Examination of Witnesses (Questions 140-159)
MICROPOWER COUNCIL
23 OCTOBER 2006
Q140 Mr Bone: Can I move on to carbon
savings? Your submission argues that microgenerators should receive
the full value of the carbon savings they create in addition to
a fair price for their surplus electricity. How do you think that
should be done?
Mr Sowden: In general terms we
do not have a long term price for carbon. I am sure you have heard
that from other submissions in a wider context. In specific terms,
there are policy instruments which are designed partly to reduce
carbon but there are other policy objectives as well. One of these
is the Renewables Obligation. It is impractical and not cost effective
for customers installing microgeneration technologies to claim
the so-called ROCs, Renewable Obligation Certificates, to which
they are entitled. Just as an example, we talked about the introduction
into the mass market by major DIY chains of wind turbines. That
type of wind turbine will generate around one ROC per year. That
is worth £40-£50 per year, so if that were available
that is potentially quite a useful additional benefit that the
customer could claim, and they are entitled to it. The difficulty
is that the administration that surrounds the way in which people
have to claim ROCs stacks up transaction cost upon transaction
cost and erodes all of that value. For example, an energy supplier
would have to remind the customer to read the meter—which
has to be done, incidentally, in an 11-day window right in the
middle of the Easter holidays, not very practical for the majority
of household consumers—and if the energy supplier has to
remind the consumer and then remind them again it is probably
going to cost an energy supplier £20 or £30 each time
they send that reminder out for something that is only worth £40
or £50 a year anyway.
Q141 Mr Bone: What we have heard
in some evidence overseas is that the way to encourage microgeneration
is that for the surplus electricity fed back into the grid you
get a premium price for, and that would be very simple to do,
but we do not seem to be doing that at the moment.
Mr Sowden: No. This is the so-called
feed-in tariff that exists in Germany and now in France as well
and in other European Union Member States. We need to separate
the level of de facto subsidy from the delivery mechanism
for that subsidy, and one of the features in particular for solar
photo voltaics in Germany, and now in France, is that the level
of government support that is given, never mind the method through
which you claim it, is substantially higher than it is in the
UK, and that is a matter of political choice. The German Government
has decided to back PV to a much greater extent than the UK Government.
The delivery mechanism is also important. The feed-in tariffs
certainly have their merits in terms of simplicity for the customer,
allowing the customer to capture more of that value. I agree:
the structure is helpful but let us recognise that the subsidy
levels are also significantly different.
Q142 Mr Bone: If it is purely market-driven
economics you would never put PV in because it has 120 years payback,
I am told, 29 years for a small wind turbine and 80 years for
your solar thermal heat. You just would not do it on pure economics,
would you?
Mr Sowden: I do not know where
those figures come from if I am truly honest.
Q143 Mr Bone: The DTI's consultation
on its Microgeneration Strategy.
Mr Schofield: In the Sunday
Times yesterday there was a list of payback times and for
solar thermal, the ones that we use, it was 13 years.
Q144 Mr Bone: Thirteen?
Mr Schofield: Yes.
Q145 Mr Bone: It says 80.
Mr Schofield: Yes, so a bit of
a difference. It is a real hot potato, payback. People only really
want to be engaged with these technologies if there is an issue
of payback and yet when it is part of your central heating system
it is wiser—and I would say this because we are manufacturers—to
separate out the capital cost. You have to pay a certain amount
for this technology to be installed but once it is installed,
solar thermal can give you between 50 and 70% payback on hot water
per year, and that is a DTI figure, and that is quite realistic
then. If you look at payback and technologies, you do not ever
question what the payback is on other things like the front door
or the skirting board. You do not ask the question what the payback
is on those technologies. We seem to be very hung up on this and
it does seem to be an issue to the market that people are only
engaging these on the assumption that they will get a payback
on them. However, what we are seeing is that that is not necessarily
why people are engaging in these technologies. Solar has the biggest
take-up of these technologies for one group of householders in
particular, and that is the grey/silver market, people who have
their own property and perhaps have an eye on retirement, invest
now and want to stay in that property when they retire and that
is when the running costs then come into play. These figures are
very wild and differing and I do not think they are truly accurate.
We are doing a number of test houses to try and get some accurate,
realistic figures in normal households.
Q146 Chairman: Can I just push you
a bit on this payback issue? When I came to Worcester Bosch a
few weeks ago you were giving figures for solar hot water of 17,
18, 19 years. Now in the Sunday Times comes a figure of
13 years, whereas the Government is saying 80 years. This is a
huge difference. I am a cynic. I think the only thing that will
encourage people is if they think there is money in it for them,
so why has the Government got 80 years in its Microgeneration
Strategy?
Mr Sowden: Can I tackle that directly
from the money point of view because I think it is tremendously
important. If we are serious about getting micropower technologies
from the niche market that they are currently in into a mass market
context, making a compelling economic case to the consumer is
important and we recognise that. These numbers that were quoted
in I think, the Energy Saving Trust research that supported the
Microgeneration Strategy were on a worst case scenario and when
you look at the implementation of a number of support mechanisms
that are currently on the table of stated Government policy they
start to shorten significantly. Let me give you a couple of examples
just to bring this debate to life. Let us take the example that
has received quite a lot of attention recently, micro-wind turbines
sold through B&Q at £1,495, I think it is, including
installation. Provided that you are in a decent windy location,
you are looking at energy savings of £100, £150 per
year, and if you are in a really good wind location it could be
even higher than that. That sounds like a ten-year payback, but
once you take into account the fact that you are entitled to claim
a grant of £478, I think it is, once we tackle the issue
that I raised before of access to ROCs, which you are entitled
to on a cost effective basis, if you look at capitalising that
£50 a year revenue stream and try and get an up-front value
for it, even if you discount it, that is worth another £300
or £400, and we are only at the very early stages in the
market while we have got a relatively inefficient installation
infrastructure and we are in the very early stages of bringing
the products into the market. They are not being mass produced
yet, so even on today's numbers, once you apply the policy support
mechanisms that are in place or replace those with scale economies
in manufacturing and installation, you are getting down to the
realms of five, six, seven-year simple payback and that does not
take into account any kind of what we call the gadget factor:
why do people spend £1,500 or £2,000 on a plasma screen
TV? People want these just because of what they are as well as
for that compelling economic case.
Q147 Chairman: The Government's figures
are wrong; that is the bottom line? Eighty years is an over-long
period for payback on solar systems?
Mr Sowden: I would have to take
a look at the basis of that underlying number, but my understanding
is that they picked particular products there. I know that the
solar hot water industry did level some criticism at the analysis
there because they believe that it over-estimated the capital
costs of solar hot water systems in particular, so, with permission,
Chairman, I think that is a question I would like to come back
to the Committee on perhaps in writing.
Q148 Chairman: It is almost an order
of magnitude difference between your estimates and the Government's.
Mr Sowden: Yes. Even for solar
hot water, for the kinds of prices that Worcester Bosch systems
are installed for, realistically you are looking at something
in the region now of 10 to 15 years, but let us bear in mind that
we do not have a mass market installation infrastructure in this
country, people have to put up scaffolds instead of investing
in cherry-pickers to put them up. The installation part of the
industry is relatively immature and relatively inefficient, so
there is still scope for cost reductions and therefore for that
equation to get better.
Q149 Mr Wright: The large-scale wind
technology that we are coming to depend on we get from Danish
technology rather than UK technology. When we are talking about
microgeneration what is the current UK manufacturing capacity
for developing microgeneration?
Mr Schofield: As far as the products
that we are concerned with, the thermal ground source heat pumps,
being part of Bosch, they are established technologies. Bosch
owns a company in Sweden called IVT who are the European market
leaders in ground source heat pumps. They sell 50,000 to 60,000
a year. In Sweden ground source heat pumps are the norm; that
is how people heat their homes and use hot water. It is just in
the UK that they are regarded as a relatively new and unusual
technology with only round about a thousand systems. In terms
of industry capacity on those technologies, and solar is exactly
the same with an established company in Germany, we can supply
those without any issue whatsoever. The development and manufacturing
of those are well established but they are all imported currently
and if we got the volume up to where we are in boilers—when
we first introduced condensing boilers we imported those from
Germany, but with building regulation changes our factory went
from 3% import to 93% manufacture in Worcester.
Q150 Mr Wright: Do you see it the
same way with microgeneration?
Mr Schofield: Yes. We found that
we could not import enough so, being close to the M5, we decided
to manufacture those at Worcester and that is where we would be
with these technologies if there were to become a mass market.
Q151 Mr Wright: Is that the driving
force, that you cannot import enough to keep up with the demand?
Why not invest in the manufacture now on the basis that there
is going to be more demand?
Mr Schofield: Being an international
group, we have specialist sites in different parts of the world,
but predominantly in Europe, and so with the volumes that currently
exist we are making over a thousand boilers a day in Worcester,
employing 1,800 people, but we are also very pleased with our
sales figures on solar. We have about 20% of a 10% market, so
it is not hard to work out how many of those a year we are selling
now. However, that still does not warrant sufficient investment
to manufacture in the UK. If that were to increase significantly,
and we hope it will, then we would invest in it.
Q152 Mr Wright: Would you not see
it then as a possibility for an export market perhaps? Instead
of the Danes selling their technology to us can we not use the
manufacturing base here to sell it to the Danes or the Swedes?
Mr Schofield: But if the home
market is requiring 40,000 ground source heat pumps and we only
require a thousand, then it is it is obviously more cost effective
to make them in Sweden, but if the volumes turned round then it
might be a possibility. The UK is the largest heating market in
Europe. There are a million and a half boilers sold in the UK:
far and away the largest market. The next biggest is Italy, surprisingly
enough, and that is less than a million. That is what we are good
at and those are predominantly gas. Gas is 84%.
Q153 Mr Wright: Looking into the
future, can you see us expanding the manufacturing base for this
microgeneration?
Mr Schofield: We have a long term
business plan and we see that the current market for gas central
heating boilers will be maintained at that one and a half million
level until about 2015 and then we see these other technologies
taking over.
Q154 Chairman: What about the energy
efficiency of boilers? That is a bit of a problem, is it not?
Mr Schofield: Yes. That is about
unintended consequences really because building regulations changed
in April 2005 and now all boilers should be condensing A or B
technology, the top two bands, but what we have seen is a big
increase in the lesser of those two technologies, B, and so 25%
of all boilers sold now are band B. When legislation was put into
place to improve the efficiency perhaps we did not go far enough
and we should have just said band A. That is perhaps a lesson
to be learned in the future if we look at there being stricter
controls on this. This is with established technologies. This
is with solar and ground source heat pumps. They are up and running
and Dave can talk about the other technologies. Where there are
concerns on capacity they are on the infrastructure. For example,
in relation to ground source heat pumps in Sweden—and Sweden
is not a massively populated country, there are three million
people, I think—every town has its own drilling organisation
and they will come in in a day and drill a hole 100 metres down.
This is where you drop the pipe to take the energy out of the
ground, and then they fit a heat pump and within a couple of days
the job is done. In the UK that type of structure does not exist.
If you want to drill you are talking very limited specialist firms
who are not actually drilling for ground source heat pump technology;
they are really drilling for water, so they are not really geared
up and that is where we have a lack of capacity. That would be
the restriction and we include that with our sales on solar. It
is engaging that winter market, in our case the installer, and
educating them to promote and become more able to supply the skills
and infrastructure to the installer.
Q155 Mr Wright: Do you consider that
the micropower sector is really dependent on the capital grants?
Mr Schofield: Interestingly enough,
because we decided to go down our own route and do our own accreditation
system, it was not put until fairly recently in with the Clear
Skies and the Low Carbon Buildings Programme grant scheme, so
of all those we have sold in the last 12 months the vast majority
have not been grant subsidised; they have been there on their
own merits and someone has gone out after the prices were acceptable
and the take-up has been made. That is with an established product.
With other technology undoubtedly you do need grants to pump-prime
the market. Also, to give a little bit of credibility to these
technologies, if it holds a government grant there is a comfort
factor for the householder that it is supported, it is approved,
it is accepted by the Government; this is a good idea. The government
grant is wider than just the cashback and the subsidy. It does
give greater support and encouragement. Also, on the grants, there
is not just the Low Carbon Buildings Programme; there is also
the EEC with the power supply companies. I think we could do a
lot more there with micro technologies, which is particularly
the bee in my bonnet, and the Chairman touched on renewable heat,
talking about microgeneration, and most people do think that most
of the energy used in their home is on heating and hot water.
About three-quarters of the energy in the home for heating and
hot water at this moment in time is via the boiler. Everyone has
got a boiler.
Mr Sowden: Can I just come in
on this point because it is an important one? The industry and
the Government get themselves into trouble about once every three
years, or more recently in much shorter timescales, because the
money for the grants programmes runs out or what happens after
that programme expires is not made clear by Government at an early
enough stage, and it is therefore very difficult to plan ahead
for businesses because if people think there might be a new grant
scheme round the corner they will put off the decision to go ahead
and they may have gone ahead if there had not been a grant in
the first place. Yes, it is important that there is some pump-priming
for the industry to help it transit from where it is now into
a mass market context, but we need to give some very careful thought
to the design of future grant schemes so that they become market
transforming. If we just continue to provide cash subsidies in
the same way that we have done before without giving any thought
to how that helps the industry to become more self-sustaining,
then we are just going to be in this constant discussion with
the Government every three years, every time there is a comprehensive
spending review, about how much money is on the table next time
round. It is unsatisfactory, and particularly for an industry
which I certainly would like to see get to a scale where the Government
cannot afford to give it grants any more because the numbers are
so great.
Q156 Mr Wright: You talk about the
numbers being so great in terms of a mass market. Do we need to
reduce the cost of microgeneration or do you see technical advance
as necessary to be able to make it more viable?
Mr Sowden: We certainly need to
bring prices down to the sort of price the consumer wants, which
was the point the Chairman made earlier on. At the moment the
grant helps to do that. Scaling up the industry is the thing that
is going to wean the industry off those grants in the longer term,
but do not put grants in the bin at the moment. They are important,
there is an industry out there that values grant programmes but
let us be very careful about the way in which we design them in
the future.
Q157 Mr Wright: In terms of your
company, Mr Schofield, you entered the solar warming and ground
source heat pump market. What motivated you to get into that?
Quite clearly you are saying to us that we are not geared up to
this kind of technology in the UK so there must have been an element
of risk there?
Mr Schofield: Bosch in continental
Europe is very established in other technologies. RWE have a company
on fuel cells, they are looking at micro-combined heat and power.
They have established a company, a different one, that makes solar
panels, which is part of Bosch, called Solar Diamond that has
been running for 30 years. IVT Ground Souce Heat Pumps in Sweden
(which is part of the Bosch Group) is very established. As I say,
they are market leader for ground source heat pumps in Europe.
We have a comfort factor. We can pull on these technologies, put
our brand on them for the UK market. They make biomass pellet
boilers. We have decided not to take that on board because there
is not any infrastructure for pellet boilers in the UK and yet
in Germany and Austria they are very popular but they do not have
the gas network that we do. Only 50% of properties have gas. We
have got a lot of pedigree to fall back on but we do see that
gas is not finite in a domestic situation and we have just moved
into this new era of condensing boilers. We think that is to be
established and we are certainly talking about the next seven
to 10 years. Looking longer term, we believe this market will
grow and we want to be established in that. We want to get in
early and we want to build up our network of an inter-market for
our supply chain. We want to promote this and we have to start
at some point. We are fortunate; we have got a big organisation
and we have taken on sponsorship of Channel Four News in the last
couple of months and are promoting solar heat, so we can put our
money where our mouth is and build this market. We think it is
the future, so we are confident that this is the starting point
of these technologies.
Q158 Chairman: Do you think that
"ground source heat pump" is a phrase that trips easily
off the tongue and explains what it actually is?
Mr Schofield: No; that is a very
valid point, Chairman. In hindsight we would never call a condensing
boiler a condensing boiler. It condensates. People associate condensing
with water running down the inside of windows; it is not a good
term.
Q159 Chairman: It is a recovery boiler.
Mr Schofield: Yes. Boiler is a
wrong term. Boilers do not boil. The last thing you want it to
do is boil.
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