The Renewable Heat Incentive - An opportunity too good to miss
The world's first Renewable Heat Incentive (RHI) scheme has been open to applicants since 28th November 2011, providing payments for heat generated from renewable technologies including biomass boilers, solar thermal equipment and heat pumps. The scheme is retrospective, meaning that installations made since 15th July 2009 are eligible.
With an initial budget of £860million for the period 2011-2015, the RHI provides financial support to commercial, industrial, public and not-for-profit and community generators of renewable heat.
RHI payments last for a 20-year period, with the Department for Energy and Climate Change predicting 14,000 industrial installations and 112,000 installations in the commercial and public sector by 2020. The domestic sector will be included in the scheme later on.
In their analysis of the RHI scheme to date, the Carbon Trust predicts that biomass will be the most popular technology to be adopted, with the initial budget capable of supporting up to 6,000 new installations.
However, the renewable energy industry has concerns about the low take-up of the RHI so far, despite the very attractive and near-certain returns on investment that are possible.
So, if the opportunity is too good to miss, what is holding it back?
Can the Government be trusted?
With the furore surrounding the Government's earlier than expected review of electricity Feed-in-Tariffs (FiTs)still rumbling on, prospective customers can be forgiven for harbouring sceptical attitudes towards any reassurances over the RHI. A lack of trust in Government initiatives is likely to be an important factor for organisations considering large investments.
RHI - the opportunity
The Government's handling of the Review of Feed-in-Tariffs undoubtedly had an impact on confidence in the Government's commitment to the renewable energy market. However, a closer analysis of the impact of the FiT Review shows that the Government did not renege on promises made to existing customers. Unfortunately, bringing forward the deadline for installations to qualify for higher payments meant that some projects ended up on the wrong side of the revised deadline and missed out.
This clearly demonstrates the importance of taking advantage of similar schemes as soon as possible.
£860million has been committed to the RHI scheme, so it is vital that investors act quickly to guarantee their share before the fund is exhausted, especially as the RHI represents such an excellent return on investment, far better than many other alternatives.
How to pay for it - Energy Efficiency Financing
The general economic climate is making organisations cautious about committing large sums of money to capital improvement schemes. Even when the investments can generate huge savings, as with renewable energy, organisations can be reluctant to spend money, preferring to hoard it for emergencies. Alternative funding arrangements are therefore vital for facilitating such projects. This is where Siemens Financial Services can help.
In collaboration with The Carbon Trust, Siemens has created the Energy Efficiency Financing (EEF) scheme, offering low-cost leases, loans and other financing options to all types of organisations seeking to reduce their energy use. This innovative financing scheme is designed to pay for itself from the combined energy savings and Renewable Heat Incentive payments generated by the installation of renewable energy systems. Once the loan has been repaid, the equipment will continue producing savings and receiving RHI payments for the remainder of the 20-year span of the RHI scheme, allowing organisations to reap the benefits of renewable energy without having to tie up their own capital.
The EEF scheme can be accessed via a select group of renewable energy 'Recognised Suppliers'. Only a few national suppliers, such as Ecoliving, have been awarded such status. This ensures that customers benefit from dealing with installers that have the resources and national scope to implement the entire project successfully.
Feed in Tariffs were a huge success, leading to a surge in sales of generating systems, which is precisely what prompted the Government's review. In the age of austerity, the Government is likely to be wary of a similar runaway success story for the RHI scheme and has perhaps been more reticent about it than it could have been.
A lack of awareness about the scheme could reduce its uptake, with the risk that some potential customers could miss out on the generous terms currently available. The industry has a responsibility to promote the scheme. It is also important that customers turn to the larger, more experienced installers for the best advice.
Even if they are aware of the scheme, customers still need help with applying for funding. Responsibility for the application lies with the customer, not the supplier. Therefore, customers need to deal with reputable companies such as Ecoliving, who have the experience and expertise to guide them through the bureaucratic process, helping with the application and ensuring that the customer receives all the benefits they are entitled to.
Credibility of Payback Estimates
The boom in Solar PV led to accusations of malpractice in certain quarters, with some disreputable salesmen overstating the benefits and payback schedules of their systems. Again, this emphasises the importance of dealing with reputable suppliers.
Companies such as Ecoliving take great care in compiling estimates of payback periods, which is one of the reasons they have been accorded 'Recognised Supplier' status in the EEF scheme. If customers are borrowing money to fund renewable energy equipment, they need to be sure that the investment will cover the repayments. The lender also needs to have confidence in the figures to ensure that the loan will be repaid.
Worked examples of RHI payback:
Case Study 1: Office block, replacing an oil-fired boiler with a biomass system
A particular office has an estimated annual heat demand of 35,860kWh. This is currently met by oil, at an average annual cost of £3,067. To generate the same heat using wood pellets, the fuel cost would be £2,363 (based on quoted figures of 6.59pence/kWh, after boiler efficiency is considered). The annual fuel saving would be £704.
On top of this, the RHI would be received at a rate of 8.3pence/kWh of heat delivered to the building, as measured with a heat meter. If 35,860kWh of heat demand is fully met, the RHI amounts to £2,976 per annum, payable for 20 years. With the fuel saving of £704, there is a total net annual benefit of £3,680.
The office is in a listed building, adding to the complexity and cost of the installation. If the biomass boiler system costs £24,000, the payback period is less than 7 years. After that, the customer will receive a net annual benefit of £3,680 for another 13 years. Loan finance will increase the payback period, but it is clear that the installation of renewable energy systems is a shrewd investment, generating excellent returns.
Case Study 2: Ground source heat pump installation, with lease financing provided by Siemens
The annual heat demand of a social housing building is 327,000kWh. If this was to be met by oil, the cost would be £24,427 at current oil prices of 7.47p/kWh. A ground source heat pump could meet the same demand with an electrical running cost of £11,947 per annum. Therefore, the heat pump achieves a net annual saving of £12,480. The total net cost of installing the heat pump is £110,000. This results in a payback period of 9 years.
If the installation is financed under the Siemens lease scheme, the customer has the option of choosing the payback period. In this particular case they opt for a 7-year period. The total net cost of the lease purchase over this time will be £145,209.12. Therefore, the payback period based on annual energy savings of £12,480 increases to 12 years. This is still very respectable, as the equipment has an expected life expectancy of 20-25 years. The figures also do not include any corporation tax savings resulting from offsetting the lease repayments against profit.
However, once RHI is factored in, the economics of the installation are transformed:
If the total 327,000kWh annual heat demand of the property is met by the heat pump, it will attract RHI payments of 4.7p/kWh. This amounts to a staggering £15,369 per annum. Combining this with the annual savings of £12,480 results in a total annual benefit of £27,849, effectively reducing the payback period to less than 5½ years!
With the lease financing costing £20,744 per annum, it is clear that the combined savings and RHI payments easily cover the cost of repayments during the 7-year lease arrangement. Furthermore, not only has the customer avoided the risk of tying up their own capital, but they will continue to enjoy the savings and RHI payments for the remainder of the 20-year period of the scheme.
An opportunity not to be missed
The RHI represents an extraordinary opportunity for companies and organisations to invest in renewable energy systems which will not only save them money compared to their existing heating costs, but will ultimately generate an annual income. In other words, they will be paid to heat their premises!
Furthermore, the new Siemens financing options means they don't even have to risk their own capital to benefit from the RHI scheme.
If this sounds too good to be true, it is simply because the Government recognises that 'early adopters' of such technology need to be encouraged and rewarded for their commitment to carbon reduction. This paves the way for economies of scale, bringing down manufacturing and installation costs until the technology becomes widely affordable, at which point the incentives will be withdrawn, as happened with Feed-in-Tariffs. The pioneering early adopters will therefore reap the greatest rewards -they just need to act quickly while the scheme is still available!
For more information, please contact Ecoliving or call 0141 309 5543.