Select Committee on Trade and Industry First Report

Conclusions and recommendations

What is 'Local energy'?

1.  The focus of this Report is on the various ways in which individuals and communities can produce their own low-carbon energy. Hence, we have used the term 'local energy' to incorporate both microgeneration and community-level energy, whether electricity or heat, that has been produced for own-use. We hope that this more accurate and easier-to-understand term might command general acceptance and recommend that it be adopted in all official government documents. (Paragraph 8)

2.  Local energy can be produced in a variety of ways, using either renewable or fossil-fuel sources. Each has the potential to generate energy, whether in the form of electricity or heat, at or very near to the point of consumption. In many cases these are not new energy sources. Indeed, humanity's use of biomass, wind, and hydro energy pre-dates the use of fossil fuels. What is new today is the technology available to harness these sources of energy and the way in which their use in a modern context presents newly perceived benefits by reducing carbon dioxide emissions and contributing to energy security. (Paragraph 15)

3.  Overall, local energy currently contributes a very small proportion of the UK's supply of electricity and heat—less than 1%—reflecting the highly centralised structure of our energy system. (Paragraph 33)

Potential of local energy

4.  Local energy has the potential to reduce carbon dioxide emissions by displacing the use of fossil fuels, decreasing network losses, and increasing energy awareness amongst users. The scale of these benefits, however, is dependent on the types of technology used and their location. For domestic installations, local heat production such as solar thermal systems or ground source heat pumps will often be just as beneficial as electricity generation. There are some situations involving micro-combined heat and power (CHP) where local energy systems will not necessarily lead to a reduction in carbon dioxide emissions. Moreover, local energy must be considered as part of a multifaceted effort to tackle the causes of climate change, in which there are other means of reducing emissions. In particular, energy efficiency measures offer better value-for-money in the short run. As such, the Government should remain mindful of the underlying cost per tonne of carbon dioxide saved in developing policies to ensure that its approach is cost-effective. (Paragraph 24)

5.  Greater use of local energy could, prospectively, increase the security of the UK's energy supplies by drawing on a more diversified range of fuel sources, many of which are renewable. It will still, however, require the presence of backup capacity when local supply fails to meet local demand, and for the time being, this is likely to use fossil fuels. In the future more active network management of the UK's energy systems will be necessary to balance supply and demand and ensure that both small and large-scale generating assets are able to operate cost-effectively. (Paragraph 27)

6.  Local energy presents additional economic benefits in terms of tackling fuel poverty and reducing network costs. The extent to which those in fuel poverty can capture these benefits is uncertain, though, because of the current high capital costs of local energy systems. Also, estimates of the total savings on network investment and operating costs are small, and do not of themselves provide a rationale for encouraging local energy. (Paragraph 31)

7.  Local energy systems, such as CHP, wind and solar photovoltaics, are only suited to certain locations or consumption patterns. In addition, most local energy technologies are not yet cost-effective, reducing the potential for dramatic take-up in the near future. For community-CHP projects, assessments of the potential vary. Though a large number of urban dwellings would suit this technology, cost-effective implementation is likely to be limited to developments of new build. However, the UK's potential resource of local energy is large. If costs fall, and/or prices of energy from other sources rise, and certain government interventions are put in place, local energy could contribute a sizeable proportion of the UK's energy mix in the long run. One estimate, looking specifically at household installations, puts this in the range of 30 to 40% of our electricity needs by 2050. Local energy is a developing concept with real potential, but it cannot make a significant contribution in the next decade in closing the capacity gap created by the closure of coal-fired and nuclear power stations—local energy is not a panacea that will "keep the lights on". (Paragraph 40)

Barriers to take-up: Planning and Regulatory

8.  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. (Paragraph 44)

9.  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. (Paragraph 47)

Barriers to take-up: Receiving full value for energy produced

10.  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 put forward 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. (Paragraph 51)

11.  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. (Paragraph 58)

Barriers to take-up: Metering

12.  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. (Paragraph 63)

Barriers to take-up: Lack of incentives for commercial energy suppliers

13.  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. (Paragraph 66)

Barriers to take-up: Lack of information

14.  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. (Paragraph 71)

15.  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. (Paragraph 76)

16.  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. (Paragraph 79)

Costs for consumers

17.  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. (Paragraph 83)

18.  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 funds, or increasing the available monies for the household stream. A stop-start approach to funding could be damaging to the sector's growth. (Paragraph 89)

19.  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. (Paragraph 89)

20.  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. (Paragraph 89)

The role of local authorities

21.  The London Borough of Merton has set a clear example of how local government can show leadership in promoting the use of local energy in new developments. However, many authorities have failed to follow its lead. The Government should increase pressure on those councils to implement targets for on-site renewables in new developments, with a view to all local authorities having such targets in place by 31 December 2009. This would create consistency for developers and councils across the country. Progress in this area is crucial if local government is to demonstrate its capability to respond to any future policy instruments for tackling the causes of climate change, such as new planning guidance. (Paragraph 96)

22.  The experience of Woking demonstrates the importance of leadership at a local level, with individuals having an ambitious vision of how they can directly contribute to reducing their communities' carbon dioxide emissions. Other local authorities should seek to learn from Woking's example in developing and implementing their own strategies for tackling the causes of climate change. (Paragraph 99)

23.  The high level of energy consumption in London makes it an important leader in spearheading the greater use of local energy systems in urban areas. The London Climate Change Agency looks set to play a major role in exploiting this potential. We believe the UK's other large cities should seek to adopt similar strategies for tackling the causes of climate change, learning lessons from current experience in London, while also working to develop their own innovative approaches to reducing carbon dioxide emissions. (Paragraph 103)

Community Heating

24.  There is some scope for reducing carbon dioxide emissions by encouraging greater use of community-based combined heat and power (CHP). However, while the current schemes to support such systems require a pro-active approach by communities to take advantage of them, a lack of awareness and co-ordination prevents many from doing so. Also, the reward for producing low-carbon heat is much less than that for low-carbon electricity. We accept the potential difficulties of implementing a Renewable Heat Obligation. Nevertheless, we recommend that the Government should look at other ways in which it can provide incentives for local areas to move towards community-based low-carbon heating, where it is appropriate for them to do so. Current policy places too much emphasis on the role of local electricity generation and not enough on the production of heat. Renewable, low-carbon heat production is the Cinderella of energy policy and this attitude must change. (Paragraph 109)

Developing manufacturing and skills capacity

25.  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. (Paragraph 113)

26.  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. (Paragraph 124)

Further action by central Government

27.  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. (Paragraph 121)

28.  Government procurement is potentially a powerful lever for implementing its energy policy and can demonstrate its commitment to tackling the causes of climate change. We recommend that, as a first step, procurement policy should seek to maximise energy efficiency opportunities. But where appropriate and cost-effective, it should additionally aim to incorporate local energy systems in its infrastructure investment programmes. Public buildings and schools, for example, provide an ideal setting in which to showcase local energy technologies, demonstrate public sector leadership, and help engender greater awareness of the need to reduce carbon dioxide emissions. (Paragraph 128)

29.  The Code for Sustainable Homes provides a welcome demonstration of the Government's intentions for future Building Regulations. Standards under the Code should promote greater energy efficiency for all new homes built with public money. Further tightening of the Code in the future should also provide a lever for greater use of local energy installations in new build. We recommend that if costs for local energy technologies fall significantly, relative to energy efficiency measures, or relative to the cost of energy from other sources, the Government should then establish a framework for the incorporation of local energy into future Building Regulations, and that any such framework must place more emphasis on the role of local heat production than has been the case so far. (Paragraph 133)

Adapting the electricity networks

30.  The distribution networks have been designed as passive systems, taking electricity from the transmission network and supplying it to customers. Local energy technologies go against this traditional approach because they have the potential to export electricity back into the system. Yet, even for significant levels of market penetration, the evidence suggests there are no technical barriers, with regard to the distribution networks, to the expansion of local energy capacity. However, to accommodate such a change in the energy mix, network operators must invest in new technology to develop more active network management. This will require a significant change in approach in how the distribution networks operate, but the expected incremental growth in any local energy capacity should give time to respond effectively. (Paragraph 143)

31.  The UK will still require a transmission network even if there is very large growth in the level of local energy capacity. This is because local energy supply is rarely likely to match exactly local demand. Hence there will be a continued need for a transmission network that can balance electricity flows across regions and maintain security of supply. The capacity needs of the network will depend on the sources of electricity, although some research suggests local energy can make a small contribution to reducing the cost of maintaining and operating the network. (Paragraph 147)

32.  Developing an understanding of the long-term implications for the network infrastructure of different energy technologies, including local energy, is important for ensuring timely and cost-effective investment. This is particularly the case given the potentially long lead times for new grid capacity. We welcome Ofgem's commitment to publish long-term scenarios of network development, and hope the industry will make use of these in planning its investment programme. (Paragraph 149)

33.  The argument made by some lobby groups, however, that local energy production either renders investment in renewing the grid unnecessary, or will be frustrated by such investment, is not one we accept. Local energy has a potentially important role to play in meeting the UK's carbon dioxide reduction targets and enhancing security of energy supply, but it will take many years to fulfil its potential. (Paragraph 150)

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