Notice

Non-Domestic Renewable Heat Incentive Scheme: modified capacity budget proposals

Published 31 August 2021

Summary

Government has allowed modified capacity for shared ground loop systems to continue after the closure of the Non-Domestic Renewable Heat Incentive scheme (NDRHI) and has implemented a budget cap for the financial year (FY) 2021 to 2022 to maintain affordability. Participants must notify Ofgem (the scheme administrator) on or before 31 March 2023 of any plan to modify the installation capacity.

This stakeholder bulletin sets out the government’s intention to make small amendments to how modified capacity budget caps are set from FY 2022 to 2023. We propose amendments to the NDRHI regulations to introduce split budget caps and to amend the payment formula. These proposals are to ensure participants are guaranteed fair access to the budget and to better calculate spend. We welcome industry feedback and wider thoughts on the proposals.

Policy background

The government response NDRHI – Ensuring a Sustainable Scheme outlined how after the scheme’s closure on 31 March 2021, NDRHI participants are able to modify capacity by adding additional heat pumps to an existing shared ground loop (SGL) system. This policy change was to encourage greater heat pump deployment, and to benefit installers and developers by not requiring the total potential capacity to be commissioned at once. The Domestic Renewable Heat Incentive Scheme and Renewable Heat Incentive Scheme (Amendment) Regulations 2021 included the power for the Secretary of State to implement a budget cap on the cost of modified capacity, to protect overall scheme affordability. Please see this government response, and Ofgem Guidance Volume 2, for further detail on the operation of Modified capacity policy.

On 5 August 2021 BEIS published the government notice to announce the introduction of a budget cap for this SGL cohort. This was for £15 million for the total potential annual expenditure related to modified capacity plans notified to Ofgem in FY 2021 to 2022. Participants must notify Ofgem of plans to modify capacity on or before 31 March 2023. A modification can occur on 2 occasions up to 20 years after the initial accreditation. This is to give participants flexibility, while ensuring that budget is available for modification whenever it occurs. Any applications requiring greater budget than is available will be queued in order of receipt. Queued applications could be allocated funding if applications ahead in the queue are rejected, withdrawn or if the budget cap is increased. In a similar way to the process of Tariff Guarantee budgets, modified capacity applications that have not been allocated budget by the final date of FY 2023 to 2024 will be cancelled.

Split budget caps

On 5 August BEIS set a single overall budget cap for FY 2021 to 2022, however we want to set a more nuanced cap going forward. This would cover the remaining financial years in which modified capacity applications can be notified to Ofgem (FY 2022 to 2-23 and FY 2023 to 2024). This is to ensure that all sectors continue to have sufficient access to the budget. There are several sectors that modified capacity is designed to benefit, and in particular multiple domestic dwellings in social housing, as set out in the government response. However, modified capacity for projects heating housing can be relatively small compared to some other larger sectors. Introducing specific caps is to ensure that housing-related projects are not crowded out of fair access to the budget by larger installations in other sectors.

Government would welcome industry views on the most effective way to distinguish these caps. While the objective is to ensure housing-related projects are not crowded out by large projects in other sectors, the regulations are more specifically framed in terms of heat use. Therefore, capturing this distinction may be most applicable within the current regulations by setting caps in terms of heat uses. Alternatively, government could rule out specific heat uses that cause particular risk to the budget. However, this is not viewed as the most desirable approach, in terms of fulfilling the original modified capacity policy intent, or of encouraging renewable heat deployment.

We propose to introduce split budget caps from FY 2022 to 2023 and FY 2023 to 2024, split according to heat use – one for domestic space heating, and one for all other uses.

Question 1: Do you agree with our proposal to split modified capacity budget caps for FY 2022 to 2023 and FY 2023 to 2024 by heat use? If not, do you have suggestions for other ways in which to split the budget?

Formula amendment

Regulation 52B (6)(i) sets out the formula which calculates the estimated annual payments for modified capacity. This formula uses the value ‘C’, defined as ‘the expected installation capacity of the plant following the modification’. This means that in calculating whether the budget cap for modified capacity has been reached, the total capacity of the plant is considered rather than just the extra capacity being added.

We think this definition of C can be amended to make the calculation used for checking available budget more accurate, by amending the definition to read ‘the expected extra installation capacity of the plant following the modification’. In other words, annual payments (and therefore the budget cap required) would be calculated based on just the modified capacity of a given installation, not the post-modification capacity of the entire installation.

This change would mitigate against the risk that large capacity installations with small modifications of capacity would take up an oversized proportion of the budget, while only adding a small amount to modification of capacity. Making this change would therefore bring greater parity between smaller and larger installations, with their impact on the budget purely based on the modified aspect of their capacity. This change would also allow BEIS to more accurately set a budget to reflect the expected modified capacity, without having to also account for the added variable of pre-modification installation capacity.

Question 2: should the government amend the value C in the modified capacity formula to read ‘the expected extra installation capacity of the plant following the modification’?

Further details on taking forward either of these measures will be published in the government response to this notice. Please send any responses to RHI.consultations@beis.gov.uk by 12 October 2021.