APPENDIX 65
Memorandum by the Renewable Energy Association
INTRODUCTION
1. We are pleased that the Committee has
extended its inquiry to encompass distributed generation, rather
than merely micro-generation. As requested, we have submitted
our evidence to the Energy Review. In addition we have provided
this evidence paper which addresses the following specific issues:
What is a distributed energy system?
The potential contribution renewables
could make towards meeting the UK's electricity, heat and transport
energy requirements.
Comment on most significant barriers
to realising larger-scale distributed power projects and renewable
micro-generation.
A rationale for the promotion of
renewable heat supplies, with the outline of a proposed approach.
THE DISTRIBUTED
ENERGY SYSTEM
2. The Energy Review gave a useful definition
of the Government's understanding of distributed energy. We agree
with this wider definition, given below. It covers the "wide
range of technologies that do not rely on the high-voltage electricity
transmission network or the gas grid. This includes:
Distributed electricity generation,
including:
all plant connected to a distribution
network rather than the transmission network;
small-scale plant that supplies electricity
to a building, industrial site or community, potentially selling
surplus electricity back into a distribution network; and
"microgeneration", ie small
installations of solar panels, wind turbines or biomass/waste
burners that supply one building or small community, again potentially
selling any surplus; and
Combined Heat and Power (CHP) plants,
including:
large CHP plants (where the electricity
output feeds into the transmission network but the heat is used
locally);
building or community level CHP plants;
"micro-CHP" plants that effectively
replace domestic boilers, generating both electricity and heat
for the home; and
Non-gas heat sources such as biomass,
wood, solar thermal panels, geothermal energy or heat pumps, where
the heat is used in just one household or is piped to a number
of users in a building or community."
3. In addition, any appraisal of distributed
energy must give proper consideration of the role of low-carbon
heat. For CHP plant it is the recovery of the heat and the supply
of this useful energy locally that delivers the efficiency benefits
and consequent carbon savings from this technology. For biomass,
combustion in heat-only boilers is often the most straightforward
and hence commercially attractive means of utilising this valuable
energy source, particularly for small- to medium-scale applications.
Furthermore, the provision of local heat networks is a key infrastructure
development that can facilitate the development of a competitive
market for heat supplies from these and other sources. For these
reasons, heat must be a central consideration in any serious scrutiny
of distributed energy. In addition, it should be recognised that
solar thermal panels are probably the most financially attractive
microgeneration technology available today, while heat pumps are
a proven technology that can cut the carbon emissions from electrical
heating by up to 75%.
4. The Association would therefore urge
the Committee to reflect this emphasis upon heat, and also to
recommend to Government that its consideration of distributed
energy, arising from the Energy Review, affords similar prominence
to the supply of sustainable heat from renewable and low-carbon
sources.
5. Although this definition clearly includes
some non-renewable forms of energy, the Association's response
considers only renewable sources of distributed energy, reflecting
our specific constituency.
QUANTIFYING THE
POTENTIAL
6. When considering the "capacity"
of micro and distributed generation to meet the UK's needs, one
must first consider how much renewable resource is available.
There have been numerous studies addressing this issue, many of
which have been commissioned by Government. As part of its response
to the Energy Review, the REA commissioned IPA to bring these
studies together to give an overview of how renewables could contribute
to the three key energy sectors of power generation, heat production
and transport. Previous studies have covered the theoretical potentials,
the practicable potentials (which take into account various constraints)
and finally the economic potentials. The various studies are based
on differing assumptions, making them hard to bring together in
one analysis.
7. However, under the cost projections assumed
in the studies, and with varying degrees of market support, IPA
estimates the "practicable" potential of renewables
could range from 61% to 106% of 2004 electricity sales, with an
"economic" potential, even in 2004 prices, of up to
81%. IPA estimated a practicable potential for renewables in the
heat market of 10% to 16%, and 9% to 13% for transport fuels using
exclusively UK-produced feedstock. Economic potentials are, of
course, highly dependent upon underlying fossil energy prices,
which have moved significantly since much of the source data contained
in the original research was produced.
BARRIERS TO
LARGER-SCALE
DISTRIBUTED GENERATION
RENEWABLES PROJECTS
Grid issues
8. Delays in gaining access to the grid
are one of the biggest barriers to meeting the UK's renewable
electricity targets. It is an issue for both connections to the
distribution network and the transmission network. Whilst consideration
of the latter is not, strictly speaking, within the remit of the
inquiry the issues are similar. Also, the transmission network
in Scotland encompasses voltage levels down to 132 kV, which would
be regarded as the distribution network in England and Wales.
9. At present the Transmission Operator
is working on an "invest and connect" approach, ie waiting
until the investment has been made before allowing connections
to be made. Note also that transmission investment must sometimes
be made in order to accommodate generation connected to the distribution
network. The applications to connect are dealt with on a first-come-first-served
basis. Generators, once connected, have an enduring right to use
the network, subject to a rolling annual obligation to pay transmission
charges. Therefore existing fossil fuel generators are effectively
preventing new renewable capacity from connecting onto the network.
10. The situation is most acute in Scotland,
where over 100 applications totalling some 14 GW of generating
capacity are currently seeking connection[32].
There is a cost incurred by such generators in occupying a place
in this "grid queue" as they have to provide a financial
guarantee in respect of the work that is required on the transmission
system.
11. This seems in contradiction with EU
legislation. Article 7 of the Renewables Directive states that
the transmission and distribution of electricity produced from
renewable energy sources shall be guaranteed, that member states
may provide priority access to the grid system for renewable generators,
that these stations shall have priority during dispatch of power.
It even suggests that Member States may require the costs of connection
to be borne, in full or in part, by the network operators.
12. The Electricity Directive (which has
precedent over the Renewables Directive) is similarly positive
towards renewables. Article 23 Part 1(f) states "the terms,
conditions and tariffs for connecting new producers of electricity
to guarantee that these are objective, transparent and non-discriminatory,
in particular taking full account of the costs and benefits of
the various renewable energy sources technologies, distributed
generation and combined heat and power".
13. Taken together there is a strong argument
that these directives mean that we should not be allowed in the
UK to delay the connection of renewable generation so that fossil
generation should be allowed to continue to operate in a largely
unconstrained manner. In other words renewable generators should
be allowed to connect as soon as the direct connection can be
physically made and the system should be managed by dispatching
all the plant connected to it, giving priority in this dispatch
to renewable generators.
14. This is known as a "connect and
manage" approach. It would involve connecting all generation
that requests it to the grid, and then making compensatory payments
(if necessary) to generation has to be constrained off the system
when there is insufficient demand.
15. There is currently a threat to the financial
well being of generation connected to distribution systems in
the form of a wish by the National Grid Company to charge such
generation for use of the transmission system even if all its
output is absorbed by the demand within the distribution network
and does not therefore flow on to the transmission system. Such
a move to charging for gross generation (and gross demand) rather
than allowing one to net off the other would be a seriously retrograde
step in encouraging distributed generation. The change, if it
occurred, would not have any effect either on the need for transmission,
the geographical location of new generation, or the total cost
of the transmission system.
Planning
16. Whilst the overall success rate may
be acceptable, the time taken to secure planning consent is a
major problem, particularly if the application has to go through
the appeal process. This is costly and inefficientparticularly
when generic issues are repeatedly re-visited. Nor does it contribute
to local democracy for planning officers' attention to be distracted
by generic rather than location-specific issues.
17. We are pleased that the Energy Review
proposes streamlining the planning process for all energy projects,
although it may not go far enough.
18. The REA would like to see:
Decision making focused on local
rather than generic issues, through publication of clear advice.
Incentives created to speed rapid
decision-making once the 16 week deadline has passed, by increasing
the costs incurred by local planning authorities and introducing
further targets, 90% of projects to be determined in 30 weeks
and 100% in 50 weeks.
Introduce timescales and targets
for the Section 36 decision-making process.
19. We are also concerned about the implementation
of new planning guidance in Scotland. The Scottish Executive is
intending to implement a policy based on the principal of directing
onshore wind energy to specific areas identified by local authorities
as suitable for development. These "broad areas of search"
are zones where wind farm proposals are likely to be considered
appropriate, taking account of the renewable energy resources
in the area, natural heritage interests and existing, planned
and possible future grid availability.
20. The REA believes this approach has risks.
We believe project developers are best placed to identify potential
sites. Local authorities do not have the required expertise to
undertake the task as well as a project developer. Indeed, in
those local authorities that have undertaken such exercises in
the past, project developers have often found it to be unhelpful.
It will also take considerable effort from local planning authorities,
which may slow down the process of preparation and adoption of
development plans and, in turn, frustrate planning applications.
There is also scope for objectors to sensitise local communities
if their area has positively been selected for wind energy development.
Finally the implementation of this policy may damage the prospects
for projects already in the planning process or grid queue, and
which lie outside areas of search.
21. The REA believes it is best to set out
clear criteria which give developers guidance on where development
is unlikely to be acceptable. Our response to this consultation
can be found on our website33[33].
BARRIERS TO
MICRO-GENERATION
22. The main barriers to the uptake of micro-renewables
are:
cost, along with difficulties accessing
grants and premiums from the Renewables Obligation; and
an (understandable) lack of knowledge
on the part of customers regarding what system would be most appropriate
and the volume of energy purchases it would offset.
23. Only when it becomes easy for householders
to adopt micro-renewables will mass-market deployment really take
off. We would like to achieve a situation where utilities strive
to deploy micro renewables on their customers' premises, and provide
incentives to householders to allow them access to do so. In contrast,
under current arrangements, any householder who succeeds in installing
a PV panel or a wind turbine on his/her premises and manages to
benefit from the Renewables Obligation is likely to require the
entire skill set found in a specialist renewable project development
company.
Inadequate levels of grant funding
24. Grant funding for householders has been
reduced in real terms, despite micro generation being high up
the political agenda. The Low Carbon Buildings Programme (LCBP)
replaced the Clear-skies and PV demonstration programmes in April
this year. The LCBP provides similar levels of grant funding per
installation for householders, but the total amount of funding
available for household grants is lower than under the previous
programmes. In other words it will cover fewer householders than
its predecessors. In the last 12 months of Clearskies and the
Major PV Demonstration Programme (MDP) the combined grant funding
of household projects was approximately £4 million, whereas
the budget for householders under the LCBP for totals £6.5
million over three years. We understand over 70% of this year's
funding was allocated in just five months of the programme.
25. In the short term the householder stream
of the LCPB should be increased to meet the level of demand. The
DTI has been considering how it can stretch out the funds to cover
the entire three years of the programme. It would be extremely
damaging if, once the first year's worth of allocation has been
spent, there is a delay until the start of the second year. This
would slow the market down. Customers will not go ahead with orders,
if they have the option of waiting a few months in the expectation
of a grant. As well as slowing down deployment, a stop-start situation
would be very confusing to the public, and creates immediate difficulties
for business planning and cashflow management.
Inequitable fiscal treatment
26. Another factor compounding the cost
problem is the inequitable treatment of householders engaging
in micro-generation. Individuals are at a great disadvantage compared
with corporate entities.
27. An individual would have to pay VAT
on the equipment, whereas a company would get the VAT back. Individuals
do not benefit from any beneficial tax allowances on the investment;
corporate entities do not. Furthermore the capital cost of equipment
per kilowatt installed is in inverse proportion to the capacity,
so the smaller scale the generating equipment, the higher the
cost per kilowatt installed.
28. Government should level this playing
field or, better still, introduce fiscal incentives to encourage
the uptake of micro-renewable generation.
Incentives for utilities to achieve read reductions
in energy consumption
29. Energy is complex. It is extremely difficult
for the average householder to grasp which micro technology would
bring most appropriate. The knowledge barrier outlined above would
be circumvented if energy services companies took responsibility
for reducing their customers' energy purchases. This would take
the risk away from the householder, and place it with the party
most able to manage it.
30. The Energy Review suggests that the
next phase of EEC could be replaced with an obligation on suppliersbased
on a tradable targetto cap growth of emissions from the
household sector. Micro-renewables and energy efficiency measures
would be the most common way of achieving this goal.
31. DEFRA has just issued a consultation
document on the third phase of the EEC. It proposes that EEC should
be extended to encompass all forms of micro-generation, as this
would broaden the options available to suppliers, encourage a
whole-house approach, aid the targeting of consumers and foster
an energy services approach.
32. The Electricity Supply company could
act as a one-stop shop in this respect, through offering its customers
easily comprehensible contracts, and taking care of all the administrative
issues surrounding ROCs, LECs, reduced VAT levels, connection
agreements etc.
33. It would seem that broadening the scope
of EEC to encompass micro generation would present an ideal, long-term
framework for the householder. It will, however, take time to
evolve and should therefore be augmented by significant extension
of householder grants, more equitable fiscal treatment, plus the
improvements to the Renewables Obligation already in train.
THE PROMOTION
OF RENEWABLE
HEAT
34. Securing supplies of heat from renewable
sources can provide a more straightforward option for many individuals
and businesses to access the benefits of renewables. Many of the
fundamental conditions already exist for the development of renewable
heat supplies:
Heat generation already occurs on
a highly decentralised and unregulated basis; virtually every
home and business in the UK either has a boiler or is connected
to a local hot water system served by a boiler plant. In many
cases a move to renewables is little more than a fuel switch.
The domestic boiler stock is turned
over approximately every 15 years, providing the opportunity for
rapid but systematic market growth.
Costs for renewable heat are increasingly
competitive with fossil alternatives. [34]
Table 1
WOODFUEL EQUIVALENT ENERGY COSTS COMPARED
TO FOSSIL FUELS
Fuel | Fuel
Price
|
Unit | Fuel
Price
| Heat
Cost |
Savingp/kWh vs
| |
% Cost Saving
| |
| | |
p/kWh |
p/kWh
| High
Qual.
Chip
|
Co-
Product |
Pellets
| High
Qual.
Chip
|
Co-
Product |
Pellets
|
High quality wood-chips 55 | £/tonne
| 1.60 | 1.88 |
| | | |
| |
Sawmill co-product | 30 | £/tonne
| 1.56 | 1.89 |
| | | |
| |
Pellets | 150 | £/tonne
| 3.08 | 3.52 |
| | | |
| |
Heating oil | 32 | p/litre
| 3.29 | 4.39 | 2.51
| 2.50 | 0.87 | 57%
| 57% | 20% |
Natural Gas | 1.6 | p/kWh
| 1.6 | 2.37 | 0.49
| 0.48 | -1.15 | 21%
| 20% | -49% |
Tanked gas | 34 | p/litre
| 5.38 | 7.17 | 5.30
| 5.28 | 3.65 | 74%
| 74% | 51% |
MFO | 22 | p/litre
| 2.07 | 2.77 | 0.89
| 0.87 | -0.76 | 32%
| 31% | -27% |
Coal | 80 | £/tonne
| 1.03 | 1.58 | -0.29
| -0.31 | -1.94 | -18%
| -20% | -123% |
Electricity (off peak) | 4 |
p/kWh | 4 | 4.44 |
2.57 | 2.55 | 0.92
| 58% | 57% | 21%
|
Electricity (peak) | 6.5 |
p/kWh | 6.5 | 7.22
| 5.35 | 5.33 | 3.70
| 74% | 74% | 51%
|
Source: Econergy, 2005
35. In addition, studies have shown that the contribution
that renewable heat could make to UK carbon emissions abatement
is far from trivial. The Carbon Trust[35]
has estimated that biomass could save a maximum of 5.6 Mt carbon
per year if all the existing and potentially available UK biomass
resource was used in large heat projects. Large heat has the highest
conversion efficiency and displaces the higher carbon intensity
of heavy fuel oil (HFO), rather than light fuel oil (LFO). Carbon
Trust estimates that using the same resource in small heat or
very small heat installations, typical of domestic applications
would only reduce these carbon savings slightly.
36. Despite the major benefits and the potential accessibility
of renewable heat to many citizens, Government has consistently
overlooked the opportunity either to stimulate the market for
renewable heat supplies through effective, stable incentives or
to reward the carbon benefits that it can deliver. This institutional
failing has previously been highlighted in the House of Commons
Environment, Food and Rural Affairs Committee's earlier inquiry
"Climate change: the role of bioenergy".
37. If Government were to establish a stable incentive
framework that created a long-term market opportunity for renewable
heat, then an efficient industry that could deliver equipment,
installation, servicing andin the case of biomassrenewable
fuels would develop. The framework introduced should reflect the
needs of specific sub-sectors:
For domestic installations such as heat pumps,
solar thermal panels and biomass boilers, the scope of the existing
Energy Efficiency Commitment should be extended to recognise the
benefit of these systems in reducing fossil-fuel consumption.
For larger installations, typically biomass boilers
supplying commercial premises, building heating systems or district
heating networks a Renewable Heat Obligation (RHO) would underpin
market demand and provide a certainty over future revenue streams
that would support capital investment.
38. Further details regarding these approaches are set
out in the Annex.
39. In the absence of such incentives the opportunity
is likely to remain under-invested and underdeveloped. Worse still,
segments of the market, notably biomass heat, will be compromised
by the effect of other renewables policies. Current incentives
for co-firing of biomass fuels in fossil power stations are now
so strong that they result in upward price pressure for some feedstocks;
as a consequence biomass heating, which could be competitive at
cost-reflective fuel prices, can prove unable to compete for fuels
and so be rendered unviable. Incentives for co-firing, which as
a renewable supply option is time-limited by the lifetime of coal-fired
power stations, may therefore be acting to restrict the development
of a long-term market for the supply of renewable energy to the
domestic, commercial and industrial heat sector.
October 2006
Annex
RENEWABLE ENERGY ASSOCIATION RENEWABLE HEAT & 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
Increased security of supply through diversification
away from fossil-fuel energy sources. Heat makes up 30% of UK
energy demand outside of the transport sector.[36]
The UK today depends on natural gas to meet 90% of its domestic
heat demand and 55% of industrial and commercial needs.
Carbon savings of between 2 and 5.6 MtC p.a.[37],[38].
One measure alonereplacing all suitable oil-fired boilers
with biomass alternativescould deliver savings of 2.5 MtC
p.a..
Alleviation of increasing rates of fuel poverty,
particularly in off-gas grid locations. Once installed, solar
thermal units deliver heat at zero-cost to the consumer. Heat
pumps can cut electric heating costs by up to 75%. Woodfuel heating
options deliver overall cost savings of between 20% and 60% to
households using heating oil, and up to 75% for those using tanked
gas[39].
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:
The Biomass Task Force[40]
estimated renewables could meet 3% of UK heat demand by 2010 and
7% by 2015; a market in heat supply of c.£1.5 billion p.a..
FES estimate a market potential of 92 TWh p.a.
by 2020, or 12% of UK demand.
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:
policies are projected to deliver a heat market
share of less than 1%[41]
and a market of only £100 million p.a.less than 7%
of potential growth;
new measures announced in the Climate Change Programme
Review will save a maximum of 0.1MtC p.a.2% of estimated
potential[42].
MEASURES
A coordinated 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 & 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 1000m2 and all residential
developments over five units.
Planning guidance should be developed to avoid
a 10% minimum requirement becoming a de facto cap.
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 & 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.
Below an appropriate de minimis level,
future benefits should be recognised as a present value.
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 marketin 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 tradable certificates.
Sale of certificates would create a revenue stream
against which:
costs of fuel supply could be supported
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
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
partiesa "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.
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:
Gas and coal together contribute c.85%[43]
of fuel supply for heating. Suppliers of natural gas and coal
are required to complete detailed records in order to comply with
the requirements of the Climate Change Levy. These records provide
for quantification and differentiation between supplies reaching
users in the power, transport and domestic sectors.
Liquid fuels contribute c.15% 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 illustrates the performance of the schemein
terms of cost per tonne of carbon savedfor 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 compares a heat incentive to a range of
carbon abatement measures employed elsewhere in the economy.
Table 1
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
|
ElectricityGrid Average | 0.115
| 69 | 92 | 115
| 139 |
ElectricityGrid 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 boilerswaste | 0.007
| 859 | 1,146 | 1,432
| 1,719 |
Source: ODPM, BRE
*Average of marginal carbon intensity and plant built or
avoided 2005-2010
Table 2
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 p.a.
Actual cost to the economy will be determined
by the level of response to the incentives introduced. Table 3
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.
Costs per unit of energy supplied will depend
upon the level of incentive and the target imposed by Government.
Gas costs are presently approximately 2.0-2.5 p/kWh for industrial
consumers and 2.1-2.8 p/kWh for domestic consumers (including
taxes)[44]. With a £10/MWh
incentive and a 7% target, a decision to impose the burden of
the incentive on consumers would introduce additional costs of
0.07 p/kWh for fuel supplied, equivalent to c.3% of current gas
costs.
Table 3
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 |
http://www.defra.gov.uk/farm/acu/energy/fes-renewable-chp.pdf
32
A framework for considering reforms to how generators gain access
to the GB electricity transmission system. Ofgem website, April
2006. www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/14998_8306b.pdf Back
33
www.r-p-a.org.uk/article_default_view.fcm?articleid=2185 Back
34
Scoping Study: The Commercial Opportunities of Wood Fuel Heating
in Scotland, Econergy, December 2005. Back
35
Biomass sector review for the Carbon Trust, Paul Arwas Associates,
October 2005. Back
36
Biomass sector review for the Carbon Trust, Paul Arwas Associates,
October 2005. Back
37
Renewable Heat and Heat from Combined Heat and Power Plants-Study
and Analysis, FES, 2005 Back
38
Biomass sector review for the Carbon Trust, Carbon Trust, 2005. Back
39
Scoping Study: The Commercial Opportunities of Wood Fuel Heating
in Scotland, Econergy/Scottish Enterprise, December 2005. Back
40
Report to Government, Biomass Task Force, October 2005. Back
41
UK Energy and CO2 Emissions Projections, Updated Projections
to 2020, DTI, February 2006. Back
42
Climate Change-The UK Programme 2006, HM Government, 2006. Back
43
Since energy supply data as reported in DUKES and UEP is not disaggregated
by end-use, it is assumed throughout this paper that non-electricity
energy supplies will meet a heating demand. In some cases this
is likely to result in an over-estimate for heat demand and some
skewing of proportional allocations. Back
44
Quarterly Energy Prices, DTI, March 2006. Back
|