Select Committee on Trade and Industry Written Evidence

APPENDIX 68

Supplementary Memorandum by Jim Watson[48] and Raphael Sauter Sussex Energy Group

  This supplementary memorandum provides additional information in response to questions from Committee members in the oral evidence session on 17 October 2006. It covers three areas. First, the costs of decentralised energy systems. Second, the carbon abatement costs of microgeneration technologies in comparison with other investments in energy supply and demand. Third, the experience of metering heat in individual homes that are part of a district heating scheme.

1.  THE COSTS OF DECENTRALISED ENERGY SYSTEMS

  As we outlined in our oral evidence, the relative costs of centralised and decentralised energy systems are not easy to quantify. There are, however, three factors that should be borne in mind when making this comparison.

—  First, the centralised system has been developed since the early 20th Century. The trend towards progressively larger power plants that lasted until the 1970s was driven by economies of scale; costs per MW of capacity generally fell as unit sizes increased. This trend began to break down in many countries during the 1970s and 1980s due to diminishing returns to scale as technical progress slowed. The advent of smaller more flexible centralised technologies such as the Combined Cycle Gas Turbine (CCGT) meant that individual units no longer needed to be as large as possible to minimise the installed cost per MW.

—  Second, the increasing availability of smaller-scale distributed power generation technologies including many renewables, gas turbines and diesel engines brought with it economies of mass production. Instead of making power generation units as large as possible, suppliers have sought to reduce costs by scaling up production volumes.

—  Third, power systems have always been designed capture economies of system. The interconnection of a diverse range of power sources and consumers in an integrated network can increase flexibility, redundancy and security. For example, more wind power can be integrated securely into the UK (or even European) network if it is geographically dispersed. The shift towards decentralisation means that the scope for such economies of system might increase, though there will also be an increase in complexity. This is particularly the case if energy demand can be integrated into system operation with the use of information, communication and control technologies.

  We have not carried out a quantitative analysis of the economics of decentralisation versus the economics of continued centralisation. One study that the Committee might find useful is the analysis carried out for Greenpeace by the World Alliance for Sustainable Energy (WADE)[49]. WADE's report concludes that a decentralised power system would be cheaper than a continued commitment to a centralised system. This is due to the efficiency gains from using combined heat and power plants and a reduction in transmission and distribution costs.

  Whilst this conclusion is plausible and is backed up by analysis, the approach used by WADE is rather static. It does not appear to give any weight to the costs of the transition from our current centralised system to the decentralised future they envisage. It is not clear how significant these costs might be. They may be outweighed in the medium to long term by the gains WADE identify.

  These transition costs could arise in several ways. The redesign of networks to integrate many more distributed power plants would not be carried out over night. There may be a period in which network infrastructure would have to support both the old and the new system simultaneously. Some existing assets might become "stranded" in the process if investment in them was made on the basis of the centralised system. Network companies would also need to develop new skills and capabilities to support decentralisation—again, something that might require significant investment. Similarly, markets and regulations would need to adjust—sometimes extensively—to ensure that the system as a whole continues to operate smoothly.

2.  COSTS OF CARBON ABATEMENT OPTIONS

  In our oral evidence, we discussed the potential for carbon savings from microgeneration technologies. We were asked to provide further information on the costs of these technologies per tonne of carbon saved in comparison with other investment options in energy supply or demand reduction.

  The analysis conducted by government and consultants for the 2003 Energy White paper included a number of estimates of technology-specific carbon abatement costs. These are summarised in a supplementary annex to the 2003 Energy White Paper[50]. The annex includes lists of abatement costs (in £/tonne of carbon saved) developed by the Interdepartmental Analysts Group, the team that conducted the Cabinet Office Energy Review, and Future Energy Solutions. The figures developed in each case are for the medium to long term future and focus on likely abatement costs in 2020, 2025 or 2050. No figures for current abatement costs are given. Some of these estimated costs for 2020-25 are shown in table 1.

  We have recently calculated ranges of abatement costs for three microgeneration technologies—solar PV, micro-wind and micro combined heat and power (micro-CHP). These calculations show that each technology could reduce the CO₂ emissions for an average UK household by at least 10 to 15%. This is based on a comparison with the average UK electricity grid emissions (including line losses) as outlined in the guidance document to Part L of the Building Regulations (0.568kg CO₂/kWh). We did not, however, include potential additional carbon savings occurring from changing energy consumption patterns as a result of microgeneration installation. In addition, no discount rate was applied to the calculations due the difficulties of choosing a plausible figure for consumer decision making.

Table 1

COSTS OF ABATEMENT OPTIONS IN (£/TONNE OF CARBON SAVED)

	Future Energy Solutions (2020)	Cabinet Office (2020)	IAG (2025)
Energy efficiency
Domestic	—	-300-50	—
Services	—	-260-50	—
Industry	—	-80-30	—
Electricity generation
Onshore wind	-40-130	-80-50	0-50
Offshore wind	160-480	-30-150	0-100
Energy crops	135-185	70-200	100-250
Muni waste/landfill gas	—	—	-50-70
Nuclear	105-180	70-200	70-200
Wave	120-430	70-450	—
Tidal	250-690		—
Photovoltaics	2,200-3,200	520-1,250	—
Super-critical coal retrofit/sequestration	160-200		70-100
CCGT sequestration	180-200	80-280	—
New coal sequestration	460-560		—
Road transport
Hybrid ICE	380-420	—	—
Hydrogen fuel cell	470-550	—	—
Biodiesel	290-380	—	—

  The precise carbon savings from microgeneration technologies depends on a number of factors such as location. Important influences include the wind speed (for micro-wind), the orientation of the house (for micro-wind and solar PV) and the heat demand of the house (for micro-CHP).

  These variations in performance mean that the costs per tonne of carbon saved also vary. In the case of micro CHP, we expect costs per tonne of carbon saved of between £230 and £350. This assumes that homes have an average heat demand and that a micro-CHP unit costs £1,500 more than a replacement condensing boiler. For micro wind, costs per tonne of carbon saved are likely to be between £560 and £740 at good wind sites. Costs would be much higher at poor wind sites where annual generation is significantly less than 1000kWh. For a south-facing PV array, we expect—under our cost assumptions—costs per tonne of carbon saved of around £1,800 Significant cost reductions can be expected for solar PV if market demand continues to grow as in the last decade.

  Only one of these technologies, solar PV, features in the government figures published with the 2003 Energy White Paper. Our figure for PV is at the high end of the ranges shown in table 1. This can be explained by the expected cost falls included in government calculations for 2020 or 2025. The results for the other two microgeneration technologies shows that micro-CHP is the lowest cost abatement option of the three, with micro-wind somewhere in between micro-CHP and solar PV.

  Comparing our microgeneration results with the official figures in Table 1 is problematic for two main reasons. First, it is not clear what baseline the government figures have used to calculate carbon savings. Without knowing this, it is not possible to make a direct comparison. Second, the official figures include anticipated cost reductions over the next 15-20 years whilst our calculations use current costs. Nevertheless, the figures show—as expected—that energy efficiency measures have the lowest abatement costs. Furthermore, they suggest that micro-CHP and micro-wind costs are in a similar range to other renewable or low carbon supply options.

3.  METERING HEAT

  The use of heat in individual dwellings that are connected to a district heating network can be measured individually. The transcript of evidence from the witnesses who appeared after us (the Renewable Energy Association) shows that systems to measure heat use in this way are in operation in the UK already[51].

November 2006

---

---

48   Contact details: Sussex Energy Group, SPRU, Freeman Centre, University of Sussex, Brighton, East Sussex, BN1 9QE; Email. [e-mail]; Tel. [phone]. Back

49   See http://www.localpower.org/documents_pub/reporto_greenpeace_modelrun.pdf. Back

50   DTI (2003) Our Energy Future: Creating a Low Carbon Economy. Supplementary Annex 1. Available at: http://www.dti.gov.uk/files/file21214.pdf Back

51   Oral evidence from Renewable Energy Association, uncorrected transcript, response to Q118. Back

---

Prepared 30 January 2007