UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1664-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TRADE AND INDUSTRY COMMITTEE

 

 

LOCAL ENERGY GENERATION

 

 

Monday 23 October 2006

MR DAVE SOWDEN and MR NEIL SCHOFIELD

MR JOHN LOUGHHEAD

Evidence heard in Public Questions 130 - 219

 

 

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Oral Evidence

Taken before the Trade and Industry Committee

on Monday 23 October 2006

Members present

Peter Luff, in the Chair

Roger Berry

Mr Peter Bone

Mark Hunter

Mr Anthony Wright

________________

Memorandum submitted by The Micropower Council

 

Examination of Witnesses

 

Witnesses: Mr Dave Sowden, Micropower Council, and Mr Neil Schofield, Worcester Bosch, Micropower Council, gave evidence.

Q130 Chairman: Gentlemen, I am very grateful to you for coming. This is our second evidence session on what we call now Local Energy Generation. I am not quite sure what it is we are studying, the nomenclature slightly escapes me, but it is to distribute energy and microgeneration. A multitude of sins is covered, I think, by the title. Can I begin by asking you, although I do know you both, particularly one of you, to introduce yourselves for the record?

Mr Sowden: Thank you to the Committee for inviting us to give evidence. I am Dave Sowden. I am Chief Executive of the Micropower Council. We are an industry body that exists for policy research and advocacy for the microgeneration sector. Neil Schofield to my right, who will introduce himself, I am sure, is from a company that is one is one of our members, Worcester Bosch. One of the things we are hoping to develop in the course of this afternoon's questions is the importance of renewable heat. Neil chairs one of our policy and development groups looking at that subject in particular.

Mr Schofield: I am Neil Schofield from Worcester Bosch. Worcester Bosch is an equipment manufacturer, predominantly of central heating boilers. Our headquarters is based in Worcester itself but we have another manufacturing site in Derbyshire at Clay Cross. We are market leader for central heating boilers. The market has changed dramatically in recent years to condensing boilers due to building regulation changes in 2004 and we are market leader for the condensing boiler side. We also manufacture oil boilers in the UK but more recently we have moved into microgeneration technologies, in particular the mainstream solar thermal panels and ground-source heat pumps, and we are part of the larger international group of Bosch.

Q131 Chairman: Thank you. I visited the factory recently in Worcester and know your operation quite well. Can I start, Mr Sowden, by asking you to explain what the Micropower Council is in slightly more detail, all the bodies out there involved in this issue? Just take us through it and tell us exactly what you do for the whole sector.

Mr Sowden: Around five years ago a number of companies identified a gap in the way that the microgeneration sector was represented insofar as the renewables industry was doing quite an effective job in representing the renewable family of technologies and emerging technology known as micro-CHP or combined heat and power, which was starting to appear on the scene as well. We looked at that and discovered that there were quite a number of common things, particularly to do with interface with the electricity industry but also on wider issues to do with the engagement of consumers and customers taking responsibility for providing part of their own heat or electricity requirements from sustainable sources. On that basis there was a good case for drawing industry representation together where common themes could be found and speaking with one strong voice on behalf of, if you like, the non-expert user or consumer-led applications of sustainable heat and power production. That was, if you like, our genesis. Today we have around 15 corporate members. They tend to be the larger players in the microgeneration sector but we also build in membership of all of the other trade associations and professional institutions that have a strong interest in the microgeneration sector as well, including some of the trade associations you have been taking evidence from in this inquiry.

Q132 Chairman: But it is fair to characterise it broadly as the representatives of the private sector?

Mr Sowden: Yes, I think that is right. It is the companies and trade associations that are interested in the commercialisation of microgeneration technologies across the whole family, across a range of applications.

Q133 Chairman: Before I bring in Mr Bone can I ask you if there is a term of art you would prefer to use for this rather diverse concept? What microgeneration means is enshrined in statute law but I am coming to the view that we should be talking about much more than electricity and "generation" seems to imply electricity all the time. Is there a word or phrase you prefer?

Mr Sowden: We would love to find one, something snappy and eye-catching. We are at the stage, as you rightly point out, where section 82 of the Energy Act defines microgeneration to include heat as well as power production technologies, and that seems to be where the political world has formed an understanding, so, given that that is where we are (and Neil in particular raises with me), that microgeneration or micropower has connotations of electricity production, I do hope that we represent a fair balance of heat technologies as well as electricity. It is important to us that we do that.

Q134 Chairman: "Low-hanging fruit" is the cliché we use now, and the low-hanging fruit seems to be largely in heat rather than electricity. Is that fair comment or not?

Mr Sowden: I think that is absolutely right. Before we even get into micropower or microgeneration technologies on the heat side we should be talking about energy efficiency. Energy efficiency should come first. It is the low-hanging fruit that we have out there at the moment and microgeneration technologies are there to supply whatever residual needs you have after you have taken every cost effective step to make a building as energy efficient as possible.

Q135 Mr Bone: I would like to ask a few questions about the application of microgeneration. If we start at the basic level, we have got to persuade consumers to take it up and to put solar panels in or have wind turbines on their houses, but if you cannot persuade them, as you mentioned in your very first statement, to turn the lights off how are we going to get them to consider taking up microgeneration?

Mr Sowden: Just to avoid me doing all the talking Neil might like to talk about the commercial perspective.

Mr Schofield: I began by saying that our mainstream and what pays the rent is central heating boilers and only recently have we moved into microgeneration technologies. The first one we have approached is solar thermal, which is by far and away, as the Chairman said, the big take-up of all microgeneration technologies but it is still relatively small. In Europe 50 per cent of all solar panel sales are in Germany, so it is very much an established market over there, whereas in the UK it only represents something like two per cent of all solar panels sold. However, in the last 12 months since our introduction of these products we have gained about 20 per cent of the market. Obviously, we are delighted with that take-up. That really is about engaging customers, coming back to your question, and the way we have done that is the way we do with our mainstream products, boilers, and that is through the route to market. If someone wants a central heating boiler, normally it is not a particularly exciting product; it is usually taken for granted, at that point, because it is a distress purchase because the old boiler has packed up after 20-odd years, they call in an installer, a plumber, and it is the plumber that then makes the recommendation and evaluates the property. That is how we have approached these technologies. We do not sell direct. We sell in a two-step distribution to builders' merchants and the builders' merchants then sell to an installer who then goes to the householder. The key within that route to market as far as we are concerned is undoubtedly the installer. If he is going to go to somebody's house and they need a new boiler, if we can get the installer to engage with them and say, "Perhaps this is the time to think about other technologies rather than just the boiler and a perfect match with a central heating boiler is a thermal solar panel", that is very simple. To do that we have supported the installer with training. We have trained round about a thousand installers in the last 12 months. We do it independently. We give them an accredited card. It is UCAS approved and independently tested, so it is quite a serious achievement to get to that level of understanding and the installer is then promoting it. What we have seen only in recent weeks is high street organisations like B&Q and Currys promoting these technologies.

Q136 Mr Bone: Can I come in on that point? In some of the evidence sessions it has been said to us that yes, you have got these high street retailers promoting microgeneration, but does the consumer not then get a problem with planning? If I wanted to put solar panels on my house would I have to get planning permission? Is that a barrier?

Mr Schofield: Undoubtedly it is a barrier and currently you do need planning permission for solar panels and wind turbines, but I understand there is legislation going through.

Mr Sowden: Perhaps I could cut in there and try to answer both points. The first point, if I could paraphrase the question, is how are we going to engage consumers in micropower technologies when we cannot engage them in energy efficiency. Around nine million cavity walls, I believe, are still unfilled and that is a very cost effective technology. That is a valid point indeed. I was at a presentation last week to people from the City, investors, and I asked the question, "Who in this room has had a dinner party this summer?". Several hands went up and I then put the subsequent question, "How many of you showed your dinner party guests your cavity wall insulation?", and of course hands remained firmly down. However, evidence does suggest that those consumers who install microgeneration technologies are rather proud of them, they do like to show them off to their friends, and they actually start to change their behaviour in other ways as well, thereby leveraging wider benefits than purely the benefits that flow from having microgeneration technologies themselves. It is not just me that is saying this. This is backed up by evidence. We refer to it in our memorandum. The Sustainable Consumption Round Table published a report around this time last year, which is not statistically validated as it was only an anecdotal piece of research, but nonetheless it is demonstrating that this feature does exist. I am afraid the second point has gone out of my head.

Q137 Mr Bone: If we are serious about microgeneration do we need to change the planning laws to make it easier?

Mr Sowden: The answer to that is yes, but we have to take great care in the way we do it. We do not want to see the unmitigated proliferation of inappropriate visual amenity throughout our towns and cities. That would not help the microgeneration industry to capture hearts and minds. The Department for Communities and Local Government has been conducting a review over the summer and the report is now with ministers. It has been done by a planning consultancy called Entec, prompted by provisions in the Climate Change and Sustainable Energy Act which became law earlier in this parliamentary session. That is setting out recommendations that, for example, for solar panels the bulk of those would fall into what we call the permitted development system, so they would be listed in the general permitted development order under relevant town and country planning legislation. That would even extend to wind turbines, but with appropriate limits on size, visual amenity and particularly noise and vibration. All those recommendations are in that report which rests with ministers at the moment and we await a decision on whether ministers are going to publish it.

Q138 Mr Bone: Merton Council I believe requires ten per cent of new builds to be microgeneration. My council, Wellingborough, has put it to me that we have thousands of new homes to be built in our area because we are one of the Government's growth areas, and they are saying that it should not be on their shoulders. They would like to do it but why does the Government not require it because with new building there would not be all the planning issues because it would be done when they were doing the new build. Do you think the Government should set for new build a proportion to be based on microgeneration?

Mr Sowden: I know the Committee has taken evidence from the Energy Minister, Malcolm Wicks. I do not know if you intend to take evidence also from the Minister for Housing and Planning, Yvette Cooper, but there are a number of policy initiatives, if you like, within DCLG that I think might start to tackle that, although we would like to see them go further. The first is dealing with the Merton Rule, as it is called, and its application. There are certainly quite a number of local authorities around the country now picking up what is enshrined in statutory guidance, and Planning Policy Statement 22, as we call it, PPS22, does encourage local authorities to have a Merton-style policy. It is not worded quite as tightly as saying ten per cent but it does require that. The Government conducted a review earlier this year of the extent to which local authorities were applying that guidance. That review concluded that just under half of the local authorities who could reasonably have been expected to adopt that style of policy, basically those who have revised their local plans since the policy came into force, had not done so. We would obviously like to see the Government strengthen the guidance and require them to do so.

Q139 Mr Bone: That sounds as though it is still being put onto the basis of local government. If we are really serious this needs the Government to say it, does it not?

Mr Sowden: Yes. Forgive me; I am coming on to that in just a moment. I am just explaining the application of that particular policy instrument. The Government has responded to a letter that we have sent saying that, beyond a ministerial statement to Parliament made by Yvette Cooper on 8 June, they do not consider anything further is necessary, and that ministerial statement simply said that the Government "expects" local authorities to have these policies, nothing stronger than that. We would very much like to see that go further. To answer your question about whether we should do this through regulation, the building regulations being a good example of that, the Climate Change and Sustainable Energy Act 2006 amends the Building Act to create a new provision in the Building Act to allow the Government to regulate microgeneration into existence should it choose to do so. It has taken an enabling power which it can exercise through secondary legislation. At this juncture the Government is not prepared to enact that legislative power because it takes the view that the industry is not at the scale where it could deliver, and I think that some in the industry would have some sympathy with that view. In the meantime the Government has committed to producing what it calls a code for sustainable homes which will apply to all publicly funded housing that is built, I believe, from April this year. I will have to check that detail but I think it is from April this year. Within that code they have set a number of standards. The exemplar standard, which is carbon neutral, means that you cannot achieve that without some form of on-site microgeneration. The mandatory level within that requires premium levels of energy efficiency that go beyond the building regulations, but we would like to see the Government in a measured and controlled way tighten the requirement so that you need progressively greater carbon performance over time and in that way we have a glide path for the industry towards eventual inclusion as a mandate within the building regulations. We think that is a sensible, measured policy that sets industry expectations well in advance and allows us to respond.

Q140 Mr Bone: Can I move on to carbon savings? Your submission argues that microgenerators should receive the full value of the carbon savings they create in addition to a fair price for their surplus electricity. How do you think that should be done?

Mr Sowden: In general terms we do not have a long term price for carbon. I am sure you have heard that from other submissions in a wider context. In specific terms, there are policy instruments which are designed partly to reduce carbon but there are other policy objectives as well. One of these is the Renewables Obligation. It is impractical and not cost effective for customers installing microgeneration technologies to claim the so-called ROCs, Renewable Obligation Certificates, to which they are entitled. Just as an example, we talked about the introduction into the mass market by major DIY chains of wind turbines. That type of wind turbine will generate around one ROC per year. That is worth £40-£50 per year, so if that were available that is potentially quite a useful additional benefit that the customer could claim, and they are entitled to it. The difficulty is that the administration that surrounds the way in which people have to claim ROCs stacks up transaction cost upon transaction cost and erodes all of that value. For example, an energy supplier would have to remind the customer to read the meter, which has to be done, incidentally, in an 11-day window right in the middle of the Easter holidays, not very practical for the majority of household consumers, and if the energy supplier has to remind the consumer and then remind them again it is probably going to cost an energy supplier £20 or £30 each time they send that reminder out for something that is only worth £40 or £50 a year anyway.

Q141 Mr Bone: What we have heard in some evidence overseas is that the way to encourage microgeneration is that for the surplus electricity fed back into the grid you get a premium price for, and that would be very simple to do, but we do not seem to be doing that at the moment.

Mr Sowden: No. This is the so-called feed-in tariff that exists in Germany and now in France as well and in other European Union Member States. We need to separate the level of de facto subsidy from the delivery mechanism for that subsidy, and one of the features in particular for solar voltaics in Germany, and now in France, is that the level of government support that is given, never mind the method through which you claim it, is substantially higher than it is in the UK, and that is a matter of political choice. The German Government has decided to back PV to a much greater extent than the UK Government. The delivery mechanism is also important. The feed-in tariffs certainly have their merits in terms of simplicity for the customer, allowing the customer to capture more of that value. I agree: the structure is helpful but let us recognise that the subsidy levels are also significantly different.

Q142 Mr Bone: If it is purely market-driven economics you would never put PV in because it has 120 years payback, I am told, 29 years for a small wind turbine and 80 years for your solar thermal heat. You just would not do it on pure economics, would you?

Mr Sowden: I do not know where those figures come from if I am truly honest.

Q143 Mr Bone: The DTI's consultation on its Microgeneration Strategy.

Mr Schofield: In the Sunday Times yesterday there was a list of payback times and for solar thermal, the ones that we use, it was 13 years.

Q144 Mr Bone: Thirteen?

Mr Schofield: Yes.

Q145 Mr Bone: It says 80.

Mr Schofield: Yes, so a bit of a difference. It is a real hot potato, payback. People only really want to be engaged with these technologies if there is an issue of payback and yet when it is part of your central heating system it is wiser - and I would say this because we are manufacturers - to separate out the capital cost. You have to pay a certain amount for this technology to be installed but once it is installed solar thermal can give you between 50 and 70 per cent payback on hot water per year, and that is a DTI figure, and that is quite realistic then. If you look at payback and technologies, you do not ever question what the payback is on other things like the front door or the skirting board. You do not ask the question what the payback is on those technologies. We seem to be very hung up on this and it does seem to be an issue to the market that people are only engaging these on the assumption that they will get a payback on them. However, what we are seeing is that that is not necessarily why people are engaging in these technologies. Solar has the biggest take-up of these technologies for one group of householders in particular, and that is the grey/silver market, people who have their own property and perhaps have an eye on retirement, invest now and want to stay in that property when they retire and that is when the running costs then come into play. These figures are very wild and differing and I do not think they are truly accurate. We are doing a number of test houses to try and get some accurate, realistic figures in normal households.

Q146 Chairman: Can I just push you a bit on this payback issue? When I came to Worcester Bosch a few weeks ago you were giving figures for solar hot water of 17, 18, 19 years. Now in the Sunday Times comes a figure of 13 years, whereas the Government is saying 80 years. This is a huge difference. I am a cynic. I think the only thing that will encourage people is if they think there is money in it for them, so why has the Government got 80 years in its Microgeneration Strategy?

Mr Sowden: Can I tackle that directly from the money point of view because I think it is tremendously important. If we are serious about getting micropower technologies from the niche market that they are currently in into a mass market context, making a compelling economic case to the consumer is important and we recognise that. These numbers that were quoted in I think, the Energy Saving Trust research that supported the Microgeneration Strategy were on a worst case scenario and when you look at the implementation of a number of support mechanisms that are currently on the table of stated Government policy they start to shorten significantly. Let me give you a couple of examples just to bring this debate to life. Let us take the example that has received quite a lot of attention recently, micro wind turbines sold through B&Q at £1,495, I think it is, including installation. Provided that you are in a decent windy location, you are looking at energy savings of £100, £150 per year, and if you are in a really good wind location it could be even higher than that. That sounds like a ten-year payback, but once you take into account the fact that you are entitled to claim a grant of £478, I think it is, once we tackle the issue that I raised before of access to ROCs, which you are entitled to on a cost effective basis, if you look at capitalising that £50 a year revenue stream and try and get an up-front value for it, even if you discount it, that is worth another £300 or £400, and we are only at the very early stages in the market while we have got a relatively inefficient installation infrastructure and we are in the very early stages of bringing the products into the market. They are not being mass produced yet, so even on today's numbers, once you apply the policy support mechanisms that are in place or replace those with scale economies in manufacturing and installation, you are getting down to the realms of five, six, seven-year simple payback and that does not take into any kind of what we call the gadget factor: why do people spend £1,500 or £2,000 on a plasma screen TV? People want these just because of what they are as well as for that compelling economic case.

Q147 Chairman: The Government's figures are wrong; that is the bottom line? Eighty years is an over-long period for payback on solar systems?

Mr Sowden: I would have to take a look at the basis of that underlying number, but my understanding is that they picked particular products there. I know that the solar hot water industry did level some criticism at the analysis there because they believe that it over-estimated the capital costs of solar hot water systems in particular, so, with permission, Chairman, I think that is a question I would like to come back to the Committee on perhaps in writing.

Q148 Chairman: It is almost an order of magnitude difference between your estimates and the Government's.

Mr Sowden: Yes. Even for solar hot water, for the kinds of prices that Worcester Bosch systems are installed for, realistically you are looking at something in the region now of ten to 15 years, but let us bear in mind that we do not have a mass market installation infrastructure in this country, people have to put up scaffolds instead of investing in cherry-pickers to put them up. The installation part of the industry is relatively immature and relatively inefficient, so there is still scope for cost reductions and therefore for that equation to get better.

Q149 Mr Wright: The large-scale wind technology that we are coming to depend on we get from Danish technology rather than UK technology. When we are talking about microgeneration what is the current UK manufacturing capacity for developing microgeneration?

Mr Schofield: As far as the products that we are concerned with are concerned, the thermal ground-source heat pumps, being part of Bosch, they are established technologies. Bosch owns a company in Sweden called IVT who are the European market leaders in ground-source heat pumps. They sell 50,000 to 60,000 a year. In Sweden ground-source heat pumps are the norm; that is how people heat their homes and use hot water. It is just in the UK that they are regarded as a relatively new and unusual technology with only round about a thousand systems. In terms of industry capacity on those technologies, and solar is exactly the same with an established company in Germany, we can supply those without any issue whatsoever. The development and manufacturing of those are well established but they are all imported currently and if we got the volume up to where we are in boilers --- when we first introduced condensing boilers we imported those from Germany, but with building regulation changes our factory went from three per cent import to 93 per cent manufacture in Worcester.

Q150 Mr Wright: Do you see it the same way with microgeneration?

Mr Schofield: Yes. We found that we could not import enough so, being close to the M5, we decided to manufacture those at Worcester and that is where we would be with these technologies if there were to become a mass market.

Q151 Mr Wright: Is that the driving force, that you cannot import enough to keep up with the demand? Why not invest in the manufacture now on the basis that there is going to be more demand?

Mr Schofield: Being an international group, we have specialist sites in different parts of the world, but predominantly in Europe, and so with the volumes that currently exist we are making over a thousand boilers a day in Worcester, employing 1,800 people, but we are very also pleased with our sales figures on solar. We have about 20 per cent of a ten per cent market, so it is not hard to work out how many of those a year we are selling now. However, that still does not warrant sufficient investment to manufacture in the UK. If that were to increase significantly, and we hope it will, then we would invest in it.

Q152 Mr Wright: Would you not see it then as a possibility for an export market perhaps? Instead of the Danes selling their technology to us can we not use the manufacturing base here to sell it to the Danes or the Swedes?

Mr Schofield: But if the home market is requiring 40,000 ground-source heat pumps and we only require a thousand, then it is it is obviously more cost effective to make them in Sweden, but if the volumes turned round then it might be a possibility. The UK is the largest heating market in Europe. There are a million and a half boilers sold in the UK, far and away the largest market. The next biggest is Italy, surprisingly enough, and that is less than a million. That is what we are good at and those are predominantly gas. Gas is 84 per cent.

Q153 Mr Wright: Looking into the future, can you see us expanding the manufacturing base for this microgeneration?

Mr Schofield: We have a long term business plan and we see that the current market for gas central heating boilers will be maintained at that one and a half million level until about 2015 and then we see these other technologies taking over.

Q154 Chairman: What about the energy efficiency of boilers? That is a bit of a problem, is it not?

Mr Schofield: Yes. That is about unintended consequences really because building regulations changed in April 2005 and now all boilers should be condensing A or B technology, the top two bands, but what we have seen is a big increase in the lesser of those two technologies, B, and so 25 per cent of all boilers sold now are band B. When legislation was put into place to improve the efficiency perhaps we did not go far enough and we should have just said band A. That is perhaps a lesson to be learned in the future if we look at there being stricter controls on this. This is with established technologies. This is with solar and ground-source heat pumps. They are up and running and Dave can talk about the other technologies. Where there are concerns on capacity are on the infrastructure. For example, in relation to ground-source heat pumps in Sweden, and Sweden is not a massively populated country, there are three million people, I think, every town has its own drilling organisation and they will come in in a day and drill a hole 100 metres down. This is where you drop the pipe to take the energy out of the ground, and then they fit a heat pump and within a couple of days the job is done. In the UK that type of structure does not exist. If you want to drill you are talking very limited specialist firms who are not actually drilling for ground-source heat pump technology; they are really drilling for water, so they are not really geared up and that is where we have a lack of capacity. That would be the restriction and we include that with our sales on solar. It is engaging that winter market, in our case the installer, and educating them to promote and become more able to supply the skills and infrastructure to the installer.

Q155 Mr Wright: Do you consider that the micropower sector is really dependent on the capital grants?

Mr Schofield: Interestingly enough, because we decided to go down our own route and do our own accreditation system, it was not put until fairly recently in with the Clear Skies and the Low Carbon Buildings Programme grant scheme, so of all those we have sold in the last 12 months the vast majority have not been grant subsidised; they have been there on their own merits and someone has gone out after the prices were acceptable and the take-up has been made. That is with an established product. With other technology undoubtedly you do need grants to pump-prime the market. Also, to give a little bit of credibility to these technologies, if it holds a government grant there is a comfort factor for the householder that it is supported, it is approved, it is accepted by the Government; this is a good idea. The government grant is wider than just the cash back and the subsidy. It does give greater support and encouragement. Also, on the grants, there is not just the low carbon buildings programme; there is also the EEC with the power supply companies. I think we could do a lot more there with micro technologies, which is particularly the bee in my bonnet, and the Chairman touched on renewable heat, talking about microgeneration, and most people do think that their most of the energy used in their home is on heating and hot water. About three-quarters of the energy in the home for heating and hot water at this moment in time is via the boiler. Everyone has got a boiler.

Mr Sowden: Can I just come in on this point because it is an important one? The industry and the Government get themselves into trouble about once every three years, or more recently in much shorter timescales, because the money for the grants programmes runs out or what happens after that programme expires is not made clear by Government at an early enough stage, and it is therefore very difficult to plan ahead for businesses because if people think there might be a new grant scheme round the corner they will put off the decision to go ahead and they may have gone ahead if there had not been a grant in the first place. Yes, it is important that there is some pump-priming for the industry to help it transit from where it is now into a mass market context, but we need to give some very careful thought to the design of future grant schemes so that they become market transforming. If we just continue to provide cash subsidies in the same way that we have done before without giving any thought to how that helps the industry to become more self-sustaining, then we are just going to be in this constant discussion with the Government every three years, every time there is a comprehensive spending review, about how much money is on the table next time round. It is unsatisfactory, and particularly for an industry which I certainly would like to see get to a scale where the Government cannot afford to give it grants any more because the numbers are so great.

Q156 Mr Wright: You talk about the numbers being so great in terms of a mass market. Do we need to reduce the cost of microgeneration or do you see technical advance as necessary to be able to make it more viable?

Mr Sowden: We certainly need to bring prices down to the sort of price the consumer wants, which was the point the Chairman made earlier on. At the moment the grant helps to do that. Scaling up the industry is the thing that is going to wean the industry off those grants in the longer term, but do not put grants in the bin at the moment. They are important, there is an industry out there that values grant programmes but let us be very careful about the way in which we design them in the future.

Q157 Mr Wright: In terms of your company, Mr Schofield, you entered the solar warming and ground-source heat pump market. What motivated you to get into that? Quite clearly you are saying to us that we are not geared up to this kind of technology in the UK so there must have been an element of risk there.

Mr Schofield: Bosch in internal Europe is very established in other technologies. RWE have a company on fuel cells, they are looking at micro-combined heat and power. They have established a company, a different one, that makes solar panels, which is part of Bosch, called Solar Diamond(?), that has been running for 30 years. The IVT ground in Sweden is very established. As I say, hey are market leader for ground-source heat pumps in Europe. We have a comfort factor. We can pull on these technologies, put our brand on them for the UK market. They make biomass "penny points". We have decided not to take that on board because there is not any infrastructure for penny points in the UK and yet in Germany and Austria they are very popular but they do not have the gas network that we do. Only 50 per cent of properties have gas. We have got a lot of pedigree to fall back on but we do see that gas is not finite in a domestic situation and we have just moved into this new era of condensing boilers. We think that is to be established and we are certainly talking about the next seven to ten years. Looking longer term, we believe this market will grow and we want to be established in that. We want to get in early and we want to build up our network of an inter-market for our supply chain. We want to promote this and we have to start at some point. We are fortunate; we have got a big organisation and we have taken on sponsorship of Channel Four News in the last couple of months and are promoting solar heat, so we can put our money where our mouth is and build this market. We think it is the future, so we are confident that this is the starting point of these technologies.

Q158 Chairman: Do you think that "ground-source heat pump" is a phrase that trips easily off the tongue and explains what it actually is?

Mr Schofield: No; that is a very valid point, Chairman. In hindsight we would never call a condensing boiler a condensing boiler. It compensates. People associate condensing with water running down the inside of windows; it is not a good term.

Q159 Chairman: It is a recovery boiler.

Mr Schofield: Yes. Boiler is a wrong term. Boilers do not boil. The last thing you want it to do is boil.

Q160 Chairman: Before I came to see you a few weeks ago I thought a ground-source heat pump was something to do with geothermal energy. I had no idea that it was actually a big solar panel in your garden.

Mr Schofield: That is right. It is getting energy out of the ground that has been heated by the sun. It is not digging that deep that you are hitting the earth's core and getting heat that way, so it is not a good term and we try and put brands on. We call our solar panel Greenskies. We call our heat pump Greenstore, because you are getting stored energy out of the ground. I have managed to get a plug in there, if you will excuse me.

Q161 Chairman: I gave you the line for the commercial.

Mr Schofield: Yes, sorry about that. Ground-source heat pumps are a fascinating technology. For every one kilowatt of energy you put into the unit to run it - and it is basically like a fridge in reverse; you are just moving heat from one place to another - you get four kilowatts of heat out, so you get this four-to-one ratio of energy savings, and they are not cheap. An average system is going to cost you between £7,000 and £10,000, but if you put that in an off-the-mains fuel poverty property, an old person's bungalow, something like that, the running costs then can be less than the winter fuel allowance. Okay, it has cost the council probably £10,000 to install it but for the householder and the issue with energy costs, which is very apparent to everybody, as I say, it can be less than the winter fuel allowance. There are massive benefits to these technologies.

Q162 Mark Hunter: May I apologise to our witnesses for being late and missing the start of their answers but I have been listening very patiently to the questions that have gone before. I would like to come on to the role of Government with a few specific questions that I would like to put to you, starting with the DTI. I think it is understood that the DTI has only one dedicated person at present looking at microgeneration and, given that, it seems reasonable for me to ask you how confident you are of the Government's ability to "aggressively" implement its Microgeneration Strategy.

Mr Sowden: I have to say this is a major concern for us.

Q163 Mark Hunter: I thought it might be.

Mr Sowden: We welcomed the Microgeneration Strategy when it was published in March. Broadly, it is the right set of policies, we believe, to take the industry from the niche market that it is in into a mass market context. There are two areas where we think it is deficient but I think somebody may ask a question on fiscal issues later so I will hang fire on that, and the other area is renewable heat which we have discussed. Other than that we think it is a pretty good suite of policies that we very much welcome. With the best will in the world it represents an ambitious work programme and having one middle-ranking civil servant responsible for its entire delivery we do not consider to be sufficient. I did learn last week, and we have been lobbying Government quite hard on this, that they have now strengthened that team by two people. There are two more junior people, taking the sum total on policy implementation to three. They also had another two people already working just on administering the existing grants programme. I am sure the Government will put to you that they have now got five people working full time on microgeneration. However, that is not five people working on implementing the strategy and we certainly do not have a senior civil servant whose day job is to do not much else than microgeneration.

Q164 Mark Hunter: So you would be more minded to believe they were taking it more seriously if there were a little more resource allocated to that area of policy?

Mr Sowden: Yes, and I think you have already heard from other people giving evidence that we do not believe there is a dedicated budget. It is not just about the human resource; it is also about the pieces of consultancy work that need to research a detailed bit of policy in some more detail.

Q165 Mark Hunter: Can I move you on to the business of targets? We know that we have a Government which has a great fondness for targets in all kinds of areas. Your submission argues in favour of Government targets for microgeneration. Could you explain to me what purpose you think having such targets would serve and at what level and on whom you would wish to see them imposed?

Mr Sowden: First of all let me give you the negative response to that, which is that targets will serve no purpose whatsoever unless they are accompanied by a commitment to underpin them with detailed policy measures designed to deliver them. It is not just targets for targets' sake. It needs substance underneath it. Indeed, the Microgeneration Strategy starts to give us some of that substance. Where we think targets still have an important role to play is in inspiring confidence amongst investors. The micropower industry is unique. Investors are very familiar with consumer goods and investing in that sort of thing - the MP3 player, the whiz-bang gadget. They understand that market. They also understand the energy sector because they invest in utility stocks. This is a little bit mould-breaking because it brings those two worlds together and nobody has ever done it before on a mass market scale. On what basis therefore do investors believe the business plans that prospective companies are putting forward? On what basis do they believe their market projections match their product offering? It is very difficult to get investors engaged in this and secure the capital that is so important (a) for scaling up production, and we all know how mass production can bring down manufacturing costs, and (b) to invest in the infrastructure, the point that Neil was making, on the installation side because there are good opportunities to strip costs out of the installation part of the industry as well. We consider targets at the highest level to be very important for instilling confidence in the investment community.

Q166 Mark Hunter: Targets on whom?

Mr Sowden: In the Climate Change and Sustainable Energy Act the way in which the targets section is worded would apply a national target which really just sets out where the Government sees the microgeneration industry sitting in general terms in the portfolio measures that it has available for energy policy, so we have targets on renewables, we have targets on CHP, we have targets on energy efficiency. Something that explains (and I am just using one example that could be expressed in other ways) how many households the Government expects to see with microgeneration technologies installed by 2015, by 2020, by 2025, gives a fairly solid commitment to where the Government sees this sitting within the overall energy mix. The target would be on the Government and the Act, I believe, if I am correct in my interpretation of it, requires the Secretary of State, once having set a target, to use reasonable endeavours to ensure that target is achieved.

Q167 Mark Hunter: So the target is one of Government's own?

Mr Sowden: Yes.

Q168 Mark Hunter: Moving on to a question which you rightly anticipated a few moments ago, can you tell us a little bit more about the fiscal incentives that you would like to see imposed for microgeneration?

Mr Sowden: One of the clauses that was in the first draft of the Climate Change and Sustainable Energy Bill was a requirement for a fiscal strategy to be drawn up covering both energy efficiency and microgeneration, and I do think it is important to take those two together. This is not so much about individual financial incentives; it is more about addressing whether there are fiscal imbalances in the system. I know you took evidence last week from Sussex University which expanded on this theme, but, for example, we have an energy system where corporations make large capital investments or the public sector makes capital investments in power generating facility. If we are going to start to recapitalise the energy industry in part on the other side of the meter then the fact that corporations can write those investments down against tax and individuals have to fund that capital from post-tax income creates an imbalance and that is the sort of imbalance that, if we are serious about microgeneration playing a major role in energy policy into the future, the Treasury needs to take a look at. There are a number of other specific examples. We have had some recent changes. All microgeneration technologies now qualify for a five per cent VAT rating. We do not regard that as a financial incentive per se. We regard that as levelling the playing field between energy efficiency/microgeneration on the one hand, which previously had a VAT rate of 17.5 per cent, and the sales of energy on the other, which previously attracted and still does attract a rate of five per cent, so that is more about removing a strong disincentive than providing a strong financial incentive. Just to give you a comprehensive answer, in a couple of other areas it is not only fiscal policy in the Treasury sense of the word but there are some perversities in the way that business rates are operating. We have had examples where a business has installed some small-scale renewable technology energy solution and then found that it has had a rating reassessment and all of the benefit of installing that technology has been wiped out by the increase in business rates. There are, I believe, examples in the household sector where, because the value of the property has increased as a result of the customer installing microgeneration measures, it has gone into the next council tax band and the increase in council tax has wiped out all of the benefit. Those are the kinds of areas which we think need looking at in the round, in a proper strategic review of how the fiscal system operates for the micropower sector.

Q169 Mark Hunter: What about stamp duty rebates?

Mr Sowden: Stamp duty rebates is another one I forgot to mention but it is in our evidence. Stamp duty catches people at a time in their lives when they tend to do things to their property anyway. The first thing many people do is fit a new kitchen or refurbish the bathroom. They make improvements when they move house, so stamp duty catches that natural discontinuity and provides a valuable incentive at that moment in a customer's life.

Q170 Mark Hunter: I guess you would accept that without these kinds of incentives it is going to be something of an uphill struggle for the microgeneration schemes that you would like to see taking hold because most people are motivated by what is in it for them. Would you accept that this is absolutely key to the whole issue of providing proper incentives?

Mr Sowden: Indeed I do, and I think the messages that it sends to consumers are just as important as the actual quantities of money. There was a recent pilot which British Gas ran in Braintree where it was offering customers the same amount of money to subsidise cavity wall insulation through its own direct branding and then it tried a combination of its branding and a £50 council tax rebate. There was no new money overall. There was exactly the same discount and of course take-up shot up because the perception from customers, even though British Gas was funding that discount on council tax, was that it was a reduction in tax. Therefore, because it came through the local authority, because it was branded by the local authority and because nobody likes paying council tax, it was much more effective as a policy instrument.

Q171 Mark Hunter: Given that you seem to have pretty comprehensively accepted the case for the importance of incentives, how do you square this with what I understand to be your view to see a level playing field amongst all energy generators?

Mr Sowden: I hope I have answered that as I have gone through. When it comes to access to ROCs, we are talking about levelling the playing field in terms of transaction costs. When we are talking about fiscal equity, particularly writing down allowances, we are talking about levelling the playing field between corporations on the one hand and individuals on the other. When we are looking at stamp duty rebates, we might be looking at direct financial incentives or subsidy, if you like to call it that, but there is a good case for some boost to get the industry moving. As long as that is transitional and something that is there on a temporary basis to help us kick start the mass market, I think it is well justified.

Q172 Mark Hunter: Do you think the structure of government, given that Defra and the DTI both have a policy interest in sustainable energy, undermines progress on microgeneration?

Mr Sowden: That is always a difficult question to answer. It has been the case with the development of the microgeneration strategy that the one middle ranking civil servant is proving to be an extremely effective civil servant and did a very good job of pulling all those different strands of government together but the ability to join up government is one that should be institutionalised and not reliant on the motivation of one civil servant, quite frankly. We need to look at more effective ways of drawing all these policy strands together. The microgeneration strategy does a good job of that but if we did not have a very enthusiastic civil servant at the centre of that, I question whether it would be quite the document that it is.

Q173 Mark Hunter: The point is not so much the lack of resource but the fact that it is the two departments and that is the crux of my question. Given that Defra and the DTI have a policy interest, do you see that as being a drag factor in that regard? Would it be simpler if it were just one of them that was responsible for progressing this agenda?

Mr Sowden: I am sure it would be simpler and I am deliberately sitting on the fence here.

Q174 Mark Hunter: I noticed.

Mr Sowden: That is because we do not have a strong view about those institutional arrangements.

Q175 Chairman: Presumably, if there is one civil servant in the DTI, she is there doing her work. There is no civil servant in Defra who will take an interest.

Mr Sowden: They have a responsibility for individual pockets of policy but as a very small proportion of their overall job portfolio.

Q176 Mark Hunter: Is there any specific policy took that you would use or like to see used to encourage renewable heat?

Mr Sowden: Neil chairs our policy development group on renewable heat. We have quite a well formulated policy proposal on this. The important thing to stress at the start is that the microgeneration of the household sector in particular works rather differently to other sectors in that customers respond much better to, "I will have £300 off the up front price of the installation now" rather than some vague promise that it might be £10 or £40 per year into the future. There are proponents of that latter revenue based scheme who support renewable heat. We think the two sit quite comfortably together. We have been working very closely with the Renewable Energy Association who you took evidence from last week in order to make sure that the proposals they are developing for larger scale applications and the proposals that we are developing for the household sector sit together comfortably. What we believe is that there is already a well designed, effective policy mechanism with a good track record on the energy efficiency commitment. It has been proven to work. We have seen the mass market transition of A rated white goods through that scheme - fridges, freezers, washing machines and so on. We have seen those come into the mass market and we have established delivery chains that understand how that instrument works. We have a proposal which we are writing to the government this week about to submit to government both in our response to the energy efficiency commitment consultation which goes in today and as a response to a wider invitation that we had from the DTI to respond on this issue, which is flagged up in the energy review. We do have some concrete proposals which we are in discussion with government about right now.

Mr Schofield: I welcome the fact that renewable heat got a name check in this Committee because it has been a frustration that it does seem to be overlooked. It is so much more the norm in the domestic property. Heat and hot water are what people need. Three quarters of energy is dedicated to those disciplines. There is not currently a government strategy on renewable heat so it is very much lacking at the moment.

Q177 Chairman: What can we do to help ensure that those who are least able to afford renewable technologies can benefit from them? You, Mr Schofield, said in your answers that you can effectively run a ground heating source pump for the cost of the fuel allowance meaning there will be no energy bill for the individual concerned, but the up front capital costs are huge. Also, what can we do to make sure that those who are not necessarily environmentally conscious but want to derive some of the financial benefits are helped as well? What, in summary, can we do?

Mr Schofield: The starting point is the technology that we are personally involved in. The route to that market is key. It is engaging the industry. Someone has to fit all these technologies. They are not DIY technologies. You need to call on a professional to install whatever it may be. It is that point of engagement with the householder that can be the turning point. Energy efficiency, as we all know, is not very sexy. People are not particularly interested in it, but what we have seen in recent months is a phenomenal awareness of energy costs. I remember, when I used to come down here a couple of years ago, getting a cab and being asked, "Where are you going?" "Westminster". "What is happening on energy efficiency? I spend more on my daughter's telephone bill for her mobile phone than I do on gas or electricity." There just was no interest. That has changed. We undoubtedly have come to a tipping point where people are very interested in the cost of energy. It is now a turning point where we can engage people, all people, not just the middle classes who want to put a wind turbine up to make a statement. People want to look at the technologies that can save them money. There is this issue of payback and I accept that. I think the industry has more to do to prove the case. We are trying to do that ourselves. The route to market is key for us and we have proved that through our installing network, encouraging its promotion at that point when we engage with the customer. We very much welcome that the B&Qs and the Currys of this world promote it. The uptake has been very impressive in those organisations in recent weeks. We are starting but there is obviously more to do. It needs us all to engage. My boss, if he was here, would ask people to put their hand up if they had a solar panel or a wind turbine in their own house. We all have to start somewhere.

Mr Sowden: There are three things we need. One, we need to reduce prices in this industry and engender mass market appeal. As part of that we can only do that if we have reliable products that are easy to use. In that sense, one thing we have not had the opportunity to talk about is the need for industry standards. As we are moving into the mass market it is very important that we do not let cowboys in, especially when we are talking about putting moving part objects on people's roofs such as wind turbines. It is very important that we have high standards of product installation from a health and safety point of view but also from a performance point of view as well. We also need to remove the remaining regulatory barriers and that means implementing the microgeneration strategy properly. Where it is appropriate, there is a good case still for pump priming but we need to design that in a way that gets the industry as quickly as possible to become self-sustaining.

Chairman: Thank you very much. We wish you every success in your endeavours. We are very grateful to you for your time and trouble.

Memorandum submitted by the Institution of Engineering and Technology

Examination of Witness

 

Witness: Mr John Loughhead, Institution of Engineering and Technology, gave evidence.

Q178 Chairman: Welcome to this small but intimate and, I am sure, fascinating session of our inquiry. Can you introduce yourself?

Mr Loughhead: My name is John Loughhead. I am here representing the Institution of Engineering and Technology, which is a professional engineering institution in the UK. It is the largest of those institutions. We represent about 150,000 members, most of whom are registered as chartered or incorporated engineers. Within the institution, we have a number of panels which look at particular aspects of policy or questions which are of interest to the government. I happen currently to chair the energy sector panel of the institution and consequently we made the response to the consultation when it came out. We do not act in favour of any particular interest here. We try to give evidence simply on the basis of the engineering implications or facts associated with them.

Q179 Chairman: Facts are what we are after. There is a lot of interest in microgeneration and a lot of people make some very big claims for what it can achieve for the United Kingdom. Rising concern about gas prices is focusing quite a lot of interest in the media on this. What is your headline on how important it all is? Is it just a lot of hot air or is there real substance in interest in microgeneration? What is your take on the overall position?

Mr Loughhead: Microgeneration does offer certain possibilities in certain circumstances to make efficiencies in the usage of energy or alternatively as a means of collecting renewable energy. In terms of the energy consumption of the UK as a whole, it could potentially, in the long term, start to make a truly material contribution but frankly it is our opinion that in the short to medium term it will make a comparatively modest contribution to that. We would see the main benefits of microgeneration systems as being as a means of collecting renewable energies which all suffer from the fact that they are highly diffuse - in other words, very low energy densities - and therefore, if you are going to collect any significant amount, you have to cover large geographical areas of collection to do that. Having systems which are placed on domestic or small industrial, commercial dwellings or sites is one way of tackling that. The second option it gives you is that if we are using a primary fuel such as gas or coal it does give you the opportunity to use that conversion either integrated into some industrial system or alternatively to both generate electricity and heat at the same time. That gives you certain efficiencies in the use of the fuel. Those efficiencies are only comparable to the efficiencies that are claimed for modern condensing boilers.

Q180 Chairman: What do you mean by the long term?

Mr Loughhead: The long term for me in this instance is something that stretches between 25 and 50 years.

Q181 Chairman: To an extent we are reinventing the wheel a bit here, are we not? There were quite a lot of microgeneration facilities around the UK before the centralised grid system was developed.

Mr Loughhead: Yes. They were all microgeneration systems. The reason that the grid was originally developed was that it was a lot more efficient and reliable than a multiplicity of small systems. In saying that I am not implying that modern systems would have that same reliability issue but at the time when the decision was made that was the right answer.

Q182 Mark Hunter: I would like to talk to you about reducing costs specifically. Your submission quotes some very high payback periods. My note reminds me for photovoltaics it is 120 years, for small wind turbines it is 29 years and for solar thermal hot water systems it is 80 years. You agree that these would have to fall by an order of magnitude, if microgeneration were to enter the mass market. What estimates do you have of the likely reduction in costs over time? Do you think the industry is perhaps being slightly too optimistic in its predictions of costs?

Mr Loughhead: The figures that we gave were extracted from the DTI's consultation document. The calculation of payback times like this is notoriously unpredictable. In my industrial career, the standard answer from an accountant when asked how much it would cost was, "How much do you want it to cost?". There are so many assumptions buried into these payback periods that just to take a simple headline figure is not very good. What we said in that submission was that these figures were likely to be challenged, but that we felt they were of the correct order of magnitude. What that means is to a factor of ten they were probably there or thereabouts, but I would happily give you a sum for solar PV and I could prove that it was 120 years and that it was, say, 20 years without doing much more than choosing amongst the assumptions that I can validly make.

Q183 Mark Hunter: The 120 would be the outer reach?

Mr Loughhead: The 120 year figure - there is a serious point within this - almost certainly takes into account the fact that the current life of some of these solar panels is considerably less than 120 years. Effectively what is going in there is the fact that there will be benefits from having such a system that will require more than one generation of systems to realise. There are many complicated figures. To come to your other point which is how will it come down, if you look at all these technologies they are all, in engineering terms, very mature technologies. The only exception is solar photovoltaic where there are still people who believe that they can make substantial reductions in costs of equipment. Those reductions might be in how well you manufacture it or they could be reductions in how efficiently it collects the energy from the sunlight. Current systems can only capture about 15 per cent of the energy. If you could increase that, that might be quite good. Because it is a comparatively mature technology, many of those benefits will come about through improvements in the detailed engineering design or in progressive manufacturing process, either through economies of scale or learning curve type factors. From an engineering viewpoint, you would expect to be seeing reductions which would be somewhere between 25 and 50 per cent on a timescale of something between certainly not less than five years and probably not more than 20 years. That will depend largely on what is the volume of equipment that is manufactured, because that very much drives the learning curve and the investment profiles.

Q184 Mark Hunter: Is it not the case that other factors also influence consumers' decisions when it comes to installation of microgeneration, perhaps such as the effect it will have on their house price? What about the other factors that are at play here?

Mr Loughhead: I do not think I can claim any professional view on that because it is difficult to say but I can give you an example from my previous career. When dealing with consumer products, it is very difficult to know why people are going to buy them. The example that I would cite is some 20 or maybe even 25 years ago. I was then running a project to develop a central heating boiler for houses. This central heating boiler worked on the principle of storing heat in a great big pile of bricks, using offpeak electricity overnight. It then operated as a standard wet central heating system, just like a gas boiler so that you could switch it on and off. The idea was it was a storage system but you could use it like a standard one. We spent a considerable amount of money and effort designing this so that the payback costs made it cheaper than the oil boiler that it was going to replace. We then put it on the market. Remarkably, it worked.

Q185 Mark Hunter: You sound surprised.

Mr Loughhead: I am an engineer. When we went back after two years and asked people how the costs were working out, none of them could tell us. All they said was, "It does not seem any more expensive." We said, "Why did you buy it then?" There were two primary reasons: because it was electrically powered and they did not have to remember to get the oil tank refilled. That was convenience. Secondly, oil boilers were very noisy and a number of people bought it simply because it was quieter. When looking at new technologies like this, the moral of that tale is that the reason consumers take things is to do with the benefits that are perceived by the consumer. To try and decide what that is, when you are following a classic, industrial, economic return model on an engineering basis, often leads you into the wrong assumptions. I do not know the answer to your question. I suspect you will find any reason under the sun amongst the people in the country overall.

Q186 Mark Hunter: I am sure someone somewhere has lots of marketing people working on that.

Mr Loughhead: They will probably get it wrong as well. I remind you of the Ford Edsel.

Q187 Chairman: Are these known unknowns or unknown unknowns?

Mr Loughhead: These come into both categories, I think.

Q188 Mr Bone: I want to talk to you about connecting to the grid because I got the feeling that the National Grid was all right for generation purposes and we did not have to worry about that for the next 25 years or so. In your submission you said, "Contrary to claims, the need is to enhance the capability of existing networks, rather than to substitute them with an entirely different system." Is that technically correct?

Mr Loughhead: We believe it is technically correct. That is why we said it. We probably need to contradict something that you imply. As far as I am aware, the issue of microgeneration does not impact whatsoever on the National Grid's operation, which is to operate the transmission systems of the UK. All of these microgeneration systems are connected to the distribution systems which are the intermediate and low voltage networks operated by the distribution network operators, not by the National Grid. Consequently, the national transmission grid would not be affected by microgeneration systems in terms of direct connection. The only way it would be affected would be if there was such a large number of microgeneration systems installed in some distribution network area that that area became a net exporter to the grid.

Q189 Mr Bone: That was the Greenpeace scenario and that was what I thought the National Grid was pooh-poohing.

Mr Loughhead: If that is the scenario, it is very difficult to envisage the penetration of microgeneration getting to a point where a region would be a net exporter of power. I have not even done the sums, it is so far in the future. It is unlikely.

Q190 Mr Bone: You are agreeing?

Mr Loughhead: I would agree it is not going to have any impact on the transmission system in the foreseeable future..

Q191 Mr Bone: The centralised grid network is not a constraint on microgeneration in any way whatsoever?

Mr Loughhead: From where we are at present, I do not see the transmission system having any impact on the evolution of microgeneration.

Q192 Mr Bone: Do you think the technology is sufficiently advanced for us to have the kind of intelligent network management that greater deployment of microgeneration could entail?

Mr Loughhead: I can answer that in a much more concise fashion. We already have the technologies available that will enable us to intelligently manage distribution systems so as to enable any level of penetration of microgeneration. The issue when you are talking at that level is the issue of assuring stability of the system under a whole range of different conditions and operations. That has already been demonstrated on a small scale. The technologies involved are simply technologies of sensing and software control. Those technologies can be successfully deployed. There is however an industrial development phase while you establish what the appropriate standardised methods of doing that are in such a way that you can easily apply those to many different systems. There will probably also be a phase of developing simply the boxes and equipment. Technologically, I think you will find most engineers working in electrical distribution and intelligent grid systems will say that there are some details we need to agree with customers but they are not really a technical barrier.

Q193 Mr Bone: If there was a particular town or area which had a lot of microgeneration, your concern would be about the management of it if it did not produce what it was expected to and energy had to flow in from the grid, rather than the other way round.

Mr Loughhead: I would not be worried about energy flowing in from the grid. I would be worried about energy flowing out from the region. The big issue with this kind of thing is that the system as currently designed assumes that the distribution system has energy poured in at the top from the transmission grid and it simply flows through an ever-branching system until it gets to the final end user. One of the consequences of that unified flow is that the design of the system, the control voltage, the protection of the system and the safe operation of the system are considerably simplified compared with a system where power can flow in any direction and where the intermittency of generation requires that you need much more sophisticated means of controlling the voltage. The big issue with all that is, if you start to get localised areas where people can generate, you need to ensure that you can cope with those situations, that you are starting with a network that has inbuilt into it the assumption that all the power is going one way. There is another point about this that is an obvious one but I should raise it. One of the big dangers is that when you are maintaining these networks at the moment, if you crudely pull the fuse at the feeder substation, the network is dead and you can send people to work on it. One of the big issues is, if you have lots of generators scattered around over which you have no control and you pull the fuse on the feeder, you have no guarantee that you are not sending your workmen into a situation where they could be touching live equipment. That is one of the issues when we talk about protection and safety.

Q194 Mr Wright: In terms of household energy exports, what do you think the barriers are being faced by householders who wish to export their energy?

Mr Loughhead: I am not totally up to date on exactly what the current regulations are but I suspect the main barrier is that their electricity company does not want to allow them to do it, essentially either for the reasons we have just touched upon or because the value of what they export and the means of monitoring, metering and billing, the settlement process, have not really been settled. Effectively, if you are a distribution company, at the moment you are buying electricity from the transmission grid at the price of 4p a unit, or whatever the price is, and you are then selling it to the customer for 8p a unit. If you are going to take power back in, it is not unreasonable that you might only want to pay the wholesale price for that power rather than paying the wholesale price plus your own profit margin. There are barriers because of complications of that nature and there are many people better qualified than I to talk about those processes. Largely, the use of microgeneration at the domestic level has been restricted to people who can generate electricity locally that falls within their own consumption. All they are effectively doing is reducing the amount that they wish to take over the wire from the supplier.

Q195 Mr Wright: You touched on the question of the price of selling back into the grid itself. Do you think that, if you export the excess energy that you have, you should be paid a minimum price or do you think you should be paid the market price?

Mr Loughhead: I do not feel that I can give you anything other than a personal opinion on that point. It is an important point. I would suggest that it comes down to the issue of, if one wishes to encourage people to generate locally, you need a scheme that will encourage them to do that. As to exactly what that is, it could be anything. There is another issue in that your question assumes that the device is owned by the householder. It is quite possible that the device might be owned by the network operator, in which case many of those trading issues would be minimised because they would simply be transferring money between their own pockets.

Q196 Mr Wright: Can you see that happening, that they provide you with that type of equipment?

Mr Loughhead: I do not see what barrier there is to it happening. It is unlikely at the moment that they would do that because at the moment microgeneration is more expensive than the centralised generation model. There are benefits in line with government's policy to try to reduce carbon emissions and similar things, but in terms of cost there is not the immediate economic incentive.

Q197 Chairman: The obligation that the government is talking about putting on energy companies to reduce carbon emissions could incentivise those supply companies to supply equipment in a domestic environment.

Mr Loughhead: It may well do. It may be that, if those incentives are so designed, they could encourage local moves such as that. The parallel is that in the United States there is an obligation on energy suppliers to bring about energy efficiency amongst their consumers which led them to go around replacing light bulbs with compact fluorescents and things of that kind. We have seen a very similar move here. The advantage of that is that it overcomes some of the problems that the earlier evidence touched upon, about the safe installation of equipment. If you have a competent organisation handling it all in an area, that might become an easier issue.

Q198 Mr Wright: Is the installation of smart metering an absolute prerequisite for households wishing to export energy?

Mr Loughhead: No. It is not an absolute prerequisite at all. However, it would give a much more sophisticated level of information and therefore it might enable a solution to be found earlier to this trading problem. At the moment if you have a meter you can only drop it backwards so all you can record is net consumption from the grid.

Q199 Mr Wright: Do you think the government have a role to play in trying to encourage greater use of smart metering?

Mr Loughhead: I believe that under the present system there is no immediate incentive for any energy supplier to install a smart meter. The system as it stands meets all of their needs and therefore there needs to be some external stimulus if it is going to happen.

Q200 Mr Wright: We understand that the Italian approach is that they have implemented a national roll-out of a particular technology. Do you think there should be standards to which the industry can work or do you consider that the Italian approach is correct?

Mr Loughhead: If you are going to make any change to a critical infrastructure like our energy system, it makes enormous sense if you agree the standards you are going to adopt and that then allows you to give people the freedom to implement those standards in any way they see fit. The Italian approach which is simply an edict that you shall install this on a certain timescale works fine in a more centralised system than it appears we wish to pursue at present.

Q201 Mr Wright: It is difficult to get people to convert to water meters without a degree of compulsion in terms of new properties. Would we face the same with smart metering?

Mr Loughhead: It depends what you want to do. From a purely engineering viewpoint, our natural desire to make the systems work more flexibly, efficiently and with all kinds of possibilities would lead us to say, "Yes, smart meters would be great." If you ask me do we need smart meters to make the system work, it depends on the trading arrangements. Meters are simply a means by which you decide how much money person A is going to pay to organisation B or vice versa.

Q202 Chairman: You were sitting in during our last witness session and you heard them talk about training, standards and those issues. I think we had a call from the council for clearer standards in this sector. Do you think the industry is doing a good enough job of maintaining standards?

Mr Loughhead: Could you clarify "standards" in what exactly?

Q203 Chairman: Particularly the workforce, the installation, the engineers who are doing the job.

Mr Loughhead: Our observation would be that in many of these systems industry as such does not control the workforce because the workforce consists of a spectrum of people employed by large organisations rather than individual traders. If you get somebody from, for example, Central Networks come to look at something in your fuse box, you probably have a higher likelihood that they will not blow up your house than if you get Eric, the electrician, from the local Yellow Pages or even worse from a sign in a local newsagent's window. In a number of areas evidence is starting to be found that there is cause for concern about the standard of installation. Recently, I was talking to an organisation that had started to look at the efficiency of condensing boilers in operation, as installed in houses. Their initial and as yet unpublished data suggests that the boilers have been installed safely but none of the other necessary changes to the heating systems to make them work efficiently had been made or attempted. Consequently, they were working at an efficiency much lower than they claimed to operate at. There are instances like that which make me believe that there are some problems. If you look at some of the other systems that you are looking at - for instance, solar thermal systems in houses - for those to work really effectively you need an internal water system which is arranged differently to our standard water system. Ideally you need to both install the panel and look at changes to the internal plumbing. Whether that is done by everybody who has installed systems I do not know. To what standard is it done? I do not think there is a standard; it is just assumed that somebody will advise you what to do.

Q204 Chairman: I am not familiar with the current accreditation schemes. Do you think they meet the needs of the industry?

Mr Loughhead: I am not aware personally of any accreditation for people to install a domestic wind turbine, solar PV systems or solar thermal systems or anything else so I do not really know. That is marginally outside the area with which I am fully familiar.

Q205 Chairman: If we are to get the benefit of these systems that are installed and if people are to have confidence in them, it is clearly important they do the job they are intended to do. I am about to have a condensing boiler installed next week at home.

Mr Loughhead: I hope they have done a consultation on the design of your heating system to ensure it is compatible. If they have not been measuring radiators and adjusting the temperatures, I would be very willing for a small fee ----

Q206 Chairman: He has been trained by Worcester Bosch, I know. What about the skills shortages in the sector? There is a great shortage of plumbers and electricians as it is generally. Do you think you have a problem with the skills?

Mr Loughhead: I think the skills probably are currently slightly inadequate for the level of activity that we have. If there is any significant increase, I am sure that we will see a need to increase substantially the number of people that are competent to install and maintain systems of this form.

Q207 Chairman: The answer is yes, there is a potential skills shortage?

Mr Loughhead: I believe that there is a potential skills shortage, yes.

Q208 Chairman: The degree of expertise required to install conventional systems is quite high and this is higher still.

Mr Loughhead: Yes, correct.

Q209 Chairman: Can the government do anything about that? Should it?

Mr Loughhead: That is almost a political question. Certainly if we are going to do things like this we should have some form of standards. Those standards inevitably will touch upon the competence of the persons who are going to do it. It would seem something that is natural to be done at a national level. I cannot see any reason why you would want to have regional differences and consequently it sounds like something that the government should expect to be involved in.

Q210 Chairman: We must look crucially not just at the safety of installations but their efficiency as well.

Mr Loughhead: Yes. The efficiency is something tested on a bench in a laboratory, under ideal conditions. One used in a household, possibly full of teenagers, is something totally different.

Q211 Chairman: Presumably typically better done with new build as well rather than retrofitted?

Mr Loughhead: It is always easier to do these things with new build and it is always cheaper. If there is a serious desire to see things such as, for instance, solar thermal, one would have to ask the question: why does it not just become a requirement on new roofs, because the marginal cost is probably quite small. The advantage is you then also have the internal hot water system designed to be used in a case like that. Ensuring that new build is microgen ready makes a lot of sense and it is difficult to see why we do not do that.

Q212 Chairman: You talked about solar thermal. Most of our evidence session with you has been discussing electricity. Do you accept the view that has been expressed by some of our witnesses that some of the easiest things to do are on the heat front rather than the electricity front?

Mr Loughhead: It is certainly easier to do things on the heat front generally, yes, as long as we overcome the problems to which I alluded earlier about making sure it is installed effectively. The difference however is, I would remind you, most parts of the UK use three to four times the amount of energy in heat that they do in electricity so you have to make a much bigger contribution with heat to have an impact. Electricity is, in the energy sector, the lowest efficiency at the moment with the current system.

Q213 Chairman: We could make a big contribution with carbon saving if we increased the use of microgen for heat purposes?

Mr Loughhead: I would advocate using it for both electricity and heat, yes.

Q214 Chairman: One of the problems is that if the government decides it wants to create a framework in which new nuclear power stations can be built, it can price carbon, adapt the planning regime, do various things to try and encourage the build of new nuclear power stations generating lots of electricity and that is fine; but this is an issue where millions of people must be incentivised to do something or at least hundreds of thousands of councils or local organisations must be incentivised. What is the role for government, if there is one, in encouraging these people to make all these great changes?

Mr Loughhead: That is an enormously difficult and key question. I am afraid I do not have a simple answer for you. If you can find a way to incentivise people to make more use of microgeneration, you should have done that after you have incentivised them to do the simpler thing, which is to find more effective ways of using energy. There is a lot of scope to reduce our energy usage without impacting on our quality of life, probably at a very crude estimate by about 20 per cent. That comes straight off our carbon emissions and straight off our energy bill.

Q215 Chairman: Are we talking about the domestic environment with space heating or transport as well?

Mr Loughhead: I am talking about energy use by individuals which represents half the total energy consumption of the UK, whether it is in space heating or electricity usage in the home, the use of cars, the use of transport or whatever. The other 50 per cent of energy is used by people while they are at work and there is some flexibility there. If we assume that there is a 20 per cent reduction - let us confine ourselves to the domestic sector which is what we are talking about for microgeneration in the first instance - to make a 20 per cent reduction in our carbon emissions by substitution of conventional energy by microgeneration is quite a long term programme and it is quite capital intensive. A behavioural change to effect a reduction in demand is probably difficult to do but does not have a capital implication at all. That is what one should try first of all. To go back to the question about incentivising people to do it, I would repeat something I said earlier. To the individual consumer there has to be a benefit. I noted in the other evidence the fact that people who have microgeneration show signs of changed behaviour but I think we must be careful because mainly those that have it today are the ones who are already eager to change their behaviour and they are quite a small proportion of the population. The key must be to find some benefit. Whether that is fiscal, whether you get a green badge to stick in your window, whether you get free tickets to the local football match or whatever I do not know, but there has to be some benefit. It is unlikely with our current regime of low energy prices. Energy is not expensive for many of the population. It is a low item of cost. The savings that you can make on energy efficient technologies are almost irrelevant. There has to be an incentive and a benefit that is other than fiscal and other than just a feel good factor.

Q216 Chairman: Your institution's view is that microgeneration has the potential to make quite a useful contribution to energy production and carbon saving in the medium to long term but in the short term energy efficiency is the single cost that should be gained?

Mr Loughhead: Yes. It is a cheaper one and it is something that you can do more quickly but that is not an argument against microgeneration.

Q217 Chairman: I understand that. Too much of the debate is either/or, is it not, in this area?

Mr Loughhead: In this whole area it is everything. We will need to deploy a whole suite of methods if we are to meet our long term aims and it will involve everything from different large scale generation technologies, including carbon capture, all the way down to exploiting small scale systems. The simplest thing any engineer will tell you is, if you have a problem in meeting your needs for something, start by reducing your needs and then work on the difficult question of how you supply them.

Q218 Chairman: There is no philosopher's stone.

Mr Loughhead: I am afraid there is not.

Q219 Chairman: Is there anything more you want to say, Mr Loughhead?

Mr Loughhead: No, I think that is it. Thank you very much.

Chairman: We are most grateful to you. Thank you very much indeed.