Scottish and Southern Energy (SSE) is grateful to have this opportunity to submit written evidence to assist the Committee's inquiry into the capacity of microgeneration and other forms of distributed generation to meet a substantial proportion of UK electricity demand. SSE is one of the UK's largest energy companies, with major interests in the generation, transmission, distribution and supply of electricity and in the storage, distribution and supply of gas. It has a variety of investments and interests in microgeneration technologies.

The definition of distributed energy

  SSE accepts the definition of "distributed energy" which the government used in its report in July 2006 on the progress of the review of UK energy policy: "|there are a number of ways of producing heat and/or electricity for a home, housing development, industrial site or local community, and of connecting these sites through small-scale electricity or heat networks. `Distributed energy' is a broad term used to denote this diverse range of technologies. Its essence lies in generating electricity near where it is used."

The benefits of distributed energy

  SSE also endorses the summary of distributed energy included in the July 2006 report: it "can potentially lower emissions, increase the diversity of our energy supply and, in some cases, lower costs".

  More specifically, SSE agrees that generating energy more locally has the potential for more efficient use of fuels and that a more community-based energy system might lead to greater awareness of energy issues.

The problems with distributed energy

  Distributed energy accounts for a very small proportion of the UK's total supply. In particular, technologies that allow energy generation at a household or community level currently make a minimal contribution to the UK's overall energy supply.

  The fundamental reason for this is that the main types of low-carbon distributed energy technology are relatively new and therefore expensive to purchase. In addition, the government's Microgeneration Strategy recognised that lack of awareness is a key barrier which limits the take-up of the technologies. Moreover, there are complexities involved in the arrangements for planning consent for distributed energy developments and for dealing with "surplus" energy.

  In other words, systems and structures in the UK are fundamentally geared towards centralised energy production and distribution. This will need to evolve over time to allow a significant take-up of distributed energy.

Creating opportunities for distributed energy

  In its July 2006 report, the government sets out a series of proposals for incentivising community and building-level distributed energy. SSE is broadly supportive of many of the proposals. They reflect SSE's submission to the energy review, which called for a package of measures to reduce demand for energy from the national electricity and gas grids.

  The report commits the government and Ofgem to completing a comprehensive review of the incentives and barriers that impact on distributed electricity generation, including CHP. This review is welcome, and should set the right context for future policy development.

  This should build on the new incentives on Distribution Network Operators to facilitate the connection of distributed generation introduced by Ofgem in 2005. In our view, these incentives do not go far enough. For example, the current incentive framework provides for a partial pass-through of capital invested, with the rest remunerated by a £/MW term. This is sufficient to remunerate connection of distributed generation but incentivises DNOs to minimise their risk by investing only what is required to accommodate distributed generation on a scheme-by-scheme basis, leading to a piecemeal and sub-optimal development of the distribution network. Particularly in areas where network infrastructure is sparse (often those areas with potential for renewable generation) there is a need to plan network upgrades to cater for sizeable increments of generation over the medium to long term in an holistic manner.

  It is also the case that the current incentives do not give DNOs a positive incentive to promote distributed generation connections; nor does it allow DNOs to build distributed generation themselves to remove the need for reinforcement where it is efficient to do so. A more positive aspect of the current incentives is the "Registered Power Zone" concept, which provides funds to encourage field trials of innovative connection approaches for distributed generation. As a final comment on the framework of incentives facing distributed generation, SSE believes it is possible that the uncertainties of an ongoing requirement to pay distribution use of system charges, as now currently required for new generation, might act as a barrier for these developments. In SSE's view, there would be merit in reverting to an approach whereby generation connecting to distribution systems pays a contribution to network costs on a one-off basis at the time of connection only, so that its commercial position is not adversely affected by future uncertainty in ongoing liabilities.

  The package of measures set out by the government could be boosted further, in line with the content of SSE's submission. For example, setting national targets for the take-up of micro generation and annual reporting of progress to meet such targets would be a step forward, as would amendment of the planning rules to include micro generation as a permitted development.

  More generally, achieving a greater contribution from distributed energy will require an approach which embraces both the distribution and the supply of energy, and the policy and regulatory framework will have to accommodate this.

Meeting a proportion of electricity demand

  SSE's submission to the government pointed out that, at present, there are fewer than 100,000 homes in the UK with any form of micro generation of electricity. Measures such as those listed in the government's report in July 2006 should help confirm the viability of micro generation technologies, lead to increased production and, ultimately, lower costs.

  It also quoted the Energy Saving Trust's assessment that, by 2050, micro generation technologies could provide as much as 40% of the country's electricity needs and deliver a 15% reduction in carbon emissions. SSE's view is that this may be feasible, but only if real action is taken to kick-start the sector.

  On balance, the Energy Saving Trust assessment is highly ambitious. As the government has stated, we will be heavily dependent on much of our centralised infrastructure for decades to come and we need to foster the growth and development of distributed energy in a way that maintains and strengthens the safety and reliability of supply.

  In summary, distributed generation has a growing part to play in meeting the UK's electricity needs—but that growing part will develop over the long-term. Policy development must reflect that.

4 October 2006