House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Written Evidence

APPENDIX 1

RENEWABLE ENERGY ASSOCIATION RENEWABLE HEAT AND COOLING SUMMARY POLICY POSITION

CASE FOR ACTION

Existing measures to promote renewable heat and cooling fall far short of the incentives necessary to establish a sustainable renewable heat industry that can deliver major benefits for the environment, the UK economy and householders.

Benefits of Renewable Heat

— Growth and diversity in the rural economy, through the development of an additional end-use that will contribute to a sustainable market for energy crops and biomass fuels in the UK.

— An immediate contribution to UK energy policy objectives:

— Simple, proven and highly efficient technologies are available today.

— Commercial risks can be minimised through incremental capital investment and under simple contractual arrangements.

Potential

Renewables have the potential to make a major contribution to UK heat supplies:

Existing Incentives

— Planning and grant-led approaches deliver installed capacity, but used in isolation cannot guarantee either physical heat supply or carbon savings.

— Grants cannot deliver the long-term confidence vital to attract investment.

— Current policies for renewable heat fail to match the scale of the opportunity:

MEASURES

A co-ordinated package of measures should be established to realise the potential contribution of renewable heat supplies to the UK's energy policy objectives.

Institutional Reform

— Adapt government, legislation and regulatory agencies to recognise diverse sources of supply and the need to develop a renewable heat market.

— Monitor and measure the contribution that renewables deliver to national heat supplies, irrespective of the fiscal treatment of these supplies.

Capital Grants

Grants have an important function in pump-priming demand for renewable heat technologies and fuels, and in facilitating supply of biomass fuels:

— To be effective, grants must be simple to administer, with minimum transaction costs and bureaucracy.

— The value and award of grants should be structured to incentivise early movers and reward success.

Certificate-Based Renewable Heat Incentive

Sustained growth in the renewable heat supply industry can only be achieved through a measure that creates enduring, long-term demand:

— The demand created by an incentive scheme will generate revenues against which both capital installations and businesses can be financed.

— Through driving investment in the industry, the incentive will optimise the impact of grant programmes, stimulating competition and cost-reduction.

— A certificate-based scheme:

— Rewards schemes on the basis of environmental benefits delivered.

— Provides the flexibility to link the incentive to new or existing schemes, including the Energy Efficiency Commitment and the EU Emissions Trading Scheme.

— An incentive should be structured to provide a value equivalent to that afforded to biomass power under the RO, addressing fuel market distortions, providing a level playing field and maximising incentives for efficient CHP.

Planning and Public Procurement

— Part L of the Building Regulations should recognise the cost-effectiveness of renewable heat technologies and "prescribe" renewable energy systems on a technology-blind basis in all new-build buildings from 2010.

— Positive planning policies should be strengthened, to require developers to incorporate on-site renewable energy in all new commercial developments over 1,000m2 and all residential developments over five units.

de facto

— Government must lead in demonstrating the viability of renewable heat in the public estate through a proactive public procurement policy.

OUTLINE PROPOSAL FOR A RENEWABLE HEAT INCENTIVE

Introduction

The introduction of revenue-based, demand-side incentive to underpin the long-term value of the renewable heat and cooling market will be vital to securing investment in the sector, achieving energy policy objectives and optimising the impact of parallel measures, including capital grant schemes.

Guiding Principles

Equity

— Any scheme should be accessible to all renewable technologies on an equitable basis.

— The level of incentive should be the same for all heat technologies.

— The level of incentive should allow heat suppliers and customers to compete for feedstock on a level playing field with other end uses.

Flexibility

— Wherever practical the scheme should directly reward the benefits delivered, creating a revenue stream from units of heat supplied.

de minimis

— The widest possible range of parties should be capable of contributing to renewable heat supply and realising the value of the incentive framework.

Capital Efficiency

— The scheme should deliver stable and secure revenue streams in order to leverage private capital investment.

— The introduction of the scheme should be signalled as early as possible to deliver maximum impact from existing grant programmes.

— The scheme should be established within the context of a long-term framework providing the incentive for investment in the industry and supply infrastructure.

Consistency

— The scheme should be consistent with existing support mechanisms such as the RO, and should explicitly provide for convergence with the carbon market—in respect of both function and value.

OUTLINE STRUCTURE

Generic Requirements

Certificate-Based

— The supply of renewable heat should receive credits for the carbon saving, fuel security and economic benefit that it delivers.

— Credits should take the form of tradeable certificates.

— Sale of certificates would create a revenue stream against which:

— costs of fuel supply could be supported; and

— investment in renewable heat plant and infrastructure could be financed.

— Certificates would be awarded on a flexible basis in order to maximise access and avoid disproportionate costs of compliance (notably on smaller installations where metering costs may be prohibitive):

— primarily on the basis of metered heat output;

— in restricted circumstances on the basis of a "derived" method meeting prescribed standards of accuracy, eg quantity of fuel supplied, where that fuel meets a consistent, verifiable standard and supply is supported by auditable documentation; and

— alternatively as an "up-front" allocation equivalent to the lifetime output of the installation.

Since heat meters are widely used in industrial and community heating applications, and accurate meters are increasingly available at relatively low cost, the majority of capacity is expected be metered.

— Certificates could be awarded to any entity meeting specified qualification criteria. This may include owners or operators of plant. Criteria should reflect plant standards of performance and capacity of operator to provide accurate data.

— OFGEM have already established a simple and efficient process for certificate issue that could be readily adapted.

Flexible Cost Burden

Purchasers of certificates could be one of a number of parties, which might change or evolve with the scheme:

— Obligated parties, established under a Renewable Heat Obligation or similar.

— Obligated parties, subject to the Energy Efficiency Commitment (EEC) or any successor, such as an Energy Reduction Commitment.

— Other obligated parties.

— Government, via a bilateral contract with the producer, for conversion into carbon credits of some type (AAU, unilateral ERU etc).

Transparent and "Future-Proof" Market Arrangements

Market transparency, third party access, and liquidity would be facilitated by the establishment of a Government-sponsored "clearing house" or "broker" for certificates. This arrangement would:

— Ensure that even the smallest parties were able to transact efficiently and extract value from the scheme.

— Preserve the capacity for evolution of the scheme if the purchasing parties were to change.

— Provide price stability and the capacity to set a price floor.

Competitive and Equitable Revenues

The price of certificates would be driven by an administrative process:

— Under an Obligation arrangement, demand for certificates would be driven by the alternative compliance costs for obligated parties—a "Buy-Out Price". To deliver a real incentive to supply this should be set at a level that exceeds by a significant margin the expected costs of supply of renewable heat.

— Under any scheme the price level would need to reflect the value of biomass created by the Renewables Obligation in the power market and should be consistent with the RO in terms of cost of carbon saved.

— Over the long-term prices should migrate towards a stable carbon price, in parallel with the similar migration of incentives under related measures.

Differentials in the rate of Climate Change Levy provide a potential precedence:

— With lower emissions per unit of output associated with generating heat, the Climate Change Levy on heating fuels is roughly a third of that on electricity (0.15p/unit compared with 0.43p/unit).

— Correspondingly the Buy-Out Price of a certificate should be £10-£15 per MWh (ie one third to one half of the current level of a Renewables Obligation Certificate).

Administration

— Any incentive scheme would require an appropriate authority to register qualifying schemes and issue certificates on the basis of metered heat output or other qualifying criteria.

— Existing experience, systems and institutions could readily be adapted to deliver the administrative infrastructure necessary to support a heat incentive:

— collectively, OFGEM and the DEFRA-sponsored CHPQA programme have established proven systems for data management and scheme administration in respect of Renewable Obligation Certificates (ROCs) and Climate Change Levy Exemption Certificates (LECs);

— CHPQA has specifically addressed the technical challenges in respect of heat; and

— HMRC will gain relevant experience of data management through the RTFO.

Considerations for an Obligation

Where to impose the cost burden for any certificate-based heat incentive is a key consideration for Government. If Government opted to place a cost burden upon consumers via an Obligation, specific considerations would be raised over the mechanics of collecting and disbursing funds.

Obligated Parties

— An Obligation would be placed on suppliers of fossil fuels for heat.

— A party's Obligation would be determined on the basis of the quantity of fuels sold for heating purposes (as opposed to electricity or transport), and could be readily determined:

— Liquid fuels contribute c15% of fuel supply for heating. The majority of liquid fuels for the heating market are duty-exempt (90% of domestic heating oil is kerosene). Since these fuels are both marked under controlled conditions at a limited number of bonded locations, and are sold through Registered Dealers in Controlled Oils that declare quantities and end receivers, it is possible to accurately record volumes of these fuels. Gasoil supplies would need a separate administrative system to differentiate end-use, but this should be readily achievable (a similar system is already practiced in France).

Compliance

— Obligated parties would face alternative compliance options, analogous to the RO and RTFO:

— Payment of a "Buy-Out" penalty, set at a relatively high level that maximises the likelihood that a party would seek to supply renewable heat.

— Presentation of certificates, generated either via the party's own actions or purchased from a 3rd Party.

Distribution of Funds

— The decentralised nature of activity in the renewable heat market suggests that 3rd Party supply of certificates would be a prominent feature of any heat incentive, and for an obligation would be a notable differentiation from the RO and RTFO.

— An administered "clearing house" would minimise transaction costs, increase liquidity of certificates and enhance system efficiency; it would likely prove a prerequisite under an obligation approach in ensuring that obligated parties meet the objectives of the measure at least cost.

Costs to the Economy

Cost of Carbon

— At an incentive level of £10/MWh, abatement costs range from £70 to £220/tC saved.

— Table 2 illustrates the performance of the scheme—in terms of cost per tonne of carbon saved—for a range of levels of incentive from £7.50/MWh to £15/MWh of heat supplied. Costs have been derived by determining the difference in carbon emissions per MWh for a range of energy sources and the renewable alternative, and equating this to the level of incentive offered.

— A heat incentive, imposed at the levels proposed, performs favourably with other comparable measures employed in the energy sector.

— Table 3 compares a heat incentive to a range of carbon abatement measures employed elsewhere in the economy.

Table 2

COST OF CARBON ABATED USING RENEWABLE HEAT AT VARIOUS INCENTIVE LEVELS

	Emission Factor	Incentive (£/MWh of Heat Supplied)
	(tC/MWh)	7.5	10	12.5	15
Electricity	0.115	69	92	116	139
Electricity—Grid Average	0.115	69	92	115	139
Electricity—Grid Average/New Build*	0.155	51	68	84	101
Gas	0.054	159	212	265	318
Mains Gas	0.053	163	217	271	325
Bottled Gas	0.064	132	175	219	263
Fuel Oil	0.076	109	145	181	217
Burning Oil	0.072	115	153	191	229
Gas Oil	0.073	113	151	189	226
Domestic Oil	0.072	115	153	191	229
Non-Domestic Oil	0.072	115	153	191	229
Heating Oil	0.074	112	150	187	224
Heat from boilers—waste	0.007	859	1,146	1,432	1,719
Source: ODPM, BRE
* Average of marginal carbon intensity and plant built or avoided 2005-10

Table 3

COMPARISON OF CARBON ABATEMENT COSTS

Measure	Cost (£/tC)			Source
	Low		High
Renewables Obligation	183		513	NAO/Oxera
Renewables Obligation		175		DEFRA
RTFO	slight -ve		350	DfT
Social Cost of Carbon	35		140	DEFRA
Heat Incentive @ £10/MWh	70		220
Cost to the Economy and Consumers

— Costs to the economy of a proposed heat incentive are of the order of £0.5-£1.5 billion pa.

— Actual cost to the economy will be determined by the level of response to the incentives introduced. Table 4 illustrates the cost to the economy at various response, or success, rates in successive years. Response rates reflect the potential market penetration for renewables illustrated by the Biomass Task Force and FES.

— Costs of renewable heat supply options will become increasingly competitive under conditions of rising fossil fuel prices. Since an obligation does not impose a direct cost on the consumer or taxpayer, this approach would offer the distinct advantage that costs to the economy (and consequently consumers) of the incentive could be reduced or even eliminated.

Table 4

SUMMARY OF COSTS TO THE ECONOMY

	Year
	2010	2015	2020	2010	2015	2020	2010	2015	2020
Level of Incentive (£/MWh)	7.5				10				12.5
Renewable Target (% Heat Demand)	3%	7%	12%	3%	7%12% 3% 7% 12%
Heat Demand (TWh)	837	862	884	837	862	884	837	862	884
Maximum Cost (£M)	188	452	795	251	603	1,061	314	754	1,326
Cost per Unit of Energy (p/kWh)	0.02	0.05	0.09	0.03	0.07	0.12	0.04	0.09	0.15
Renewable Energy Association September 2006