Some like it hot

8 Jun 11
Michael Ware

Next month the government will introduce a new subsidy scheme to encourage the production of renewable heat. Public bodies should stop delaying and do something to take advantage

I recently got married again (for the third and final time!) and my wife and I spent the second evening of our honeymoon naked in a sauna with 16 sweaty Finns and a chubby couple from Doncaster. Because Em and I are English and therefore unfamiliar with the eye contact protocols of public nudity, we spent most of the time staring intently at our toes and discussing heat i.e. how cold it is in Finland (an unbelievable minus 35), how hot the sauna was by comparison and the relative temperatures of Epsom and Doncaster.

Ever since this nadir of personal embarrassment, I have been thinking a lot about the concept of heat. I spend a lot of money and energy trying either to make my house hotter or to cool specific bits down; such as the fridge or the baby’s room. I also spend a lot of money heating water so that the women in my life can live like Roman empresses and spend hours every day taking piping hot baths.

On a macro scale, my efforts are duplicated millions of times over and today the nice people at the Department of Trade and Industry told me that 70% of UK energy use is for heating either buildings or water. Given that our total energy bill is now equivalent to over 250 million tonnes of oil per annum, we are funding an awful lot of the market for palatial gated mansions in down town Jeddah just to stay warm, get hotter or sometimes colder - anything but stay at the outside temperature.

The public sector is a big contributor to all of this. It used about 10 million tonnes of oil (or equivalent) last year and most of this was to heat draughty old Victorian buildings. Despite everyone’s best efforts to shut the windows, turn down the thermostat and go home by 5, energy consumption by the public sector rises inexorably and is now the second biggest cost (after payroll) facing most organisations. Or to put it another way, the next moody multi million footballer to be signed by Manchester City will probably have indirectly been paid for from the cost of heating the impressive but impractical Gothic Town Hall.

Refreshingly the Government has been thinking a lot about this and is about to introduce the Renewable Heat Initiative (RHI). Like its sister scheme of Feed in Tariffs for electricity, the RHI will subsidise the production of heat from renewable sources and pay organisations an amount per kilo watt of heat produced even if you use it yourself.  The total budget for the scheme is £860m and it goes live in July.

This is truly groundbreaking stuff and we are the first country in the world to have this type of scheme.  Yes, you read that last sentence correctly. We may be the second worst country in Europe at producing renewable power, we may never win another world cup in my lifetime, Cheryl Cole may have been sacked from the US X Factor because she rhymes 'right' with 'feet' but we have the world’s first renewable heat subsidy regime and by God I am proud of it.

Finally we can look our yellow jumper wearing tasselled loafer European cousins in the eye and say we are doing something about the environment that you aren’t. We are the best at renewable heat. End of. Period.

So how do you take advantage? You start by realising that this is a government subsidy for creating the heat you are providing anyway and you procure a renewable technology to provide it instead. It doesn’t have to be ground breaking or difficult, just stop procrastinating and do something. Put solar thermals panels on the roofs of your schools to provide hot water, put a containerised bio mass boiler in the car park and connect it up to the plumbing. Just do something, claim the subsidy and overnight Robert becomes your dad’s brother.

Yes, yes you may splutter at this point, this is all very well but this fancy renewable technology costs money and we need that to preserve front-line services. But, at the last reckoning, local government alone had billions of pounds tied up in reserves. Now the treasurer may warn that this cash is required for a rainy day but take a look outside. You are shutting libraries, laying off care workers, closing playgroups for vulnerable children. How much more water has to fall from the sky before you concede that this may, in fact, be that rainy day?

And what’s more the RHI is designed to give you a 12% return on your investment. Hands up those amongst you who are still making 12% per annum return on your cash reserves but don’t lie awake at night worrying that you have invested in another one of Bernie Maddoff’s schemes.

So, in conclusion, I think it is unlikely that Em and I will pursue our nascent friendship with that nice couple from Doncaster. Once you have spent an evening comparing surprising skiing bruises on rarely seen parts of the anatomy, it tends to diminish your appetite to have the same people over for dinner.

However, I urge the public sector to develop its relationship with renewable heat. We are in the early days of a massive change in the way the world generates energy and, for once, the UK is on top of the barricades waving a big banner that says ‘RHI’. The revolution may not be televised but, surprisingly, it is being partly sponsored by the UK Government.

Michael Ware is a corporate finance partner at BDO

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