Select Committee on Trade and Industry First Report

3  Tackling barriers to household take-up

41. Local energy technologies have been available to households for a number of years, yet to date, take-up in the sector has been very low. This is because individuals face a number of hurdles when it comes to the purchase, installation and operation of local energy systems. As one witness put it, for households to overcome these barriers they are "likely to require the entire skill set found in a specialist renewable project development company".[62] The various obstacles are well-documented.[63] Last year's Energy Review report, The Energy Challenge, bracketed these into three categories—practical barriers, relating to issues such as planning and grid connection; information barriers; and cost constraints. In this Chapter we examine the Government's progress in tackling each of these.

Practical constraints

42. Households face a range of practical barriers that inhibit their ability to adopt local energy technologies. At the outset, acquiring planning permission and gaining consent from the distribution network operator to export surplus electricity can prove excessively costly. Even when a system has been installed and connected there remain issues surrounding payment for exported electricity and any other rewards the owner may be entitled to. This suggests that there is significant scope for a simplification of current rules concerning local energy and for commercial energy suppliers to play a larger role in encouraging greater take-up.


43. Under current law, households must receive planning permission before they can install a local energy system, such as a solar panel set or wind turbine, to the exterior of their property.[64] This can cost up to £250.[65] Industry representatives told us that, taking into account also the time needed to navigate the planning process, this requirement is proving a significant deterrent for potential purchasers.[66] The Government recognised this fact in last year's Climate Change and Sustainable Energy Act, in which it made provisions for a review of development orders in England, with a view to granting local energy 'permitted development' status.[67] This would allow property developers and private individuals to fit solar panels or wind turbines without obtaining planning permission, in the same way that they can currently erect satellite dishes. The Department for Communities and Local Government has completed this review, and intends to consult on its proposals in 2007.

44. The requirement of planning permission is a significant deterrent to households wishing to install local energy systems to the exterior of their properties. We welcome the Government's commitment to grant household local energy installations 'permitted development' status and hope there will be no significant delay in agreeing a sensible implementation of the proposal once the consultation is complete.


45. Once they have overcome the planning barrier, households can have electricity-producing local energy systems installed without prior approval from the company that provides their electricity grid connection (known as the distribution network operator, or DNO). The aim of this is to provide a 'plug-and-play' approach for consumers.[68] Nevertheless, installers do have a duty to notify the network operator when they have fitted new systems. At the moment, there is no charge for household connections because network operators are able to accommodate the change in domestic consumption patterns that local energy systems bring about. However, where larger installations require modifications to the local network that incur costs to the distribution company, these may be passed on to the owner.

46. All large-scale generators that connect to the distribution networks face use-of-system charges, which cover the ongoing cost of operating the networks. Currently, most of the distribution companies do not impose these charges on households with local energy installations. In the previous Chapter we saw how local energy generation can lead to a reduction in the required level of network investment by decreasing the demands placed on the transmission and distribution systems. As such, because it cuts network costs, distribution network operators should have an incentive to see more microgeneration connecting to their systems. It seems anomalous, then, that until very recently two distribution companies did impose use-of-system charges on households that exported electricity, albeit at a relatively low level. Under pressure from Ofgem these companies have now agreed to drop these charges. Nevertheless, the network operators still face conflicting incentives to encourage local energy. While it may reduce demands on the networks, at the same time the network operators' revenues are partly determined by the amount of electricity they distribute. Because local energy can lower network flows, this could act as a disincentive for network operators to promote forms of generation that reduce their income.[69]

47. Conflicting incentives to encourage local energy indicate that there is further work for the regulator in ensuring that households receive equitable treatment within the regulatory framework. Ofgem has committed itself to considering these issues as part of the next distribution price control review, to apply from 2010. The importance of this issue will increase, however, as more households seek to export electricity to the grid.


48. We have noted already that, for most households, there will be times when domestic supply outstrips demand—for example when a house with PV panels is empty on a sunny day—and in these instances excess supply will be exported back into the distribution network. For many owners this is one of the advantages of installing such systems as it can increase the payback they receive on their investment. Ofgem reported recently, however, that most "operators of domestic small-scale microgeneration often encounter difficulty in obtaining any kind of price offer from any buyer".[70] Those distribution companies that do pay for exported electricity appear to do so as a gesture of good will: paying customers without registering the electricity, because the transaction costs of doing so exceed the value of the generation.[71] This informal approach would not be sustainable were the overall level of household generation to increase significantly.

49. Much of the evidence we received emphasised the importance of households receiving a 'fair price' for their electricity exports if the technology is to have mass market appeal.[72] Last year's Climate Change and Sustainable Energy Act acknowledged this in setting a requirement for distribution companies to purchase electricity exported onto their networks.[73] It gave commercial energy suppliers one year to propose a suitable scheme, which would provide this service for consumers. If they fail to do so, the Act gives the Government powers to impose a scheme. As such, the industry has a strong incentive to develop a proposal for consideration in 2007, with implementation thereafter. We note that the industry also has a strong interest in designing a scheme that suits itself best, rather than the consumer. It is surprising, therefore, that the Government has not shown greater leadership in this area, by itself proposing options for consultation with the sector.[74]

50. In developing a scheme for pricing electricity exports, consideration will need to be given to the 'buyer groups' for locally generated electricity. While this Chapter is concerned primarily with households, provision will also need to be made for the community and industrial sectors, both of which could potentially export electricity. In practice, these groups may require different tariff arrangements.[75] It will also be important to reach an agreement on what is meant by a 'fair price'. We received a range of evidence on this issue. The general approach taken by countries such as France, Germany, Italy and Japan has been to set a feed-in tariff rate above the market price for electricity. This has proved highly successful in expanding the level of capacity in these markets.[76] In the UK, Powergen already operates a similar scheme, offering to buy the exported electricity from households' PV panels.[77] Ofgem has said, however, that it is against a regime that guarantees prices for consumers, favouring instead an approach that reflects the real value of electricity exports.[78] Even then, there remains the question of whether a market price should mean the wholesale or retail price of electricity. For example, the Energy Saving Trust argues that energy export equivalence—in other words, the retail price—would be vital if household-produced electricity were to achieve its estimate of 30 to 40% of UK needs by 2050.[79]

51. If the Government is serious about expanding the level of local energy capacity in the UK it must provide consumers with confidence that distribution companies will purchase exported electricity at a reasonable price. We recommend that the Government itself by 1 August 2007 put forward options for consultation. Thereafter, if commercial suppliers fail to make an acceptable, household-friendly proposal for rewarding exports in 2007 the Government and Ofgem should use their powers under the Climate Change and Sustainable Energy Act 2006 to enforce an appropriate scheme post haste. We acknowledge the regulator's preference for a market-based approach to pricing, and the need to keep low transaction costs for commercial suppliers and consumers. However, depending on its level, a feed-in tariff could be used to encourage the development of local energy.


52. In Chapter 2 we showed how local energy can play an important role in lowering carbon dioxide emissions. However, as we have previously stated, if the Government wishes low-carbon energy, such as nuclear power or local energy, to contribute a significant proportion of the energy mix, then it must provide a framework that puts these sources on a par with users of fossil fuels, principally by developing a more reliable way of pricing carbon dioxide emissions in the long term.[80] For renewable energy the main way in which generators are currently rewarded for their carbon dioxide savings is through the Renewables Obligation (RO). The RO is a traded certificate scheme, paid for by electricity consumers, which requires commercial electricity suppliers to purchase a growing proportion of their electricity from renewable sources. The current market price of Renewables Obligation Certificates (ROCs) is about £40, representing one megawatt hour of electricity generated from renewable sources.[81]

53. Although the RO was initially designed to encourage the expansion of large-scale renewables, households with renewable local energy installations are also eligible to receive ROCs. A typical roof-top wind turbine may produce enough electricity in a year to entitle its owner to one Certificate.[82] The Micropower Council told us, however, that under the current rules and regulations, the transaction costs of administering the scheme for households can be greater than the value of the ROC. For example, owners must complete a 19 page accreditation form to register with Ofgem for RO eligibility. Also, to claim their Certificates, they must provide meter readings to Ofgem within an eleven day window covering the end of the financial year—a period that often coincides with the Easter holidays. Factors such as these are a significant disincentive for households to claim any ROCs to which they are entitled.[83]

54. The DTI has recently consulted on possible changes to the RO, which will reduce the administrative burden on small-scale and microgenerators.[84] One proposal is to permit 'agents' to act on behalf of a number of households, allowing them to undertake all parts of the administrative process for claiming ROCs. In this scenario the agent would receive the ROCs. It would then be a matter between the agent and the generator as to what happened to the value of the Certificate. For example, the DTI consultation suggests that the agent could be the commercial electricity supplier, or a company that has installed the local energy system itself. In these situations, payment of the value of the ROC to the generator might be bound up either in their electricity prices or installation costs.

55. Another proposed reform to the RO is the removal of the requirement of 'sale and buyback' arrangements for microgeneration. Under the current system, renewable generators that consume their own electricity are only able to claim ROCs if they have first entered into an agreement to sell that electricity to their supply company, then purchase it back. The proposal to do away with this requirement was welcomed in several of the memoranda we received.[85]

56. Our discussion so far has focused on rewarding the carbon dioxide savings arising from electricity-producing local energy installations. It is important to note, however, that both micro and small-scale CHP and those forms of local energy that produce only heat, such as solar thermal systems and ground source heat pumps, are not eligible to receive ROCs.[86] Instead, the main scheme under which the carbon dioxide value of these technologies is recognised is the Energy Efficiency Commitment (EEC). Under the EEC, commercial electricity and gas suppliers are required to meet targets for improving energy saving in the household sector. They can achieve this through efficiency measures such as cavity wall and loft insulation, installing energy efficient boilers, or simply by changing light bulbs. In addition, suppliers must meet at least 50% of their targets through measures aimed at low-income households. The EEC is now in its second phase, which runs from April 2005 to March 2008. Under the current phase, micro-CHP, solar thermal heating, and ground source heat pumps have been included as eligible efficiency measures for commercial suppliers to introduce. In so doing distribution companies are able to claim a 50% credit from the value of the energy savings for such installations, to count towards their targets. This is designed to increase the incentives for energy firms to install micro-heat systems, although few have chosen to do so thus far. This is because, even with the 50% uplift, most of these technologies are still not as cost-effective as energy efficiency measures.[87]

57. Overall, the returns for producing low-carbon heat under the EEC are much smaller than those for generating low-carbon electricity under the Renewables Obligation. Indeed, for households the incentives for installing low-carbon heat are lower still, as the EEC is incumbent upon commercial energy suppliers to implement. Some of the evidence we received was critical of the Government's apparent neglect of incentives to promote low-carbon heat generation, especially given the fact that it accounts for over a third of our primary energy consumption.[88] We return to this issue in the next Chapter.

58. To date, it has been difficult for households to be rewarded for the carbon dioxide value of installing local energy systems. Although individuals who fit renewable micro-electricity systems, such as wind turbines, are eligible under the Renewables Obligation to receive a reward for the carbon dioxide savings their generation brings about, the transaction costs of doing so exceed the potential benefit. We welcome changes to the Obligation that will make it easier for households to receive the full value of this reward. We note, however, that the carbon dioxide savings brought about via other forms of local energy, for example non-renewable CHP or micro-heat, are not valued in the same way. We recommend the Government brings forward proposals to amend this anomaly.


59. In order for households to sell their electricity back to the supply company, or claim Renewables Obligation Certificates, they must have an electricity meter that measures exports as well as imports from their home. Most traditional meters are designed simply to record the flow of electricity into a property, using technology that dates back to the 1960s. It is possible for these meters to operate in reverse when electricity is exported, but this only provides a net figure for household electricity consumption. Increasingly, though, 'smart meters' are becoming available, which offer customers clearer information about the energy they are using including gross measures of household electricity exports and imports. They also have the potential to let users know the value of the electricity and gas they are using, their consumption patterns and the resulting carbon dioxide emissions. In addition, more advanced meters are able to communicate directly with the commercial energy supplier, conveying real-time information of customers' energy usage. The technology is still at an early stage, and available meters vary significantly in their cost and the amount of information they provide.[89]

60. Smart metering offers several potential benefits. By providing households with more information about the cost and pattern of their energy usage, they are better-placed to manage both how much electricity and gas they consume and when. This makes it easier for homes to introduce energy efficiency measures and see the real-time results of doing so in their meter reading. Evidence from other countries has shown that consumption can fall by over 6.5% in households that have smart meters installed.[90] Indeed, the Government estimates that take-up of more innovative metering could reduce the UK's annual carbon dioxide emissions by around 400,000 tonnes by 2020.[91] Elsewhere, smart metering also offers potential benefits to commercial energy suppliers. Where meters are able to communicate directly with suppliers, this avoids the cost of manual meter reading—an activity which is conducted, on average, twice a year. In addition, commercial suppliers may benefit from the reduced customer service costs associated with estimated billing. Also, smarter metering can reduce the possibility of theft through meter tampering. Finally, real-time monitoring of energy usage would allow energy companies to offer more innovative time-of-use tariffs, the effect of which may be to shift some consumption to off-peak periods, thus reducing the level of capacity investment needed to meet peak demand.[92]

61. Despite the various advantages that using smarter meters could bring about, there remains the disadvantage of their cost. This can be up to £150 compared to around £10 for a standard meter.[93] Whereas the current meter stock costs in total around £800 million to read and maintain, a national roll-out that replaced all 49 million electricity and gas meters in homes would cost in the range of £5-8 billion.[94] Some research conducted by Ofgem suggests that, despite the costs of installing smart meters, the estimated benefits could make the investment worthwhile. However, because customers rather than energy companies are the main recipients of these benefits, this currently reduces the incentive for firms to implement a mass market deployment of smart meters of their own accord. This could change, though, in the next five to ten years as technology costs fall and if energy companies begin offering services to customers which capture some of the benefits of the reduced energy consumption brought about by smart meters. In addition, there may already be some customer groups where commercial suppliers would experience greater benefits from installing new meters, such as where consumers are situated in hard to reach sites. [95]

62. Another reason why the take-up of smart meters by commercial energy suppliers has been slow to date is because the technology is still developing, with a range of different meters available and continuing debates about interoperability and the common standards smart meters should adhere to.[96] Some countries, such as Italy, have already instigated a national roll-out of smart metering technology, and a few witnesses we spoke to were keen to see the UK Government adopt a similar approach: for example, by compelling the replacement of old meters at the end of their operational life, or by installing them as a matter of course in all new buildings.[97] Ofgem is, however, committed to a market-led approach as the most cost-effective way in which to encourage the adoption of smart metering.[98] As such, amongst other activities, it is working with the industry to agree common standards for new meters. It will also consider barriers to take-up as part of its supply licence review due to be completed later in 2007. Additionally, Ofgem is working with the Government on a pilot study that will look at the various ways in which consumers can be helped to manage their consumption better, including through more innovative metering. The study will consider the costs and benefits of smart metering vis-à-vis other options, such as better billing. It should also provide information on the scope for different tariff structures, which could reduce peak demand and energy consumption overall.

63. If households wish to receive payment for their electricity exports and earn Renewables Obligation Certificates, they must have a meter installed that provides both import and export information. The replacement of meters for households installing local energy systems provides the opportunity for them to install more innovative meters, which also have the potential to promote domestic energy efficiency measures. This could present a possible win-win situation for households fitting local energy systems. Commercial energy suppliers would also benefit from the installation of smart meters in customers' homes, and Ofgem is committed to a market-based approach to their take-up, led by these companies. The UK has no national roll-out of smart metering, unlike other countries, such as Italy. Therefore, whilst encouraging commercial suppliers to offer a choice of innovative metering packages to their customers may be the most cost-effective way to promote usage, this approach will not necessarily lead to a rapid adoption, which is desirable in order to cut carbon dioxide emissions. Hence, we recommend that the Government set a deadline of 1 July 2008 for agreement with the industry on standards and interoperability, in default of which the Government should legislate.


64. We have seen already in this Chapter how practical constraints such as connecting to the grid, receiving payment for exported electricity and Renewables Obligation Certificates (ROCs), and replacing meters, can all act as inhibitors to people wishing to install and run local energy systems. One approach, which presents a possible solution to all of these problems, is the concept of commercial energy suppliers offering households local energy systems as part of a package of energy services. In so doing, the customer would, for example, enter into a contract with the company to install some form of local energy and smart metering. The supplier could agree to a tariff for purchasing any electricity exports, or these might be bound up in the overall price paid by the consumer for their services. The company could also act as an agent, administering any ROCs for which the household might be eligible.

65. The idea of commercial energy suppliers moving towards a model that focuses them on providing services, rather than simply selling electricity or gas, is potentially revolutionary.[99] In the current market, however, energy companies have little incentive to adopt such an approach. If the concept is to take off, it will require measures from the Government.[100] There is already some evidence that policy is developing in this direction. For example, the Government has proposed the inclusion of all local energy technologies within the third phase of the Energy Efficiency Commitment (EEC) to run from 2008 to 2011, as well as measures that would bring about behavioural changes among consumers, such as smart metering.[101] In practice, DEFRA does not expect the take-up of local energy within the EEC to be high because it is still too expensive relative to energy efficiency measures, such as cavity wall and loft insulation. Elsewhere, Ofgem has proposed removing its requirement that commercial energy suppliers should allow consumers to terminate supply contracts at 28 days notice (known as "the 28 day rule"). This has been seen as a barrier to firms offering more sophisticated and innovative supply arrangements to their customers because of the difficulty and cost of removing assets, such as local energy systems or smart meters, if the customer chooses to change energy supplier.[102] Ofgem will be considering other ways in which it can encourage energy companies to be more innovative in the services they offer as part of its supply licence review, due to be completed later in 2007.

66. Many of the practical barriers faced by households could be overcome if commercial energy suppliers were to offer local energy systems as part of a package of energy services to their customers that also included energy efficiency measures. We support the moves made to encourage suppliers to offer such services. However, because energy efficiency measures are currently a more cost-effective means of reducing demand and, therefore, carbon dioxide emissions, local energy is unlikely to form a significant part of these services in the near future if they evolve within the framework of the Energy Efficiency Commitment. In the short term, however, changes in such areas as the '28 day rule' and administrative arrangements for the Renewables Obligation could encourage commercial suppliers to offer services specifically for those households wishing to install local energy systems.

Information constraints

67. We were told that part of the reason why energy consumers do not consider installing local energy technologies is because many are simply unaware of the option as a means of both reducing their energy bills and making a contribution to reducing their carbon footprint.[103] Of those who do wish to install local energy systems, many are overwhelmed by the complexity of the market—the choice of technologies, as well as the rules and regulations they must adhere to. Hence, in this section we consider the role of Government in raising awareness of the sector and supporting the provision of impartial advice to potential customers, in addition to engendering user confidence in the local energy industry more generally.


68. Evidence we received from several organisations highlighted a general lack of awareness amongst most energy consumers as a factor affecting the uptake of local energy.[104] However, the level of interest in the sector has increased in the past year, in part due to the sharp rise in energy costs, reflecting higher gas prices. This has prompted many energy users to consider ways in which they can reduce their consumption or offset the amount they have to purchase from commercial suppliers.[105] In the future, fossil fuel prices are likely to prove one of major drivers of local energy take-up. 2007 could be a crucial year for testing continuing public interest in the local energy sector, as retail prices are predicted to drop substantially.

69. Be that as it may, most households that have purchased solar panels or wind turbines have tended to be those early adopters who are not necessarily motivated by a rational cost-benefit-analysis of local energy, given that it is still a relatively expensive technology. They are instead motivated by other factors. For example, they may simply be technology enthusiasts who are keen to own the latest environmental innovation. They may also wish to feel they are 'doing their bit' in making a contribution to reducing carbon dioxide emissions. These individuals are therefore more likely to invest the time in finding information on what is available in the sector.[106] Consumers are also motivated by other non-economic reasons such as developments in current affairs. One witness, based in the solar energy industry, told us there had been a large upsurge of interest in their products last year, following the news of Iran's uranium enrichment programme and rising concern over increasing European dependence on Russian gas imports.[107] The reporting of this kind of news does play a role in leading consumers to consider how they might increase their energy self-sufficiency.

70. The early adopter group is important for the local energy industry. It is this group that will help build a market for the sector and, in the long-run, reduce prices, thus making the technologies available to a larger pool of consumers.[108] Also, as one industry representative pointed out, "those consumers who install microgeneration technologies are rather proud of them, they do like to show them off to their friends …".[109] This dissemination of information will play a role, too, in moving the technology towards a mass market. The Government cannot, however, rely on word-of-mouth alone to increase household awareness. It recognised this in last year's Microgeneration Strategy, one of the actions from which was to assess the feasibility of a communications and information campaign to raise the profile of the technologies available.[110] Indeed, evidence we received suggested it may be possible to target such communications specifically at those economic groups within the population who are most likely to be interested in, or can afford, the technology.[111] As one witness noted, there are groups "that have a fair amount of disposable income … but they would much prefer to spend it on another foreign holiday, a patio heater, [or] a plasma television".[112] Much of this kind of consumption actually increases our carbon dioxide emissions. It is these groups that the Government should be targeting in particular to alter their behaviour.

71. Awareness of the potential of local energy as a viable form of low-carbon energy is currently confined to a niche market. As the market grows, commercial motives will drive higher levels of information provision, but if rapid uptake is considered desirable, the Government will have to play its part in promoting the sector amongst the wider population, targeting initially those groups that are most likely to be able to afford and adopt the technology.


72. It is not simply enough, however, to create greater awareness of the local energy technologies available to energy users—once engaged, many need advice and information in determining how they go about entering the market. The installation of local energy systems can represent a fundamental change in the way households view their energy, moving them from being passive consumers to operating as both consumer and producer of energy.[113] This shift creates complexity. Therefore, there are a range of areas in which households may seek guidance. These include information on the various practicalities, outlined earlier in this Chapter, such as receiving payment for electricity exports, gaining Renewables Obligation accreditation, and claiming Renewables Obligation Certificates.

73. Potential customers also need reliable support in advising them on what technologies their properties are best suited for. We have noted already that some forms of local energy operate best under certain conditions. For example, wind turbines are less suited for urban buildings, while micro-CHP is more appropriate for larger dwellings that have reasonably large heat requirements. Customers that are new to the market will not necessarily be aware of which technologies best match the needs of their homes.[114] This suggests an important role for the Government in ensuring the provision of reliable and impartial advice to assist customers' decision making. Indeed, research on consumers of solar hot water systems, conducted by the University of Sussex, has shown the information and guidance provided by an energy advice agency to be the single most important factor in helping customers make informed choices.[115]

74. We were told by a number of bodies that the current availability of reliable information and advice on local energy is inadequate.[116] Yet, there are various ways in which this constraint could be overcome. For example, the Energy Saving Trust is piloting a Sustainable Energy Network through the creation of Sustainable Energy Centres (SECs) in three parts of the UK. These build upon its existing infrastructure of Energy Efficiency Advice Centres, which now advise around 770,000 people every year.[117] The SECs will provide 'one-stop-shops' for advice on all aspects of energy efficiency in the home, as well as information on domestic local energy and energy use in road transport. They will also play a role in raising local awareness of sustainable energy issues. The Trust believes the centres will go some way towards filling the current gap in the provision of advice in these areas. It hopes to have in place a nation-wide network of SECs by 2008-09, although it does not yet have funding for this from DEFRA.[118]

75. In addition, the Energy Saving Trust has highlighted other ways in which the Government could support the provision of information for consumers. These include publication of a simple guide, setting out the practical requirements—technical, commercial and regulatory—associated with household-based local energy, as well as providing an information sheet comparing the electricity export and import prices that commercial suppliers offer their customers.[119] Another witness pointed to the important role that installation engineers can play in providing on-site advice to domestic consumers on what energy systems, be they local energy or otherwise, may best suit their needs.[120] In this regard, adequate training for the installer is necessary for them to provide such advice. We examine this issue further in Chapter 5.

76. For households to make the right choice of local energy system for their home, and gain the full benefit of investing in new technology, they need to have reliable and impartial advice. We support the Energy Saving Trust's move to establish a Sustainable Energy Network to advise households on all aspects of their energy use. If the pilot advice centres prove a success, we recommend that the Government ensures a national roll-out of this service by 31 December 2009.


77. In addition to raising wider awareness of the potential of local energy, and providing consumers with guidance on what systems may suit them best, customers also need confidence that, in making investments, they will receive a good level of service from the equipment manufacturers and their installers. As one witness said to us, "it is very important that we do not let the cowboys in, especially when we are talking about putting moving-part objects on people's roofs, such as wind turbines".[121] To this end, it is essential that standards for products and installation are in place and that companies and their installers are accredited for fitting local energy systems.[122] Confidence amongst customers in the quality of service from installers will also help promote greater awareness of local energy possibilities through word-of-mouth. This is vital, too, if the industry is to break into the mass market.

78. As part of the list of actions in its Microgeneration Strategy, the DTI committed itself to implementing a new accreditation scheme for the local energy sector, covering products, installation and a Consumer Code. The Renewable Energy Association has taken the lead in developing the last of these, taking a self-regulatory approach through its REAL Assurance Scheme, which will help ensure good service at all stages in the customer's dealings with installers. Elsewhere, the DTI is working with the Buildings Research Establishment to develop installer accreditation and product certification schemes, which will build on the existing accreditation schemes the Department already had in place.[123]

79. We support the use of a self-regulatory approach by the Renewable Energy Association in developing a Consumer Code, as well as the work of the Buildings Research Establishment on installer accreditation and product certification, and recognise their importance in engendering confidence amongst consumers entering the sector for the first time. We recommend that the Government's new accreditation scheme, with its Consumer Code, be in place by 1 July 2008.

Cost constraints

80. The third main barrier to the uptake of local energy by households, and indeed local energy generally, is that of cost. We have already noted that if consumers wish to reduce their fuel bills, and in so doing, cut their carbon dioxide emissions, then energy efficiency measures are an easier and cheaper way of doing so. Even when homes have exhausted their potential for energy efficiency, and are just looking to get the best deal on their electricity or heating, they will still find most local energy technologies far more expensive than simply purchasing energy from their local commercial supplier. In this section we look at the cost levels within the local energy sector and the potential for reducing these in the future.


81. The capital cost of local energy varies according to the technology. In a blaze of publicity and media interest last year, B&Q began offering roof-top wind turbines and solar thermal heating panels at a starting price of around £1,500 including installation.[124] We heard that ground source heat pumps can cost between £7,000 and £10,000,[125] PV panels have capital costs of around £9,000 for a 1.5 kilowatt array,[126] while E.ON UK's WhisperGen micro-CHP unit costs about £500 more than a standard boiler.[127] In contrast, electricity supply for homes does not require a capital investment and the cost of a combination gas boiler can be in the region of £1,500. The DTI's Microgeneration Strategy stated that, with the exception of biomass heating (compared with electricity) and, in the near future, ground source heat pumps, most local energy technologies are still too expensive to be cost-effective.[128]

82. In much of the evidence we received, attention was given to the 'payback' period that local energy technologies required. This is the length of time needed for purchasers of such systems to recover the cost of their investment. It is one way of measuring the cost-effectiveness of different technologies. For local energy, the payback occurs through various routes—by reducing energy bills, and through payment for electricity exports and Renewables Obligation Certificates. We received in evidence a variety of estimates of payback periods. For example, a few organisations quoted DTI's own figures of 120 years for PV panels, 80 years for solar thermal systems (in a property originally heated by gas) and 29 years for wind turbines.[129] In most cases, these estimates actually exceeded the operating lifetime of the equipment. Industry representatives we spoke to, however, were more optimistic about the current payback for local energy technologies, suggesting around 13 years for solar thermal systems, and 5 to 7 years for micro-wind turbines.[130] Calculation of payback requires a number of assumptions, regarding both the costs and benefits of the various technologies. This makes it very difficult to gauge accurately the period over which consumers will break even on their investment.[131] In addition, it may be the case that the presence of low-carbon installations in properties raises their market value relative to less energy-efficient or self-sufficient homes, especially given the recent legal requirement for energy efficiency certificates to be provided by anyone offering a home for sale in the UK. If this is so, the payback period could be substantially reduced if the capital investment is mirrored in the asset value of the house, although this benefit could in turn be offset by a change in the council tax and/or stamp duty banding of the property, both of which are currently re-assessed when a home is sold to a new owner.

83. Most local energy technologies are currently too expensive to have mass market appeal compared to other means of supplying domestic energy needs. Calculation of the payback periods on these technologies is fraught with difficulty and likely to give misleading figures. We are concerned, however, that the published Government figures, particularly for solar water heating panels, are far more pessimistic than any other estimates quoted to us.


84. Because the costs of most low-carbon sources of heat and electricity are so high, there is, rightly, a consensus around the need for these to fall, or the cost of other energy sources to rise markedly, if the technologies are to become cost-effective and have mass market appeal in the long run. There are potentially two main drivers to reducing costs. First, costs may fall as a result of improvements in the technology itself. For example, PV panels currently capture only 15% of the energy in sunlight—this might improve with scientific advances.[132] The second source of lower costs, and the one on which greater emphasis is placed by commentators, is through the economies of scale that will arise from producing and installing these technologies for a mass market, through, for example, improved manufacturing processes. Here, there is a potential feedback effect between rising demand for local energy systems and falling costs as the market expands.

85. The Government recognises the role it can play in providing 'seed-corn' or 'pump-priming' funding for the industry so as to stimulate early growth in the market. It has provided support for local energy technologies since 2000, with annual funding under its Solar Photovoltaic and Clear Skies capital grant programmes, peaking at £13.5 million in 2005-06. In 2006, the DTI replaced these schemes with the Low Carbon Buildings Programme (LCBP). This is set to run over three years, with capital grants allocated in two phases. Phase one provides £28.5 million for household, community and commercial projects, while phase two has £50 million of funding for local energy projects in the public and charity sectors. Within the household stream of phase one, applicants can receive a grant of up to 30% of the capital cost of new installations, depending on the technology used.

86. In the first few months of the LCBP, take-up from households has been much higher than anticipated. So far, £6.4 million has been allocated to 4,370 projects. Yet only £6.5 million out the £28.5 million of phase one funding was originally set aside for the household sector. The DTI responded to the high level of demand by re-allocating to the household stream an additional £6.2 million from elsewhere in the phase one budget. This gives total capital grant funding for households of £12.7 million from 2006 until the summer of 2008. With almost half of this allocation already committed, the programme's manager, the Energy Saving Trust told us that "there is a serious risk of shortfall".[133] As another witness noted, this means "there is a danger of serious disappointment amongst consumers" if funds run dry before the scheme is scheduled to close.[134] Not only that, but this kind of 'feast or famine' approach to supporting the sector also potentially undermines the industry's ability gradually to build up capacity.[135]

87. A number of organisations argued that, in the long run, there were approaches other than capital grants that the Government could use to encourage growth in the sector. One of the key themes was that of fiscal policy and, in particular, the tax treatment of local energy vis-à-vis larger energy producers.[136] For example, investment in large scale power stations can be written off against companies' tax bills over time. In addition, businesses that invest in energy efficiency and local energy measures can now receive enhanced capital allowances that allow them to write-off the whole cost of their investments in their first year.[137] Yet households are not able to do this, having to purchase installations out of post-tax income.[138]

88. Elsewhere in the fiscal system, we were told council tax and stamp duty are areas where reform could provide strong incentives for investment in local energy.[139] Because local energy installations can increase property values, such investments could push homes into higher council tax or stamp duty bands—thus largely, or entirely, offsetting any income benefit from the installation. Council tax is an area in which there is scope for innovative local authorities to provide incentives for local energy. British Gas is currently working with around 40 councils, offering households a £100 rebate on their council tax bills if they invest in home insulation from the company. Schemes such as these could be extended to local energy. We are encouraged, also, by the Chancellor's announcement in the 2006 Pre-Budget Report, of the introduction of a time-limited stamp duty exemption for the vast majority of new zero-carbon homes. We welcome too the commitment to enact legislation exempting households from income tax on the earnings from any exported electricity they produce.[140] However, the Government still needs to address the wider treatment of local energy within the fiscal system if it is to provide a fair reward for all forms of low-carbon energy.

89. The expansion of the local energy industry is the key to reducing costs. The Government has in place a popular capital grants scheme, which is in danger of running out of funds before it is due to close in summer 2008. The Government should continue to monitor take-up of the scheme with a view to either rationing of funds, or increasing the available monies for the household stream. A stop-start approach to funding could be damaging to the sector's growth. The Government should also conduct a comprehensive review of the way in which local energy is treated within the fiscal system, both at a national and local authority level, with a view to rewarding investment by households, businesses and large-scale generators in low-carbon energy. However, the Government's efforts to encourage households to invest in reducing their carbon dioxide emissions could be undermined by the law of unintended consequences: if improving energy efficiency raises property values, then households may be subject to higher council tax. As a result, we recommend that any increases in property value due to energy efficiency measures, or local energy installations, should not be considered for purposes of re-assessing homes for council tax.

62   Q 97 (Renewable Energy Association) Back

63   See for example, Department of Trade and Industry, Power from the people - Microgeneration Strategy, March 2006 Back

64   Planning permission is not required for internal microgeneration systems such as micro-CHP. Back

65   Q 276 (Energy Saving Trust) Back

66   Q 76 (Sharp UK) Back

67   Climate Change and Sustainable Energy Act 2006, Section 10 Back

68   Ofgem, Microgeneration: next steps, October 2006 Back

69   Ibid. Back

70   Ibid. Back

71   Appendix 36 (Micropower Council) Back

72   Qq 40 (Sussex Energy Group) and 103 (Renewable Energy Association); Appendices 22 (E.ON UK), 32 (Institution of Engineering and Technology), 36 (Micropower Council) and 61 (Energy Saving Trust) Back

73   Climate Change and Sustainable Energy Act 2006, Section 7 Back

74   Q 42 (Sussex Energy Group) Back

75   Appendix 32 (Institution of Engineering and Technology) Back

76   Qq 103 (Renewable Energy Association) and 235 (Energy Saving Trust) Back

77 Back

78   Ofgem, Microgeneration: next steps, October 2006 Back

79   Appendix 61 (Energy Saving Trust) Back

80   Trade and Industry Committee, Fourth Report of Session 2005-06, New nuclear? Examining the issues, HC 1122 Back

81 Back

82   Q 140 (Micropower Council) Back

83   Appendix 36 (Micropower Council) Back

84   Department of Trade and Industry, Reform of the Renewables Obligation and Statutory Consultation on the Renewables Obligation 2007, October 2006 Back

85   Appendices 36 (Micropower Council) and 58 (EDF Energy) Back

86   For CHP plant using a biomass fuel source, the electricity output is eligible for ROCs, though not the heat output. Back

87   Appendix 61 (Energy Saving Trust) Back

88   Appendices 36 (Micropower Council) and 65 (Renewable Energy Association), Back

89   Ofgem, factsheet 62, 'What is a smart meter?' May 2006  Back

90   Energywatch, Response to 'Our energy challenge-securing clean, affordable energy for the long-term', January 2006 Back

91   Department of Trade and Industry, Energy metering and billing-Changing customer behaviour, November 2006 Back

92   Ofgem, Domestic metering innovation, February 2006 Back

93   Qq 53 and 55 (Sussex Energy Group) Back

94   Department of Trade and Industry, Energy metering and billing - Changing customer behaviour, November 2006 Back

95   Ofgem, Domestic metering innovation, February 2006 Back

96   Q 506 (Ofgem) in Trade and Industry Committee, Fourth Report of Session 2005-06, New Nuclear? Examining the issues, oral evidence, HC 1122 Back

97   Qq 48 (Sussex Energy Group) and 78 (Renewable Energy Association); Appendix 58 (EDF Energy) Back

98   Ofgem, Domestic metering innovation: Next steps, June 2006 Back

99   Q 24 (Sussex Energy Group) Back

100   Q 100 (Renewable Energy Association) Back

101   Department for Environment, Food and Rural Affairs, Energy Efficiency Commitment April 2008 to March 2011, Initial Consultation, July 2006 Back

102   Appendix 64 (Ofgem) Back

103   Appendices 20 (Environment Agency) 61 (Energy Saving Trust) and 65 (Renewable Energy Association) Back

104   Ibid.  Back

105   Q 177 (Worcester Bosch) Back

106   Q 79 (Renewable Energy Association) Back

107   Q 86 (Econergy) Back

108   Q 284 (Energy Saving Trust) Back

109   Q 136 (Micropower Council) Back

110   Department of Trade and Industry, Power from the people - Microgeneration Strategy, March 2006 Back

111   Appendix 61 (Energy Saving Trust) Back

112   Q 40 (Sussex Energy Group) Back

113   Ofgem, Microgeneration: next steps, October 2006 Back

114   Q 227 (Energy Saving Trust) and Appendix 65 (Renewable Energy Association) Back

115   Appendix 67 (Sussex Energy Group) Back

116   Qq 30 (Sussex Energy Group) and 227 (Energy Saving Trust); Appendices 20 (Environment Agency), 36 (Micropower Council), 61 (Energy Saving Trust), 65 (Renewable Energy Association) and 67 (Sussex Energy Group) Back

117   Appendix 61 (Energy Saving Trust) Back

118   Q 227 (Energy Saving Trust) Back

119   Appendix 61 (Energy Saving Trust) Back

120   Q 135 (Worcester Bosch) Back

121   Q 177 (Micropower Council) Back

122   Appendices 20 (Environment Agency), 32 (Institution of Engineering and Technology), 61 (Energy Saving Trust) and 67 (Sussex Energy Group) Back

123 Back

124 Back

125   Q 161 (Worcester Bosch) Back

126   Appendix 67 (Sussex Energy Group) Back

127   Cogen Europe, Micro-CHP Factsheet - United Kingdom, March 2005 Back

128   Appendix 61 (Energy Saving Trust) Back

129   Appendices 11 (BNFL plc) and 32 (Institution of Engineering and Technology); Department of Trade and Industry, Strategy for the promotion of Microgeneration and the Low Carbon Buildings Programme - Consultation, June 2005 Back

130   Qq 143 (Worcester Bosch) and 146 (Micropower Council)  Back

131   Q 182 (Institution of Engineering and Technology) Back

132   Q 183 (Institution of Engineering and Technology) Back

133   Q 250 (Energy Saving Trust) Back

134   Q 23 (Sussex Energy Group) Back

135   Q 40 (Sussex Energy Group) Back

136   Appendices 19 (Energy Saving Trust), 22 (E.ON UK), 36 (Micropower Council), 65 (Renewable Energy Association) and 67 (Sussex Energy Group)  Back

137 Back

138   Q 48 (Sussex Energy Group) Back

139   Q 169 (Micropower Council); Appendices 3 (Association for the Conservation of Energy) and 61 (Energy Saving Trust)  Back

140   HM Treasury, Pre-Budget Report 2006 - Investing in Britain's potential: Building our long-term future, December 2006 Back

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