Memorandum submitted by the Co-operative Group (FP 51)

 

Executive Summary

 

The Co-operative Group believes strongly in decentralised energy systems and sees smaller scale embedded generation as playing an important role in the future of the UK's generation mix. The Co-operative Bank has invested significantly (over 100m) in CHP, district heating and affordable warmth schemes and is keen to expand its work within this area. Decentralised energy systems will help tackle carbon reduction, energy security issues as well as fuel poverty.

 

Delivery at community level can be greatly assisted by the strength of the co‑operative model. With the right levels of support funding, community energy co-operatives are able to both involve individuals and deliver real change. The co-operative model holds many benefits for its members, can create a mechanism to pay back initial grants thereby reducing lender risk and can be very cost effective, highly innovative and flexible.

 

Fuel poverty can only truly be tackled by delivering renewable heat and energy savings. In the UK this requires a sharp increase in the understanding of how the technologies work, how they are installed and delivered and as importantly how they are procured (especially by Government and Local Authorities who have a key role to play). As such, investment is needed in the further and higher education sectors with additional incentives to encourage people to undertake training through apprenticeships and vocational study.

 

There is a role for financial incentives and alternative approaches to individual up-front householder investment in order to drive swift changes in energy usage. The Co-operative Group believes that it is at a community scale where there exists a cost effective investment market that can deliver high energy savings. The Co-operative Group supports the proposed Renewable Heat Incentive (RHI) but believes that it should be developed more quickly than at present.

 

The Co-operative Group sees a vital role for Energy Services Companies ("ESCOs") to help fund new heat and energy saving schemes. ESCOs provide a bridge for developers and local authorities to help deliver upon planning requirements in new developments for example. The flexibility of ESCOs also allows for them to fill a number of different roles in delivering new heat or energy saving projects.

 

The Co-operative Group recommends that Building Regulations should be widened in order to provide cost-effective energy saving alongside a streamlined planning system to ensure speedy delivery of projects. This could help better plan for district heating and heating networks to be installed at the same time as major infrastructure developments, reducing overall costs and maximising new community benefits. Local authorities should be encouraged to be anchor customers for such projects, using their procurement strength to assist.

 

This submission draws heavily upon The Co-operative Group responses to the government's 'Renewable Electricity Financial Incentives' and 'Renewable Heat Incentive' consultations. In these submissions, we outlined our broad support for a tariff based system to stimulate decentralised and community energy. The growth in demand will inevitably create new employment and manufacturing and is aligned to government commitments to create a new green industry in the UK. The same rationale applies for energy generation as applies for energy efficiency and tackling fuel poverty and this underlines our response to the points below.

 

 

1. The Co-operative Group is one of the world's largest consumer co-operatives and has a turnover of more than 14 billion per annum. It has more than 5 million members and operates food, financial services, funeral parlours, travel, legal services and farming amongst other businesses.

 

2. The Co-operative Group has pioneered a range of renewable energy initiatives. 99% of the electricity for our 4000 outlets is sourced from good quality renewables, through wind and water-power. Since 2008, with support from the Low Carbon Buildings Programme, we have match-funded the installation of 160 photovoltaic systems and other renewables in schools across the UK. In 2006 the Coldham Wind Farm was launched, which is a joint venture between The Co-operative Group and Scottish Power. The 17million, eight-turbine wind farm, built on a farm estate owned by The Co-operative Group, supplies approximately 4% of The Co-operative Group's energy requirements (equivalent to 9,000 homes) and is now set to expand with local community backing. The CIS Tower in Manchester became Europe's largest vertical solar array when it was clad in energy generating solar panels in 2005. In September 2004, an innovative 4m, eight-year green electricity purchase agreement was entered into whereby The Co-operative Financial Services receives a guaranteed, cost-effective green electricity supply, while stimulating the construction of a six wind turbine project in Lincolnshire. In 2003 The Co-operative Insurance became the first institutional property investor to transfer all contracts for its 2billion investment property portfolio to green electricity. In addition, other wind farm developments are proposed on both Co-operative Group and third party owned land as well as various exemplar sustainable development projects, which will incorporate a range of renewable power generation initiatives. The Co-operative Enterprise Hub has helped to create new market entrants that deliver co-operative solutions at community level in the UK. One example is Energy4All, which via funding from The Co‑operative Group has set up further community energy projects, each owned by members of a local co-operative.

 

3. Renewables are also central to The Co-operative Financial Services' commercial strategy from asset finance to institutional investments. The Co-operative Bank has committed 400m to be invested in community renewable energy and low carbon energy technologies. The Corporate Banking team has been involved in funding a variety of renewable energy investments in recent years, from hydro schemes, to wind farms and CHP plants. These schemes underline the Bank's leading commitment to community renewables, generating significant carbon savings. Our first hydro scheme has now been completed in New Mills, we are looking to fund several anaerobic digestion and biomass projects and developing financial models to support the energy efficiency sector.

 

4. The Co-operative Group's work on energy efficiency and fuel poverty is underlined by a strong corporate approach to energy investments. Our Ethical Engagement Policy encourages investees to reduce their reliance on fossil fuels and to increase their usage of renewable energies and energy efficiency. Furthermore, The Co-operative Bank's Ethical Policy includes a commitment for our business not to invest in other businesses that are considered to be integral to the extraction and / or production of fossil fuels. The Co-operative Group is firmly committed to high quality, voluntary carbon offsetting which allows for investment in projects such as fuel-efficient stoves in Cambodia; reforestation in Kibale Forest National Park, Uganda; and treadle pumps in Uttar Pradesh and West Bengal, India.

 

 

Consultation response

 

Progress against Government targets

 

5. The rise in fuel poverty from 1.2m in 2004 to 4m in 2008 demonstrates clearly that the fuel poverty challenge is getting more difficult to resolve. Factors such as fossil fuel prices and changing demographics have played a huge part in the rise in fuel poverty. However the statistics also underline how policies are not solving the root cause of fuel poverty - namely how we supply heat and energy to homes in an efficient, decentralised and cost effective way. It is telling that very often those on the lowest incomes in our society have the most inefficient heating systems.

 

6. Delivering heat and energy saving at a significant rate requires partnership working between financing, production and delivery bodies - this includes government (both nationally and locally), lenders, businesses, manufacturers and communities. Whilst enabling legislation for incentives such as the Renewable Heat Incentive (RHI) are welcome, more needs to be done to create a requirement on each of these bodies to work together. The prohibitive costs for example of heat networks have prevented their potential being realised. New infrastructure such as roads and housing provide perfect opportunities to ensure heat networks from the outset and provide linkages to existing communities. Not enough progress is being made in these areas at present.

 

7. Local Authorities should be required to take a strategic approach to energy generation (heat and power) and distribution within their authority area in that the allocation of areas for major new development should be integrated with such a strategy. Local authorities are key to the success of district heating networks as public sector buildings can provide the base load to make a project viable. Local authorities are already required to build up an evidence base on the potential for new renewable projects - including location, scope and type - as outlined in Planning Policy Statement 1 (PPS1) - and central Government should be further encouraging this. We recommend that Local Authorities should review their asset registers to plan when energy related plant (boilers etc) are due for replacement to ensure they look to employ the best solution for their tenants and own building stock. Often the best whole life solution requires a larger upfront capital investment.

 

8. There has been too much focus through various initiatives on tackling fuel payment problems and not reducing the cost of supply. We are not addressing the root problem i.e. there is to much focus on providing a subsidy rather than reducing consumption through greater efficiency. We recommend that government moves away from tackling fuel poverty with subsidies aimed at meeting costs, to a model where funding targets reducing consumption and increases efficiency.

 

9. More needs to be done to target investment in decentralised energy and alternative emerging markets. It is not enough to allow the lack of manufacturing or skills in these areas to argue against a roll-out of proven models. As with any initiative, investment, education, manufacturing and skills will follow such investment - it should be the government's role to identify the most efficient solutions to the root problems of fuel poverty and then invest to give confidence that an industry will form to support this. It is The Co-operative Group's firm view that there is a huge untapped potential for new employment in building the UK's decentralised energy infrastructure- beginning with quick win projects based on workable models at scale. Targets will not be met with a piecemeal approach or by looking at investing on a building by building basis - the model has to build in scale to realise cost effectiveness eg. local/district or a regional approach. There are quick wins which can be achieved and priorities need to be set. There are high rates of fuel poverty in tower blocks were the heating systems are predominantly electrical powered. We should move to install wet system retrofits , using CHP , biomass boilers (once the RHI is confirmed) and energy efficiency measures. An opportunity exists to fund strategic de-centralised energy generation facilities to benefit fuel poverty areas under the Carbon Reduction Target (CERT) scheme which may in some cases provide greater wider benefit to the fuel poor than the sometimes ad hoc energy efficiency measures delivered under the scheme. Standardised structures utilising CERT funding should be developed through dialogue between utilities, local authorities and funders.

 

 

The definition of households in fuel poverty commonly used

 

10. The broad definition is a useful barometer in order to measure the success of investment decisions though there will always be alternative measures suggested. The key point is that fuel poverty figures move in the right direction and this appears not to be the case at present. It is perhaps as useful to measure those households in the most energy inefficient properties and therefore are the ones at most risk of fuel poverty even if currently they do not fall into that definition.

 

 

The coherence of the Government's initiatives on energy efficiency

11. The Co-operative Group supports the introduction of tariffs for renewable heat and recognises the important role of targeted initiatives such as better home insulation - both of which could be important in helping families out of fuel poverty by taking control of their energy generation and usage. The Co-operative Bank was the first mortgage provider to offer a green mortgage product - the 'Energy Efficient Advance' - which gives customers additional secured lending at a low rate on energy efficiency products and services. While secured lending and tariff income works from a homeowner point of view it is not clear how the same policies can be applied easily for those in social housing or in the private rented sector.

 

12. The Co-operative Group supports the aims of initiatives such as the Low Carbon Communities challenge which provides grant funding to indentify best practice at local level. However, we would caution against a further pilot 'project-led approach' and maintain that direct funding for infrastructure investment should start to take precedence as it is this which is under the most threat from the current economic situation. Similarly government subsidy has driven down energy prices in a competitive market but investment has not kept apace with subsidies so that effects are felt disproportionately when the subsidy is eventually removed or replaced. The unintended consequence is the sharp rise in energy costs when subsidy is removed which could exacerbate fuel poverty levels. Government and its agencies also needs to be aware of how grant support can impact on the take-up of technologies - with considerable delays being caused and industry players becoming frustrated when decisions are reliant on when grant applications have been decided on.

 

13. With infrastructure investment, there needs to be a greater focus on 'quick wins' in partnership and at a scale that delivers efficiently on any public sector investment. This would be best undertaken through an analysis using existing installations or sites that can provide the best financial case to deliver renewable heat or energy schemes. There is also a role for local authorities and developers to work in partnership to look at areas where in future developers are not able to meet low carbon targets on-site and have to draw on 'allowable solutions' elsewhere. (note: Allowable solutions for non-domestic zero carbon development is currently under consultation by CLG) We recommend that surplus public sector land, schools, hospitals or other sites that exist in or near local communities are ideal anchor points for schemes that can deliver low cost district heating or CHP.

 

14. The Co-operative Group would question the rationale for limiting support to only micro-CHP through the Feed-in Tariff (FIT) regime. The cost effectiveness of larger-scale CHP led by community co-operatives or equivalents would make much more sense from a subsidy point of view.

 

15. Simple measures such as educating people to use their boilers properly ie. setting the thermostat and the timer would go some way to help manage energy demand and usage in low income households. This is indeed the case with the old and vulnerable of our society. We recommend targetted support for education and a new public awareness campaign regarding energy efficiency.

 

16. Historic initiatives such as equity release in relation to 'care and repair' schemes should be re-examined. It remains the case that many who are in fuel poverty find themselves 'asset rich but cash poor' and unable to find the funds to invest in efficiency measures. Financial models should be developed with lenders to create a low-risk product that is easy to understand and access. We recommend central Government have its own delivery mechanisms to support local authorities who do not have the necessary skill sets or resource to run such schemes.

 

17. Given the huge health and social costs associated with fuel poverty there is a case for targeted health budgets to be set out purely to assist with district heating systems. Studies have shown the link between well heated properties and healthier individuals. Also, as shown elsewhere in this submission hospital sites are often close to homes and other public sector buildings and offer both a good location to install a district system but also often have excess land or facilities to keep upfront costs to a minimum. They are also necessarily linked to local authorities and communities and offer a good focal point for community awareness on the benefits of energy saving and good health. We recommend that an assessment of cost savings is made in other government departments (eg. Department for Health) in order to release further targeted funding for energy efficiency investment.

 

18. The Co-operative Group supports the removal of barriers to district heating and also welcomes the formal discussions that could take place in the Heat Markets Forum. We recommend that the Government should consider innovative schemes to encourage renewables in the rural communities where fuel poverty is high. The natural resources are such that there should be no reason why communities cannot be self sufficient in their energy needs where forestry, wind and hydro resources are all available or close to hand.

 

 

The methods used to target assistance at households which need it most

 

19. As referenced elsewhere in this submission, The Co-operative Group actively supports the role of identifying 'anchor' sites at which heat and energy generating systems can be installed but offer benefits to the surrounding community. It is not clear that pilot projects to date or indeed the early takers of the FIT or RHI support will be in areas that suffer from the worst fuel poverty rates. Local authorities have a key role in identifying the geographic locations that are likely to suffer from fuel poverty and alongside this, to find locations with good local links that could house a renewable facility such as a district heating network. A co-operative could be formed at a community level to facilitate the funding, installation and ownership of the necessary technologies in discussion with banks and the renewables industry. Central government funding in this model relies on bridging the gaps between these stages in the process rather than being a one-off grant and therefore builds-in a legacy to protect households from fuel poverty. We recommend grant funding to act as a 'bridge' to help bring other finance together rather than seeking to cover the majority of costs as shown in some of the recent pilot schemes. This would allow funding to go much further in economically constrained times.

 

20. In addition to targetting district heating The Co-operative Group supports measures to encourage the rapid growth of CHP at scale in the UK. At present, the CHP market remains in a poor position. Current incentives need to become more effective to counteract high fuel input costs. We hope that this will be partially addressed by new planned tariffs. As a business and investor, this is a sector in which The Co-operative Group has a strong track record. For example, The Co-operative Bank invested 1 million in a heat and power scheme in Aberdeen which is now a self funding ESCO. See:

http://www.scotland.gov.uk/Publications/2009/05/28154437/1

 

 

Social tariffs and plans to put social price support on a statutory footing

 

21. The concept of the social tariff should be supported. However linking it to the volatile fossil fuel market is a risk given the likely rise in oil and gas wholesale prices in the coming years. We must consider the matter of security of supply and look to encourage the use of local resources.

 

Winter fuel payments and cold weather payments

 

22. The winter fuel payment should be reformed as it is currently not targeted at those in fuel poverty, is not ringfenced (so can be spent on non-fuel items) and is simply aimed at cushioning higher winter bills - not investing in a decentralised heat system that can cut energy costs, consumption and reduce carbon emissions. Investing in infrastructure and using subsidy as a 'bridging' fund to bring individuals and communities into district heating schemes would present a far better cost efficient model with the potential for free heat where the scale and model is right. We recommend that the Winter Fuel Payment is re-examined and more focus given to low-cost or free heat provision through district heating systems.

 

Support for households which are not connected to the mains gas grid

 

23. Clearly the RHI provides a good opportunity to set up local networks or community scale electricity to replace current localised gas installations. As recommended at point 18 in this submission, rural areas and those off-grid should be encouraged to use natural resources to ensure energy self-sufficiency. This requires a range of actions from Local Authority-led analysis of land and resource assets, bridging funding from government and its agencies to reduce lender risk and empowering local communities through forming co-operatives to take control of their own energy supply.

 

Conclusions and key recommendations

 

We recommend that Local Authorities should review their asset registers to plan when energy related plant (boilers etc) are due for replacement to ensure they look to employ the best solution for their tenants and own building stock. Often the best whole life solution requires a larger upfront capital investment.

We recommend that government moves away from tackling fuel poverty with subsidies aimed at meeting costs, to a model where funding targets reducing consumption and increases efficiency.

We recommend that surplus public sector land, schools, hospitals or other sites that exist in or near local communities are ideal anchor points for schemes that can deliver low cost district heating or CHP.

We recommend targetted support for education and a new public awareness campaign regarding energy efficiency.

We recommend central Government have its own delivery mechanisms to support local authorities who do not have the necessary skill sets or resource to run schemes (such as 'Care and Repair').

We recommend that an assessment of cost savings is made in other government departments (eg. Department for Health) in order to release further targeted funding for energy efficiency investment.

We recommend that the Government should consider innovative schemes to encourage renewables in the rural communities where fuel poverty is high. The natural resources are such that there should be no reason why communities cannot be self sufficient in their energy needs where forestry, wind and hydro resources are all available or close to hand.

We recommend grant funding to act as a 'bridge' to help bring other finance together rather than seeking to cover the majority of costs as shown in some of the recent pilot schemes. This would allow funding to go much further in economically constrained times.

We recommend that the Winter Fuel Payment is re-examined and more focus given to low-cost or free heat provision through district heating systems.

 

February 2010