Select Committee on Trade and Industry First Report

5  Developing manufacturing and skills capacity

110. If local energy is to make a significant contribution to reducing carbon dioxide emissions in the long-run, then the cost of the various technologies available has to fall for them to appeal to a mass market. Yet, the industry faces a catch-22 situation in that it cannot drive costs down until mass market demand for its products exists. Hence, there is a role for Government in providing confidence that it supports the long-term development of the sector and sees local energy as playing an important role in the UK's future energy mix. Supported by the right incentives, the industry can then invest in the manufacturing and installation processes that will reduce costs. The ultimate aim should be for the sector to provide products that are able to compete with other energy sources without Government support. In this Chapter we look at the current state of the local energy industry, and examine what the Government can do in addition to the measures already discussed. We also consider the skills capacity of the sector and its ability to respond to increased demand.

The current state of the sector

111. The size of the UK's local energy industry is tiny. The Energy Saving Trust estimates total annual turnover for the sector as £10-20 million, employing between 200 and 600 people (excluding micro and fuel cell CHP).[171] Most of these are involved in installation: currently 275 installers, 64% of which are in the solar industry. The fuel cell and micro-CHP sectors are different, involving a much smaller number of large companies employing a large number of staff mainly engaged in research and development.[172] In terms of equipment manufacturing, relatively little of this takes place in the UK. For example, ground source heat pumps are mostly imported from Sweden, and solar thermal systems primarily from Germany. This reflects the fact that the market for these products is much larger in the source countries than it is in the UK. The relatively small size of the UK market for local energy systems currently makes it more cost-effective to import them than to manufacture them here.[173]

112. The number of companies operating in the local energy sector has risen significantly in recent years on the back of Government grant support for the industry. For example, the number of firms installing PV panels has increased from 15 to 50 in just four years. Although most of the businesses in the industry are small, employing up to 30 people, there is evidence that larger companies are starting to move into the sector. For example, British Gas has signed an agreement with WindSave to make roof-top wind turbines available to households.[174] Elsewhere, Worcester Bosch have recently entered the solar water heating and ground source heat pump markets, promoting them alongside their high-efficiency condensing boilers as part of an overall energy and carbon dioxide saving package, and capturing 20% of the market for solar panels in the space of 12 months.[175] It is worth noting that this expansion has taken place without the use of grants from the Government.

113. The UK's local energy industry is small and focused primarily on installation, with manufacturing occurring mainly abroad. As a result of Government grant schemes, there has been significant growth in recent years, albeit from a very low base, and there are now signs that larger energy companies are beginning to take an interest in the sector.

Moving towards a mass market

114. We have seen already that the various local energy technologies available are all at differing stages of development. Some, such as biomass heating and ground source heat pumps, are already cost-effective. Other technologies, however, including solar photovoltaics and micro-wind turbines, are still too expensive to be commercially viable for the mass market. Indeed, fuel cell CHP is still in its research and development phase.

115. Because of the relative immaturity of some technologies, there is significant scope still for technical advances and innovation, which will drive down costs in the long-run. Here, the Government can play a role by providing R&D support for the sector. The Energy Saving Trust told us, however, that not enough of the DTI's available funding for emerging technologies was being targeted at local energy research—less than 3% of the £320 million available to business over the period 2005-08.[176] In its Microgeneration Strategy, the DTI argued that there are sufficient funds for carrying out R&D in the sector, available not only from central Government but also through generous tax reliefs, and through the Research Councils, Regional Development Agencies and European Union. One example is the New and Renewable Energy Centre (NaREC), funded by the One NorthEast Development Agency, which has provided an initial investment of £10 million. The DTI has agreed to produce a map outlining all the available funding sources, in response to evidence from its strategy consultation that there is not sufficient information about where businesses can seek support.

116. Other changes will occur in the wider energy market over the coming years that could promote the viability of local energy. These include the possible adoption of smart metering; improved power flow management on the grid; and improved small-scale energy storage capabilities.[177] Changes in fuel availability and prices could also be important drivers, as proved in 2006, with increased interest in local energy systems in the UK resulting from higher electricity and gas bills.

117. The consensus within the industry, however, is that the key driver for reducing costs in the long-term will come about through the scaling up of production and by investing in installation infrastructure so that the sector is able to supply a mass market.[178] In order to achieve this, the local energy industry told us the Government needs to signal its commitment to the sector and the long-term contribution it can make to the UK's energy mix, while backing this up with a credible effort to provide incentives for growth in the industry.[179] They claim that only this approach will enable firms to develop business plans for the long-term, and attract investment to carry them out. In this regard, the Microgeneration Strategy has been generally welcomed by the sector as a demonstration of the Government's support.[180] The local energy industry was sceptical, however, about the Government's stated intention in last year's Energy Review Report, The Energy Challenge, to implement the strategy "aggressively", given the limited human resources currently dedicated to local energy in the DTI.[181]

118. The industry says that one area in which the Government could further demonstrate its support for the local energy sector is through the setting of a national target for its contribution to the energy mix.[182] Such a move, the local energy industry argues, would send a clear signal to investors of how the Government expected the market to develop in the medium to long-term. The Climate Change and Sustainable Energy Act 2006 gave the Secretary of State for Trade and Industry powers to set a national target specifically for microgeneration from November 2008, provided the Government believes it appropriate to designate one at that time.

119. However, we have previously stated the Government should not seek to pre-determine the proportion of the mix that any energy source should contribute—be it gas, coal, nuclear or renewables, large or small. Rather, if its aim is to reduce carbon dioxide emissions, it should establish a level playing field that equally rewards all forms of low-carbon energy, and allows the market to determine the energy mix.[183] Yet there may be a case for treating certain low-carbon energy sources differently if it is believed that investment in them will, in the long run, reduce their cost per tonne of carbon dioxide saved. If the Government wishes to set a target for local energy it should therefore only be on the basis that it would play a significant role in the sector's transformation from niche market to full cost-effectiveness, backed up by credible incentives for its achievement. Before then, it would also be necessary for the DTI and industry to conduct robust market analysis on the growth potential of the market so that any target could be both stretching and achievable.[184]

120. Underpinning any target-setting should also be the final objective of tapering the industry's dependency on capital grants as the technologies become more cost-effective. As noted already, one key aspect of the sector's current and past growth has been the presence of government grants. Under previous schemes, the Micropower Council argues, the Government failed to set a clear expectation of how the sector should develop, and what cost reductions it anticipated. As a result, the industry ran into difficulties as soon as there was uncertainty about the continuance of support.[185] The Low Carbon Buildings Programme has funding to run until mid-2008, by which time the Government expects some of its "wider measures to promote microgeneration should be taking hold, facilitating the uptake of these technologies".[186] This could suggest that the Government expects to have weaned the industry off grants by this time, although it seems to us a very short period in which to expect the industry to have built sufficient capacity. More likely, the closure of the current scheme in 2008 reflects the end of the Government's current Spending Review period. It will therefore not be known whether there will be more grants available, or indeed a department to allocate them, until the next Spending Review settlement is announced.

121. Key to the uptake of local energy systems in the long-term will be reductions in their cost so as to secure a mass market. Achieving this requires the Government to demonstrate credible support for the sector to give the industry sufficient confidence to invest in scaling up its activities. Recent policy developments, such as the Microgeneration Strategy and the Climate Change and Sustainable Energy Act 2006, have gone some way to achieving this. However, the small number of staff responsible for policy implementation in this area at the DTI, and the lack of clarity as to the future of capital grant support beyond 2008, suggest to us there is more to do if the Department intends to fulfil its commitment to support the sector "aggressively". A national target could help achieve this, but should only be used if there is a clear justification for its role in making the industry cost-effective, and if it is underpinned by incentives for its achievement.

Ensuring the industry has the skills

122. While local energy systems allow households and communities to produce their own energy, as one witness told us, "they are not DIY technologies".[187] This is why many of the companies currently operating in the sector offer installation services as part of their product packages. We noted in Chapter 3 the importance of trained and accredited installers in order to strengthen customer confidence in the reliability of local energy products, for example, to ensure health and safety. Therefore, as demand for these systems grows, so too will demand for skilled technicians able to fit them.[188] However, given the industry is expected to experience, at best, incremental growth in the coming years, the DTI's Microgeneration Strategy argued the sector should be able to respond in developing the skills necessary as demand grows. It cites recent work by the Energy and Utility Sector Skills Council, which shows there are no major skills shortages in the renewable energy sector. However, this piece of work is now over three years old, and was focused then primarily on the needs of the larger-scale renewables industry.

123. If the sector is to respond to growing demand for installers as the industry grows, companies will need to ensure they invest in the skills of their employees. Here, our evidence identified two skill sets as being important. Not only is the technical know-how required to fit local energy systems, but also installers need marketing skills to ensure the products they sell best match the needs of their customers.[189] We have seen already that some local energy systems are not appropriate in some circumstances, for example, micro-CHP in small dwellings with a low heat demand. This is why the accreditation of installers is important for instilling confidence amongst customers that recommendations made to them are in their best interest. The Energy Saving Trust told us about work it has done in collaboration to develop a qualification regarding energy efficient central heating boilers and control systems. It argues that a similar approach could be used for developing skills and training in the local energy sector.[190] The Micropower Council also called for a Government-promoted training course for installers.[191]

124. Growth in the local energy industry is likely to be gradual enough for the sector to be able to respond to increased skills needs. The Government's accreditation scheme will help ensure consumers' confidence provided they are aware of it. It is then incumbent on the sector to regulate itself to ensure all its installers are trained and accredited. We recommend that the Government's role should be focused on wider workforce concerns, such as tackling the perceived stigma attached to vocational skills and qualifications.

171   Energy Saving Trust, Potential for Microgeneration Study and Analysis, November 2005 Back

172   Ibid. Back

173   Qq 149 an 152 (Worcester Bosch) Back

174   Centrica, Response to "Our energy challenge-securing clean, affordable energy for the long-term", January 2006 Back

175   Q 135 (Worcester Bosch) Back

176   Q 264 (Energy Saving Trust) and Appendix 61 (Energy Saving Trust) Back

177   Appendix 36 (Micropower Council) Back

178   Qq 165 (Micropower Council) and 90 (Renewable Energy Association); Appendices 36 (Micropower Council) and 61 (Energy Saving Trust) Back

179   Q 90 (Renewable Energy Association) and Appendix 36 (Micropower Council) Back

180   Q 165 (Micropower Council) Back

181   Qq 96 (Renewable Energy Association) and 163 (Micropower Council) Back

182   Q 111 (Renewable Energy Association); Appendices 36 (Micropower Council) and 61 (Energy Saving Trust) Back

183   Trade and Industry Committee, Fourth Report of Session 2005-06, New Nuclear? Examining the issues, HC1122 Back

184   Appendix 36 (Micropower Council) Back

185   IbidBack

186   House of Commons, Official Report, Written Answers, 1893W, 25 October 2006 Back

187   Q 177 (Worcester Bosch) Back

188   Q 206 (Institution of Engineering and Technology); Appendices 16 (EDF Energy), 32 (Institution of Engineering and Technology) and 61 (Energy Saving Trust)  Back

189   Q 43 (Sussex Energy Group) Back

190   Appendix 61 (Energy Saving Trust) Back

191   Appendix 36 (Micropower Council) Back

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