So we now have the details for the UK

Renewable Heat Incentive

and we know that households have been left out in the cold until late in 2012 (!). However, what are the implications for businesses? What are the financial returns likely to be? How do costs compare with traditional forms of heating? And finally, is the scheme as good as the Government claims? Well, this is what we shall discuss here.

1.0   The

Renewable Heat Incentive scheme details

:

The scheme pays a fixed amount per kWh of renewable heat generated, which will be measured by a meter on the business property. The rates per kWh of heat generated are shown here, with the associated lifetime of the scheme:

Technology	Eligibility	Size		p/kWh	Duration
Biomass	Solid Biomass; Municipal Solid Waste (incl. CHP)	< 200kWth	Tier 1	7.6	20.0	Tier 1 to installed capacity x 1,314
			Tier 2	1.9	20.0
		200-1,000 kWth	Tier 1	4.7	20.0
			Tier 2	1.9	20.0
		> 1,000kWth	No Tier	2.6	20.0	Metering
Ground Source Heat Pump	GSHP's, Water Source Heat Pumps and deep Geothermal	< 100kWth		4.3	20.0	Metering
		> 100kWth		3.0	20.0	Metering
Solar Thermal		< 200kWth		8.5	20.0	Metering
Biomethane	Biomethane injection and Biogas combustion	All		6.5	20.0	Metering

 

The first thing we should note is that Air Source Heat Pumps have been excluded from the scheme until 2012, and that only systems that have a Coefficient Of Performance (a measurement of the amount of energy generated by a system compared to the amount of energy require to run the same system) of 2.9 or greater are accepted in the scheme.

For the purpose of this document, we will exclude Biomethane Injection, pending further news from the Government about how this will be implemented.

Also, in order to stop the process of heat dumping, whereby as much heat is generated as possible to increase the RHI payments, the tariff for Biomass has been Tiered. Tier 1 applies to the first ‘1,314 x Installed Capacity’, with Tier 2 applying for all capacity thereafter.

2.0   Fossil Fuel Costs:

The following shows traditional costs of fossil fuels and their associated cost per kWh:

Fuel	Price per Unit (£)	Unit	kWh per Unit	pence per kWh
Wood Chips	80.00	tonne	3,500	£0.023
Wood Pellets	185.00	tonne	4,800	£0.039
Natural Gas	0.04	kWh	1	£0.039
Heating Oil	0.63	litre	10	£0.063
LPG	0.52	litre	7	£0.079
Electricity	0.13	kWh	1	£0.130
Excludes VAT
Source http://www.biomassenergycentre.org.uk

 

3.0   Assumptions for Analysis:

For the purpose of this analysis we will make some very basic assumptions:

The first is that we will design a basic heating system, using each technology on its own, for a small business that requires 400,000kWh of heating energy per year (The average household uses 30,000kWh of heating energy per year).

In order to achieve that 400,000kWh of energy a heating system of 100kW is installed (about the size required by an average sized primary school in the UK).

Installations are easily managed, keeping costs to a minimum. We will state the expected installation cost associated with each technology.

Given these assumptions, we can then analysis each technology once we have determined the following:

1. Purchase and installation cost
2. Running costs
3. RHI Payment

 

4.0   Technologies:

4.1   Solid Biomass:

Solid Biomass require a lot of storage space for the fuel that needs to feed to boiler. This obviously adds to the cost of installation, although it does not require any other fuel to run (i.e. electricity).

The cost of a 100kW system, fully installed and including the fuel storage system with an automatic feeding mechanism, will be assumed as being £60,000 (VAT inc @ 5%) fully installed.

Thus, we have the following information:

Cost	£60,000	fully installed and including all taxes
System Size	100	kWp
Annual Energy Output	400,000	kWh

 

We can now calculate the annual energy bill using each type of fuel. The Biomass costs show how much you need to spend on fuel for the biomass boiler. The Gas and Oil costs show what the costs would have been had you been using Gas or Oil to heat the premises:

Annual Fuel Cost (Oil)	£25,200	£0.063p/kWh
Annual Fuel Cost (Gas)	£15,600	£0.039p/kWh
Annual Fuel Cost (Wood Chips)	£9,200	£0.023p/kWh
Annual Fuel Cost (Wood Pellets)	£15,600	£0.039p/kWh

 

We can then calculate the Renewable Heat Incentive payment:

Tariff Rate	4.7	p/kWh
Tariff Lifetime	20	years
Annual Income from RHI	£15,090	7.6p for the 1st 131400kWth, 1.9 thereafter

 

In addition to this, we can add the savings from not using Oil or Gas to heat the premises, taking away the cost of buying the Wood pellets for the Biomass boiler. Here we have assumed that we were previously paying £15,600 to heat the property with Oil, and now buy the more expensive Wood Pellets to feed the biomass boiler:

Annual Saving from Fossil Fuel

£0

Saving from Gas - Cost of Wood Pellets

 

We then have our total annual savings and total return over 20 years:

Total Annual Saving	£15,090
Total Saving Over 20 years	£301,796

 

Finally, we get our investment return analysis:

Total Return	502.99%
Total Return On Investment	402.99%
Annual Return On Investment	25.15%
Annual AER	8.41%
Payback period	3.98	years

 

So, for an initial outlay of £60,000 we are receiving a total return over 20years of £301,000! Very impressive. The payback period is a mere 3.98 years! In addition to this, Biomass boilers tend to have economies of scale advantages for larger systems. Systems sizes can be above 500kW, which is very large, and thus the purchase and installation costs per kW installed become lower the larger the system installation.

However, if this was the case the scheme would be open to abuse, whereby the installer would just burn as much Biomass as they could to get more money! For this reason the Government has introduced a Tier system. Tier 1 will be the 7.6 pence which is paid for the first 1,314 x installed capacity of kWth produced. Thereafter the tariff drops to just 1.9p/kWth.

 

4.2   Ground Source Heat Pump:

To install a GSHP we are assuming that you have the space to install the ground looping system, whether it is underground or in a lake.

Also, Ground Source Heat Pumps require electricity to make them run. In this case we are going to assume that the Coefficient of Performance for any installed GSHP is 4. That implies that for every 1 kWh of electricity used to run the system, 4kWh of heat are produced. We will also assume that the electricity is taken from the grid rather than from a Solar PV or Wind turbine installation.

The installed cost of the system is taken as £80,000 or £800 per kWp installed.

Thus we have the following information:

Cost	£80,000	fully installed and including all taxes
System Size	100	kWp
Annual Energy Output	400,000	kWh
Coefficient of Performance	4	ratio to 1

 

We can now calculate the annual energy bill using each type of fuel. The Electricity costs shows how much you need to spend on running the GSHP. The Gas and Oil costs show what the costs would have been had you been using Gas or Oil to heat the premises:

Annual Fuel Cost (Oil)	£25,200	£0.063p/kWh
Annual Fuel Cost (Gas)	£15,600	£0.039p/kWh
Annual Electricity Cost	£13,000	£0.130p/kWh

 

We can then calculate the Renewable Heat Incentive payment:

Tariff Rate	4.3	p/kWh
Tariff Lifetime	20	years
Annual Income from RHI	£17,200

 

In addition to this, we can add the savings from not using Oil or Gas to heat the premises, taking away the cost of buying the Wood pellets for the Biomass boiler. Here we have assumed that we were previously paying £15,600 to heat the property with Oil, and now buy the more expensive Wood Pellets to feed the biomass boiler:

Annual Saving from Fossil Fuel

£2,600

                                              

We then have our total annual savings and total return over 20 years:

Total Annual Saving	£19,800
Total Saving Over 20 years	£396,000

 

Finally, we get our investment return analysis:

Total Return	495.00%
Total Return On Investment	395.00%
Annual Return On Investment	24.75%
Annual AER	8.33%
Payback period	4.04	years

 

Thus, we get an Annual ROI of 24.75%! with a payback period of a mere 4.04 years. However, the installation of the GSHP is very difficult to do on retro-fit properties, and a lot of land is required for a system size of 100kWp.

 

4.3   Solar Thermal:

For Solar Thermal, we have an estimated system cost as stated below based on the Solar Energie Thermal System. We assume the CoP is 3.7 which is based on actual field trials.

Thus we have the following information:

Cost	£110,000	fully installed and including all taxes
System Size	100	kWp
Annual Energy Output	400,000	kWh
Co-efficient of Performance	3.7

 

We can now calculate the annual energy bill using each type of fuel. The Gas and Oil costs show what the costs would have been had you been using Gas or Oil to heat the premises:

Annual Fuel Cost (Oil)	£25,200	£0.063p/kWh
Annual Fuel Cost (Gas)	£15,600	£0.039p/kWh
Annual Running Cost (Electricity)	£15,027	£0.130p/kWh

 

We can then calculate the Renewable Heat Incentive payment:

Tariff Rate	8.5	p/kWh
Tariff Lifetime	20	Years
Annual Income from RHI	£34,000

 

In addition to this, we can add the savings from not using Oil or Gas to heat the premises. Here we have assumed that we were previously paying £15,600 to heat the property with Oil:

Annual Saving from Fossil Fuel

£15,600

 

We then have our total annual savings and total return over 20 years:

Total Annual Saving	£34,573
Total Saving Over 20 years	£691,459

 

Finally, we get our investment return analysis:

Total Return	628.60%
Total Return On Investment	528.60%
Annual Return On Investment	31.43%
Annual AER	9.63%
Payback period	3.18	years

 

Thus, we get an Annual ROI of 24.80%! with a payback period of a mere 4.03 years.

 

5.0   Summary:

In summary, we can see that the average payback period, with the RHI payment, has fallen to just 4 years, with payments guaranteed for 20 years and inflation linked. Below is a brief summary on the investment returns:

 

	Biomass	GSHP	Solar Thermal
Cost	£60,000	£80,000	£110,000
Annual RHI payment	£15,090	£17,200	£34,000
Payback Period	3.98	4.04	3.18
Annual ROI	25.15%	24.75%	31.43%
Annual AER	8.41%	8.33%	9.63%

 

 

6.0   Private Financing:

Obviously, given the size of the rates of return and the fact that they are guaranteed by the UK Government and inflation linked, there will be considerable interest from Private Financing companies, as there was for Solar PV.

However, the above analysis includes as part of the ‘annual savings’ from installing the technologies, the savings that were made by NOT paying for the fossil fuels. This is not an actual payment, but more a Non-cash flow that the tenant benefits from.

If Private Financing were to become available and the money was used to install a system in our hypothetical building, then the rates of return would not be as stated above as the financer will not benefit from the saving arising from not paying for fossil fuel (unless they make the tenant pay them for the renewable fuel).

This is what we shall calculate next to highlight the different rates of return achievable for the different possible situations. We will have three end results for each technology at the end of this:

1. Rates of Return including fossil fuel bill savings
2. Rates of Return excluding fossil fuel bill savings
3. Rates of Return excluding fossil fuel bill savings BUT the tenant pays the now reduced annual electricity bill (in the case of GSHP or Solar Thermal) or Biomass fuel.

 

	Biomass	GSHP	Solar Thermal
Tenant pays Nothing / Return INC Fossil Fuel Saving
Cost	£60,000	£80,000	£110,000
Annual Tenant Energy Bill Pre Installation	£15,600	£15,600	£15,600
Annual Tenant Energy Bill Post Installation	£15,600	£13,000	£15,027
Net Annual Cash Flow to Financer	£15,090	£15,600	£34,573
Payback Period	3.98	4.04	3.18
Total ROI	402.99%	3.95	528.60%
Annual ROI	25.15%	24.75%	31.43%
Annual AER	8.41%	8.33%	9.63%
Tenant pays Nothing / Return EXC Fossil Fuel Saving
Cost	£60,000	£80,000	£110,000
Annual Tenant Energy Bill Pre Installation	£15,600	£15,600	£15,600
Annual Tenant Energy Bill Post Installation	£0	£0	£0
Net Annual Cash Flow to Financer	-£510	£4,200	£18,973
Payback Period	NA	19.04	5.8
Total ROI	NA	5.00%	244.96%
Annual ROI	NA	5.25%	17.25%
Annual AER	NA	0.24%	6.39%
Tenant pays the annual running cost of technology
Cost	£60,000	£80,000	£110,000
Annual Tenant Energy Bill Pre Installation	£15,600	£15,600	£15,600
Annual Tenant Energy Bill Post Installation	£15,600	£13,000	£15,027
Net Annual Cash Flow to Financer	£15,090	£17,200	£34,000
Payback Period	3.98	4.65	3.24
Total ROI	402.99%	330.00%	518.18%
Annual ROI	25.15%	21.50%	30.91%
Annual AER	8.41%	7.57%	9.54%

 

As you can see from the above, a scheme whereby the tenant pays nothing results in the private financing firm making very little return (or even a negative return in one case). Meanwhile, where the Tenant is forced to pay for the running cost of the new technology, there is little incentive for the Tenant to accept the proposal. The reality is that a middle ground is likely to be agreed upon.

Also, it must be noted that all calculations have been made assuming the tenant heats the property through gas originally, as opposed to oil. Had they been using oil, then the bill savings would have been around £10,000 more for the Tenant than if they were using gas.

 

7.0   Conclusion:

The RHI will provide an incentive for the non-domestic sector to introduce renewable heating technologies. The type of technology will be dependent on the site availability. For instance, some properties will not have sufficient ground mass for GSHP’s or storage space for Biomass boilers.

Also, the upfront costs are likely to be quite significant, and whilst it is more cost advantageous for the tenant to finance the system, this may not always be possible. In this case, Private Finance is likely to get involved and there is a strong case for them to do so.