Promoting Renewable Energy: FITs, RHI and the Green Deal

Rob Hill Principal Energy & Resource Manager

Approximately 75% of the UK’s housing stock was built before 1975.

•Huge variety in types and styles of properties•Huge variety in construction types and materials used•Government policies must acknowledge the facts•Needs retrofitting to bring up to modern standards•More expensive to retrofit renewables than in a new-build

Housing

UK’s housing stock is notoriously energy inefficient and amongst the worst in the Western world. Historically, little has been done to improve it.

•Property is expensive in the UK, especially in city centres•People move frequently for economic & social reasons•Financial priorities•Energy has long been regarded as ‘cheap’, until more recently…

Energy efficiency

North Sea oil & gas meant that energy in the UK was cheap. Only recently have the public thought energy has become expensive, but…

“The reality is we have some of the lowest energy prices in Europe. We could get them even lower. The country with the lowest energy prices at the moment happens to be France” - Chris Huhne, 10th July 2011

Is he right?

Energy is cheap (Really!)

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A household is classed as being in fuel poverty if it needs to spend more than 10% of it’s income on fuel to maintain a satisfactory heating regime.

In 2009 approximately 5.5million households in the UK were classed as being in fuel poverty, representing about 21% of all UK households.

Since then, the impact of the recession and increases in fuel costs will have made this situation worse.

Fuel Poverty

As well as fuel poverty and energy cost increases, the government has CO2

emission reduction targets to consider too. Accordingly, the energy mantra takes centre stage:

1.Be Lean – improved insulation, energy efficient products, etc…

2.Be Mean – switching off, etc…

3.Be Green – renewable & low carbon energy sources

Leading to the creation of FITs, RHI & the Green Deal

Energy Mantra

Launched in 2010, a scheme that provides a payment for every kWh of electricity generated from sub 5MW generating capacity installations of the following technologies:

•Solar PV•Wind•Hydro•Micro CHP•Anaerobic digestion

Feed in Tariff (FIT)

The future…?

•Significant breakdown in trust in the scheme following the Solar PV changes – change towards market caps driving tariffs rather than schedules?

•Proposed links between installing technologies (eg, PV) and compulsory insulation/energy efficiency measures?

•Community projects & multi-installation tariffs for social housing providers and community groups?

Feed in Tariff (FIT)

The first scheme in the world to provide a financial incentive (based on achieving 12% returns) for generating heat from the following renewable energy sources:

•Solar thermal (hot water)•Biomass (inc energy from waste)•Ground source heat pumps•Biomethane (grid injection or combustion)

Phase 1: non-domestic installation launched November 2011Phase 2: domestic installation (due to launch in 2012)

Renewable Heat Incentive (RHI)

“The Renewable Heat Incentive (RHI) will only support useful heat. It is not practical to provide an exhaustive list of all the acceptable heat uses which will be eligible. Instead, we can outline the broad principles of what we want to support:

• The utilisation of useful heat; • The heat must be supplied to meet an economically justifiable heating requirement i.e. a heat load that would otherwise be met by an alternative form of heating e.g. a gas boiler; • This heat load should be an existing or new heating requirement i.e. not created artificially, purely to claim the RHI; and • Acceptable heat uses are space, water and process heating where the heat is used in fully enclosed structures.

The only exception to this approach is for biomethane injection, where we will not specify how the biomethane should be used, given it will be injected into the existing gas grid.“

Renewable Heat Incentive (RHI)

Similar to FIT:

•Administered by OFGEM•Installers must be MCS certified•Banding, eg small, medium, large biomass (<200kWth, 200-1000kWth, >1000kWth)•20 year duration of tariff•Index linked•Disallows public funded grants

Renewable Heat Incentive (RHI)

What is it?

“Put simply, the Government is establishing a framework to enable private firms to offer consumers energy efficiency improvements to their homes, community spaces and businesses at no upfront cost, and recoup payments through a charge in instalments on the energy bill.

At the heart of the Government’s proposals is the “Green Deal plan”, an innovative financing mechanism which allows consumers to pay back through their energy bills. This means consumers can see the Green Deal charge alongside the reductions in energy use which generate savings on their bill. It also means that if they move out and cease to be the bill-payer at that property, the financial obligation doesn’t move with them but moves to the next bill payer: the charge is only paid whilst the benefits are enjoyed. In this way, the Green Deal differs from existing lending – it is not a conventional loan since the bill-payer is not liable for the full capital cost of the measures, only the charges due whilst they are the bill-payer. This is a market mechanism, funded by private capital, which we believe will deliver far more to consumers than any sort of top-down Government programme.”

The Green Deal

Where did it come from?

The Energy Act 2011 made provision for the Green Deal and the Energy Company Obligation (ECO). Due to launch Autumn 2012.

Green Deal and ECO will replace the Carbon Emissions Reduction Target (CERT) and the Community Energy Savings Programme (CESP) to be the main drivers of the improvement of the UK housing stock and the route for energy companies to fulfil their obligations.

ECO will target low-income and vulnerable households as well as hard to treat properties…very relevant to Stoke!

The Green Deal

What is it not?

It is not a guarantee of energy savings – it only predicts savings

It is not linked to a homeowner or resident – it is attached to the property

Linked to gas bills – it is paid via the electricity bill although the gas usage forms part of the initial assessment

It is not a grant – no public funds are used, it is like a private loan

It is not compulsory – homeowners can still install insulation or renewables other ways, but it is intended to offer an affordable finance option

The Green Deal

It includes a number of measures and rules to protect consumers, including the following prerequisites:

1.The expected financial savings must be equal to or greater than the costs attached to the energy bill, known as “the golden rule” of the Green Deal.

2. The measures must be approved and the claimed bill savings must be those accredited through this process.

3. The measures installed must have been recommended for that property by an accredited, objective adviser who has carried out an assessment.

4. The measures must be installed by an accredited installer.

5. For householders, the Green Deal provider must give appropriate advice within the terms of the Consumer Credit Act and take account of the individual circumstances of the applicant.

The Green Deal

Continued…

6. The Green Deal provider must have consent from the relevant parties, including the express consent of the current energy bill-payer.

7. The presence of a Green Deal must be properly disclosed to subsequent billpayers (e.g. new owners or tenants) alongside energy performance information.

8. Energy suppliers must collect the Green Deal charge and pass it on within the existing regulatory safeguards for collecting energy bill payments – including protections for vulnerable consumers.

The Green Deal

How does it work?

1.Unlocking demand – marketing via various channels

2.Accredited Assessment – provision of EPC + Green Deal recommendations

3.Finance at no upfront cost – financed according to preference

4.Accredited Installation – MCS approved installer, Quality Mark

5.Repayments – via electricity bills

6.Moving on – disclosure of Green Deal to prospective house buyers

The Green Deal

30 technologies are eligible:

The Green Deal

NB: For ECO, the key technology is Solid Wall Insulation

How does it work for SMEs?

“SMEs will be able to play a key role in delivering the Green Deal. Their local customer base and ability to engage them through other works will be a major link between potential customers and the Green Deal.

We would expect to see SMEs in the role of advisors (carrying out building assessments) and installing measures. We have also designed the Green Deal so that any size of organisation can become a Green Deal provider as long as they can fulfil the authorisation requirements and ongoing obligations. The main role of the Green Deal provider is to arrange the Green Deal finance plan under which the customer makes repayment for installation of works, so those ongoing obligations include responsibilities under the Consumer Credit Act 1974. SMEs who do not want to be Green Deal providers will be able to partner with a larger Green Deal Provider either to act in their supply chain or to act on their behalf.”

The Green Deal

The Green Deal

1. SMEs entering the supply chain for Green Deal Providers (GDP): One model, based on existing practice, is for larger companies to use local suppliers of goods and services. Under this model a GDP would market the Green Deal to customers and then pass on the installation work to companies engaged in its supply chain. This could also work with Local Authorities becoming GDPs and then creating local supply chains to maximise the local economic benefits.

2. SMEs working in partnership supply chain with GDPs: Under this model SMEs would be the face of the Green Deal and make full use of their local networks and customer base. The GDP would, effectively, become a silent partner behind the scenes, providing the financing. One or a number of SMEs could discharge the ongoing obligations of the Green Deal Provider including assessment, installation, customer services and ongoing customer relations.

3. SMEs in partnership as agents with GDPs: SMEs could become agents for these GDPs and would be able to offer their customers access to Green Deal financing following an assessment. They could find clients for GDPs thus providing access for their customers and at the same time, increasing the remit of their business. This model could involve SMEs directly becoming agents of GDPs, or becoming agents through their trade body (who could partner with a finance provider on their behalf). Alternatively, trade bodies or trade suppliers could become GDPs on behalf of their members/customers

The Green Deal

Accreditations & Qualifications

Above all will sit the Green Deal Code of Practice which applies to everyone participating in the Green Deal.

To be an Advisor, will require building upon energy assessor qualifications (EPC provider). It will add Green Deal specific requirements, eg finance and communication skills. The qualification is still being developed.

To be an Installer, will require becoming a registered installer, requirements for which are contained in PAS 2030. It will require additional training – still being developed.

The Green Deal

Quality Management

The Green Deal Mark: to cover all energy efficient measures in PAS 2030

Green Deal Providers to provide guarantees & warranties

Green Deal Providers to have an obligation to put things right where faulty or poorly installed – including obligations on the installer

Possible ‘Carding of Operatives’ as a means of quality assurance

The Green Deal

Lessons learned from the pilot scheme (67 homes in Sutton):

Most popular measures included:•Boiler upgrade (75%)•Loft insulation (73%)•Solid Wall Insulation (73%)•Draught proofing (72%)•Heating controls & double glazing (50%)

Average spend was £13,000 (Maximum was £33,000)

28% chose a 10 year payback period, 72%, chose the 25 year option

Only ¼ met the Golden Rule, ¾ had bills averaging £256 higher then fuel savings

Average CO2 savings of 26% (maximum achieved was 52%)

The Green Deal

rhill@wardell-armstrong.com

www.wardell-armstrong.com