Despite the recent delay to the second phase of the UK’s Renewable Heat Incentive (RHI) and the associations being made with the Feed-In Tariff (FiT) scheme for solar technology, SVI believes the renewable heat market has significant potential. The first phase of the RHI has been running since November 2011 and though principally marketed at businesses, it provides a range of incentives, from which those in the public and commercial sector could yield substantial returns.
SVI expects an initial period in which, while steady growth will continue, explosive uptake such as that driven by the FiTs for solar will not occur. This is due to the fact that the government is keen to manage budgets – evident in the announcement that the second phase of the RHI, originally scheduled to launch in October 2012, will be delayed for cost consultations. However, SVI believes that this is unlikely to deter those positioned to take advantage of the opportunities which are explored in the report as steady growth is likely to lead to further incentives to drive uptake.
Analysis of key areas
DECC (2011), NERA (2011) and AEA (2009) forecasts predict £5bn-8bn will be spent on renewable heat projects over the next 10 years, and with the sector accounting for over 40 per cent of UK carbon emissions and worth an estimated £45bn, there is clearly a sizeable prize at stake. However, in the context of ever-changing regulation, fickle tariff pricing, limited access to finance, multiple technology options, variable fuel costs and a fragmented market, it can be exceptionally difficult to ensure well-informed strategic or investment decision making.
SVI analysis has identified six key areas in which opportunities will arise:
- Biomass: The Development of biomass heat; consolidating the equipment market; and fuel supply. The market, while immature, is in place and there are incentives and attractive returns to be had from policy that has already been implemented – even excluding the RHI, biomass is competitive with coal and oil in most sectors.
- FIT-style asset ownerships, though these will rely on scale and present an opportunity in the medium term. The aggregation of renewable heat installations by developers creates the opportunity for economies of scale and hence cost reduction in both capital and installation costs – leading to improved returns for developers.
- ESCO (Energy Services Company) models, under which customers pay for heat and suppliers own and operate the equipment, are particularly well suited to medium-scale installations in the public and commercial sectors and provide a separate, guaranteed income stream.
- Improving the quality and public perceptions of heat pumps could provide developers and installers with significant sustainable advantage. With the right quality installation and maintenance, heat pumps can deliver attractive returns today and with expected improvements in mechanical performance and reductions in capital costs, they will improve further over the next decade.
- We see attractive opportunities for consolidation plays by private equity investors, similarly to those which occurred in the solar industry as non-specialist wholesalers identified competitive options for acquiring the technology overseas before selling on to installers.
- Biogas production has already seen a spike in investment in recent years and the drivers of biogas production – which include regulatory pressures on dealing with waste and low-carbon energy generation, as well as technical innovation – are similar across Europe.
SVI expects to see the steady, though not spectacular establishment of a Renewable Heat Market through to 2014, with the earliest mover being medium-sized biomass finding modest traction in the public-commercial sector. It also expects to see an increasing number of biomass replacements in domestic, off-gas grid properties – as a niche market at first – at the natural replacement point for incumbent technologies at the end of their useful lives.
Later in the decade (2015-17), SVI expects improving economies of scale and falling technology costs to coincide with government introducing additional incentives to drive uptake. SVI expects this over-incentivisation to trigger a ‘gold rush’ in medium-scale biomass, but also that ASHPs could potentially begin to fulfil current bullish projections, at least in part, by finding traction much in the manner that solar has in the past few years. The end of the decade (2018-20) should see consolidation as capex costs fall and adjustments are made to reflect a more mature market.
The report will include:
– Executive Summary
– Introduction
– Market Dynamics – Market Segmentation; Macroeconomic Drivers; Customers &
Customer Needs, Cost Drivers, Technology, Policy; Legislation Pertaining to Renewable Heat
– Technology Profiles – Air Source Heat Pumps; Ground and Water Source Heat Pumps; Solar Thermal; Biomass; Other Technologies (Biogas, Biomass CHP); Economics & Scenario Modelling
– Case Studies
– Opportunity Identification
– Appendices
The report will be published on Monday 30 April and orders can be placed at www.svionline.co.uk/store, where readers can also view the executive summary and download the table of contents. Subscribers to REI can also use the discount REI15 for a 15 per cent discount.
Return to emailshot http://www.andpublishing.co.uk/www.renewableenergyinstaller.co.uk/news/