The future of the Non-Domestic Renewable Heat Incentive Scheme

The Department for the Economy (DfE) today published its preferred option for the future of the Non-Domestic Renewable Heat Incentive Scheme (NIRHI).

The future of the Non-Domestic Renewable Heat Incentive Scheme

The preferred option is to establish a new set of tariffs for all small and medium sized biomass boilers accredited to the Scheme.  The basic payment structure will remain the same with a Tier 1 tariff applied to the first 1,314 hours of heat generation each year, with a Tier 2 tariff applied to the remainder.

The tariffs are set out in the attached table and will apply from 1 April 2019.

Richard Rodgers, Head of Energy at DfE, said: “The new tariffs are a variant of the ‘Base Case’ tariff structure from the Ricardo Tariff Review, consulted upon by DfE in the summer of 2018.  That original option involved a negative Tier 2 tariff for medium sized boilers. 

“However, the responses to the public consultation highlighted potential issues with this option and hence it has been amended to deliver the same prospective rate of return, set at 12%, without the need for a negative second tier.”

The tariffs will subsequently be adjusted annually in line with inflation as measured by the Consumer Price Index.

A key consideration in coming to this preferred option has been to ensure that the NIRHI is compliant with State Aid rules.

Alongside the new tariff structure, NIRHI participants will also be able to apply for a voluntary buy-out.  This recognises that a small number of installations with very low usage requirements or higher-than-average capital costs could see low rates of return under any of the tariff options that were consulted on. 

The voluntary buy-out will provide participants with a one-off payment equivalent to a 12% return on the additional capital cost of their biomass boiler, taking account of RHI payments already received and the timing of the payment.  In return for the one-off payment, participants would not receive any further ongoing NIRHI payments. It will be entirely up to participants to decide whether or not they wish to apply for the voluntary buy-out.

Following the findings from the Ricardo Tariff Review, which found that public subsidy was not required in respect of Combined Heat and Power plants, the preferred option does not include tariffs for this technology.

Implementing the preferred option will require legislation.  In the continued absence of the Northern Ireland Assembly, the Department has written to the Northern Ireland Office requesting that the Secretary of State for Northern Ireland sponsors legislation in Westminster which would give effect to its preferred option.

A policy summary document outlining the proposals in greater detail can be found at the future of the Northern Ireland non-domestic renewable heat incentive scheme.

Notes to editors: 

Background

1. The Northern Ireland Non-Domestic Renewable Heat Incentive Scheme (NIRHI) was introduced in November 2012. The Scheme was designed to contribute to a reduction in carbon emissions by increasing the uptake of renewable heating technologies.  The NIRHI was based on the GB Renewable Heat Incentive Scheme but with different tariff rates and the absence of important cost control measures, including a tiered tariff structure.
2. In early 2015, the projections of the cost of NIRHI started to rise above the available budget for 2015-16 and future years. This led to the introduction of tiering and a heat generation limit for small and medium biomass installations for new participants from 18 November 2015. The Scheme was suspended to new applications in February 2016 whilst the tiered structure was extended to all small and medium sized biomass boilers on 1 April 2017.
3. This tariff structure was extended for a further 12 months through the Northern Ireland (Regional Rates and Energy) Act 2018 whilst a long term policy was being developed.
4. If this action had not been taken, the Northern Ireland Executive would have faced significant financial pressures over the lifetime of the Scheme as a result of flaws in the original design of the tariff.
5. The Department for the Economy undertook a public consultation on the long-term future of the Scheme including proposals on a range of tariff options.

Ricardo Tariff Review

6. The tariff options that were consulted on included those identified as part of a comprehensive review of the tariff for small and medium sized biomass boilers which DfE had commissioned from Ricardo Energy and Environment. 
7. The Ricardo Tariff Review identified the extent to which the current NIRHI biomass tariffs are set at too high a level and suggested three main alternative tariff scenarios.
8. The full Ricardo report can be found at the future of the Northern Ireland non-domestic renewable heat incentive scheme.

Consultation

9. On 14 June 2018, the Department launched a public consultation on the future of the Non-Domestic NIRHI.  The consultation document outlined eight tariff options for small and medium sized biomass installations.
10. A total of 258 written responses were received.  The responses provided the Department with a range of information and views, including evidence from Scheme participants on costs associated with biomass installations, the impact of tariff changes and data on capital costs. 
11. While the majority of responses to the public consultation chose the original single tier tariff on the NIRHI, which provides the highest level of payment, there was little supporting evidence provided by respondents that this would be justified.
12. This compared to the large body of evidence produced by the NIAO, the external expert consultants Ricardo and the Public Inquiry regarding the flaws in the original tariff. In addition, European Commission officials have made it clear that a tariff which provided an excessive rate of return would not be State aid compliant.  Therefore, whilst the views expressed in the public consultation have been carefully considered, it is not possible to return to the original tariff structure.
13. The Consultation Report was published on 31 January 2019.

Affordability

14. A key consideration when setting the future payment structure is whether it is affordable within the allocated budget from HM Treasury.  The projected total cost of the preferred option is £70 million from 2019-20 to the end of the Scheme. This is in addition to the £120 million estimated spend on the Scheme to the end of 2018-19. Although the available budget for the NIRHI will only be confirmed as part of future Spending Reviews, the preferred option is expected to be affordable.

European Commission Engagement

15. The Department for the Economy has engaged with the European Commission in developing the long-term tariff.  The Commission has made clear that State aid approval for the Scheme is based on a 12% rate of return rather than the associated tariff levels.

Impact on Scheme participants

16. Two key elements of the preferred option have been specifically designed to take account of the impact on boiler owners:
    • Scheme participants indicated that they overwhelmingly would prefer an ongoing tariff payment structure rather than closure and buy-out; and
    • Scheme participants with very small load factors or higher-than-average capital costs could see lower rates of return or experience short term cash flow problems.  Both these issues will be mitigated by the inclusion of a voluntary buy-out option.

17. The Ricardo Tariff review estimated that approximately 90% of participants would achieve at least a 12% rate of return over the lifetime of the NIRHI under the Ricardo Base Case tariff structure.   Whilst the responses to the public consultation suggested that amendments to tariff levels could have negative financial consequences for scheme participants, there was limited evidence provided that this had occurred to date or would not be due to other factors.

Further Information

18. There are other technologies which are eligible for support under the RHI Scheme, including solar and heat pumps. However, these technologies account only for a small proportion of the overall number of boilers accredited on the Scheme.  Once the new biomass tariffs have bedded in, the Department will consider the need to review the tariffs for other technologies and large biomass boilers.
19. The background and the issues around the Non-Domestic RHI Scheme are well documented.  For more information, please see the Department for the Economy website  . 
20. Follow us on Twitter @Economy_NI.
21. For media enquiries, please contact the Department Press Office on 028 9052 9604. Outside office hours, please contact the Duty Press Officer on 028 9037 8110.

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