Government confirms short-term cost controls for renewable heat incentive

The amount of funding available for projects in this financial year will be limited to £70 million of the scheme's total £860m budget, it said, to ensure that there would be enough to pay for existing and new installations in the second and third years of the scheme.

The short-term cost control mechanism (16-page / 103KB PDF) will allow the Government to suspend the scheme until the following financial year once payments reach 97% of the £70m limit. It will publish weekly updates on the website of the Department for Energy and Climate Change (DECC) website, complete with an estimated suspension date if required. The Government will publish a consultation next month on longer term proposals designed to ensure that the scheme keeps within its budget.

"Given current uptake figures we do not currently envisage having to use this mechanism," said energy minister Greg Barker in a written ministerial statement. "However, we have learnt from our previous experiences and want to provide assurances to the market and the public that we are spending money on the RHI in a sustainable way."

The Government first proposed the introduction of a cost control mechanism for the RHI in March this year, after it was refused leave to appeal to the Supreme Court over "legally flawed" cuts to feed-in tariffs for solar power generation. The falling cost of the technology put a "huge strain" on its financial support package, it said.

A one-week notice period allowed for a much higher trigger point for suspension of the scheme than would have been the case if a longer notice period had been used, as well as reducing the chances of suspension being "triggered unnecessarily", the Government said. An alternative proposal would have seen the scheme suspended with one month's notice once 80% of the budget had been spent.

Should the mechanism be triggered applications made before the notice period begins will be processed as normal, while applications made during the notice period will be processed if the installation has been commissioned before the suspension date.

Under the RHI long term financial incentives and support are available to successful applicants that use eligible and qualifying renewable technologies - such as heat pumps, biomass boilers and solar thermal panels - to generate heat. The first phase, which was introduced for non-domestic users in November 2011, will make payments on a quarterly basis over a 20-year period. The Government intends to consult on extending the RHI to domestic users in September.

Energy law expert Linda Fletcher of Pinsent Masons, the law firm behind Out-Law.com, said that this consultation – which will also cover proposals to extend support to new technologies - would be of particular interest to the industry. "This will give business the opportunity to express its concern at the current limitations of the technologies covered by the scheme, for example air source heat pumps," she said.

"The announcement of the budget review mechanism following the consultation which closed in April demonstrates the concern that there may be a similar overspend issue as with solar under the FIT scheme," she added. "Although it is stated that current and forecast expenditure will be published weekly, the ability to suspend funding on one week's notice is still likely to cause concern to industry."

Energy regulator Ofgem, which administers the scheme, had received 533 applications for the RHI and accredited 88 installations as of 27 May 2012. Ofgem has recently completed a series of presentations around the UK designed to improve the quality of applications by ensuring applicants are aware of what information to provide on registering.

The Government recently published its Heat Strategy (120-page / 4.3MB PDF), setting out its plans to cut the emissions caused by heating homes, buildings and offices entirely by 2050, last month. Almost half the energy consumed in the UK is used to generate heat for buildings and water, in cooking food and the manufacture of goods, and the majority of this energy currently comes from burning fossil fuels.