Select Committee on Science and Technology Appendices to the Minutes of Evidence


APPENDIX 48

Memorandum submitted by BG MicroGen

1.  EXECUTIVE SUMMARY

  BG Group believes that climate change is a reality, supports the placing of greater emphasis on it in energy and environmental policies and therefore concludes that a key objective of energy and environment policy must be to drive lower carbon intensity into the economy.

  The process of driving lower carbon intensity into the economy will require three components: a progressive migration to lower carbon fuels, a more efficient use of energy and the introduction of renewable energy sources.

  Natural gas has the lowest carbon content of all of the hydrocarbons and, in combustion, produces 22% less CO2 equivalent emissions than oil and 40% less than coal. Natural gas also releases virtually no particulate matter and emits significantly lower levels of sulphur dioxide (SO2) and oxides of nitrogen (NOx). Therefore, it is critical in policy terms that all hydrocarbons are not treated as though they have an identical environmental impact.

  We believe that the economy of the future is likely to be hydrogen-based. However, we see natural gas as a clean, and convenient bridge to a carbon-free future and gas-fired MicroCHP as a central plank in that bridge.

  Energy efficiency improvements by households are key to achieving a zero carbon economy. The equivalent of a quarter of the UK's total Kyoto Commitment across all sectors could be delivered through MicroCHP alone if all 13 million suitable UK homes were converted. Even at more modest levels of penetration, it is clear that the technology can deliver major environmental benefits and help the Government meet its "green" targets.

  We suggest that Government support for carbon abatement measures should be targeted at the most cost effective solutions. The PIU, in its Energy Review[24], identified MicroCHP as by far the most cost effective of all the carbon abatement methods. The Fuel Poverty Advisory Group has also noted the importance of micro CHP

  With government support, MicroCHP can make a significant contribution towards achieving a low—and ultimately zero carbon economy, and importantly, on a much shorter time-scale than via many renewable technologies

  Over time, the technical, regulatory and legislative framework that is required for gas-fired MicroCHP to deliver energy efficiency gains and carbon abatement can apply equally to renewable technologies such as photo-voltaics and fuel cells. So, by acting as the launch fuel for MicroCHP, natural gas can act as a bridge to renewable energy sources.

  MicroCHP is a radical and evolutionary change in home heating, which incorporates the technology of the highest efficiency boilers plus significant additional functionality including the production of electricity. However, because it replicates the functions of a conventional boiler and this is something which domestic customers are familiar with, this technology can begin the process of familiarising domestic customers with the concept of generating their own power—making it far easier to sell technologies such as fuel cells when they become available.

  Measures which will help achieve the potential of MicroCHP and which have significant parliamentary support demonstrated by support for Early Day Motions are:

    —  Direct grant support (EDM 47).

    —  The extension of 5% VAT to accredited MicroCHP (EDMs 79 and 29).

    —  Access to enhanced capital allowances for accredited MicroCHP (EDM 367).

  Customers only replace central heating boilers around once every 15 years. It is essential therefore that as a country we take all possible steps to ensure that the most CO2 friendly choice is made. An inefficient boiler once installed cannot be changed without enormous inconvenience and extra cost. Every time a customer chooses to install a traditional boiler rather than a MicroCHP we have lost the opportunity to save more than 20 tonnes of CO2 (1.5 tonnes pa for 15 years).

2.  INTRODUCTION TO BG GROUP

  2.1  BG Group welcomes the opportunity to give evidence to this Committee. BG Group is one of the very few integrated natural gas companies with expertise and experience from gas production, through transmission, distribution and marketing to the consumer.

  2.2  Part of the former British Gas, the company now has its centre of gravity—around 65% of activity—in exploration and production and has played a part in some of the biggest gas finds in the world in recent years—in Trinidad, Bolivia, Egypt and Indonesia.

  2.3  BG Group has interests in around 20 countries worldwide but its base is still solidly in the UK, which accounts for 55% of current production. BG Group is a top 30 FTSE company.

3.  INTRODUCTION TO MICROGEN

  3.1  MicroGen Energy Limited is a wholly owned subsidiary of BG Group which has been established to develop what the Group perceives to be a significant market opportunity in Micro combined heat and power.

  3.2  Following an extensive review of various technologies, MicroGen selected and obtained an exclusive worldwide licence to develop and commercialise, the free piston Stirling engine. The resulting appliance is an innovative energy system for individual homes and small businesses that generates heat for water and space heating requirements and at the same time produces electricity from a single compact unit. MicroGen intends to launch the product commercially in just over a year's time.

  3.3  The unit, which fits into the same space on the wall as a traditional boiler, can contribute to economic, environmental and social objectives by:

    —  reducing a typical household's energy bills by around £150 per year;

    —  helping lift people out of fuel poverty; and

    —  reducing CO2 by around 1.5 tonnes per household per annum.

  3.4  MicroCHP can also improve security and stability of supply by reducing energy usage, increasing the diversity of its supply and reducing peak loads on the network because it generates power independently of large, centralised power stations.

4.  BRIDGING THE ZERO CARBON ECONOMY GAP

  4.1  BG Group believes that climate change is a reality, supports the placing of greater emphasis on it in energy and environmental policies and therefore concludes that a key objective of energy and environment policy must be to drive lower carbon intensity into the economy. The process of driving lower carbon intensity into the economy will have three components:

    —  progressive migration to lower carbon fuels;

    —  a more efficient use of energy; and

    —  the introduction of renewables.

  4.2  The migration to lower carbon fuels is critical. We believe that the economy of the future is likely to be a hydrogen-based. However, the transformation to such an economy is some years in the future. Action can and should be taken now that reduces carbon emissions and we see natural gas fired MicroCHP as a clean, convenient and innovative bridge to such an economy.

  4.3  Natural gas has the lowest carbon content of all of the hydrocarbons and, in combustion, produces 22% less CO2 equivalent emissions than oil and 40% less than coal. Natural gas also releases virtually no particulate matter and emits significantly lower levels of sulphur dioxide (SO2) and oxides of nitrogen (NOx). Therefore, it is critical in policy terms that all hydrocarbons are not treated as though they have an identical environmental impact.

  4.4.  Environment and Energy Ministers have made clear their zeal for much greater energy efficiency and improved air quality. Many of their policies are designed to help renewable energy sources achieve that. Whilst we support this approach, renewables are still in their infancy, represent a fairly small part of generation and are, by nature, concentrated in some parts and absent from other parts of the UK. Many renewable technologies are, therefore, a solution in the medium to long term. This leaves a gap, which needs to be bridged. With government support, MicroCHP can make a significant contribution towards achieving a low and then ultimately a zero carbon economy. But, critically, it can achieve this transition on a much shorter time-scale than many renewable technologies.

  4.5  Over time, the technical, regulatory and legislative framework that is required for gas-fired MicroCHP to deliver energy efficiency gains and carbon abatement can apply equally to renewable technologies such as photo-voltaics and fuel cells. So, by acting as the launch fuel for MicroCHP, natural gas can act as a bridge to renewable energy sources.

  4.6  A combination of the desire for a zero carbon economy and concerns over security of supply of energy, make it essential that energy is consumed in the most efficient way possible. We therefore support the Inter-departmental Analysis Group (IAG)[25], which concluded that "the key issue is not whether energy efficiency should be pursued as a priority within a carbon saving programme—but how."

  4.7  BG believes that government support for carbon abatement measures should be targeted at the most cost-effective solutions. The PIU, in its Energy Review24, identified MicroCHP as by far the most cost effective of all the carbon abatement methods.

  4.8  Technologies offering distributed power generation offer significant advantages with respect to emissions and security of supply. However, the concept of generating your own power within your home is a novel one with which domestic customers are unfamiliar. Here also, the uptake of MicroCHP can act as a stepping-stone for other technologies. MicroCHP is a radical and evolutionary change in home heating, which incorporates the technology of the highest efficiency boilers plus significant additional functionality including the production of electricity. However, because it replicates the functions of a conventional boiler and this is something which domestic customers are familiar with, this technology can begin the process of familiarising domestic customers with the concept of generating their own power—making it far easier to sell technologies such as fuel cells when they become available.

  4.9  Energy efficiency improvements by households are key to achieving a zero carbon economy. The equivalent of a quarter of the UK's total Kyoto Commitment across all sectors could be delivered through MicroCHP alone if all 13 million suitable homes were converted. Even at more modest levels of penetration, it is clear that the technology can deliver major environmental benefits and help the Government meet its "green" targets.

5.  ACTION REQUIRED

  5.1  It is widely accepted that energy efficiency is not sufficiently valued by the market. One of the ways in which this market failure can be corrected is by the introduction of economic instruments, which place a value on this benefit. In keeping with our view that government support for carbon abatement measures should be targeted at the most cost effective solutions, we have considered the most cost effective ways of providing that support and recommend the following measures:

5.2  Direct grant support for MicroCHP similar to that provided to the solar electricity industry and LPG vehicles.

  Such a grant would not need to be a permanent measure but could be used to "kick-start" the introduction of MicroCHP—which delivers greatly enhanced benefits over both condensing and traditional boilers. The grant could be a time or volume-expired measure, as once a critical manufacturing mass is established within the MicroCHP industry, unit costs will fall and MicroCHP will be able to compete alongside other energy saving and carbon reducing technologies.

  5.3  This measure has considerable support within parliament, as demonstrated by the large number of signatories (134) to Early Day Motion number 47 tabled by Dr Ian Gibson MP, "Extension of the new technology grant scheme to domestic CHP systems and domestic heat pumps".

  5.4.  EDM 47 states "this House . . . believes that encouragement for new technology is essential for achieving long-term reductions in emissions of carbon dioxide; therefore calls for the extension of that grant scheme to domestic micro-combined heat and power systems and domestic heat pumps, both of which are new technologies with great potential for the future; and notes that in the case of domestic combined heat and power systems the recent report by the Performance and Innovation Unit, in Table 6.1 identified MicroCHP as the most efficient method of carbon abatement and that the Government's Fuel Poverty Strategy stated that it also has a considerable potential to reduce fuel poverty."

5.5  The extension of 5% VAT to accredited MicroCHP

  Domestic customers currently pay 5% VAT on the energy that they use but 17.5% VAT on energy saving devices. Five per cent VAT is a recognised fiscal instrument, already used by government to incentivise domestic consumers—it already applies to energy saving materials, and this includes central heating and hot water system controls. A customer who installs a MicroCHP, which is among the most efficient energy saving devices available, should also benefit from the lower rate of VAT.

  5.6  Parliamentary support for this measure is demonstrated by EDM 79 "Reduction of VAT on Energy Saving Materials" and EDM 29 "VAT on DIY installations of energy saving materials", which have gained 215 signatures.

5.7  Access to enhanced capital allowances for accredited MicroCHP

  In the March 2002 budget, the Government extended the application of Enhanced Capital Allowances on Good Quality CHP to include leasing arrangements in the business sector. In the domestic sector, basic rate capital allowances are also available to the Government's Affordable Warmth scheme. Extending access to even basic rate capital allowances to all domestic sector leasing arrangements for suitably accredited energy efficiency measures, including MicroCHP would be particularly effective in encouraging the establishment of "Energy Services". This is a business model supported by the Energy Saving Trust that encourages energy efficiency measures by allowing customer payments to be structured such that the extra capital cost of the energy saving measure (in this case MicroCHP) is paid concurrently with the receipt of the benefits that the measure brings.

  5.8  In support of this measure EDM (number 367) "enhanced capital allowances for domestic sector energy services" was put down last week by David Chaytor MP, Chair of the All Party Environment Group.

  5.9  The potential benefits of MicroCHP are huge. However the window of opportunity is small—because customers only replace central heating boilers around once every 15 years. It is essential therefore that as a country we take all possible steps (short of compulsion) to ensure that the most CO2 friendly choice is made because an inefficient boiler once installed cannot be changed without enormous inconvenience and extra cost. Every time a single customer chooses to install a traditional boiler rather than a MicroCHP we have lost the opportunity to save more than 20 tonnes of CO2 (1.5 tonnes per annum for 15 years).

December 2002




24   Table 6.1, p108, The Energy Review, A Performance and Innovation Unit Report, Cabinet Office, February 2002. Back

25   Long Term Reductions in Greenhouse Gas Emissions in the UK,Report of an Inter-departmental Analysts' Group. Feb 2002. http://www.cst.gov.uk/energy/greenhousegas/greenhouse.pdf. Back


 
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