The UK Government has once again heavily incentivised the renewables sector as a result of over generous generation tariffs; this time in the renewable heat industry. After the success investors have had with Solar Assets the RHIs potential to achieve 20%pa+ inflation linked yields is even more exciting than the beginning of the UK solar market.
Whats the big idea…?
To incentivise investment into renewable heat production, the UK Government in November 2011 implemented a Feed-in-Tariff style payment scheme for creating sustainable heat from biofuel, called the Renewable Heat Incentive RHI.
However unlike the FIT it is the UK government that will be footing the bill rather than UK energy paying general public. DECC currently predicts total 2012/13 RHI expenditure (including additional within year applications) to be around £41m. As with all new technology and grants there is a time lag involved while people fully understand the initiative and implement their strategies. Uptake is already beginning to form an exponential curve and just like the solar industry we expect this capacity to be reached much before the Governments expectations, making this a time limited opportunity.
RENEWABLE HEAT INCENTIVE (RHI)
Under the RHI, the Government pays a fixed tariff to the owners of these renewable energy systems for every kilowatt-hour of heat produced.
Ofgem administers each eligible renewable energy system, whilst RHI tariff payments are paid directly by the Treasury. As there is no ‘national grid’ for heat all heat generated must be used at the point of generation. Making this an AAA rated income stream.
Under the RHI, different systems will be paid different tariffs depending on the type of technology used and the size of the system
A tariff is paid as “£ per kilowatt-hour” and so the final payment depends on not only the size and type of system, but also the number of “kilowatt-hours” (kWh) generated.
Note that for each given system, there are actually two tariffs; “Tier 1” which is paid for the first 1,314 hours of the year, and “Tier 2” which is paid for the remainder of the year.
For the purpose of this blog we will focus on the returns generated by a 200kw system.
Tier 1 -¬‐ 7.9p/kWh
Tier 2 -¬‐ 2.0p/kWh
These systems can run 24/7, however for the purpose of allowing downtime we have used 22 hours per day which will generate 8000kWh of heat per annum. As a result the total RHI Revenue forecast is calculated as;
Tier 1; 199kWth * 1,314h * £0.079 = £21,227
Tier 2; 199kWth * 6,686h * £0.020 = £26,610
Giving a total of £47,887 in Year 1 from RHI alone. Note that the tariff is guaranteed for 20 years and linked to RPI. The technology and incentives work best on businesses with very intensive year round heat needs such as drying facilities, chicken farms, and leisure centres.
Willow Rivers will be implementing the first of our projects on a kiln-dried log facility in the South West of England thus maximising the potential returns to investors.
We expect this sector to follow a very similar curve to that of the Solar Feed-in-Tariff, in that the Government has miscalculated the potential uptake of the incentive and as a result the tariffs will be met quicker than anticipated. We hope to be the first to offer a retail level investment in RHI to our clients and investors.