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How councils can benefit from renewable heat

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From Friday, local authorities can apply for payments to switch to ‘green heating’ under the Renewable Heat Incentive scheme. For the public sector, this is a great opportunity to be paid to heat buildings rather than paying to heat them.

The RHI provides a financial incentive to the public sector and to businesses to switch from heating systems based on fossil fuels, such as gas or oil, to those powered by selected eligible renewable technologies. These include biomass, solar thermal, heat-pumps, and so on.

The government is committed through the EU Renewable Energy Directive to producing 15% of its energy from renewable sources by 2020, a dramatic rise from the current level of 6.5%, and sees the RHI playing a substantial role in this.

Public sector organisations that successfully apply will get a guaranteed payment for each unit of heat (kilowatt hour, kWh) produced by their new green heating systems. The RHI is all-encompassing, so public sector bodies can apply for their HQ, to heat a local authority swimming pool or leisure centre or any other part of their estate. It is also big news for schools, universities, and prisons.

The clear message from the government is that early-adopters will benefit the most, as a result of being able to lock in to tariffs at the most favourable rate. Tariffs are subject to ‘degression’, which means that over time the government may seek to lower the rates for new entrants. Hence there is a clear message that to benefit, public sector organisations need to get their application in quickly, to benefit from the early, higher tariffs.

How does it work?

Tariffs will be paid quarterly for 20 years to eligible technologies that have been installed, backdated to any installations made on or after 15 July 2009. Payments will be made for each kWh of renewable heat produced.

So, for a council owning a building of around 5,000m2, which is not at all unusual, their annual heating requirements might be 600,000 kWh from a 195 kW capacity boiler. The initial outlay would be around £100,000 for the cost of the boiler but, under the RHI, not only does the tariff mean around £26,000 ‘cash-back’ from the government in the first year, it is guaranteed for 20 years.

Therefore, the initial installation costs are covered in the first five years and, for the other 15, once the cost of the wood pellets are deducted (about £24,000 per year), it’s £2,000 net in the bank. Plus, of course, the additional savings to be gained from not paying for fossil fuel - the prices for which are continuing to rise fast.

In today’s prices, using oil, would mean a saving of around £45,000, so in total the council (or another public sector building owner) could theoretically save £47,000 a year. The same principle applies if you have a much smaller building and only need, for example, a 60 kW capacity boiler. You will need to cover the instalment costs but you should make considerable savings after the first few years.

Why biomass?

Of the renewable technologies on offer, a biomass boiler using wood pellets represents a logical choice. Not only do they deliver impressive environmental performance (up to 90% lower CO2 emissions than traditional fuels) they also deliver substantially reduced heating bills. The boilers can be easily accommodated, are responsive - operating to a thermostat as with a gas or oil boiler - and are reliable.

That is not the case for all the alternative fuel sources. For example, the space needed by options such as solar thermal units and ground pumps to deliver the same heat output may well be prohibitive and their performance may be affected by winter weather conditions, for example the intensity of the sun on a clear day versus a cloudy day.

Wood pellet burners, on the other hand, are as efficient as modern gas-fired boilers, working at optimum levels whatever the weather. While the RHI is a new scheme, the technology for wood pellet burners is not. In fact, wood pellet boilers are very well established and popular across Europe. In upper Austria, for example, some two-thirds of new heating systems are wood pellet burners, a further indication of how slow on the uptake the UK has been with renewable technology.

Crucially, when it comes to long-term financial planning, not only are wood pellets cheaper than fossil fuels, they are price stable, unlike oil, of course, which is seeing year on year hikes. In fact, CPL estimates that an average commercial-size office block will save around £15,000 (30%) a year in fuel costs when comparing pellets to oil. That’s a huge saving - and on top you get the RHI.

Green heating

Public sector building owners can benefit from significant payments if they apply under the RHI: for a 5000m2 building, a switch to ‘green heating’ could save in the region of £47,000 a year.

To note:

  • Apply early so as not to miss out on the higher grant levels.
  • It applies to all public sector buildings which need to be heated.
  • No-one is yet clear whether the saving will be clawed back by the Treasury in subsequent years. This is interesting in that it should not be, if the government are serious about encouraging the public sector to go green!

Duncan MacKenzie-Reid, partner, College Hill

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