The Renewable Heat Incentive (RHI) and wood pellets

Get Paid To Stay Warm

The Renewable Heat Incentive (RHI) is a government scheme to support the use of renewable-heat technologies, such as wood-pellet boilers. The government pays the owners of eligible installations for every MWh of renewable heat that they use.

As of autumn 2013, commercial, public sector and "community" (i.e. district heating) schemes receive:


Tier 1 (p/kWh)
Tier 2 (p/kWh)
Small (< 200 kW boilers)
8.6
2.2
Medium (200 - 999 kW boilers)
5.0
2.0
Large (> 999 kW boilers)
1.0

For small and medium boilers, Tier 1 tariffs are paid on the first units produced in the year, upto a maximum calculated by multiplying the boiler capacity by 1314. All units produced over and above that amount in the year are rewarded at the Tier 2 rate. Payments are made for 20 years, with annual indexation.

As of autumn 2013, domestic boilers receive no support. The Government intends to introduce a domestic RHI in Spring 2014, provisionally at a level of 12.3p/kWh for 7 years. The domestic RHI may be limited to boilers with a capacity of 45 kW or less.

Ofgem (the energy regulator) manages the RHI, including processing applications and quarterly claims for payment.

There are many complexities to the RHI. We have set out some of the details below under the following headings:

They may (probably will) change the rules. You should not rely on this information. If any detail is important to you, you should confirm it with Ofgem, who are administering the scheme.

RHI tariff rates

For eligible pellet boilers below 1 MW in size, the value of the RHI is greater than the cost of the fuel a lot of the time, i.e. you have a negative cost of running your boiler (or to put it another way, the government is paying you to stay warm). To avoid this creating a perverse incentive to burn more pellets than you need to, simply to make money, you only receive the high level of support for an amount of heat equal to running your boiler at full capacity for 1,314 hours each year. This is known as the Tier 1 rate. For example, a 100 kW boiler will receive the Tier 1 rate for the first 131,400 kWh that it produces each year.

If you use any more heat than that over the course of the year, these additional units are supported at the Tier 2 rate, which is set at a lower level that results in a net cost for running the boiler (albeit significantly lower than the cost of heating with fossil fuels). There is no point producing heat that you don't need if it costs you to produce it.

The Government announced on 26 October that the level of support for large biomass had been revised down from 2.7p/kWh to 1p/kWh. On the face of it, this degree of change without supporting evidence in such a short space of time seems vulnerable to legal challenge. Cross your fingers that the policy is not subjected to Judicial Review and further delayed.

Comparing the RHI with your fuel-cost

A1-grade wood pellets typically have an energy content of around 4.8 MWh (4,800 kWh) per tonne. You can use our price calculator to work out what wood pellets would cost you on average. For example, if your average delivered cost of pellets over the year were £192/tonne, that would equate to 4p/kWh.

Allowing for efficiencies

You cannot compare the cost of the fuel directly with the value of the RHI. The RHI is paid on the amount of heat that you use in the building, not the amount of fuel that is consumed to produce that heat. So you have to allow for losses in converting the fuel to heat, and in distributing that heat to the building (if the boiler is not in the building).

You also need to be careful of both fuel suppliers and equipment suppliers quoting misleading figures for the energy content of the fuel and conversion efficiency of the boiler, and forgetting to mention the losses in the heat-distribution system. We set out how you may be misled if you are not careful in our page on the energy content of pellets.

The relevant energy content for you to look at is the Net CV, as-received (or wet) basis. You can then combine this with the net efficiency figure quoted by your boiler supplier, which will almost certainly be based on the Net CV of the fuel, to give you the energy output of the boiler relative to the fuel consumption.

It wouldn't be unusual for the net efficiency of the boiler to be around 85% and the Net CV (as received) of A1 pellets to be 4.8 MWh/tonne. If you are paying £192/tonne, the cost of the energy output from this combination of boiler-efficiency and wood pellet energy-content is 4.7 p/kWh.

Then you need to allow for any losses in the heat distribution network, if the boiler is not in the building where the heat will be used.  At 10% distribution losses, for example, the cost of the usable energy in the above example is around 5.2 p/kWh. 

That (the cost of the energy net of conversion efficiency and losses) is the figure that you should compare with the value of the RHI. For a 100 kW boiler with the above efficiencies and losses, that means that the running cost of the first 131,400 kWh will be minus 2.7 p/kWh, and the remainder of the heat that year will cost plus 3.2 p/kWh.

Allowing for avoided costs

Of course, you would have had to pay for heating fuel even if you hadn't installed a pellet boiler, so for calculating the return on investment on the net cost of installing a pellet system, you should also net-off the avoided cost of the alternative fuel. If that was heating oil at 60p/litre (5.7 p/kWh) in a system that is 75% efficient (7.6 p/kWh), the value of switching to pellets in the above example is 10.3 p/kWh for the first 131,400 kWh and 4.4 p/kWh for the balance of the heat used during the year.

If, in the above example, you used 200,000 kWh in total each year, the RHI would be worth £11,750 per year, the net running cost would be minus £1,350 per year, and the value of replacing the oil-fired system with a wood-pellet system would be £16,550 per year. That is the figure that you should compare with the net capital cost of switching to a wood-pellet heating system, in order to calculate the return on investment.

If you are replacing a working boiler with plenty of life left in it, you would compare that value with the simple cost of installing the new system and disposing of the old one. If the property needs (or will soon need) a new boiler anyway, either because it's a new building or because the old boiler is on its last legs, you should net-off the capital cost of a new oil-fired boiler against the capital cost of the pellet system, to get the net capital cost that you should compare with the above net annual benefit.

Which installations are eligible for the RHI?

Phase 1 of the RHI, which began at the end of November 2011 is limited to certain types of installations. Phase 2 of the RHI is supposed to begin in autumn 2012, and will cover many of the installations that are not covered under Phase 1.

The main limitations of Phase 1 from a wood-pellet perspective are:

  • "Domestic" heating is excluded. This a slightly-odd, narrow definition of "domestic". It refers specifically to individual dwellings with their own boiler, whose main purpose is for residential use. So boilers for properties where people live may receive the RHI if:
    • the boiler services more than one residence, either within the building (e.g. a block of flats) or in multiple buildings (these are referred to as community schemes), or
    • most of the heat in the property is used for commercial purposes (e.g. a B&B with enough bedrooms that the commercial heat-use outweighs the owners' heat-use).
  • Systems that are not easy to meter are excluded, such as stoves and blown-air heating systems. The RHI requires the heat to be metered, and that is not easy to do if the heat is not transmitted by a liquid medium. The Government has not yet grasped that, in the case of wood pellets, the energy content is known to a reasonable degree of accuracy, and one can therefore calculate how much energy has been supplied simply on the basis of the quantity of fuel used. They may wake up to this in Phase 2 (if this affects you, you should lobby them on this issue).
  • All systems installed and commissioned before 15 July 2009 are excluded, on the basis that the investment was made without any knowledge that the RHI would be introduced, so it would count as "state aid" to give additional support. The Government and its civil servants have forgotten one of the two key principles of designing any mechanism: don't penalise early-adopters (if you ever want anyone to move early again) and always grandfather existing rights. Again, if you are affected by this decision to deter innovation and risk-taking, you should lobby the Government and your local MP on the issue, in the hope of modifying the policy in Phase 2.
  • The heat must be useful. In effect, that means that the heat needs to be supplied for internal use, and not for uses where it will be easily lost (e.g. outdoor swimming pools).
  • Boilers of 45 kW or less in capacity must be both MCS accredited and have been installed by MCS-accredited installers. This cannot be fixed retrospectively - the system and the installers must have been MCS accredited at the time the system was installed.
  • Grant-funded installations are not eligible for the RHI. Systems installed between 15 July 2009 and summer 2011 may repay their grants and become eligible for the RHI. If you are in this situation but do not have the funds to repay the grant, contact us to see if we can help you to repay it as part of a fuel-supply contract. If your grant was for equipment associated with the heating system but not the boiler itself (e.g. a grant for a district heating network), you should check with Ofgem whether this would affect your eligibility to the RHI.

The Government is looking at introducing values for the first two of these categories (amongst others) under Phase 2 of the RHI.

From 2012, boilers are likely to have to meet strenuous emissions limits on particulates and NOx to retain their eligibility for RHI.

How long will I get the RHI for?

20 years.

The values will be indexed annually to the Retail Prices Index.

How do I register/get paid?

Ofgem is administering the RHI. They are also providing the detailed guidance on how the scheme is implemented. Various pieces of information are linked from Ofgem's main RHI page.

Only the owner of the installation may register and receive the RHI. Agency/sub-contracting is not allowed. The owner may retain the services of consultants to help apply for the payment, but the money must come to the owner.

Payments are expected to be on a quarterly basis.

Phase 2 (domestic boilers, etc.)

See the section on eligibility above for the types of installation that are affected by Phase 2.

The Government originally proposed to issue its consultation document on Phase 2 in Autumn 2011, then before the end of 2011, and now it looks likely to be delayed until February or March 2012. 

They also promised that Phase 2 would be introduced in October 2012. It is claimed that the delay on the consultation will not have a knock-on effect on the introduction of Phase 2. On the basis of past experience, you may think otherwise.

We have no inside information, but if we had to guess, we would expect the introduction date to slip as well, but probably not beyond the end of winter 2012/13. If so, it is reasonable (but not safe) for those people who are ineligible in Phase 1 to make plans to install a pellet boiler from spring 2013.

We would not recommend financial modeling on the basis of any assumptions about the values in Phase 2 until the final version of the legislation has been published, unless the Government issues firm assurances that the values are guaranteed. But you could make all your plans bar placing the order, and run sensitivity analysis on a range of likely RHI values, ready to place the order once the values are secure.

As the RHI is subject to a limited budget (approx. £850m for four years), there may be a first-come-first-served element to the funding.

For those people wanting to go ahead now with projects that are currently ineligible but proposed to be covered by Phase 2, the Government offers the Renewable Heat Premium Payment (RHPP) scheme to help towards the capital costs. The RHPP is worth £950 for suitable projects.

Northern Ireland

The RHI that was about to be introduced at the end of September applies to England, Wales and Scotland. The Northern Ireland Assembly is considering a similar scheme (as of October 2011): the Northern Ireland Renewable Heat Incentive. The consultation, which closed at the end of September 2011, proposed significantly different bands to the arrangements in the rest of the GB:

  • < 45 kW: 4.5p/kWh
  • > 45 kW: 1.3p/kWh

There is no second-tier level proposed, as there is for the rest of the GB.

Like the mainland scheme, they propose to exclude domestic properties from the NI RHI. Write to your local MP and the Department of Enterprise, Trade and Investment, if you don't see why the government's business pals deserve to have the option to cut their energy bills, but domestic users are stuck with heating oil, electric, or the other exorbitant options off the gas grid.

They propose to introduce the scheme on 1 April 2012.

No reliance should be placed on the details proposed in the consultation. The final arrangements may change significantly in the light of responses to that consultation.

Enhanced Capital Allowances

HMRC published a consultation document in 31 May 2011 named Capital Allowances: Feed in Tariff and the Renewable Heat Incentive outlined below are the key measures that have come from this consultaion.

These new measures will ensure that enhanced capital allowances are not given for expenditure on plant or machinery where tariff payments are received under either of the renewable energy schemes introduced by the Department of Energy and Climate Change (DECC) i.e. FiT or RHI

These measures will affect expenditure incurred on or after the 1st April 2012 for all eligible equipment relating to the FiT or RHI except for Combined Heat & Power equipment where the measure will not affect expenditure incurred on such equipment until 1st April 2014.

Impact on our Customers

Businesses investing in Wood Pellet systems which currently qualify for ECAs after April 2012 will not be able to claim the ECA as well as tariffs. However there is no impact on earlier expenditure. 

Contact

 If you have any questions about these changes please contact Sue Pennicott on 020 7147 2610 (email: sue.pennicott@hmrc.gsi.gov.uk) or Malcolm Smith also on 020 7147 2610 (email:malcolm.smith3@hmrc.gsi.gov.uk).