projects a minimum of an additional six or seven weeks to commission, with a significant number being afforded far more additional build time where commissioning deadlines fell before 31 January 2021. This latest announcement is accordingly of particular importance to those involved in projects with existing TGs under the second allocation.
The Government’s announcement regarding specific support for NDRHI has come at the same time as the release of a consultation regarding the ‘Future support for low carbon heat’. The Department for Business, Energy and Industrial Strategy (BEIS) is seeking views on options for the future support for low carbon heat as it seeks to formalise the replacement scheme for the RHI.
The consultation sets out proposals for a Green Gas Support Scheme and a Clean Heat Grant. The Green Gas Support Scheme would be based on supporting biomethane injection into the grid and the Clean Heat Grant would combat initial cost barriers by providing an upfront grant for heat pumps and, in some cases, biomass.
You can provide your thoughts here until 11:45pm on 7 July 2020.
There is a further specific consultation concerning the replacement of the NDRHI. One of the consultation’s aims is to “maximise the contribution the NDRHI makes to the decarbonisation of heating in the UK”. This presents an excellent opportunity for industry to provide genuine feedback from first-hand experience.
The Government’s NDRHI announcement provides some much-needed direct support to applicants in the renewable heat sector. We have already seen the announcements leading to increased interest in the funding of shovel-ready projects utilising NDRHI. The Government’s proposals are likely to have tangible immediate impacts in the market as new investors see the potential upsides in utilising the NDRHI before the scheme closes to new applications on 31 March 2021.
Just as importantly, this suite of announcements also demonstrates tangible evidence of the Government’s intention to develop a future scheme to support low carbon heat in the UK. The decarbonisation of heat remains an essential and very significant challenge on the road to achieving the Government’s Net Zero goals, so industry involvement in the discussion of where and how Government support is deployed will be crucial to ensuring the resultant scheme is fit to meet this challenge.
If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Ian Holyoak, Head of the award-winning Energy team at Michelmores LLP.
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