The Economics of Renewable Energy - Economic Affairs Committee - Contents


142.  Most of the debate on renewable energy has focussed on electricity generation. This chapter considers renewable sources for the two other main uses of energy—heat and transport, which together account for roughly 80% of the UK's final energy consumption.


143.  Renewable heat sources could make a significant contribution to reducing carbon emissions, according to a number of submissions. Scottish Power believe renewable sources of heat have "significant undeclared potential" while Philip Wolfe of the Renewable Energy Association said this area had been "neglected" (Scottish Power p 646, Philip Wolfe Q 175).

144.  There are four main renewable sources for heat:

Biomass heat comes from the burning of organic matter with wood the most common source. Biomass heat is often generated on the site where it is to be used from households to intermediate industrial use but it can also be distributed through district networks or grids.

    (b)  Biomethane

Some types of biomass can also be used to produce 'biogas'—a mixture of methane and carbon dioxide—through anaerobic digestion, which turns the material into compost in the absence of oxygen. Removing the carbon dioxide leaves bio-methane. Akin to natural gas, bio-methane can be pumped through the gas networks or grid to customers. Such systems are already used in Sweden and Switzerland. Injecting bio-methane into the gas network effectively reduces the carbon intensity of gas.

    (c)  Heat pumps

Heat pumps work by first compressing a liquid or gas which naturally heats it, allowing the heat to be used to warm a building. The liquid or gas is then allowed to expand, releasing heat as it cools down (which could be used in air-conditioning or refrigeration). The resulting cooler liquid or gas is circulated via a pipe next to a natural source of warmth, either in the ground or the air. The cooler liquid or gas will absorb heat from the warmer surroundings until it reaches the same temperature. The process is repeated by compressing the liquid or gas again. The heat already absorbed by the liquid or gas reduces the amount of compression needed to reach a given temperature. This allows heat pumps to generate considerably more energy in heat than they consume in electricity, so they are regarded as renewable sources.

Ground source heat pumps extract the energy absorbed from the sun. A few metres below the ground, the earth keeps a constant temperature of around 11-12 degrees centigrade through the year. A length of pipe is placed in the ground through which a combination of water and anti-freeze is pumped to absorb the heat from the ground. Ground source heat pumps can transfer this heat from the ground into a building to provide space heating and, in some cases, pre-heating domestic hot water. For every unit of electricity used to pump the heat, 3-4 units of heat are produced, according to the Energy Saving Trust.[47] Some systems can be run in reverse to provide cooling in hot weather.

    (d)  Solar thermal

Solar thermal panels use the energy from the sun for heating. These have been found to be most cost-effective when they produce 50-70% of a household's average hot water requirements, according to the Government's recent renewable energy consultation paper.


145.  Combined Heat and Power (CHP) captures and uses the waste heat produced during generation of electricity and so can lower carbon emissions. It tends to work best at community level on residential developments rather than in individual houses. Some industrial firms also use CHP. But since in Britain CHP is mostly derived from fossil fuels, it is not a renewable source of energy. The Government's consultation paper on renewable energy nevertheless sees potential for renewable forms of CHP using biomass and biogas.


146.  The Government stated in its consultation paper that biomass heat was "one of the most cost-effective potential sources of renewable heat", while Scientists for Global Responsibility argued: "Biomass can be used directly for heating—e.g. wood pellet boilers or domestic wood burning stoves—at low cost" (Scientists for Global Responsibility p 459).

147.  Figure 8 shows small scale biomass heat—i.e. not connected to a grid for wider distribution—to be comparatively cheap. But the chart also shows that for larger scale biomass heat projects, which might well need to be connected to distribution grids, the costs range from relatively low to expensive. The wide range is due to the different costs of various biomass fuels and their high transport costs depending where they are sited. Biogas projects have a very small cost range and are only slightly more expensive than small-scale biomass heat.

Levelised project cost ranges at 2006 prices by the Pöyry energy consultancy group

148.  Biomass and bio-methane are normally generated from locally sourced feedstock. But widespread deployment of biomass would require imports, with relatively high carbon emissions from transport. Both biomass and bio-methane may also use energy crops which compete with food crops for arable land.

149.  Centrica cautioned: "More work needs to be done on the economics and supply chain risks of biomass, especially where it is produced from specifically grown crops (albeit it is less critical when using existing waste). This is a new commodity, global demand is likely to increase dramatically, and as such its future price and availability are extremely difficult to predict" (Centrica p 95).

150.  Some bio-methane production could come from waste and sewage, with the added benefits of capturing the greenhouse gas methane and avoiding the need for incineration (National Grid p 145).

151.  A report commissioned by the German government in 2007 on possible European biogas strategies found that EU-produced bio-methane has the potential to replace roughly 50% of EU natural gas imports from Russia by 2020. This highlights the potential for bio-methane injection into the gas network on a large scale (National Grid p 145).

152.  But there are technical issues—in particular whether the bio-methane meets UK gas quality requirements; and the expensive equipment needed to inject bio-methane into the grid, so that large-scale deployment is required for economic viability (National Grid p 145).

153.  Heat pumps, which are already widely used in parts of continental Europe, were favoured in a number of submissions as a good source of renewable energy (Renewable Energy Foundation p 327, EDF p 271, Mayer and Bentley p 399). The Pöyry chart shows they are only slightly more expensive than small-scale biomass heat. But heat pumps also consume some electricity, as already indicated at paragraph 144(c).

154.  Other barriers to greater use of smaller scale renewable heat technologies include lack of familiarity among households, unsuitability for flats, and high up-front capital costs, although operating costs for heat pumps are lower and could lead to lower household energy bills (Renewable Energy Foundation p 327).

155.  EDF favours heat pumps over biomass for "delivering low carbon heat as biomass supplies are limited and the transport of large volumes of biomass into urban environments is problematic" (EDF p 271).

156.  Solar thermal heating is a high cost option compared to other forms of renewable heat as shown on the Pöyry chart. A good solar thermal system can provide around 50-70% of a dwelling's hot water demand and with more panels around 30% of its space heat demand (Genersys p 311).

157.  The Government has estimated that 14% of heat would need to come from renewable sources if Britain is to hit the EU's proposed target of 15% of all energy in Britain coming from renewables by 2020. At present only 1.2% of heat comes from renewable sources. Biomass and heat pumps are the most cost-effective ways of increasing the share of heat from renewables, as shown in Figure 8. The Government expects they would make up the lion's share of any renewable heat deployment in the near term. But supplying enough biomass and heat pumps to ensure 14% of heat came from renewables by 2020 would be extremely difficult. So more expensive sources such as solar thermal and biogas might be used to reach the 14% target. The Government is considering ways to encourage renewable heat generation such as mandating energy companies to supply a proportion of heat from renewable sources, or requiring suppliers to pay generators of renewable heat an above market price. We note that the Secretary of State for Energy and Climate change stated on 16 October that he would soon make further announcements on the role of renewable heat.[48]


158.  Some witnesses argued renewable heat should be making a greater contribution towards meeting Britain's carbon emission targets. Campbell Dunford of the Renewable Energy Foundation said the "low hanging fruit" of renewable heat was being missed because "everybody is fixated with the holy grail of generating electricity [from renewable sources] at a micro and a macro level" (Q 115). Philip Wolfe of the Renewable Energy Association said: "The heat sector is still largely ignored and its contribution can be as large as electricity. The cost of producing renewable heat, the incremental cost, is substantially lower than the incremental cost of producing renewable electricity and it has been estimated that one could achieve the same carbon savings in renewable heat for about a third of the cost of the same carbon savings in renewable electricity." He suggested that it had appeared to be easy to design policy for the small number of large electricity generators, whereas renewable heat would come from a large number of small plants (Q 175).

159.  The Pöyry chart (figure 8) shows that various heat technologies such as biomass and heat pumps have lower costs than those for electricity such as wind generation. But solar thermal heat and the top end of the range for biomass heat connected to the grid are relatively expensive.

160.  A number of witnesses argued that it was more cost-effective to use biomass for heat than for generation of electricity (Renewable Energy Association p 424, Centrica p 95). The Government's recent consultation paper on renewables also assessed the use of biomass for heat as more cost-effective in terms of pound per tonne of carbon abated than for electricity.

161.  EDF argued that the key question when comparing the costs of renewable heat and electricity technologies was whether the marginal technology in the electricity sector—which they argued was likely to be offshore wind—requires more or less subsidy than the marginal technology in the heat sector. EDF expects heat pumps to be the key form of low carbon heat. EDF's analysis indicates that a heat pump, which can be retrofitted to a conventional hot water and radiator heating system in an existing property, would require less subsidy per kWh of renewable energy produced than an offshore wind farm. But the heat pump's cost per tonne of CO2 abated is considerably higher because it runs on electricity, which itself involves carbon emissions. In the long term an increase in electricity generation from renewables might increase the carbon saved by heat pumps (EDF p 280).

162.  Renewable heat can also help avoid costs associated with intermittency of many forms of renewable electricity generation such as wind farms. Heat can also be safely and easily stored, unlike electricity (EDF p 280, Genersys p 311).

163.  Harnessing renewable sources of heat is often cheaper than for electricity generation and it offers a larger target area, as heat accounts for two-fifths of final energy demand in the UK, as opposed to around 20% for electricity. Unlike wind power—the dominant source of renewable electricity generation and the renewable source to which the Government has paid most attention—there is no intermittency problem with renewable heat. We recommend that the Government should lay at least as much emphasis on encouraging the development and use of renewable heat as on renewable electricity generation.


164.  For transport the main alternative source of energy to fossil fuels is biofuels.

Biofuels can be made from a range of organic materials including oilseeds, wheat and sugar, and are typically blended with conventional petrol and diesel. At present the two main types of biofuel are biodiesel and bioethanol. Biodiesel, a diesel substitute, is generally produced from oily feedstocks such as rapeseed, sunflower or palm oil, or from recovered cooking oil. Bioethanol, a petrol substitute, is generally produced from starchy feedstocks, such as wheat, sugar beet or sugar cane—although it can be produced from any organic substance such as wood, grass or municipal solid waste. Bioethanol and biodiesel can simply be added to existing liquid fossil fuels and at low percentages require little or no changes to either the vehicles or the fuel infrastructure. Other forms of biofuels include biomethane, which is a gas produced by the biological breakdown of organic matter and can be used as a renewable alternative to natural gas, either as a transport fuel or for electricity generation and heating.

    (b)  Electric and plug-in vehicles

Small cars powered by electricity through a battery rechargeable from the electricity mains are now available. Due to their limited power the current range is seen as suitable only for short daily journeys. For more general use, the plug-in hybrid, which has sufficient battery capacity charged from the mains supply for most daily use, with a small internal combustion engine able to provide power on extended journeys, may be more promising. Plug-in hybrids are to be marketed by US and Japanese manufactures in the near future (Scientists for Global Responsibility p 459).

    (c)  Hydrogen vehicles

Hydrogen fuelled vehicles are still being researched and may be a renewable technology of the future. Two types of hydrogen powered vehicles are possible. One uses hydrogen as the fuel for an internal combustion engine. The second uses hydrogen in fuel cells which when combined with oxygen is turned into electricity to power the vehicle. Most hydrogen today comes from non-renewable sources such as natural gas. But it could in theory be produced in a renewable way through electrolysis which splits water into hydrogen and oxygen. Transport for London has signed a contract to have 10 hydrogen fuelled buses operating in the capital by 2010 after trials.

165.  The Government in April introduced a requirement that 2.5% of fuel sold in British forecourts must come from renewable sources.[49] The European Commission has proposed that 10% of energy for transport in each EU member state come from renewable sources by 2020.[50] The appeal of biofuels was outlined by the Royal Academy of Engineering: "Biofuels … can simply be added to existing liquid fossil fuels and at low percentages require little or no changes to either the vehicles or the fuel infrastructure. It is likely that the ease of adding biofuels to road transport fuel is one of the main reasons that governments … have introduced targets for their introduction" (Royal Academy of Engineering p 445).


166.  Biofuels have been controversial as some of them appear to have little impact on reducing carbon emissions—the key aim of all renewable energy. The Royal Academy of Engineering explained that in theory biofuels should be zero carbon. As with other plants, energy crops—which are used to make biofuels—absorb CO2 as they grow. When the energy crop is burned or processed the CO2 that has been absorbed during the plant's growth is then released. In theory, the amount of CO2 released should be the same as the amount absorbed during the plant's growth making the process carbon neutral. But in practice there will often be more CO2 emissions from fertiliser production and as biofuels are processed, so that they do not provide zero carbon energy. In some cases these emissions can "render the biofuel almost pointless in terms of carbon savings" (Royal Academy of Engineering p 445). Furthermore, soil degradation can occur where single energy crops, such as oil palms, replace rain forest. This is "ultimately unsustainable", according to the Royal Academy of Engineering, and results in the loss of crucial carbon sinks—areas of soil which can store large amounts of carbon that have previously been absorbed by the rain forest (Royal Academy of Engineering p 445).

167.  Today's commercially produced biofuels are made from the parts of plants that could otherwise have a food use, such as wheat grain, beet or cane sugar, or vegetable oil. In the production of bioethanol or biodiesel, very little of the plant is actually converted into the fuel with most of the plant discarded (Royal Academy of Engineering p 445).

168.  The Gallagher Review commissioned by the Government expressed concerns about the impact on people in developing countries from agricultural land and food crops being used for biofuels.[51] It concluded that: "The introduction of biofuels should be significantly slowed until adequate controls to address displacement effects are implemented and are demonstrated to be effective. A slowdown will also reduce the impact of biofuels on food commodity prices, notably oil seeds, which have a detrimental effect upon the poorest people."

169.  Second generation biofuels are manufactured from waste, residues such as straw and whole plants not suitable for food. So they should offer greater benefits, using about one third of the land and lower other inputs. But they are still emerging and not yet available on a commercial scale (Scientists for Global Responsibility p 459).

170.  Others argued that many of the first generation of biofuels lead to sharp reductions in greenhouse gas emissions compared to fossil fuels. The Renewable Energy Association argued: "Many current generation biofuels produced in the UK can deliver significant greenhouse gas savings entirely sustainably. For example, British Sugar has announced that its sugar beet-to-ethanol plant in Norfolk delivers a 71% saving against fossil petrol, and Argent Energy delivers an 83% saving against fossil diesel at its tallow-to-biodiesel plant in Motherwell" (Renewable Energy Association p 424).

171.  Yet the cost of obtaining reductions in carbon emissions from biofuels was far higher than for renewable sources of electricity and heat. A study by Pöyry for the Government modelled the most likely mix of renewables in electricity, heat and transport sectors to meet the EU's proposed targets that 15% of all of Britain's energy and 10% of transport fuels come from renewables in 2020. The study also estimated the costs and the reduction in carbon emissions in the electricity, heat and transport sectors over the lifetime of the renewable projects.[52] From these figures, Pöyry calculated the cost of reducing each tonne of carbon dioxide emissions over the lifetimes of the renewable projects in each sector—known as the lifetime abatement costs—as shown in Table 5. This differs from earlier cost tables in the report which show the cost per unit of energy. The estimated cost of reducing carbon dioxide emissions by one tonne using biofuels for transport was £189—more than 5 times the average cost of using renewable sources of electricity and heat.

Cost estimates of carbon reduction using renewable energy sources

£/tonne of CO2 abated [53]
Electricity and Heat
Weighted average

Source: Pöyry Energy Consulting, Compliance costs for meeting the 20% renewable energy target in 2020

172.  In transport there are few renewable options other than biofuels. Electric and hydrogen powered vehicles, described in paragraph 164, both use electricity. They can only count as renewables if they use renewable sources, and, as we have seen, renewables still only account for around 5% of total electricity. But if, for example, wind farms generate a larger share of electricity in future, electricity generated during periods of low demand, such as the early hours of the morning, could be stored in the batteries of electric cars (Q 223).

173.  We share the concerns raised in the Gallagher Review about existing biofuels. We consider that steps should be taken towards developing second generation bio-fuels as soon as possible. Until the costs of carbon emissions reduction through biofuels come down we recommend that the Government should not seek to increase further the use of biofuels.

Energy Saving Trust factsheet on Ground Source Heat Pumps available at: Back

48   Hansard, 16 October 2008, col 936. Back

49   The Government initially planned to increase the share of fuel sold in forecourts coming from renewables to 5% in 2010-11. But in July the Government decided to consult on whether this should be slowed down to reach 5% in 2013-2014 in line with the recommendations of The Gallagher Review of the Indirect Effects of Biofuels, July 2008. Back

50   The target does not cover transport energy from oil products other than diesel and gasoline, and therefore means that aviation (which uses kerosene) is excluded, although it is included in the denominator of the 20% EU target for the overall use of renewable energy. Back

51   The Gallagher Review of the Indirect Effects of Biofuels, July 2008, which can be viewed at: Back

52   Lifetime costs and emissions figures cover periods beyond 2020. For example, a wind farm built today to help meet the EU's proposed targets will most likely continue to operate after 2020 incurring costs and reducing carbon emissions. Back

53   The figures were originally in euros:-Total Renewable Energy Sources €57, Electricity and Heat RES €45 and Transport RES €236. These figures were converted at an exchange rate of €1.25 to the pound. Back

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