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.
| Measure | Cost 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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