APPENDIX 67
Memorandum by Jim Watson[45],
Raphael Sauter and Markku Lehtonen Sussex Energy Group
ABOUT THE
SUSSEX ENERGY
GROUP
There is growing awareness that a transition
to a sustainable energy economy is one of the main challenges
facing us in the 21st Century. Although climate change is a significant
factor, there are many other reasons why we need to address the
energy transition, including security of supply, fuel poverty
and the attractions of innovations such as renewable energy resources,
distributed generation and combined heat and power. Critically,
the energy transition needs to be designed in such a way that
maximises economic efficiency. An effective response requires
technical ingenuity, behavioural change and virtually unprecedented
political commitment. The complexities and uncertainties involved
are similarly great.
These are the challenges that the Sussex Energy
Group is addressing. We undertake academically excellent and inter-disciplinary
research that is also centrally relevant to the needs of policy-makers
and practitioners. We pursue these questions in close interaction
with a diverse group of those who will need to make the changes
happen. We are supported through a five-year award from the Economic
and Social Research Council from April 2005, but also have funding
from a diverse array of other sources.
Members of the Sussex Energy Group have been
conducting research on distributed generation since the late 1990s.
This has included collaborative projects funded by the Tyndall
Centre for Climate Change Research on the implications of the
2010 targets for renewables and combined heat and power (CHP)
for the electricity network, and on the security of decarbonised
electricity systems in 2050. Over the last two years, the Sussex
Energy Group has been working with Southampton University and
Imperial College London on "Unlocking the Power House".
This project has explored the technical, economic and policy challenges
of micro-generation.
SCOPE OF
EVIDENCE
The extension of the Committee's current inquiry
to cover micro-generation and other forms of distributed generation
is timely and welcome. In line with the Committee's terms of reference,
this submission focuses on: "the capacity of micro-generation
and other forms of distributed generation to meet a substantial
proportion of UK electricity demand in the medium and long-term".
The submission is divided into two further sections. The first
explores the potential contribution of distributed generation
in the UK. The second critically examines government policies
to help realise this potential, with a particular focus on further
measures that could be put in place to support micro-generation.
Throughout, this submission uses a definition
of distributed generation that is commonly used in the UK—ie
generation that is connected to the local distribution network
rather than the high-voltage transmission grid. This definition
is different to that used in some other countries. It is important
to note that distributed generation is not synonymous with renewable
generation and combined heat and power (CHP). This is because
some of these sources are deployed at a relatively large scale.
Examples include large offshore wind farms and large industrial
CHP installations. Micro-generation is defined as energy generation
at the individual household level.
THE POTENTIAL
FOR DISTRIBUTED
GENERATION
Distributed generation has been regarded as
a way of helping the UK meet a number of energy policy goals for
many years. The deployment of renewable energy sources and combined
heat and power (CHP) can help mitigate carbon emissions, reduce
transmission losses and improve some dimensions of energy security45[46].
These potential benefits have provided a rationale for government
policies to promote these options. Targets exist for the deployment
of renewables so that they generate 15% of electricity by 2015,
and for the expansion of CHP capacity to 10GW by 2010. The Energy
Review proposes that the Renewables Obligation should be further
expanded to increase the deployment of renewables to 20% of electricity
supplied.
More recently, interest has grown in one of
the most radical manifestations of distributed generation. The
possibility of micro-generation in individual homes has captured
the imagination of consumers, energy companies and all of the
major political parties. If it catches on, micro-generation could
fundamentally change the relationship between energy companies
and consumers. By blurring the traditional boundary between energy
supply and demand, micro generation technologies present utilities,
regulators, consumers and equipment suppliers with a new set of
challenges. Here too, government has intervened with a range of
policies to promote micro-generation including a Microgeneration
Strategy and support for the Climate Change and Sustainable Energy
Act.
The present installed capacity of distributed
generation was estimated at 13,310 MW at the end of 2005 (Econnect,
2006), providing less than 10% of our electricity generation (DTI,
2006a). Within this, the contribution of micro-generation is negligible.
Most micro-generation installations currently operating in the
UK generate heat rather than electricity. According to the DTI
(DTI, 2006b), there were 82,000 installations in the UK in early
2006, 78,000 of which are solar thermal systems for the supply
of hot water.
In comparison with this modest contribution
to the current energy system, the potential for distributed generation
in the UK is considerable. Long-term scenarios developed by a
number of research groups have explored radical futures that turn
this picture on its head. Within these, central electricity generation
often has a relatively small role to play.
For example, work by the Tyndall Centre in which
the Sussex Energy Group participated explored the electricity
system implications of the original Royal Commission on Environmental
Pollution scenarios (eg Watson et al, 2004). These assume a 60%
cut in UK carbon emissions by 2050. The Royal Commission produced
four scenarios, two of which exclude the use of nuclear power
or baseload fossil-fuel power stations to meet demand. Within
these two scenarios, the majority of demand for electricity and
some demand for heat is met from renewables and CHP including
significant contributions from distributed sources. Fossil generation
is only used to cover peaks in demand and to provide backup for
variable renewables such as wind power.
The Tyndall analysis focused on the extent to
which these scenarios would allow electricity demand to be met
throughout the typical day, month and year. The results show that
those scenarios that exclude nuclear or fossil baseload capacity
would be more secure than those that are based on these sources.
This does not necessarily mean that distributed energy futures
are inherently more secure. However, it does indicate that power
systems that include a large expansion of distributed generation
can deliver large emissions reductions whilst operating at least
as securely as centralised systems.
Another set of scenarios developed by the Supergen
research consortium includes contributions from renewable sources
of between 10% and 80% (Elders et al., 2006). Traditional centralised
electricity generation varies from 75% to zero in these scenarios,
with the difference being met from CHP. There is a particular
emphasis here on the location of generation sources and the requirements
for transmission and distribution infrastructure as well as storage
technologies to balance supply and demand. The scenarios are exploratory
and therefore do not include a detailed analysis of technical
feasibility. Interestingly, the authors avoided exploring what
they see as more radical scenarios since these were not thought
to be likely to occur in practice.
Some micro-generation technologies were included
in these two scenario exercises whilst others were not. A more
comprehensive analysis of their potential was completed in 2005
by the Energy Saving Trust (EST, 2005). This analysis modelled
the possible diffusion of a range of micro-generation technologies
for electricity and heat generation in the UK using experience
curves. These estimate the potential cost reductions that might
be achieved as more micro-generation technologies are produced
and installed. This in turn, makes the technologies more economically
attractive. Whilst this is an established methodology, the results
are subject to large uncertainties and depend on the assumptions
made about the relationship between deployment rates and cost
reductions. They are also contingent on the implementation of
a range of incentives for micro-generation deployment. The report
concludes that micro-generation could meet 30-40% of current UK
electricity demand by 2050 and achieve a 15% cut in carbon emissions
from households.
The report also analyses the electricity network
impacts of widespread micro-generation deployment, and concludes
that these will be initially small. This view is supported by
the results of a previous study for the DTI by Mott MacDonald
(2004). As deployment increases, the need for network modifications
to accommodate micro-generation will not be universal and will
depend on local circumstances. Crucially, the analysis suggests
that there is no fundamental technical barrier to this expansion,
though the costs may be significant in some cases. An analysis
of future network technologies for the Energy Review goes further
(Strbac et al, 2006). It concludes that the deployment of large
numbers of micro-generation technologies could have significant
network benefits in some circumstances due to reductions in line
losses.
Whilst the feasibility of decentralised scenarios
for UK energy provision require considerable further analysis,
the evidence to date shows that the potential for distributed
generation is very large. Furthermore, a radical shift in this
direction would be technically feasible over the timescales envisaged.
Recent advances in information, communication and control technologies
have made it more possible for this to be realised. However, further
developments are necessary to integrate thousands if not millions
of generation sources rather than the several dozen we have today
(Strbac et al, 2006).
There is also scope for an increasing inter-relationship
between developments in electricity systems and those in other
areas such as heat and transport. The simultaneous generation
of heat and electricity in CHP plants is already emphasised by
many scenarios—partly because this option is under-developed
in the UK when compared to other northern European countries such
as Denmark and the Netherlands.
The demand for energy for transport could also
be partly met from distributed sources. Some analysts have assessed
the potential for "plug in hybrids" (Lemoine et al,
2006), a new generation of petrol-electric cars that could be
recharged routinely when parked at home. These could be configured
to use surplus micro-generated electricity that is not required
elsewhere in the home. Looking further advocates of hydrogen see
electrolysis by decentralised renewables or CHP as one of a number
of routes for production of this energy carrier. Of course, a
range of technical challenges will need to be overcome before
either advanced hybrids or hydrogen vehicles can be diffused on
a large scale. Questions also remain about the circumstances under
which these will be more sustainable than the transport options
we have now.
REALISING THE
POTENTIAL: THE
CASE OF
MICRO-GENERATION[47]
Whilst policies to promote the deployment of
distributed generation have been in place for well over 15 years,
renewable energy and CHP have not expanded significantly. Electricity
market rules, planning, poor economics and existing network regulations
have all contributed to slow progress towards the government's
targets. A common issue is that many existing policies have been
designed for the traditional centralised energy system. Important
changes have been made to speed up deployment rates. But as the
Energy Review acknowledges, further policy reforms in areas such
as planning and the renewables support are necessary.
Whilst micro-generation is a more recent development,
it also confronts regulations, institutions and practices that
are not designed for energy generation on a small scale. The generation
of electricity and heat inside the home is challenging for an
energy system that is used to dealing with passive energy consumers.
Investment in micro-generation under current UK conditions is
not particularly attractive for many companies or households.
Up-front costs are significant and payback times are long. Of
course, some consumers will continue to invest despite cost barriers
whilst others would not do so even if payback times were much
shorter. This and other barriers to the uptake of domestic micro-generation
technologies have been discussed extensively (eg DTI, 2006b).
Five main areas can be distinguished: costs, technology, regulation,
information and "bounded rationality".
Costs. Some micro-generation technologies
are still expensive. This is particularly true for solar photovoltaic
(PV) technology with upfront costs of around £9,000 for a
1.5kW array. It can however be expected that prices will fall
for all these technologies with an increased market share of these
technologies as a consequence of economies of scale (Energy Saving
Trust, 2005). A further economic barrier exists since there is
currently no obligation for suppliers to pay an "export reward"
for micro-generated electricity exported to the grid. While some
suppliers pay a relatively good price for exports, they do so
on a voluntary basis.
Technology. Since many micro-generation
technologies are new—at least to the household market in
the UK—consumers may be discouraged by the potential risks
of investment. Despite its high costs, solar PV is an established
technology that has a track record. The other two technologies
considered in this report are more novel and their long-term technical
performance has not yet been proven. Poor performance would negatively
impact their economics and their contribution to carbon emissions
reduction.
Regulation. Various regulatory barriers
significantly inhibit the diffusion of micro-generation technologies
in the UK. Examples include planning regulations, the rules governing
the Renewables Obligation (RO) and the distribution network regulations.
Homeowners who want to install a micro-wind turbine need a planning
permission from their local council which adds hassle and cost.
Access to Renewables Obligation Certificates (ROCs) for microgenerators
is complex since the system is primarily designed to benefit large
renewable energy schemes. Distribution network regulations mean
that the income of Distribution Network Operators (DNOs) is based
on the throughput of electricity in their network. A significant
expansion of micro-generation might reduce this income and therefore
be discouraged by these companies.
Information and bounded rationality.
The lack of sufficient information and knowledge can prevent people
from considering micro-generation as an option. There is a general
lack of reliable advice that takes into account the individual,
site-specific circumstances of homeowners. The importance of advice
is illustrated by successful experience. A recent survey of consumers
with solar hot water systems at SPRU showed that the advice and
support of a local energy agency was the single most important
factor in their decisions (Schulz, 2006). A related issue is the
bounded rationality of consumers. Human decision-making is subject
to constraints on people's time, attention, resources and ability
to process information. Consequently many decisions are unlikely
to be made based on exhaustive economic and technical appraisals,
but are embedded in routines and rules of thumb.
Many of these barriers are now being addressed—either
through the government's Microgeneration Strategy and wider Energy
Review, or though the Climate Change and Sustainable Energy Act
that completed its passage through Parliament in June this year.
These include a number of measures:
— Work to simplify the process required
to receive ROCs for micro-generated electricity.
— A review of the planning regulations.
The objective is to give micro-generation permitted development
status that is similar to that granted to satellite dishes.
— Suppliers are expected to develop
and implement a reward scheme for micro-generated electricity
exported to the grid within a year of the passage of the Climate
Change and Sustainable Energy Act. If they do not, the government
can impose a scheme.
— An accreditation scheme that will
include products, installers and manufacturers. This aims to provide
consumers with trustworthy information on microgeneration.
— Consideration of national targets
by the government (but no obligation to implement these). This
is accompanied by guidance for local authorities to integrate
targets for micro-generation in new developments where appropriate.
— A DTI sponsored field trial on smart
metering.
— Promotion of community energy projects.
— A review of incentives and barriers
for decentralised energy generation carried out by the government
and Ofgem.
— The extension of the Energy Efficiency
Commitment to all micro-generation technologies, and modifications
to it so that it is based on carbon savings instead of energy
savings.
Whilst these initiatives will improve the attractiveness
of micro-generation for consumers and energy companies, they do
not go far enough. The Energy Review pledges to implement the
Microgeneration Strategy "aggressively" (DTI, 2006a).
But it underplays the scope for more fundamental thinking about
policy and regulatory incentives for micro-generation. It also
neglects broader strategies to help consumers reduce their energy
demand, for example through the promotion of energy service companies
and the installation of smart metering.
As policies for micro-generation are developed
and implemented, it is essential that they facilitate a diversity
of routes for micro-generation deployment. Incentives for both
householders and energy companies are important here. Micro-generation
could be deployed in a variety of ways—by individual consumers
wishing to assert their independence from established energy systems;
by incumbent energy companies that shift their focus towards the
delivery of energy services rather than energy supply; or by local
developments that implement decentralised microgrids.
These policies also need to take into account
the wide variations in the performance of micro-generation technologies.
It is well known that solar PV's output varies with orientation—with
south facing arrays performing best. Stirling engine micro-CHP
units are more economic in large and/or inefficient houses that
have high heat demand. Our calculations show that micro-wind technology
is likely to be most economic in areas with an excellent wind
resource such as rural or seaside locations—if installed
in many urban areas, its performance will be poor. They also show
that all of these technologies are likely to reduce CO2
emissions significantly. However, uncertainties remain about the
extent of these reductions for the micro-wind and micro-CHP due
to a lack of operational experience. This variability and uncertainty
does not mean that support should only be offered for the "best"
locations. However, it suggests that incentives should reflect
the specific pros and cons of investment in different locations.
Our economic analysis suggests that current
incentives miss opportunities to level the playing field for micro-generation
and household energy saving investments. These investments are
currently at a disadvantage when compared to investment in large-scale
energy supply infrastructure and some industrial energy efficiency
measures. Removing anomalies in the fiscal system and the market
settlement system for electricity might partly obviate the need
for specific subsidies such as capital grants from the current
Low Carbon Buildings Programme.
Levelling the playing field for micro-generation
in these two areas can significantly reduce payback times. Crucially,
they combine lower up-front costs and financial rewards for exported
power. This is achieved by allowing consumers and energy companies
to offset investment costs against their tax bill, and by extending
the settlement system so that exported electricity can be sold
for the real-time market price. Whilst both reforms come with
significant costs attached, they are potentially more accurate
and durable than the alternatives. Furthermore, they also open
up possibilities for wider engagement with consumers. These could
provide direct incentives for consumers to change their patterns
of energy consumption and reduce demand.
The potential for a transition from energy supply
to the provision of energy services has been discussed for many
years. But a market for these services has yet to emerge in the
domestic sector. Whilst Ministers trailed the Energy Review with
promises to reform energy regulation to encourage this market
(eg Darling, 2006), there is no detail on how this will be achieved
in the Review itself. The next phase of the Energy Efficiency
Commitment (EEC) provides an ideal opportunity to assess the feasibility
of such reforms. Instead of continuing EEC for a further phase
to 2011, the government and regulator should consider early implementation
of demand reduction obligation on energy suppliers. This would
give them a direct incentive to offer a range of services to consumers—from
energy efficient lighting to micro-generation.
Going further still, the advent of micro-generation
has implications for the development of energy and related infrastructure.
The design of infrastructure such as buildings and energy networks
has a direct impact on demand patterns and the scope for policy
intervention. One key area for action is metering. Smarter designs
of meter are now available that can measure real-time imports
and exports and can be linked to display systems for consumer
feedback. Research has shown that such feedback can lead to reductions
in demand through behaviour change (eg Darby, 2006). Micro-generation
presents an ideal opportunity to kick-start the modernisation
of the UK's meter stock. Smart meters should be mandatory for
new micro-generation installations. The case for a national roll
out should urgently be reviewed too. Ofgem and the DTI's recent
caution on the case for such a roll out misses the point. Smart
meters should not be seen as an optional extra that some consumers
might wish to buy, but as an essential element in a reoriented
energy market based on services rather than supply.
There are significant opportunities to build
micro-generation into new construction developments. The Climate
Change and Sustainable Energy Act is important since it encourages
local authorities to set targets for this. In addition, it will
be desirable to include flexible service areas and space (eg as
cellars) in new buildings so that future developments in micro-generation
and home energy automation can be accommodated. If sustainable
visions for larger developments such as Thames Gateway are to
be realised, strong intervention will be required from all levels
of government. Otherwise an opportunity for the implementation
of more pervasive local energy systems based on micro-grids could
be lost.
The pioneering example of Woking has demonstrated
that this kind of vision can be achieved. Replication on a larger
scale will require energy network innovation as well as housing
innovation. Distribution Network Operators (DNOs) should be encouraged
to develop and manage more active networks that are capable of
dealing with large numbers of distributed generators as well as
traditional consumers. Again, the regulatory system has a part
to play. Ofgem has introduced a scheme known as Registered Power
Zones that allows DNOs to recover some of the costs of innovative
network experiments. So far, only three of these zones have been
registered so far, two of which do not include generation sources
(Woodman, 2006).
The current rules are too restrictive to make
innovation economically viable, particularly for firms that have
run down their innovative capacity over the past decade or so.
The forthcoming review of the Registered Power Zone scheme presents
an opportunity for Ofgem to relax the rules governing network
innovation. This will be important for the development of new
network concepts that help to integrate large numbers of micro-generators
into housing developments—both existing and new. These could
also demonstrate how distributed generation at a variety of scales
can be integrated into the intelligent networks of the future.
REFERENCES
Darby, 2006. The effectiveness of feedback on energy
consumption. A review for Defra of the literature on metering,
billing and direct displays.
Darling, 2006. Speech to the Fabian Society, 5 June.
DTI, 2006a, The Energy Challenge: Energy Review Report
2006, The Department of Trade and Industry, London.
DTI, 2006b. Our Energy Challenge: Microgeneration
Strategy: Power from the People. The Department of Trade and Industry,
London.
Econnect, 2006. Accommodating Distributed Generation;
Report to the DTI to support the Energy Review.
Elders, I, Ault, G, Galloway, S, McDonald, J, Khler,
J, Leach, M, and Lampaditou, E, 2006, Electricity Network Scenarios
for Great Britain in 2050, Electricity Policy Research Group,
University of Cambridge.
Energy Saving Trust, 2005. Potential for Microgeneration:
Study and Analysis. Report to the DTI, November.
Lemoine, D, Kammen, DM and Farrell, A, 2006. Effects
of Plug-in Hybrid Electric Vehicles in California Energy Markets.
Energy and Resources Group, UC Berkeley, CA, USA.
Mott MacDonald, 2004. System Integration of Additional
Micro-generation. Report to the DTI.
Schulz, K, 2006. Micro-generation technology: factors
influencing the purchase decision for solar thermal systems. SPRU,
University of Sussex. Unpublished MSc thesis, August.
Strbac, G, Jenkins, N, and Green, T, 2006. Future
Network Technologies. Report to DTI to support the Energy Review,
April.
Sussex Energy Group, 2006. Response to the UK Governments
2006 Energy Review. SPRU, University of Sussex, April.
Watson, J et al, 2006. Unlocking the Power House:
Policy and System Change for Domestic Micro-generation in the
UK. Final Project Report. University of Sussex, October.
Watson, J, Strbac, G and Nedic, D, 2004. Decarbonisation
and Electricity System Security: Scenarios for the UK in 2050.
Paper for the 24th USAEE/IAEE North American Conference, Washington,
DC, 8-10 July.
Woodman, B, 2006. Ofgem, distributed generation and
innovation: recent initiatives, BIEE/UKERC Academic Conference,
Oxford, 20-21 September.
45 Contact details: Sussex Energy Group, SPRU, Freeman
Centre, University of Sussex, Brighton, East Sussex, BN1 9QE;
Email. w.j.watson@sussex.ac.uk; Tel. 01273 873539. Back
46
The enhancement of energy security is often conflated with the
reduction of fossil fuel imports in current debates (Sussex Energy
Group, 2006). Renewables and CHP help achieve this objective,
but their contribution to other dimensions of energy security
such as electricity system reliability or the diversity of imported
fossil fuel sources is much less clear. Back
47
This section is based on the conclusions of the Unlocking the
Power House project. For further details of the analysis that
led to these conclusions are available in the full report (Watson
et al, 2006). Back
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