Select Committee on Environmental Audit Written Evidence


Annex One

EXTENSION OF THE ENERGY EFFICIENCY COMMITMENT TO CREATE AN EFFICIENT AND FAIR SUPPORT MECHANISM FOR RENEWABLE HEAT

  Renewable Heat is a major component of the micropower portfolio and can be used to displace fossil fuels through domestic installations and/or via renewable fuel based CHP and community heating systems. Renewable heat technologies can play a major role in meeting all four of Government's White Paper objectives through, for example:

    —    Reducing Emissions: ~1MtC of annual carbon savings can be achieved by any of:

    —  1m domestic biomass-fired heating systems (1 in every 26 homes); or

    —  7m solar hot water systems (1 in every 3 to 4 homes); or

    —  1m heat pumps displacing electrical heating systems (1 in every 26 homes).

    —    Supply Security: ~1GW of new CCGT baseload power station's electricity (or the gas to needed to produce this amount of electricity) would be displaced by any of:

    —  1m domestic biomass-fired heating systems (1 in every 26 homes); or

    —  7m solar hot water systems (1 in every 3 to 4 homes); or

    —  1m heat pumps displacing electrical heating systems (1 in every 26 homes).

    —    Home Heating and reducing fuel poverty: fuel consumption, and therefore fuel costs, may be either eliminated or permanently lowered, [29]particularly when micropower technologies are combined with energy efficiency measures. In addition, many micropower technologies are particularly suited to tackling fuel poverty in hard-to-treat and off-gas network properties;

    —    Competitiveness: The use of micro renewable heat technologies enhances competition in the energy sector and has the potential to provide a real alternative to network-based, gas and electricity and other conventional heating fuels.

  This analysis only considers the smaller end of the micropower market—the market for domestic scale appliances. The total potential contribution from renewable heat production which includes larger applications and community schemes is considerably greater.

  The Micropower Council considers that it is essential that new measures, tailored to the needs of the renewable heat industry, are introduced to support its development for two critical reasons:

    —    first, the heat market in the UK is enormous and the potential for energy and carbon savings that can be delivered by tackling even a relatively small proportion of the heat market using renewable heat is a prize that must be won; and

    —    second, to enable the renewable heat market to evolve quickly into a mainstream industry delivering early access to the benefits of economies of scale and consumer choice that will make low energy/low carbon heating solutions a real, cost effective, alternative to conventional fuels.

  Such measures could also be used to address some of the current disparities between the treatment of renewable heat and other renewable solutions—leading to more efficient long term outcomes and the removal of short term distortions.

  Therefore the Government needs to act quickly to implement a support mechanism (or mechanisms) [30]for renewable heat to help catalyse the development of this important part of the energy industry. We are supportive of work by the Renewable Energy Association to try to find an appropriate mechanism for supporting larger scale renewable heat technologies.

  Based on our experience of other mechanisms, the Micropower Council believes that to provide effective support for domestic-scale renewable heat any support mechanism must:

    —    be simple, transparent and cost effective. It is essential that transaction costs are kept to an absolute minimum so that any value is not lost in administration (this is a key and critical lesson we have learnt from the operation of the RO for small players);

    —    have a clearly defined future (at least 10 years and preferable much longer) and should not be subject to the stop start vagaries of Government funding requirements in order to create long term market confidence. This implies an internally funded scheme independent of Government funding;

    —    provide an upfront cost reduction for customers. A key barrier to uptake of renewable heat, particularly for domestic consumers, is the higher capital cost of renewable heat technologies. Even where economic, long pay back periods (real or perceived) can act as a barrier to uptake. It is therefore essential that, for small customers, any support is accessible at the point of installation and does not take the form of a future, variable, small annual revenue stream. Again this is a major disadvantage with the RO for the smaller player;

    —    deliver an appropriate level of support and alleviate current market distortions. Support should be sufficient to catalyse the development of the renewable heat market and ensure the evolution to a mass market demand/capability as early as possible. This would also help to alleviate current distortions between the renewable heart and renewable electricity markets; and

    —    ensure there is a clear route to market for these products through installers and product suppliers. The majority of domestic scale heat systems are replaced when a system fails rather than as part of a planned replacement—it is therefore essential that any support mechanism also ensures that there is a clear route to market for these products through installers and product suppliers.

A PROPOSAL FOR RENEWABLE HEAT

  Working with our members, other industry players, and trade associations the Micropower Council has developed a model which meets these criteria based on the simple expedient of extending the current EEC arrangements to include additional provisions for renewable heat technologies that displace conventional fuels for heating in domestic premises. The key elements of this model are summarised below.

    —    Installation of new renewable heat to meet domestic heat demand will qualify for inclusion in the EEC based on an assessment of the net carbon saving over the expected life of the renewable heat system compared to the heating system being displaced. For premises that are currently unheated, the savings would be assessed against an assumed carbon burden for a typical heated household. All forms of renewable heat would be eligible, subject to meeting appropriate accreditation requirements and forming part of a "scheme" approved by the regulator.

    —    Renewable heat solutions are currently less cost effective, for suppliers, than other forms of action available to them under the Energy Efficiency Commitment. Therefore, to ensure that renewable heat can compete with other energy efficiency measures (or other carbon reduction actions available to suppliers under the EEC), renewable heat measures should automatically qualify as a specific form of innovative action—attracting a larger credit towards a supplier's EEC target than some other forms of action via use of some form of weighting factor(s). This approach is directly analogous to proposals being developed for "banding" under the RO and recognises that different technologies may need differing levels of support at different stages of their evolutionary cycle.

    —    Over time, as the cost of energy efficiency measures increase, and the market capability for renewable heat expands, bringing down costs, the weighting factors would be expected to decrease. In order to facilitate this we suggest there should be a regular review, say every five years, of the weighting factors. This review would also be used to ensure that the mechanism does not lead to an unnecessarily high reward for any technologies that are, or are almost, competitive without support.

    —    To give confidence to the market, Government should commit to a long term future for the scheme. We note Government commitment to extending the EEC to at least 2020.

    —    The overall EEC target, for EEC3, should be set to a level that recognises the contribution micro-heat technologies can make to reducing carbon emissions under this proposal, with any additional obligations being allocated between the domestic gas and electricity markets in proportion to the total carbon contribution from use of gas and electricity to provide heat to the domestic sector. It will be essential to ensure that the targets are set at a level that ensures that the EEC brings forward both energy efficiency and micro heat measures and delivers real market transformation.[31].

    —    The mechanism could be introduced fairly easily using the provisions within the Climate Change and Sustainable Energy Act, together with appropriate changes to the EEC secondary legislation.

COST OF MECHANISM

  The cost of the support to renewable heat will depend on the weighting factors that are set and the total energy savings delivered using heat rather than measures available to suppliers under EEC.

  An indication of the relative costs[32] of different mechanisms for displacing carbon are shown in the table below; the figures are not directly comparable because of difference in the calculational methodologies.
MeasureCost of Carbon (£/tonne C) [33]
Renewables Obligation (NAO/Oxera) [34] 180-510
Renewables Obligation (DEFRA) [35]includes assessment of benefits and costs 175
Renewable Heat displacing gas (EEC with weighting factor 3—cost to suppliers only, ignores benefits) Approx £200
RTFO[36] (DfT) Slight -ve to 350
Social Cost of Carbon (Government Economic Service) [37] £35-£140

BENEFITS OF THE PROPOSAL

  The move to mass market capability should deliver lower costs to consumers earlier than would otherwise occur and allow micro-renewable heat technologies to contribute to meeting Government energy and environmental policy objectives.

    —    It is simple, transparent and cost effective with minimal transaction costs. Use of an existing mechanism will allow early adoption and reduce the administrative costs of creating and maintaining a new scheme. Suppliers are expected to be keen to ensure that costs of providers and installers of equipment are maintained at a competitive level ensuring that the benefit of the scheme is shared with the consumer.

    —    It provides a stable long term funding framework independent of the stop start vagaries of Government funding requirements providing confidence to the market to invest to expand capacity and bring down costs in the longer term. The weighting and review mechanism ensure that the benefits of cost reductions can be passed through to customers over time.

    —    The use of a lifetime discounted energy saving delivers the value up front which can be used to mitigate the higher upfront cost of renewable heat technologies that currently act as a barrier to uptake.

    —    The use of appropriate weighting factors can be used to provide appropriate rewards to ensure the take up of renewable heat measures; weighting factors can also be used to deliver parity with the existing support mechanism for renewable electricity.

    —  It creates an incentive for gas and electricity suppliers to promote the installation of micro renewable heat which will help to deliver a route to market for these products through creating commercial alliances with installers and product suppliers.

WIDER ISSUES

  Looking beyond renewable heat, if this proposal is adopted, it may be appropriate to consider expanding it to accommodate renewable electricity in a similar manner—with weighting factors designed to give an equivalent reward to that would have been available under the RO with substantially reduced transaction costs—and possibly allowing the EEC to evolve into an efficiency and microgeneration (heat and power) commitment.

January 2007




















29   Many renewable heat technologies rely on wind and solar energy where the fuel is free. Other technologies such as, for example, biomass and heat pumps use clean fuels and/or use less fuel than the heating source they are displacing. Back

30   Our proposals focus on the needs of the smaller, domestic scale, end of the renewable heat industry. A different mechanism may be more appropriate for larger scale renewable heat technologies. Back

31   Longer term targets should reflect any statutory targets introduced under the provisions of the Climate Change and Sustainable Energy Act. Back

32   For example, the DEFRA methodology includes both costs and benefits in the analysis whereas the assessed cost of the proposed mechanism takes no account of the benefits delivered. Back

33   Current costs quoted for EEC 2 indicate that energy efficiency measures cost ~£10/MWh per fuel standardised lifetime discounted TWh saved (based on an assumed cost of £1,25 billion and a total supplier target of 130 fuel standardised lifetime discounted TWh). This equates to ~£3.50/MWh of gas displaced once the fuel standardisation factor has been taken into account implying a cost to suppliers of carbon saved in the region ~£65/tonne (the effect of discounting has not been taken into account). The calculation does NOT take any account of the costs and benefits to consumers installing these technologies. Back

34   http://www.nao.org.uk/publications/nao_reports/04-05/04-05210_uk_renewables.pdf Back

35   http://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/synthesisccpolicy-evaluations.odf Back

36   http://www.dft.gov.uk/stellent/groups/dft_roads/documents/pdf/dft_roads_pdf_610329.pdf Back

37   http://www.hm-treasury.gov.uk/media/209/60/SCC.pdf Back


 
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