Select Committee on Trade and Industry Written Evidence


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 inefficient—particularly 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 suppliers—based on a tradable target—to 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
FuelFuel
Price

Unit
Fuel
Price
Heat
Cost

Saving—p/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 1.601.88
Sawmill co-product30£/tonne 1.561.89
Pellets150£/tonne 3.083.52
Heating oil32p/litre 3.294.392.51 2.500.8757% 57%20%
Natural Gas1.6p/kWh 1.62.370.49 0.48-1.1521% 20%-49%
Tanked gas34p/litre 5.387.175.30 5.283.6574% 74%51%
MFO22p/litre 2.072.770.89 0.87-0.7632% 31%-27%
Coal80£/tonne 1.031.58-0.29 -0.31-1.94-18% -20%-123%
Electricity (off peak)4 p/kWh44.44 2.572.550.92 58%57%21%
Electricity (peak)6.5 p/kWh6.57.22 5.355.333.70 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 and—in the case of biomass—renewable 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

    —  Carbon savings of between 2 and 5.6 MtC p.a.[37],[38]. One measure alone—replacing all suitable oil-fired boilers with biomass alternatives—could 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 market—in respect of both function and value.

OUTLINE STRUCTURE

Generic Requirements

Certificate-Based

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

    —  Credits should take the form of 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 parties—a "Buy-Out Price". To deliver a real incentive to supply this should be set at a level that exceeds by a significant margin the expected costs of supply of renewable heat.

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

  Over the long-term prices should migrate towards a stable carbon price, in parallel with the similar migration of incentives under related measures. Differentials in the rate of Climate Change Levy provide a potential precedence:

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

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

Administration

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

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

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

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

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

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

    —  Table 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 1012.5 15
Electricity0.11569 92116139
Electricity—Grid Average0.115 6992115 139
Electricity—Grid Average/New Build* 0.1555168 84101
Gas0.054159 212265318
Mains Gas0.053163 217271325
Bottled Gas0.064132 175219263
Fuel Oil0.076109 145181217
Burning Oil0.072115 153191229
Gas Oil0.073113 151189226
Domestic Oil0.072115 153191229
Non-Domestic Oil0.072 115153191 229
Heating Oil0.074112 150187224
Heat from boilers—waste0.007 8591,1461,432 1,719


  Source: ODPM, BRE

  *Average of marginal carbon intensity and plant built or avoided 2005-2010

Table 2

COMPARISON OF CARBON ABATEMENT COSTS
MeasureCost (£/tC) Source
Low High
Renewables Obligation183 513NAO/Oxera
Renewables Obligation 175DEFRA
RTFOslight -ve 350DfT
Social Cost of Carbon35 140DEFRA
Heat Incentive @ £10/MWh70 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
20102015 20202010 201520202010 20152020
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


 
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