A micro-generation manifesto

“green alliance...

A micro-generation manifestoby Joanna Collins

Published by Green Alliance, September 2004, £20

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ISBN 0 9543813 7 8

© Copyright Green Alliance 2004

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The micro-generation manifesto has been developed in consultation withmembers of the Energy Entrepreneurs Network. For more information on thisnetwork, visit www.green-alliance.org.uk

Organisations supporting the manifesto include:

British Wind Energy AssociationCombined Heat and Power AssociationEnergy 21Renewable Power AssociationSolar CenturyThe Micropower CouncilThe National TrustTown and Country Planning AssociationUK Business Council for Sustainable Energy

acknowledgementsGreen Alliance wishes to thank the Ashden Trust for their generous support of

the Energy Entrepreneurs Network, and of this report.

We would also like to extend our thanks to all the organisations and individualswho were involved in the project. Particular thanks are due to Sebastian Berry, SarahButler-Sloss, Adrian Hewitt and Dave Sowden.

Green AllianceGreen Alliance is one of the UK’s foremost environmental groups. An independent

charity, its mission is to promote sustainable development by ensuring that theenvironment is at the heart of decision-making. It works with senior people ingovernment, parliament, business and the environmental movement to encouragenew ideas, dialogue and constructive solutions.

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contentsexecutive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

the case for micro-generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4behaviour change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5carbon reduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6fuel poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7security of supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8economic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

system resistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9energy markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9mindsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

the way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12new build . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12local heat and power networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15energy services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

a micro-generation strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Climate Change Programme review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18consumer incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

capital grant schemes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19home energy ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19fiscal measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20export reward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21distribution charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Renewables Obligation Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Winter Fuel Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

supplier incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Energy Efficiency Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Renewables Obligation Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24fuel poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

developer incentives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Building Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

advice and training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

annex A – micro-generation technologies . . . . . . . . . . . . . . . . . . . . . . . . . 29existing technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

ground source heat pumps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29micro-wind turbines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30solar thermal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30solar photovoltaics (PV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31micro-hydropower turbines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31woodfuel boilers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

emerging technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32micro combined heat and power (micro-CHP). . . . . . . . . . . . . . . . . . . . . . . . 32stationary fuel cells. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

annex B – relevant policy agendas by department. . . . . . . . . . . . . . . . . 33

annex C – glossary of acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

executive summaryOver the last year Green Alliance has coordinated the Energy Entrepreneurs

network, which brings together a diverse coalition of planners, architects,entrepreneurs and energy experts. We have been making the political case for micro-generation to Ministers, advisers and officials across Government.This reportpresents our conclusions. We have been able to do this work thanks to generoussupport from the Ashden Trust.

Micro-generation is the generation of low-carbon heat and power by individuals,small businesses and communities to meet their own needs. Bringing energygeneration closer to people in this way will forge the vital link between our concernabout climate change and our energy consumption in the home. It can help toovercome the antagonism of a minority towards renewable energy, by bringingevery householder and business closer to the solution. Homes with micro-generation are also affordable homes, with low or zero energy costs. And by curbingthe rising demand for imported electricity, home energy generation can avert theneed for investment in large new power stations and the ageing grid network.

However, there is considerable resistance to micro-generation. Current incentivesdiscourage energy suppliers and grid operators from bringing energy generation tothe point of demand. Policy-makers are accustomed to an energy system based onbig, centralised projects like nuclear or gas-fired power stations. But we now have anopportunity to start to change these mindsets and incentives, and bring micro-generation into the mainstream.

The Government has made an important commitment in the Energy Act 2004 todevelop a micro-generation strategy by December 2005.This manifesto sets out abroad framework of policies that Green Alliance and the Energy EntrepreneursNetwork hope will be addressed in the government strategy.

The Government already helps to promote micro-generation through capitalgrant programmes. However, more decisive policy action has been postponed on theassumption that the technologies will remain too expensive until 2020. Suchassumptions are self-fulfilling. Niche products are always expensive. Costs will comedown significantly when policies are introduced to increase demand, allowingmanufacturers to move from ‘built-to-order’ to mass production.To enable this tohappen, Green Alliance and the Energy Entrepreneurs call on the Government to:

● Integrate micro-generation into new build by setting targets in planningand procurement, particularly for the growth areas in the SustainableCommunities Plan, and for the proposed new generation ofsecondary school buildings. Future rises in carbon emissionstandards for new build should be clearly signalled to driveinvestment in technological innovation.

● Encourage Local Authorities to plan for community-scale gridnetworks that supply locally-generated heat and power to new orexisting developments, bypassing the costs and inefficienciesassociated with national network use.

● Introduce incentives for energy suppliers to develop energyservice contracts that enable existing householders to retrofitmicro-generation.These should allow the upfront costs to be paidback through bills over a long period and to be offset by tariffsthat reward exported electricity. A strong incentive would come

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“ the Governmenthas made animportantcommitmentto develop amicro-generationstrategy”

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from a trading scheme in demand reduction certificates, which should beintroduced at the earliest opportunity.

● Reform the fiscal framework to enable householders to see micro-generation and energy efficiency as an investment in their property value.Stamp duty rebates for low carbon homes should be introduced to coincidewith new home energy ratings.

● Develop the simplest possible procedures for householders and smallbusinesses to apply for grants and grid connection.The public’s interest inhome energy generation could be fatally undermined by excessive paperworkrequirements.

Micro-generation offers an exciting opportunity to involve the public in tacklingclimate change and give householders and businesses an incentive to use energy moreefficiently.The Government should embrace this opportunity and bring micro-generation into the heart of its Climate Change Programme by adopting these policies.

the case for micro-generationThe UK Energy White Paper, published in March 2003, established the need to

tackle climate change as one of the central aims of energy policy. It set out anambition for the UK to reduce its emissions of carbon dioxide by 60 per cent overthe next fifty years, with clear milestones in the interim.The two main routes tocarbon reduction foreseen are an increase in the use of renewable energy, and astep-change in energy efficiency, amounting to a doubling of the historic rate ofenergy efficiency improvements.These targets are certainly ambitious, and they willnot be reached without sustained action by consumers.

However, despite the evidence from opinion polls of widespread public supportfor policies to tackle climate change, the signs are that in practice the majority ofconsumers remain disengaged. Energy efficiency policy meets with apathy; windfarm proposals meet with antagonism from a vocal minority. Government has yet toconfront head-on the challenge of engaging the public, both as citizens andconsumers.

It is the belief of Green Alliance that both apathy and antagonism can beovercome through micro-generation. Micro-generation means building climatechange solutions into everyday life, and giving individuals and communities contactwith, and control over, the generation of green energy.

By micro-generation we mean the generation of zero or low-carbonheat and power by individuals, businesses and communities, at or nearthe point of use.This includes renewable heat generation through:ground source heat pumps, solar hot water systems and wood pelletboilers, displacing gas or electric heating. It also includes on-sitegeneration of electricity, from solar photovoltaic (PV) panels, micro-wind turbines, micro-hydro systems and woodchip or gas combinedheat and power (CHP), which all displace electricity demand and canexport surplus power to the grid. Annex A gives more details on existingand emerging technologies.

In the Energy White Paper’s official vision for ‘the energy system in 2020’ we dofind an aspiration for “much more micro-generation, for example from CHP plant,fuel cells in buildings, or photovoltaics.”1

“ Micro-generationmeans buildingclimate changesolutions intoeveryday life”

Micro-generation can deliver on all four of the central objectives of theGovernment’s energy policy:

● cutting greenhouse gas emissions;● securing reliable energy supplies;● maintaining competitive energy markets in the UK and beyond; and● ensuring that every home is adequately and affordably heated.

However, the current received wisdom on the prospects for micro-generationtechnologies is that costs will remain prohibitively high until 2020, and this ensuresthat policies to promote their further development are fragmented and weak.

Such assumptions are self-fulfilling. Niche products are always expensive – whatis needed is government leadership to create the incentives and certainties thatdevelopers, energy suppliers and grid operators need in order to startinstalling them in households and businesses on a large scale.The moreambitious the strategy, the quicker and bigger the payback.

If this and subsequent governments are serious about developing asecure, diverse and sustainable energy economy, then micro-CHP boilers,mini-wind turbines, solar water heating and PV arrays are destined tobecome familiar household fixtures.The question is when?

The case for micro-generation has five dimensions. Micro-generationcould be a powerful driver for behaviour change, carbon reduction, fuelpoverty, security of supply and economic value.

behaviour changeMicro-generation gives an unprecedented opportunity for engaging consumers

in climate change solutions and influencing them to use energy more efficiently.

As consumers we often fail to relate our concern about climate change to ourenergy use at home.Thanks to privatisation and liberalisation, UK electricity priceshave fallen by around 22 per cent since 1990 in real terms.This trend is beginningto reverse but there is still precious little incentive for adjusting the thermostat, orresisting the temptation to opt for standby rather than walking the few paces to thetelevision off-switch. Now that many bills are being taken care of by direct debit,we lack any feedback on our level of energy use from day to day and season toseason. It is not surprising that consumers struggle to gauge, feel, or understand theimpact of home life on climate change.

As a result it is also not surprising that the Government is curbing its ambitionfor carbon reductions through domestic energy saving: the Energy White Paperforecast of 5 million tonnes of domestic carbon savings by 2010 has already slippedto 4.2 million tonnes, only one year on.

But while it may not be surprising, it is not tenable to let us consumers off thehook in this way. Neither is it generally effective to exhort people to action throughthe medium of TV adverts or newspaper slogans.2

A large part of the answer lies in allowing energy unit prices to rise, so thatconsumers have to pay more attention to their energy use to keep bills down. Betterfeedback in bills can also help people compare this month’s energy use with lastyear’s equivalent, or with their house type average, and cut out excessive use – ifyou can persuade direct debiters to read their bills in the first place.

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“ The moreambitious thestrategy, thequicker andbigger thepayback”

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But a crucial piece of the puzzle – giving consumers a clearer sight of the biggerpicture – is micro-generation.There’s nothing like generating clean, green energyin-house to help close the gap in people’s minds between the origins and impacts ofenergy, and the way they use it at home.

Micro-generation will make the public co-producers of climate change solutionsrather than passive consumers of energy, helping to combat the “what can I do?”apathy that undermines so many well-meaning public education campaigns.

Crucially, micro-generation technologies are visible components of the climatechange solution.The innovative new micro-CHP boiler, the solar panels on the roof,the micro-wind turbine in the garden, are visible acquisitions through which peoplecan proudly demonstrate their self-sufficiency and their commitment to climateaction. Unlike hidden cavity wall insulation, they can get people talking, and act asdaily reminders to keep the energy use down.The bottom line is that, as visiblepurchases, they have far more feel-good factor and commodity value than lagging.

This is not to downplay the importance of getting the walls insulated and thewindows double-glazed. Micro-generation acts as a catalyst for people to do theenergy efficiency bit first, to cut the size and cost of the micro-generation system

that they need to cover a good proportion of their energy demand.

Finally, generating your own energy gives you an immediateincentive to keep an eye on how you use it. Once the potential is thereto keep bills down to a minimum, people will try harder to match theiruse to their own generation capacity as closely as possible.

But our definition of micro-generation is not restricted to its use inindividual households. Neither is its communication potential. Biomassheat networks for new residential developments; solar hot water andsolar PV panels on new school buildings; micro-wind turbines lininglocal council buildings – all these initiatives bring climate changesolutions into people’s everyday lives, and help them think through theorigins of the energy they use.

carbon reductionMicro-generation will not only make a significant direct contribution to carbon

reduction targets, it will also trigger a multiplier effect, by engaging hearts andminds, and catalysing more efficient use of energy by householders.

In combination with stringent energy efficiency standards in new homes, one ortwo renewable micro-generation technologies in combination can achieve zerocarbon buildings (see BOX F). In existing stock, renewable heat technologies canreduce gas use or, more importantly, replace carbon-intensive electric or oil-basedheating systems in the 4.6 million UK homes off the gas network.

Renewable power and gas-fired micro-CHP miss out all the energy lossassociated with inefficient central generation of electricity in large power plant, withtransmission from one end of the country to another, and with distribution aroundan ageing set of wires. New Combined Cycle Gas Turbine power stations are onaverage only 45 per cent efficient, compared to over 90 per cent efficiency formicro-CHP.

“ generating yourown energygives you animmediateincentive to keepan eye on howyou use it”

fuel povertyThe Government has a target to eradicate fuel poverty in the UK by 2016-18,

and to eradicate fuel poverty for vulnerable households in England by 2010,meaning that no household should have to pay more than 10 per cent of its incomeon fuel. Affordable housing is not just about house prices, it is also about livingcosts, and it is often the poorest sectors of the population that are burdened withdraughty homes and expensive electric heating.

The Government currently spends over £1.85 billion a year on Winter FuelPayments to subsidise fuel for the elderly. Without accompanying investment inequipping buildings to need less fuel, the annual burden on the taxpayer will onlyrise as the elderly population grows and building condition deteriorates. Paying nowto install energy efficiency measures and micro-generation would be an investmentfor the medium term, and give vulnerable households low or zero energy bills overthe lifetime of the technologies.

Equipping new homes with micro-generation should be another dimension ofthe drive for affordable homes. Where new buildings are off the gas network,ground source heat pumps linked to under-floor heating become a cost-effectiveinvestment, yielding high comfort and fuel savings.

Micro-generation is also particularly well suited to retrofitting in hard-to-heathomes. Of an estimated 23 million homes in the UK, 6 million have solid walls,which puts cost-effective cavity wall insulation off limits. 4.5 millionhouseholds are off the gas network, often reliant on the discomfort andexpense of electric heating, or oil-fired boilers. The fuel bill savings andease of installation of micro-generation become attractive.

The DTI’s Design and Demonstration Unit is developing ideas for pilotprojects to assess the practicality of renewable forms of energy in tacklingfuel poverty.This is a useful step forward, but the lessons need to be appliedswiftly because, as the 2010 fuel poverty target approaches, the WarmHomes and Decent Homes Programmes continue to commit substantialsums which could be more effectively spent.

Despite its potential application in tackling fuel poverty, it is importantthat the aspirational status of micro-generation technologies is retained for

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7BOX A: the power to cut carbon

1.3 million gas boilers are replaced annually in the UK. If just one quarter of these upto 2020 were micro-CHP, this alone would deliver half the Energy White Paper’s 2010 –2020 domestic sector carbon reductions, and provide 5.5GW of highly diversifiedgenerating capacity – the equivalent of 40 per cent of today’s nuclear capacity.3

Building 5 per cent of the new homes under the Sustainable Communities Plan to zerofossil fuel energy specification – generating their low heat and power requirements on sitethrough renewable energy – would save 0.7 million tonnes of carbon per year more thanmeeting the ‘Eco Homes Very Good’ standard.This would nearly double the anticipatedcarbon reduction from new build under the 2005 revision to Building Regulations.Economies of scale means these homes could cost no more than standard homes.4

Installing just six panels of solar PV on a typical new three-bedroom house built to2002 Building Regulations standards would reduce that household’s carbon emissionsby over 20 per cent. If this were repeated on every house to be built between now and2020, the UK would have 4GW of new solar PV capacity, making us a clear worldleader in this technology in line with the Prime Minister’s stated ambition.5

“ equipping newhomes withmicro-generationshould be anotherdimension ofthe drive foraffordable homes”

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all social classes. Government policy should avoid branding them as exclusivelyaimed at low-income groups and the fuel poor.

security of supplyAs indigenous energy supplies dwindle, the UK is shifting from being a net

exporter to a net importer of gas and oil. This makes us potentially increasinglyvulnerable to supply interruptions, due to regulatory failure, political instability,conflict and price fluctuations. Micro-generation is, of course, far less vulnerable todisruption (or terrorist attack) than large power stations or gas pipelines. But itsvalue also lies in its diversity: a diversity of sources and suppliers of energy is thebest way to maintain supply reliability.

In the case of power generation, security of supply is not just about plantvulnerability, but also the availability of power to meet peak demand.The diversifiedprofile of power generation by micro-generators, both in terms of location andtiming, should insulate networks from the impact of intermittency or one-off plantfailures.The most significant gains for security of supply occur where home powergeneration coincides with peak demand times, as is particularly the case withmicro-CHP. Micro-generators can then help to reduce demand at these times, orindeed export power to help meet it, reducing the likelihood of power cuts, andremoving the need to bring marginal coal power stations on line.

economic valueMicro-generation technologies can create economic value in a number of ways.

They offer consumers the chance to reduce or even remove ongoing energy costsand, for power generation technologies like solar PV and micro-windturbines, to benefit from the value of exported electricity.

They offer energy suppliers the prospect of an added value service tobe marketed to consumers, to enhance per-customer income as well asimproving customer retention. In a competitive market, the value ofbrand differentiators and value-added services like micro-generation, asa strategy for increasing market share, should not be underestimated.This value can be further enhanced if customers are generating theirenergy at times of peak demand, which saves suppliers the cost ofsupplying them with electricity when wholesale prices are highest.

By curbing the rising demand for imported electricity, micro-generation can also defer or avoid completely the need for two types of

BOX B: ground source heat pumps for social housingGround source heat pumps developed by Earth Energy Engineering and produced by

Powergen are being installed in hundreds of social housing projects around the UK.Housing associations are taking an interest, because the heat pumps can reduce heatingbills for tenants, and are cost-competitive with oil-fired systems for new rural propertiesoff the gas network. Metropolitan Housing Trust installed ten Powergen HeatPlant systemsin March 2004, in new bungalows in Nottingham, in partnership with WestleighDevelopments Ltd.The system has now been successfully installed in 60 of the Trust’sproperties. Powergen aim to supply at least 1000 heat pumps for installation in the socialhousing sector across the UK, as part of its Energy Efficiency Commitment (EEC).Economies of scale have reduced the average cost of the systems in this scheme by £1000.6

“ micro-generationis far lessvulnerable todisruption (orterrorist attack)than largepower stations”

investment: first, investment by energy companies to build large new powerstations, and second, investment by transmission and distribution network operatorsin strengthening an ageing network to carry rising power loads.The construction oftraditional central power generation infrastructure requires large long-terminvestments.These investments are becoming increasingly risky, due to a fast-changing regulatory environment, increasing competition and the reluctance ofinvestors to commit to long investment time horizons for large infrastructureprojects. Grid reinforcement also involves significant costs. Estimates in Europeindicate that the full process of building new high voltage transmission lines takesapproximately eleven years and costs as much as $10,000 per kW per mile.Thistranslates to $10 million to ship 1MW of power for 1mile.7

Micro-renewable energy systems are already often the least-cost option for off-grid applications like parking meters, bus shelters and CCTV.8 Unless you are withina few tens of metres of the low-voltage distribution network, it is not worthinstalling a new mains electricity connection for small levels of power demand.Thesmaller the power demand, the more likely it is that a new mains connection willnot be the most cost-effective solution.

There are also significant opportunities for UK industry in export markets formicro-generation technologies.9

system resistanceThe resistance to micro-generation should not be underestimated.The main

sources of this resistance lie in energy markets, where current incentives discourageenergy suppliers and grid operators from promoting micro-generation; and in themindsets of policy-makers long accustomed to big, centralised power projects, and amodel of consumer protection that prioritises low energy prices.

energy marketsAs Catherine Mitchell of Warwick Business School argues, large technical systems

like the energy system build up technological momentum, whereby established incentives

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BOX C: Rural Energy TrustThe Rural Energy Trust won the 2004 UK Ashden Award for Sustainable Energy, for

developing supply and demand chains for woodfuel in Leicestershire. In the early1990s, Richard Harvey and the co-founders of this project identified the potential forwood waste as an efficient and cost effective renewable heating fuel – and also itspotential to create rural jobs and help wildlife habitat management. In the last 12months, 11 heating systems have been added, along with wood chip and wood pelletsupply chains. Rural Energy Trust will be developing woodchip supply for a 2.5MWdistrict heating plant in Leicester City. With the serious recession in the farming sector(job losses are running at 15 per cent a year), a locally based sustainable woodfuelindustry provides an urgently needed alternative to food production to create athriving, sustainable rural economy.

“Rural Energy Trust has been fantastic! The school now has a woodfuel central heating system and a solarthermal hot water system. Rural Energy helped us obtain grants, installed the equipment and worked withmembers of the student Energy Team.We could have achieved none of this without their help.”Maxine Adams, Business Manager, Newbridge High School.

lock in institutions, companies and individuals to the status quo technologies. Suchmomentum is difficult to break. Despite the potential value that can be created bymicro-generation for grid network operators and energy companies, there iscurrently no generalised business case for them to facilitate its uptake.The incentivesacting on these organisations are not geared up to realising the efficiencies frombringing energy generation to the point of demand.

Currently, the energy market will reward neither exported electricity (i.e. excesspower not used on-site) nor the value of reducing costly peak demand, and withoutpolicy interventions it is unlikely to do so until the number of micro-generatorscrosses a threshold that is currently a distant prospect.

Distribution network operators (DNOs), which are in some cases also licensedsuppliers such as EDF Energy, Scottish Power, and Scottish and Southern Energy,manage the low voltage grid to which micro-power generators can connect toexport electricity.

Research by Mott-Macdonald for the DTI on the System Impacts of AdditionalMicro-generation (SIAM)has concluded that micro-generation overwhelminglydrives network costs down.10 Some one-off expenditure by DNOs on optimisingnetwork management will be required, but this is far outweighed by the avoidedcosts of energy losses from centralised plant, and of reinforcing the network tocarry increasing power loads to meet demand.

Despite this, DNOs currently have no incentive to help get micro-generatorsconnected to the network. Distribution networks have in the past been developed asessentially passive systems, a one-way flow of electricity down the wires to passiveconsumers.This needs to change. If the Government’s 2010 targets are to be met, upto 14 GW of new renewable energy and CHP capacity may need to be connected todistribution networks. DNOs will need to manage their networks actively, liketransmission networks, to accommodate two-way power flows and variablegenerator infeeds. While Ofgem is introducing new incentives for connecting largenew renewable generation, it is not clear that DNOs yet have a clear incentive tofacilitate the development of micro-generation. DNOs are still remuneratedaccording to how much electricity flows down the wires to consumers, rather thanfor reducing energy losses and improving security of supply via a strategic approachto connecting micro-generation.

Both licensed energy suppliers and DNOs currently receive high-value exportedenergy from micro-generation without any obligation to return some of this valueto the generator. It is high-value energy because it is produced close to the point ofdemand and will not be subject to standard energy losses in transmission anddistribution; it is also high-value if it is generated at times of peak demand whenmuch energy supplied must come from marginally economic coal-fired power

stations, as is most clearly the case with micro-CHP. Much of thisexported power currently spills onto the network un-metered, so thatsupplier cannot take credit for it, and micro-generators go unrewarded.

Excess power generated in fact spills into the power supply ofneighbouring homes or businesses.This electricity registers on theirimport meters. The neighbours pay their respective suppliers for all theirelectricity, including the part generated next door, but the supplier doesnot have to recompense the micro-generator for their contribution.

Hence the widespread call for net metering. In net metering, the netof the electricity units consumed and generated is calculated and thecustomer is billed for the remainder at the usual price.This means the

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“ excess powergenerated spillsinto the powersupply ofneighbouringhomes orbusinesses”

customer receives the domestic purchase price for his electricity rather than themuch lower retail price.11 Net metering may yet prove to be the most effective andsimple way of delivering a policy of increased micro-generation. However, netmetering may impose some unfair costs on the supplier, where they are not also thedistribution network operator (DNO).12

Generally, it is not currently in suppliers’ interests to volunteer such a policy,except for purposes of ‘green’ branding, and to promote customer loyalty. Somesuppliers, like Npower and Ecotricity, are offering payment for the energy costcomponent of exported power (BOX E).The new electricity trading arrangements(NETA) also discourage export payments, because suppliers can only trade theexported units of power in bulk. Until over 100,000 micro-generators are exportingpower simultaneously, the value of the exported power will have to be returned tomicro-generators via public policy interventions.

The Renewables Obligation on suppliers is one such intervention. Electricitysuppliers are required to produce evidence of their compliance with the RenewablesObligation, which requires suppliers to source a rising proportion of their electricitymix from renewable energy, up to a level of 15.4 per cent by 2015.They can do thisusing Renewables Obligation Certificates (ROCs), which are issued for eachmegawatt generated. Alternatively, a supplier can discharge its obligation by payingthe ‘buy-out’ price.The level at which this buy-out price has been set, and therequirement for a minimum daily output, has tended to prevent the Obligationfrom driving investment in micro-renewable power. However, following a 2003technical revision to the Obligation, micro-renewable generators can, in theory, getsome return by selling ROCs to suppliers if their total annual output is at least 0.5megawatt hours. A generator providing between half and one megawatt hour ofelectricity in the course of a year will qualify for one ROC, currently worth £49 (seesupplier recommendations).

Good Energy, the new brand of UnitE, has developed a business model tosupport micro-generation on the basis of ROC values.The supplier’s ‘homegeneration scheme’ offers to pay roughly 4 pence per kilowatt-hour to grid-connected micro-generators for all power generated, whether it is exported or usedon-site. The company can reclaim this investment through selling ROCs.

mindsetsIt is not just institutional arrangements and business models that lock us into the

status quo in energy markets. It is also mindsets. Policy-makers are accustomed to anenergy system based on big, centralised projects like nuclear or gas-firedpower stations. Despite the environmental and economic inefficiencies oflarge power stations and long distance transmission and distribution, thereare perceived institutional efficiencies in hands-on management of alimited number of large generators. Micro-power generation on everyrooftop turns this model on its head.The boundary between consumer andgenerator becomes blurred, and the traditionally separate fiscal treatment ofproducers and consumers becomes problematic. Currently, producers arecompanies, who can benefit from the system of government incentives forinvestment. If consumers become producers, will they be eligible for thesame incentives, such as tax relief on loans, depreciation allowances and soforth? The introduction of micro-generation will require a generalreassessment of fiscal and regulatory regimes, to ensure that householdersare encouraged to produce their own power, not penalised.

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“ policy-makersare accustomedto an energysystem based onbig, centralisedprojects likenuclear powerstations”

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Policy-makers and regulators are also accustomed to a model of ‘consumerprotection’ that prioritises commodity consumption at least cost. In this modelelectricity and gas are products, which the ‘fuel poor’ must be able to purchaseaffordably.Thus Ofgem, the gas and energy markets regulator, still perceives itsprimary duty to be mitigation of any upward pressure on energy prices. But theaverage consumer is not going to worry about the price of a unit of energy in penceper kilowatt-hour. If they bother to worry at all about the cost of energy, currently ata record low, it is the bill that concerns them: and the bill is as much affected bytheir energy demand as by the energy price. Demand reduction via energy efficiencyand micro-generation will only be driven by higher energy prices, but can stilldeliver affordable (or even zero) energy bills in conditions of enhanced comfort.Energy markets need to shift away from selling and regulating electricity or gas as aproduct, to understanding what a customer wants from energy, namely comfort andconvenience at least cost, and climate protection.

Ofgem should also be taking a longer-term perspective when they seek to lowercosts for consumers. Innovation is needed in new micro-generation technologiesthat will be cheaper and more efficient than current models. Ofgem should have aclear remit to promote innovation, and remove any regulatory barriers to emerging

technologies as a matter of priority.This could also involve requiringutilities to conduct demonstrations of new technologies that have thepotential to lower costs and improve performance, as part of theirlicense to operate.The risk of such demonstrations could be shared sothat the company would not be penalised in cases of poor performance.

There is a need to reconfigure the relationship between the regulatorand supplier. This should be based on working together to remove thesupply company’s incentive to increase low-price electricity sales.Instead, suppliers should be competing on ability to reduce customers’bills by providing energy services, and investing in innovativetechnology, to run homes and businesses efficiently and at least cost.

the way forwardThe common assumption that micro-generation will remain prohibitively

expensive until beyond 2020 is a self-fulfilling one. Decisive policies are needed tobring micro-generation out of its niche market.

Three areas of policy development, in particular, would help bring micro-generation into the mainstream.The first is the use of planning and procurementpolicies to get micro-generation designed into new build, bringing costs downthrough scale economies.The second is the development of local heat and powernetworks to capture the real economic and environmental efficiencies of localgeneration.The third is energy services, which would enable existing householdersto pay back the upfront cost of micro-generation at an affordable rate through their bills.

new buildThe potential to cut micro-generation costs is not restricted to ‘wait-and-see’

technological innovation.The capital and installation costs of micro-generationtechnologies are artificially high due to the small scale of the current market. There

“ suppliers shouldbe competing onability to reducecustomers’ billsby providingenergy services”

are also big costs associated with sizing systems to meet the heat and powerdemands of draughty old homes – even after a little pre-emptive loft insulation anddouble-glazing – and with tacking them on to roofs or plumbing systems designedin previous centuries.

New homes and buildings can be designed to integrate micro-generation fromthe start, avoiding all the laboured adjustments and compromises of retrofit. Andwith the increased level of insulation to be required by new building regulations, orencouraged by the proposed Code for Sustainable Buildings, the systems needed tomeet energy demand can be smaller, and cheaper.

So the obvious place to start to mainstream micro-generation is withnew buildings.The scale of proposed government investment in newhomes and public buildings is substantial. The Government’s £38 billionSustainable Communities Plan will deliver 30,000 extra dwellings a year,bringing the total number of new homes each year to 180,000.Theanticipated carbon emissions associated with these new homes by 2016will be 4.2 million tonnes of carbon per annum.13 If the recommendationsof the recent Barker review, into housing supply and affordability, are takenup, the house-building programme will double to 4.5 million by 2016,with carbon emissions up by 7.8 million tonnes in 2016.

Meanwhile the Department for Education and Skills has set in motion aprogramme designed to rebuild or refurbish every secondary school in the countryin the next 10 to 15 years. Ninety-six new acute hospitals are also in the pipeline, tobe funded through the Private Finance Initiative (PFI). Every development wheremicro-generation or community heating is not assessed is an opportunity lost forsaving carbon emissions.

If all new publicly procured buildings were designed to generate a proportion oftheir own energy needs, micro-generation technologies could be produced on ascale that would bring costs down substantially.The same supply chains could thenmake the technologies available to householders for retrofit, at greatly reducedprices. A crucial opportunity to deliver this vision lies in the new Code forSustainable Buildings, as recommended by the Sustainable Buildings Task Force,which the Government plans to develop and roll out by early 2006.This will be avoluntary standard to benchmark best practice, but the Government can use theprocurement and planning systems to ensure that its standards are widely met.Achievement of high scores within the Code’s framework should require asignificant proportion of on-site renewable energy generation and CHP.

Private Finance Initiative (PFI) contracts for new hospitals and schools aretypically 25-30 years long, and embrace the design, construction and running ofthe building. In theory such long-term contracts should give contractors anincentive to invest upfront in micro-generation technology to reduce ongoing

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BOX D: zero energy developmentsPrototype zero carbon developments, such as Beddington Zero Energy Development

(BedZED) achieve about one third of their carbon reduction through micro-generation.The architect of BedZed, Bill Dunster, has calculated that, while the premium for 100zero energy dwellings is 30 per cent, at 1000 units it is only 15 per cent, and at 5000units supply chain efficiencies have cancelled out the premium. It follows that thegreater the number of ZED specification planning briefs, the lower the planning gainthat would need to be offered to cover the premium.14

“ the obviousplace to start tomainstreammicro-generationis with newbuildings”

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energy costs. In practice, however, private finance is averse to taking on the ‘lifecyclerisk’ of new, innovative technologies even when these are widely proven.The‘completion risk’ borne by contractors – to ensure they build on time and to budget– also means that the costs of finance for the design and construction phase arehigher than the costs of finance for on-going operating costs. Any savings onoperating costs thus have to be proportionately higher to justify increased capitalcosts, which the contractor will try to keep as low as possible. If new schools andhospitals are to be flagships for sustainable development, then procuringdepartments and authorities will have to be more active in specifying the need foron-site micro-generation.15

Private sector house-builders are also notoriously conservative, but not beyondthe reach of carrot-and-stick regulation by central and local government in thepublic interest. Both Building Regulations and positive planning policies have animportant role to play in encouraging use of micro-generation in new homes anddevelopment.

Positive planning policies enable regions and localities that are best placed to investin micro-generation at this stage to lead the way, and help realise economies of scalethat will enable regulations to set more demanding minimum standards in future.

The Greater London Authority has introduced a statutory policy that “the Mayorwill, and boroughs should, require major developments to show how the developmentwould generate a proportion of the site’s electricity or heat needs from renewables,wherever feasible”.16 Merton Borough Council has adopted a precedent-settingpolicy in its local plan, which sets an expectation that any new non-residentialdevelopment over 1000 square metres should generate ten per cent of its energyrequirements through on-site renewable energy. At least forty authorities, includingEdinburgh and Liverpool, are currently considering the inclusion of similar policiesin their local plans, in many cases extended to CHP.The clear support given to suchpolicies in the August 2004 Planning Policy Guidance on Renewable Energy (seedeveloper incentives) will give these authorities new confidence to go ahead.

One option would be for local authorities to set micro-generation targets in localplans that are proportionate to land value.This would mean that areas that couldmost easily afford the upfront capital costs would bear more responsibility for

delivering national targets (and helping to drive costs down) than moremarginal areas with lower residual land values. Where the Governmentis a significant landowner, as in the Thames Gateway, site planning briefscan mitigate any ‘burden’ on developers by offering increased builddensity or reduced land cost in direct proportion to increased costsincurred by higher targets for micro-generation and energy efficiency.

Building Regulations have an important role to play in drivinginvestment in technological innovation, to bring forward a newgeneration of more efficient micro-generation technologies.This willonly happen if the Government clearly signals future rising standards forcarbon emissions, beyond what can be met by existing technologies.TheODPM ‘forward look’ papers have begun to address this, and the newvoluntary Code for Sustainable Buildings could play an important role inanticipating future minimum standards.

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“ buildingregulationshave animportant roleto play in drivinginvestment intechnologicalinnovation”

local heat and power networksMicro-generation does not have to be confined to the scale of the individual

household. Energy service companies or local authorities can manage community-scale networks to supply locally generated heat and power to new or existingdevelopments with maximum economic and resource efficiency.

Given the mass transmission and distribution networks for electricity and gasalready in place, such community networks can seem like an unnecessarilyexpensive choice. But developers generally bear the cost of extending pipelines andstrengthening wires to new developments. National Grid Transco and the DNOs arehaving to invest ever greater sums to reinforce wires and pipelines to meet risingenergy demand.These ongoing costs are passed through to consumers and anypower generators that want to feed into the network.The high energy lossesassociated with long distance transmission and distribution of electricity alsoimpose costs, both in terms of economic and energy efficiency. District combinedheat and power, fuelled by gas or biomass, offers an opportunity to capture wasteheat from local power generation and circulate this in heat networks.

Community heat or power networks are one model for making localgeneration more affordable and environmentally efficient, by leaving outthe costs and inefficiencies associated with national network use. WokingBorough Council has pioneered private wire networks in the UK.The useof private wires enables green electricity to be sold directly to the customer,rather than exporting the electricity to the national grid and incurring ‘useof systems’ and losses charges. Woking has set up an energy servicescompany (ESCO),Thameswey Energy, which manages the generation ofheat, chilled water and power from a fuel cell CHP plant, solar PV array andabsorption cooling technology. As a small generator/supplier the ESCO isable to sell the electricity, heat and chilled water directly to customers onthe private wire and heat networks, rather than to a licenced supplier.

There are over 600 community heating schemes in the UK, some ofwhich already utilise CHP. Community heating provides a significantopportunity for biomass heating. Biomass energy is most economically viable whenthe heat potential is exploited.This is most effectively achieved by locating heat andCHP plants so that they can be linked at reasonable cost to heat-distributionnetworks. In Scandinavia heat distribution networks can extend economically fortens of kilometres and reach tens of thousands of homes and other premises.

New-build residential areas, hospitals and industrial complexes are the mostlikely applications for heat distribution networks but, for existing schemes,replacing fossil fuel boilers with biomass heating boilers is a relatively simple andeconomically-viable option.

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BOX E: Bracknell town centre redevelopmentBracknell Forest Borough Council has formed a partnership with Thames Valley

Energy, Waitrose, SEEDA, Slough Heat and Power and the University of Reading, todevelop a state-of-the-art district heating, cooling and power system to serve the towncentre, run on woodfuel. Waste wood thinnings from local forests and woodland willhelp power the energy plant in the short term, with new short rotation coppice plantedto provide fuel in the medium to long term.The proposal has received a CONCERTOgrant from the EU.

“ community heator power networksare one model formaking localgeneration moreaffordable andenvironmentallyefficient”

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energy servicesIncorporation of micro-generation into a proportion of the 180,000 new homes

built each year will help transform the market, but it is important to remember thatthe existing stock of homes numbers around 24 million.

If micro-generation is to be taken up by existing householders for retrofit, newforms of energy contracts, or energy service packages must be developed.Thesecould allow the upfront cost of the technology and installation to be paid backthrough bills over a longer period, and to be offset by tariffs that reward electricitygenerated and/or exported, especially at times of peak demand.

Energy suppliers could lease micro-generation equipment to consumers,businesses or housing associations, providing an ongoing source of revenue to thesupplier and a more attractive form of payment for customers.The technology

would be rented to consumers through a package including electricitysupply and purchase of electricity exports (and possibly gas supply inthe case of micro-CHP). With equipment leasing linked to supply in onecontract, there is also less risk that micro-generators are not properlyrewarded for electricity they export.

Such leasing contracts would also ensure increased levels of controland service of the technology, by energy suppliers and the associatedmicro-generation industry, thereby avoiding potential loss of customerconfidence from poor quality installation or lack of local servicing skills.

An alternative form of leasing contract would be heat and power leasing, inwhich a company installs micro-generation on domestic premises but retainsownership of the equipment, and probably acts as electricity supplier to thehouseholder (and heat provider in the case of micro-CHP).The customer pays forthe amount of energy/heat taken, and capital cost for the equipment is paidthrough a charge on the heat units delivered.

The advantage of delivering micro-generation through energy services is thatenergy efficiency and micro-generation investment can be optimized in one holisticpackage.Visible micro-generation technologies are more marketable commoditiesthan cavity wall insulation or lagging. But suppliers can advise customers tooptimize their micro-generation investment through an energy audit and baselineenergy efficiency measures.

Consumer protection policy has in the past acted as a barrier to energy servicepackages, by suppressing energy unit prices and regulating against long term fixedcontracts that would prevent customers switching suppliers at short notice: the so-called ‘28-day rule’.17 Theoretically, suppliers can offer long term contracts on‘goods and services’ like micro-generation, but they still face the risk that the supplypart of the contract could be switched away to another supplier, and this hasreduced the attractiveness of this option.

Ofgem is piloting a limited relaxation of the 28-day rule to assess how great anobstacle to energy services this is in practice. It is not yet clear that suppliersperceive a sufficient business case in diversifying away from competition aroundleast cost supply.

A contract involving micro-generation could have a wide range of potential valuestreams for a licensed supplier, including lease-finance, electricity supply, electricityexport, gas supply (for micro-CHP), maintenance and insurance. But the transactioncosts involved in energy services are higher, and the potential to improve customershare and retention is as yet unproven.

“ energy supplierscould leasemicro-generationequipment toconsumers”

If energy services are to be given a fair trial it will take more than relaxation ofthe 28-day rule. Creative public policy intervention is needed to create clearincentives for suppliers to market energy services, and to compensate for lowenergy prices by giving consumers tax benefits from whole house improvement viaenergy efficiency and micro-generation.

Equipment or heat and power leasing is not the only way to overcome theupfront cost barrier on micro-generation. Suppliers and finance companies are alsoexpressing an active interest in developing new financial products, such aspreferential loan rates on micro-generation investments or even new financialpackages linked to home mortgages or insurance products.

Energy suppliers are unlikely to be the only players in any emergingenergy services market. Familiar household names without any previousinvolvement in the energy industry are already lending their marketingweight to established energy suppliers. With their vast customer base andreputations, food retailers such as Sainsburys and Tesco could team up withsuppliers, or form their own energy service divisions, to extend credit insupport of innovative energy service offers. Engaging a range of trustedbrands in energy service marketing could help increase customerconfidence in energy audits and subsequent recommendations.

a micro-generation strategyThe Government has made an important commitment in the Energy Act 2004

to develop a micro-generation strategy.This section sets out a broad framework ofpolicies that Green Alliance and the Energy Entrepreneurs Network hope will beaddressed in the government strategy.

The Energy Act broadly defines micro-generation as the use for the generation of electricity or the production of heat of any plant which has a capacity below50KW electricity or 45KW thermal, and relies wholly or mainly on biomass,biofuels, fuel cells, photovoltaics, water (including waves and tides), wind, solarpower, geothermal sources, or a combined heat and power system.

In preparing this strategy, the Secretary of State has committed to considering“the contribution that is capable of being made by microgeneration to

(a) cutting emissions of greenhouse gases in Great Britain;(b) reducing the number of people living in fuel poverty in Great Britain;(c) reducing the demands on transmission systems and distribution systems

situated in Great Britain;(d) reducing the need for those systems to be modified;(e) enhancing the availability of electricity and heat for consumers in Great

Britain.”18

The Government has already shown commitment to promoting some forms of micro-generation through capital grants programmes and improved access to the grid network. However, micro-generation is still confined to a niche market,and needs to break through with economies of scale before it becomes accessible tothe majority. A wide range of policies is needed to address the market failures that prevent the value of micro-generation benefits beingreturned to micro-generators.

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“ energy suppliersare unlikely to bethe only playersin any emergingenergy servicesmarket”

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The strategy should aim to join up policy between ODPM, HM Treasury, the DTIand Defra, to reward the benefits of micro-generation, realise its communicationpotential, and help accelerate the economies of scale needed to bring down theupfront costs.

The strategy must be published within 18 months of the Energy Act entering intolaw, ie by December 2005.The DTI currently proposes to consult on a proposed strategyearly in 2005, with a view to publishing the final strategy by the end of 2005.

However, it is important that the Government should seek early dialogue withthe micro-generation industry, local and regional planning authorities, energysuppliers and the construction industry to ensure that there is appropriate ambitionin policy proposals.

The strategy should aim to generate sufficient demand for micro-generationtechnologies to enable significant scale economies in production. Without these

scale economies, unnecessary costs will be imposed on householders,developers and energy suppliers.

However, policies to drive demand should be phased, according to aclear timetable, to enable the micro-generation industry, installers anddevelopers to plan for additional capacity and training to meet this risingdemand efficiently.The Government should ensure that only quality,accredited suppliers can benefit from grants, fiscal incentives or planningrequirements for micro-generation. It is also vital that the Governmentdevelops simple and clear procedures for householders and smallbusinesses to benefit from grants and other policies to encourage micro-generation and export to the grid.

Excessive paperwork requirements, or slow response and poor serviceby micro-generation companies, could fatally undermine public interestand confidence in home energy generation.

Climate Change Programme reviewIn the latter half of 2004, the Government will review their climate change

policies to assess whether they are on track to deliver the UK’s 20 per cent carbonreduction target by 2010.This review represents an ideal opportunity to take afundamental look at the scope for micro-generation to engage consumers in climatechange policy.

Defra is planning a climate change communications project in recognition of thefact that awareness of the serious implications of climate change is low, and thatwhere it exists it often fails to translate into responsible energy use in the home.Thedomestic energy efficiency target for 2010 has already slipped by nearly a milliontonnes of carbon as a result.

Instead of scaling back ambition in this sphere, the review should makeconsumer engagement its key aim. It should as a priority give clear political supportto micro-generation as a means of engaging consumers in climate change policy,and catalysing more responsible energy use.

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recommendation:The Climate Change Programme review should give clear political support to

micro-generation as a means of engaging consumers in climate change policy.

“ excessivepaperworkrequirementscould fatallyunderminepublic interestin home energygeneration”

consumer incentives

Public policy should reward all forms of micro-generation that displace thecarbon embodied in imported electricity and gas, and lost in generation andtransmission from centralised power plant. However, specific policies are alsoneeded to ensure that power-exporting generators are rewarded in line with thevalue of the exported power.

capital grant schemesThere are currently three capital grants programmes with application to micro-

generation: the Major Demonstration Programme (MDP) for solar PV; the ClearSkies programme for micro-renewables; and the Community Energy scheme forCHP and local heat networks.

The Government has committed in two White Papers to a 2002-2012 ten yearsolar PV Major Demonstration Programme (MDP) in line with the UK’s majorcompetitors. The first phase of the MDP has been highly successful in bringingdown costs, leveraging private sector investment and in attracting many new playersto the UK solar PV market. Phase Two of the ten year programme is currently onhold, due to the Government’s decision to introduce a new capital grant programmefor all building-integrated renewables and energy efficiency technologies, asrecommended by the 2004 Renewables Innovation Review. However, the start date,funding and departmental sponsor of this new scheme are as yet uncertain, whilethe Major Photovoltaics Demonstration Programme and Clear Skies programme areboth due to end in March 2005.The resulting uncertainty for the micro-renewablesindustry is already impeding future investment, job retention anddevelopment planning.The Government should therefore confirm a one-year extension to both the Major Photovoltaics Demonstration Programmeand Clear Skies at the earliest possible date.This would ensure continuity ofsupport and allow the necessary time to develop and implement theproposed new funding scheme in 2005/6.

Grant schemes are currently invaluable in building a market for micro-generation. However, they will not be sufficient to transform that market. Ittakes an enthusiast to seek out these grants and shoulder the remainingupfront costs. Grants alone cannot make these technologies become anaccepted norm for householders and businesses.

home energy ratingsFrom 2007, all houses for sale will need an energy label or rating in their ‘home

information packs’. This requirement has been transposed from the EU EnergyPerformance in Buildings Directive into the Housing Bill. Energy labelling representsa good opportunity to get 1.2 million home sellers each year interested in installingmicro-generation technologies to increase their property value. Defra is still

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progress so far:● New provisions for simple import/export metering and simple connection.● Clear Skies and Major Demonstration Programme grant schemes.● Community Renewables Initiative and proposals for Sustainable Energy Centres

(see advice and training).● VAT reductions on ground source heat pumps and micro CHP.● Carbon Trust sponsored micro CHP field trials.● Fuel Poverty Strategy: 6000 micro CHP units to be trialled in fuel poor homes.

“ grants alonecannot makethesetechnologiesbecome anaccepted norm”

deciding how the ratings should calibrate to energy performance. Ratings should bedesigned to reward micro-generation as well as conventional energy efficiencymeasures like loft insulation.

If A-rated houses, for home information packs, had to generate a specifiedproportion of their energy requirements on-site this would help to consolidate theaspirational status of micro-generation technologies. Another approach would be torequire A-rated homes to be net exporters of electricity to the grid.This could be aneven more effective way of engaging consumers, as an A-rated home wouldrepresent an income-generating opportunity. However, this would promotetechnologies that generate electricity, like micro-CHP, over those that providerenewable heat, such as wood pellet boilers.

fiscal measuresIf energy services are to be successful it will take creative marketing by energy

suppliers and clear incentives for uptake by consumers.There is an urgent need toestablish a coherent set of fiscal incentives for energy ‘demand reduction’, applicableacross both energy efficiency and micro-generation technologies.

VAT reduction across micro-generation technologies is important, to remove theperverse VAT differential between energy use, at 5 per cent and demand reductionmeasures, at 17.5 per cent. Solar technologies already qualify for VAT reduction, andthis was extended to ground source heat pumps and micro-CHP in Budget 2004.Woodfuel boilers are still subject to the higher rate. Consistent application ofenhanced capital allowances (ECAs), refused in the 2004 Budget to solar PV, is alsoneeded to stimulate business investment in both energy efficiency and micro-generation. Given the likely importance of equipment-leasing models for micro-generation uptake, ECAs should be available for leasing payments as well as capitalcost. Such measures would help reduce costs in the short term and increase thelikelihood of micro-generation technologies being taken up in energy service offersor building regulations compliance.

However, where there is no inherent market for micro-generation suchincremental cost adjustments may not be sufficient to drive consumer interest.Measures are needed that will encourage a ‘whole-house’ or ‘significant homeimprovement’ approach to carbon reduction in the home. In other words, fiscalincentives need to be used to encourage homeowners and landlords to assess the

carbon footprint of their property, and to make the necessary changesacross the board, in order to increase their property value.

The introduction of energy ratings in home information packs in 2007is an ideal opportunity to introduce a decisive fiscal incentive to motivatehomeowners to invest in micro-generation and energy efficiency. Rebatesfrom stamp duty or council tax for homes with a good energy ratingwould give a clear incentive.Tax avoidance is a powerful motivator.Surcharges for poorly-rated homes could help keep the policy revenue-neutral, but low interest credit schemes are needed to make capitalavailable for such investment among lower income groups. A well-developed market in energy service provision by suppliers wouldovercome this barrier (see supplier incentives).

The 2003 HM Treasury consultation on economic instruments topromote energy efficiency dismissed personal tax rebates or stamp dutyrebates on the grounds that they “would be administratively complex andwould also give weak signals”.19 However, no evidence was provided forthis statement.The refusal to consider such ‘whole house’ approaches was

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“ measures areneeded thatwill encouragea ‘whole-house’or ‘significanthomeimprovement’approachto carbonreduction”

widely seen as a significant weakness in the consultation and current governmentposition. Pilot trials of variable council tax are urgently needed to deliver anevidence base for their wider application.

export rewardSince 1991 Germany has rewarded export of renewable power to the grid with a

guaranteed premium price or feed-in tariff. The tariffs are set for each individualtechnology, based on its actual generation cost. Until 2002 this premium price hadto be paid by the utilities, but this obligation has now passed to the grid operators.

Similar models have been adopted in Spain, France, Austria, the Netherlands,Luxembourg, Greece and Portugal. The feed-in tariff model should be considered asone approach to overcoming some of the market failures that, in the UK, currentlyprevent the value of exported power being returned to the micro-generators. Tomake this model cost-reflective, the tariff could be set according to the standardgeneration and export profile of each technology.

Metering is the obvious basis for accurately measuring and rewarding export ofsurplus power by micro-generators. However, where electricity exports are small,some metering solutions may not be cost-effective. Net metering would secure thebest deal for micro-generators but, as discussed above, is not strictly cost-reflective,and by measuring only the net export or import may make trading of exportedelectricity by suppliers unviable.

Currently half hourly meters are required to measure the exported electricity forsystems larger than 15 KW. At a cost of £800-1000, such meters cost more than anyfeasible return from settlement or ROC payments, and as such are a big barrier togrid connection.The threshold for half-hourly metering should be raised to morethan 50KW and, for very small generators, settlement for electricity exports by wayof export profiles may be the way forward. In the case of micro-CHP, such profilingwill depend for accuracy on effective monitoring of technology performancethrough field trials. In the case of micro-wind turbines, simple export metering isrequired to reflect the variation in output profiles according to wind speed.

distribution chargesA new electricity distribution charging system will be finalised by January 2005,

for implementation by DNOs in April 2005. Despite recent research for the DTI thatdemonstrates that additional micro-generation will overwhelmingly drive downcosts for DNOs,20 it is currently proposed that micro-generators should pay anadditional capacity charge to DNOs in common with all distributed generation.Thiswould be counter to the principle of cost-reflectivity, which requires thatdistribution charges should directly reflect network costs. Therefore micro-generation should be exempt from any additional capacity charge for distributedgeneration.

Renewables Obligation CertificatesFollowing a technical revision to the Renewables Obligation, micro-renewable

generators can now, in theory, sell Renewabes Obligation Certificates (ROCs) tosuppliers if they generate at least 0.5 megawatt-hours in a year.The averagehouseholder in Npower's pilot 'solar account' scheme, for instance, will generatesufficient electricity to be eligible for one or two ROCs each year, which wouldcurrently bring in £49 each. However, to apply for ROCs the micro-generatorcurrently needs to complete a 25-page application document and supply regularmeter readings to Ofgem.The average householder will struggle to fill out a 25-page application scheme for ROCs. Ofgem needs to make it feasible for suppliers

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21

to apply for ROCs on their customers' behalf. However, the cost of Ofgem-approvedmeters for each micro-generator may cancel out the value of the ROCs for suppliers.The DTI should take further legislative steps to ensure that the meteringrequirements for micro-generators to apply for ROCs are not prohibitive, and tosupport supplier buy-back schemes.

Winter Fuel PaymentsCurrently, £1.85 billion is spent on winter fuel payments (WFPs)

annually.The system of WFPs could be used more effectively to encourageelderly homeowners not eligible for free installations under the EnergyEfficiency Commitment or Warm Front to reduce their fuel needs. As analternative to the standard WFP the Government should offer installation ofcavity wall insulation and/or micro-generation to achieve annual billreductions greater than the value of the standard payment, as well asenhanced comfort. The standard payment should be reduced to cross-subsidise this programme and encourage the elderly to opt for homeimprovement.

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“ £1.85 billionis spent onwinter fuelpaymentsannually”

recommendations for consumer incentives:● The Government should confirm a one-year extension to both the Major

Photovoltaics Demonstration Programme and Clear Skies, until March 2006, atthe earliest possible date.

● VAT reductions and ECAs should be applied consistently across all micro-generation technologies, to ensure their fiscal treatment is equivalent to that ofenergy units.

● ECAs should be available on revenue payments for leased equipment, inrecognition of the likely importance of equipment-leasing models.

● Stamp duty rebates for low carbon homes should be introduced to coincidewith new home energy ratings in 2007.

● Pilot trials should be held to assess the impact of revenue-neutral council taxbanding, based on Standard Assessment Procedure (SAP) ratings, on consumeruptake of energy efficiency and micro-generation, and quantify the likelyadministrative costs.

● Energy performance rating A in new home information packs should require aspecified proportion of on-site energy generation.

● The threshold size for micro-generation systems subject to the costly half-hourlymetering requirement on grid connection should be raised to more than 50KW.

● For very small generators, export and import profiles should be developed as abasis for settlement for electricity exports.

● The feed-in tariff model, which gives a premium price for exported electricity,should be considered as one approach to returning the value of exported powerto micro-generators. To make this model cost-reflective, the tariff could be setaccording to the standard generation and export profile of each technology.

● Micro-generators should be exempt from the proposed additional capacitycharge by DNOs for distributed generation, to reflect their network benefits.

● The DTI should take further legislative steps to ensure that the metering andpaperwork requirements for micro-generators to apply for RenewablesObligation Certificates are not prohibitive.

● Government should offer installation of energy efficiency measures and/ormicro-generation as an alternative to Winter Fuel Payments.The standard WFPshould be reduced to cross-subsidise this programme.

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23supplier incentives

Energy Efficiency CommitmentThe Energy Efficiency Commitment (EEC) is currently the major policy

mechanism for improving the energy efficiency of existing homes. Each supplier hasan energy saving target, which they can meet by encouraging householders to installenergy saving measures.The Government has proposed an expansion of EEC to runfrom 2005 to 2012, at roughly twice its current level of activity in the second phase,to deliver carbon savings of around 1 million tonnes of carbon by 2010.

The Energy White Paper acknowledges that this level of obligation will requireenergy suppliers to take up a substantial proportion of the potential for higherenergy efficiency in homes, but the easiest approaches have been made under thecurrent EEC programme. Currently, suppliers perceive EEC as a burden, and seek tocomply at least cost. As the Energy White Paper acknowledges, “While energysuppliers are selling energy saving measures under EEC, few have sought to developnew markets in energy services”.21

The forthcoming EU Directive on Energy End-Use Efficiency and Energy Serviceswill require member states to provide credible incentives for energy suppliers tooffer energy services and energy efficiency measures. If EEC is to be effective,householders have to take advantage of suppliers’ energy efficiency offers, and this isa challenge.The forthcoming trial suspension of the 28-day rule, which has beenintroduced as an incentive for the development of energy services, offers anopportunity to evaluate the commercial potential for new innovative approaches.Energy suppliers need an incentive to market offers creatively, and to harnessconsumer interest by combining energy efficiency with micro-generation.

Suppliers and NGOs agree that there is an urgent need for more creative optionsto be proposed giving an incentive for suppliers to move beyond least-costcompliance, and permitting third party implementation of household or SMEdemand reduction projects. Micro-generation technologies offer more attractivemarketing propositions for suppliers, and could act as a hook for broader energyefficiency investment by consumers.

But unlike the Renewables Obligation, there is currently no incentive forsuppliers to compete with each other to offer the best energy services packages,because there are no certificates to be traded if they exceed the commitment.Trading schemes, based on ‘white certificates’ for energy efficiency, are alreadybeing developed in France, the International Energy Agency is studying the potentialof this model at an international level, and a number of other countries are activelyconsidering the issue.Tradeable demand reduction certificates would give energysuppliers an incentive to apply their marketing expertise to promoting all means ofreducing the carbon footprint of energy demand, micro-generation included.

The Government has indicated that it is willing to consider more market-basedapproaches for the third phase of EEC, for which a target will be set in 2008. In themeantime, the second phase of EEC from 2005-2008 can help support micro-

progress so far:● 28 day rule relaxation pilot scheme.● 2003 technical revision to the Renewables Obligation, enabling micro-renewable

generators to sell ROCs to suppliers on basis of annual output.

generation technologies through ‘uplifts’, meaning that suppliers would score extrapoints towards their target by installing micro-generation.

Renewables Obligation CertificatesA customer acquiring one ROC alone will find it difficult to sell this to the

market. However through a buy-back arrangement suppliers can consolidate ROCsand sell these to the market bundled together.This will give suppliers an incentiveto pay householders for any renewable electricity generated, whether it is exportedor used on-site. However, the commercial value of this kind of package depends onthe cost of approved meters for obtaining ROCs.The incentive for suppliers andmicro-generators will not exist until Ofgem approves affordable metering solutionsor profile-based data for ROC applications.

fuel povertyIf a credible incentive mechanism is to be developed in the UK, there is also a need

to evaluate the effectiveness of current approaches that merge fuel poverty and energyefficiency objectives. Fuel poverty obligations may constrain the cost-effectiveness ofmarket mechanisms to deliver energy efficiency, and there is a need to explore howfuel poverty might be addressed alongside such instruments.The fuel rich may proveto be more responsive targets for suppliers marketing micro-generation.

developer incentives

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recommendations for energy supplier incentives:● Government should develop proposals for a market-based trading mechanism in

demand reduction certificates to succeed the existing EEC scheme in 2008.● Uplifts should be given to micro-generation technologies under EEC2 to support

their role in energy service packages.● The DTI should take further legislative steps to ensure that the metering

requirements for micro-generators to apply for Renewables ObligationCertificates will not involve prohibitive cost, and to support supplier buy-backschemes.

● The potential to de-merge fuel poverty and energy efficiency policies should beexplored, in order that the fuel rich might be cost-effectively targeted,particularly with micro-generation.

● Ofgem should have a clear remit to promote innovation, and remove anyregulatory barriers to emerging micro-generation technologies as a matter ofpriority.

progress so far:● Clear support in PPS22 for local authorities requiring on-site renewable energy

generation in large new developments.● Draft Part L Building Regulations introducing ten per cent carbon reduction

through micro-generation as an alternative to further energy efficiency measuresfor commercial buildings.

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25procurementThe Government has accepted the recommendation by the Sustainable Buildings

Task Force for a new Code for Sustainable Buildings, to benchmark performanceabove building regulations minimum standards.The Code will enable a consistentbest practice standard to be developed, building on the BRE’s BREEAM methodology,but setting minimum standards on energy (as well as waste, water efficiency andmaterials use). A project group and senior steering group are developing the Code,with a view to a national rollout by early 2006.The Code framework should bedeveloped so that achieving a high score requires a significant proportion of on-sitegeneration of renewable energy or CHP.The Government should specify this highscore as the minimum requirement for all publicly procured buildings.

In PFI contracts micro-generation paybacks become more affordable thanks tothe bundling of capital and operating costs in a unitary payment. However,contractors are reluctant to propose it in one-off bids, due to risk aversion anduncertainty about its acceptability to procuring authorities. Governmentdepartments should therefore specify a proportion of on-site generation fromrenewable energy or CHP as a target for a group of deals, or ‘programme’. Micro-generation is particularly appropriate to the Building Schools for the Futureprogramme, as such visible climate change solutions are a valuable educational aidfor teaching science, citizenship and sustainable development.The Exemplar Designsdeveloped for this programme are good on energy efficiency but make scarce use ofvisible micro-generation.The Design Quality Indicators, which will be the basis ofthe departmental approvals process for projects, should remedy this.22

Another opportunity lies in the Government’s Decent Homesprogramme. Whether through PFI or conventional procurement, £7 billioninvestment is earmarked to bring council housing up to the decent homesstandard by 2010. One million homes are still to be refurbished. In itsevaluation of this programme, HM Treasury should emphasise the role thatmicro-generation can play in meeting the standard and reducing energybills for tenants, especially in hard-to-heat homes with solid walls, or thoseoff the gas network.

Government procurement also has a vital role to play in helping tobridge the gap between demonstration and commercialisation for emergingmicro-generation technologies. Public bodies (or regulated energy companies)could make a forward commitment to purchase a significant volume of a newtechnology, at a defined price, if a demonstration project meets a previously agreedstandard.This would attract private funding for the demonstration and, critically,allow pioneering companies to engage with their supply chains on the basis of adefinite future order.

planningThe Government made a welcome commitment in the Energy White Paper to

examine “how to bring consideration of the use of renewables and energy efficiencyin developments more within the scope of the planning system, in the context ofthe review of PPG22 and the Government’s wider planning reforms, and in a waythat does not impose undue burdens on developers”.23

A very important step has been taken towards this goal in the new PlanningPolicy Statement on Renewable Energy (PPS22), published in August 2004.Thisconfirms that “Local planning authorities may include policies in local developmentdocuments that require a percentage of the energy to be used in new residential,commercial or industrial developments to come from on-site renewable energy

“ anotheropportunitylies in theGovernment’sDecent Homesprogramme”

developments”. It also states that local planning authorities should specificallyencourage renewable energy schemes in all new developments through positivelyexpressed policies in local development documents.

Merton and Woking Borough Councils and the Greater London Authority havealready introduced local planning policies requiring on-site renewable energygeneration in large new developments, and over forty councils, including Edinburgh,Bristol, Belfast and Liverpool, are now planning to take a similar approach.

Local development policies promoting on-site renewable energygeneration should also give support to community and domestic gas-firedCHP, which can achieve significant carbon savings and share the advantagesof renewable generation as a means of engaging businesses andhouseholders in co-production of energy. In line with the recommendationsof the Royal Commission on Environmental Pollution’s recent report onbiomass,24 we recommend that the ODPM encourage councils to requirenew developments to include biomass district heating and CHP wherever itis feasible.

The Sustainable Communities Plan should be seized as an opportunity toset targets for micro-generation that will enable a dedicated supply chain toreduce technology costs across the board, through economies of scale.Where the Government is the landowner, as is the case for a significant

proportion of the Thames Gateway growth area, there is clear potential for offeringdevelopers reduced land costs and/or increased build density to offset the increasedcapital costs of more on-site generation.This strategy is consistent with affordablehomes targets, in that homes with micro-generation are insulated from the socialimpact of future energy price rises.

Building RegulationsBy helping bring prices down through economies of scale, pioneering planning

authorities can help pave the way for building regulations to progressively raisenational minimum standards on micro-generation.

The Government proposals for the 2005 amendment of Building RegulationsPart L, which deals with energy performance, represent a useful step forward.TheEnergy Performance in Buildings Directive requires that Member States take thefeasibility of renewable energy systems and CHP into account at the design stage oflarge new developments (over 1000 square metres).The Government has electednot to prescribe the incorporation of micro-generation. However, in the case ofcommercial buildings of any size, it is proposed that developers should deliver tenper cent carbon reductions over and above what might be achieved by a ‘typicalpackage of conventional energy efficiency measures’, through either micro-generation or further energy efficiency investment.

There is no reason why this non-prescriptive policy should not also be appliedto residential developments over 1000 square metres.The impact of this approachwill depend on the stringency of the overall carbon emissions target, by floor area,that is set. The Government has indicated that the notional contribution from micro-generation will rise to 20 to 30 per cent at the next revision.The proportion shouldbe set at a level at which it is impossible to achieve the overall emissions targetwithout some contribution from on-site renewable energy, rather than furtherenergy efficiency measures.

The Government is beginning to use Building Regulation reviews moreeffectively to help unblock the innovation chain for emerging technologies such as

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“ the SustainableCommunitiesPlan should beseized as anopportunity toset targets formicro-generation”

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27fuel cells. The clearest possible signal is needed of the likely minimum reduction incarbon emissions required over subsequent reviews of Part L, to give a clearindication to developers, investors and the renewable energy industry that there willbe a future market for higher performing buildings and technologies.The ODPMhas indicated that future reviews will be conducted at least every five years, and thatat each the ‘likely’ level of performance improvement sought will be in the order of20 to 30 per cent. Further certainty could be given by clarifying the minimumsubsequent performance increase.The new Code for Sustainable Buildings could alsobe a useful tool in signalling future mandatory standards.

advice and trainingA number of agencies and networks have been established with the aim of

enthusing and advising the public about sustainable energy.

The Community Renewables Initiative is coordinated by the Countryside Agency,and operates via a network of ten local support teams, which are partnershipsbetween local councils and energy experts (Annex B).The teams aim to raiseawareness in communities of the possibilities of small-scale renewable energy, andto help steer interested groups through the complexities of feasibility assessment,funding, technology issues and planning consent.The role that these teams can playin getting communities enthused about micro-generation is crucial in the battleagainst public apathy and antagonism over renewable energy.This scheme should beexpanded to cover the whole of England and Wales, and to include urban

recommendations for developer incentives:● The Code for Sustainable Buildings should be developed so that a high score

requires a significant proportion of on-site generation of renewable energy orCHP. Government should specify this high score as the minimum requirementfor all publicly procured buildings.

● The Department for Education and Skills should specify a proportion of visibleon-site micro-generation as a Design Quality Indicator for all contracts underthe Building Schools for the Future programme, to give contractors certaintyacross a large number of bids.

● Public bodies should help drive innovation, by making a forward commitmentto purchase a significant volume of a new technology, at a defined price, if ademonstration project meets a previously agreed standard.

● The Government should set targets for on-site generation for growth areaswithin the Sustainable Communities Plan to enable a dedicated supply chain toreduce technology costs across the board through economies of scale.

● Where the Government is the landowner, as is the case for a significantproportion of the Thames Gateway growth area, developers should be offeredreduced land costs and/or increased build density to offset the increased capitalcosts of higher targets for on-site generation.

● The 2005 Part L Building Regulations review should extend the option forcompliance through micro-generation to residential developments larger than1000 square metres. Future revisions should set carbon emissions targets such thatit is impossible to meet them without some on-site renewable energy generation.

● The Government should give clear signals of the minimum anticipated rise incarbon emissions standards over subsequent reviews of Part L, to help unblockthe innovation chain for higher performing buildings and technologies.This canbe achieved via the Code for Sustainable Buildings and the ODPM ‘forward-lookpapers’.

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communities, where the role for micro-generation in fostering increased climatechange awareness and social cohesion is just as important.

When it comes to advice provision to individual householders, however, it isimportant that renewable energy advice is not a stand-alone service, but is deliveredwith energy efficiency advice in an integrated way.This will help harness all the‘home improvement’ synergies between energy efficiency and renewable energythat micro-generation can foster.

The Energy Saving Trust is proposing to transform the existing network of 52Energy Efficiency Advice Centres and five pilot Renewable Energy Advice Centresinto new Sustainable Energy Centres (SECs).This more integrated approach will helpensure that advisers can combine the excitement factor of micro-generation withrecommendations on basic cost-effective efficiency measures. SECs can play the role

of honest broker and support people through the sometimes-demandingprocess of feasibility assessment, grant application, installation andoperation.

An important role for SECs will also lie in providing advice and supportto local planning authorities in negotiating with developers on micro-generation requirements for new build. While local plans promotingmicro-generation are still few and far between, pioneering authorities willneed technical advice on negotiating and monitoring compliance.

There is also an urgent need for SECs to educate and advise local planningauthorities, to ensure a consistently supportive approach to roof-mountedmicro-generation. Outside conservation areas and AONBs, solar thermal andPV panels have ‘permitted development’ status – meaning that no priorplanning permission is required – but this is conditional on the panels notprotruding ‘significantly beyond the existing roofline.’ In practice thisjudgement is at the discretion of local planning officers, and eight-weekapproval procedures can be imposed at random. In the case of micro-windturbines the complexity of securing planning permission is also highlyvariable at present, depending on the experience and attitude of localplanners.

recommendations for advice and training:● The Community Renewables Initiative should be expanded to cover the whole

of England and Wales, with additional funding.● SECs should have the capacity to provide advice and support to local planning

authorities, both in negotiating with developers on micro-generationrequirements for new build, and in dealing with planning permission for roof-mounted renewables.

“ advisers cancombinethe excitementfactor ofmicro-generationwithrecommendationson basiccost-effectiveefficiencymeasures”

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29annex A – micro-generation technologies

existing technologies

ground source heat pumpsGround source heat pumps (GSHP) are in widespread use across the rural United

States but until recently have had a very low profile in the UK.They operate byextracting the solar energy that is stored in the ground a few metres down at a constanttemperature of 11-12ºC, and pumping this heat into the home for space heating andhot water. A chilled water/antifreeze mix circulates in a coil of pipe – the ‘ground loop’– absorbing the ground heat.The heat pump operates like a reverse refrigerator, usingthe evaporation and condensing of a refrigerant to move this heat from the groundloop into the hot water tank. Electricity input is required, but for every unit ofelectricity used to pump the heat, three to four units of heat are produced. Heat fromground source heat pumps can therefore be said to be 75 per cent renewably sourced,and 25 per cent electrically driven. So far, 200 to 300 domestic systems have beeninstalled in the UK, and there are 100 commerical installations of various sizes.Themost significant roll-out scheme is managed by Powergen, as one route to fulfillingtheir EEC target. Housing associations are the main clients.

They are currently most suited to new-build schemes, for two reasons. Digging atrench or drilling a vertical borehole for the ground loop can be messy anddisruptive, more suited to a building site than a garden.They also operate at highestefficiencies with underfloor space heating, because water can circulate in thesesystems at lower temperatures. However, new models such as the Powergen heatplant can operate through radiators. They can also raise hot water temperature to60°C, although at lower efficiency.

GSHPs are ideal for homes off the gas network because, based on current fuelprices, a GSHP can be a cheaper form of space heating than oil, LPG and electricstorage heaters. It is, however, more expensive than mains gas. Given newregulations on the siting of oil tanks, the upfront cost of heat pumpinstallation is now comparable to oil-fired boilers. 4.5 million householdsin the UK have no gas supply, and at least 1 million of these are fuel poor.Retrofit schemes are being piloted, notably by Penwith HousingAssociation, and research is being directed at means to minimise thedisruption of installation.

As average summer temperatures rise, GSHPs will have another attribute:they can be reversed to deliver space cooling, from the same equipment,avoiding the need for a separate air conditioning unit.

cost dynamics:Economies of scale in production already mean that Powergen can supply their

heat plants significantly cheaper than on the open market. Half the cost of a GSHP isthe installation of the ground loop: these costs already come down if a number ofboreholes are being drilled on the same site, and are predicted to halve in futureonce installers become more familiar with the technology and if builders can bepersuaded to plan ahead to minimise disruption.

skills needs:Installation of heat pumps is similar to fitting a conventional boiler and can be

undertaken by plumbers, although there is resistance to fitting new technologies in

“ ground sourceheat pumpsare ideal forhomes off thegas network”

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the industry.The chilled water technology involved in ground loop pipes mayrequire some additional training for plumbers, and is currently undertaken by asmall network of specialist installers.Vertical boreholes for the ground loops arenecessary for high density social housing, and need specialist drillers: however,family well drilling businesses are still to be found in most towns around the UK,so there is a latent installation network.

micro-wind turbinesMicro-wind turbines make use of aerodynamic blades that harness the wind to

turn a shaft inside a generator, and generate electricity for domestic use and/or export.

Current models available in the UK, manufactured by Proven Energy, Iskra Windand Marlec, are raised on free-standing poles at a distance from the house, and due to the constraints of wind speed are predominantly for rural application, or on the edge of towns. However, two near-commercial models exist which will beroof-mounted: the Swift roof-mounted turbine by Renewable Devices, and theWindsave model.

The UK industry is already a recognised world leader in micro-turbines forbattery charging applications at off-grid sites.

cost dynamics:Currently the low level of demand means that micro-wind turbines are generally

built to order, rather than mass-produced. Even before a volume threshold for massproduction is crossed, costs will fall with increased demand due to supply chainefficiencies. Housing associations and local councils are expressing increasinginterest in installations of several turbines in series, on one site, which wouldreduce the costs associated with installation.

skills needs:The basic skills required for micro-wind turbine installation are transferable.

These skills are predominantly electrical, but basic mechanical skill is required forraising the pole, in the case of free standing models, and fitting the turbine head.Electrical contractors are already used as distributors.

solar thermalSolar thermal systems are used to convert solar energy into hot water. Collectors

fitted to the roof absorb heat from sunlight, and use it to heat liquid, which releasesits heat into a hot water cylinder for household use, before returning to thecollector panels.

42-50,000 homes currently have solar thermal systems installed, delivering 50MW thermal output.

The solar collector should be as close as possible to the hot water cylinder formaximum efficiency, so solar thermal systems are suited to terraced, semi-detachedor detached houses rather than blocks of flats. Sixty per cent of boilers are currently‘combi’ systems, with no separate hot water cylinder: this makes solar thermalinstallation more problematic, so roughly 40 per cent of homes are suitable.

Solar thermal systems, on average, supply 90-100 per cent of hot water demandin summer, 50 per cent in spring and autumn, and 10 per cent in winter, but thiswill vary according to patterns of hot water usage.

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31cost dynamics:Solar thermal technology is mature in design, but volume efficiencies could

deliver cost reductions of up to 20-30 per cent. At least half the costs areattributable to scaffolding for roof mounting, and system installation. Costs will besignificantly reduced if installation can coincide with re-roofing or be integratedwith new build, avoiding the additional cost of scaffolding. Costs will varyaccording to the ease of roof access and how close the hot water cylinder is locatedto the solar collector.

skills needs:Specialist installers currently dominate solar thermal installation. Although the

plumbing skills required are no different from conventional boiler installation, mostplumbers are unfamiliar with the technology and reluctant to undertake the roofmounting. Plumbers could help drive demand and facilitate installation by raisingthe option of solar thermal systems when called in to replace a boiler.

solar photovoltaics (PV)The solar photovoltaic process converts solar energy directly into electricity.

Photovoltaic cells consist of two or more thin layers of semi-conducting material,most commonly silicon.When the silicon is exposed to light, electrical charges aregenerated and this can be conducted away by metal contacts as direct current (DC).Multiple cells are connected together to form a module or ‘panel’.The PV module isthe principle building block of a PV system and any number of modules can beconnected together to give the desired electrical output.

The total PV capacity installed by the end of 2003 is 5.9 MWp., 1.8MWp ofwhich was installed in 2002 under the first phase of the Government’s MajorDemonstration Programme (MDP) for solar PV. Although rapidly growing, the UK isstill far behind the installed capacity of many other countries. For instance, Germanyinstalled 150 MWp in 2003 alone and is on course for another 200 MWp this year.Japan’s 2010 target is 4.8 GW of installed PV capacity.

cost dynamics:According to the industry, the most significant short-term cost reductions will

come from standardisation, building industry capability and scale up of production.Prices in Germany are already significantly cheaper than current UK prices. PVbuilding products such as roof tiles and glazing are starting to be available in the UK,and have the advantage of replacing conventional cladding materials, which canrepresent a significant cost. Systems integrated into new build should be cheaper thanstandard modules, but many of the new building-integrated products are currentlymore expensive because of aesthetic design and the small volume of production.

skills needs:Most of the necessary skills are available within the building industry, amongst

electricians, cladding installers and roof tilers. However, awareness of the technologyand its potential applications is low.

micro-hydropower turbinesMicro-hydro schemes use the force of river currents to drive a small turbine to

generate electricity. Micro-hydro systems are usually defined as those smaller than1.25 MW.There is over 11MW of micro-hydro generating capacity already in theUK.There are tens of thousands of former mill sites, with the estimated potentialfor a combined generating capacity of 500MW to 2,000MW.

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skills needs:The skills needed for installing micro-hydropower are basic mechanical and

electrical engineering skills, for assembly, and basic civil engineering skills for thebuildings and water conduit work.

woodfuel boilersModern wood fuel boilers are self-feed systems, which burn high-density wood

pellets or woodchip.The process is carbon neutral, only releasing the carbon thatthe tree has absorbed in its lifetime. Woodfuel supply creates an incentive forcoppicing of under-managed woodlands, or planting new farm energy crops, suchas short rotation willow coppice, with benefits for biodiversity and rural economies.

The main challenge is currently fuel supply. Customers are reluctant to purchasewoodfuel boilers when they are not confident of the supply chain. 3G Energi andother UK companies currently import pellets from the continent and sell them at aloss to maintain the market. However, the Forestry Commission estimates that thequantity of park and garden waste arising in towns and cities could total 492,000oven-dried tonnes per year, if the resource were exploited fully.The governmentshould offer rewards to local authorities that process their wood waste into pellets.In the short term a central bulk purchase of pellets would help all the companiesinvolved in the supply and installation of woodfuel boilers. However, the carbonemissions and costs associated with transport of woodfuel must be taken intoaccount, so policies should be directed at encouraging local and regional supply.

The Clean Air Act still prevents installation of woodfuel boilers in large urbanareas.This should be revised to reflect the fact that woodfuel burns cleanly inefficient new boilers and stoves.

emerging technologies

micro combined heat and power (micro-CHP)There are currently two near-commercial models for micro combined heat and

power units: BG Microgen’s wall-mounted Microgen unit, and the Powergen-Whispertech floor-standing Whispergen unit. Market launch dates for both arescheduled for 2005 to 2007. Pilots of the Whispergen unit have been carried out in50 UK homes over the past three years, and 400 units have been available to buy inthe UK in 2004. Carbon Trust-sponsored field trials are currently being undertakenon both units.

The output of the micro-CHP units is thermally driven, i.e. it is timed to meetthe demand for hot water and heating rather than power. However, peak heating andelectricity demand are closely aligned, so the power generated will be displacingpeak power demand whether used on-site or exported. As such the power unitsgenerated will be of high economic and environmental value, as they will helpdisplace the need for the expensive, carbon-intensive, coal-fired power plant that isbrought on line to meet peak demand.

The different seasonal and daily profiles of solar PV and micro-CHP powergeneration can be combined to form an effective package. Over the longer term, itis also possible that micro-CHP units will be based on fuel cells. A fuel cell micro-CHP system is being tested by the Carbon Trust field trials. If fuel cells aresuccessfully incorporated into micro-CHP units, then it is likely that this will raisethe conversion efficiency of the technology and expand the market rapidly.

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33stationary fuel cellsStationary fuel cells could be applied in many ways to increase the efficiency of

micro-generation as well as the capacity for power storage.They will be able toprovide power and heat at scales ranging from local networks to micro-grids andindividual buildings.

The US and Japan are developing systems that convert gas to hydrogen for thefuel cell to produce electricity, and use the waste heat for heating. Other possibilitiesinclude reversible fuel cells that can store the power generated by wind orphotovoltaics, by converting it to stored hydrogen by electrolysis, and back toelectricity when it is needed. Again the waste heat from this process would beharnessed in a combined heat and power mode.

Current and planned fuel cell CHP systems include the established Woking Park250kW system, a 4.4kW alkaline fuel cell CHP system at the Black Country HousingGroup in the West Midlands installed in March 2004, and a small system forBerwickshire Housing Association which will power a new eco-house.

Moving beyond demonstration projects, commercialisation of small-scale fuelcell CHP is anticipated by 2008, with MW-scale stationary power developingtowards 2010.25 Several firms that are developing fuel cell CHP systems fordomestic application already have trials in the UK and the rest of Europe, or areplanning trials imminently.Vaillant plans to launch its model to the market in 2008.

annex B – relevant policy agendas by department

DTI & OfgemProgress so far:● 28 day rule relaxation pilot scheme.● Simple import/export metering and simple connection.● Clear Skies and Major Demonstration Programme grant programmes.Needed:● Simplification of procedures for micro-generators to access ROCs.● Distribution Charges Review: fair reflection of micro-generation benefits in

charging structure.● Reward mechanisms for power export.

ODPMProgress so far:● Part L Building Regulations compliance option to support micro-generation.● PPS22 – clarity that local authorities can, and are encouraged to, require on-

site generation in large new developments.Needed:● Sustainable Communities Plan: micro-generation targets for growth areas.● Code for Sustainable Buildings: high score to require proportion of on-site

renewable energy generation or CHP.● Permitted development status for roof-mounted micro-renewables.

DefraProgress so far:● Carbon Trust sponsored micro-CHP field trials.● Community Energy grant programme.● Fuel Poverty Strategy – 6000 micro-CHP units to be trialled in fuel poor

homes.Needed:● Climate Change Programme review: look at the scope for micro-generation to

engage consumers in climate change policy.● More ambitious domestic energy efficiency aim – now 4.2MtC by 2010,

compared to 5MtC in the Energy White Paper.● Enhancements in EEC2 to provide temporary kick-starts for micro-generation.● EEC3 from 2008 – trading in demand reduction certificates.● New Sustainable Energy Centres should have the capacity to provide advice

and support to local planning authorities on micro-generation.● Community Renewables Initiative should be extended.

HM Treasury/ Customs and ExciseProgress so far:● VAT reductions on solar technologies, ground source heat pumps and

micro-CHP.Needed:● VAT reduction extended to all micro-generation technologies.● Stamp duty and council tax rebates to drive consumer investment in micro-

generation and energy efficiency.● High score in Code for Sustainable Buildings to be required for all PFI

building contracts.

annex C – glossary of acronyms

CHP combined heat and powerDNOs Distribution Network OperatorsEEACs Energy Efficiency Advice CentresEEC Energy Efficiency CommitmentGSHPs ground source heat pumpsGW GigawattsKW KilowattsMW MegawattsMDP Major Demonstration Programme for solar photovoltaicsPFI Private Finance InitiativePPS22 Planning Policy Statement on Renewable EnergyPV photovoltaicsREACs Renewable Energy Advice CentresROCs Renewable Obligation CertificatesSECs Sustainable Energy CentresWFPs Winter Fuel Payments

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notes1 Our energy future: creating a low carbon economy, 2003, Defra, DTI, p.18.2 Carrots, Sticks and Sermons, 2003, Demos/Green Alliance.3 Submission to Corporation Tax Reform consultation, August 2003, BG Microgen.4 From A to ZED: Realising Zero (fossil) Energy Developments, 2003, Bill Dunster architects.5 Source: RPA, 2004, based on independent research carried out for the ODPM

Part L review zero carbon working party.6 Source: Earth Energy Engineering, www.oxfordsciencepark.co.uk/

downloads/geothermalheatpump.pdf7 A fuel cell vision for the UK, Fuel Cells UK, 2003, p15

www.fuelcellsuk.org/team/Library/Visionwithcovers100903.pdf8 Renewable Energy for Professional Applications: a guide to implementing off-grid power supplies in

the UK, September 2002, IT Power.9 Innovation and Growth Team Report into the Environmental Goods and Services Sector, 2003, DTI.10 System Impacts of Additional Micro-generation, Mott-Macdonald/ BPI, for the DTI,

forthcoming.11 In the UK, the domestic purchase price is roughly 6.5p/KWh, as opposed to

the retail price of 2.5p/KWh.12 This is because the price of all electricity has two main components: the cost of

energy and the cost of delivery (which is paid to the DNO). Net meteringobliges the supplier to pay both the micro-generator and the DNO for thedelivery cost component of exported power.

13 Study into the environmental impacts of increasing the supply of housing in the UK, report forDefra, May 2004.

14 From A to ZED: Realising Zero (fossil) Energy Developments, 2003, Bill Dunster architects.15 PFI: meeting the sustainability challenge, August 2004, Green Alliance.16 The London Plan, policy 4A.9, February 2004, Greater London Authority.17 Consumers have the right to switch supplier at 28 days notice.18 Energy Act 2004, Clause 129.19 Economic instruments to promote domestic energy efficiency, 2003, HM Treasury.20 System Impacts of Additional Micro-generation, Mott-Macdonald, BPI, 2004,

forthcoming.21 Our energy future: creating a low carbon economy, 2003, Defra, DTI, p39.22 PFI: meeting the sustainability challenge, August 2004, Green Alliance.23 Our energy future: creating a low carbon economy, 2003, Defra, DTI, p51.24 Biomass as a Renewable Energy Source, 2004, RCEP.25 A Fuel Cell Vision for the UK, 2003, Fuel Cells UK.

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Green Alliance40 Buckingham Palace Road, London SW1W 0REtel: 020 7233 7433 fax: 020 7233 9033email: ga@green-alliance.org.ukwebsite: www.green-alliance.org.uk