Barriers and policy measures
8.12. The most important practical and economic
barrier to community heating schemes is the initial capital cost.
Ongoing costs are much lower: experience in Northern and Central
Europe suggests that, once established, heat distribution systems
can be expanded by connecting additional sources of waste heat
or dedicated heat or CHP plant, although upgrading existing systems
may require replacement of piping and insulation.
8.13. To overcome this barrier to entry requires
positive action to promote a market for heat. The Community Energy
Programme (CEP), launched in 2001, is intended to support the
development of sustainable community heating in the United Kingdom.
The programme is jointly managed by EST and the Carbon Trust on
behalf of Defra. Initially the programme had £48 million
available for capital grants and £2 million for development
support for the period from April 2002 to March 2004, subsequently
extended to March 2005 and most recently to March 2008. However,
like other actions explored in this report, the success of the
programme has been constrained by low energy prices. We note the
conclusion of the IPA study that future prices for both gas and
electricity are likely to be higher, so that community heating
schemes are under-valued by basing long-term calculations on current
energy prices. We have also noted that concentration on capital
cost without considering the lifetime costs of operating buildings
can lead to perverse decisions. Community heating schemes are
associated with high capital costs relative to their operating
costs. Therefore we regard CEP as an area where it is particularly
important for the Government to apply their own recommendations
as embodied in the Treasury's "Green Book".
8.14. We endorse the recommendation of the
IPA study that the Community Energy Programme be extended. However,
we note that the programme has had limited impact so far, and
that commercial barriers to the take-up of heat provision must
also be addressed.
8.15. The first such barrier is simply the lack
of demand. We noted above that there is a reluctance, notably
in the construction industry, to contemplate community heating
and that this flies in the face of experience elsewhere in Europe.
While some potential users see the attraction of community heating
(for example, retailers in Leicester have been attracted by the
fact that heat provision removes the need to allocate space for
heating plant), the message has not been universally accepted.
Thus in Durham, for example, the University is currently decommissioning
a small community heating system that has provided heat to buildings
on the Peninsular since the 1950s: the inefficiency of the system
itself, compounded by the fact that there is no demand other than
from University-owned buildings, make the system hopelessly uneconomic.
When we visited Woking, in the course of our recent inquiry into
renewable energy, we learnt that a developer in the centre of
the town had chosen to install electrical heating in a new block
of flats rather than taking heat from the Council-run CHP plant
across the road.
8.16. The schemes supported so far under the
CEP are significant but limited in scale, mostly to single institutions
or developments. We therefore see a clear need for a few larger
scale developments which can be promoted as demonstrations of
the value and potential scope of heat provision. We noted in Chapter
4 the need to make such projects simpler to finance, so that local
authorities do not perceive them as risky. Such projects should
demonstrate the application in the United Kingdom of technology
which is already commonplace elsewhere in Europe. Therefore support
for such demonstration projects should not be contingent on demonstrating
novelty.
8.17. In addition to capital grants or incentives,
low-carbon heat provision should logically be treated consistently
with low-carbon electricity provision. Whereas demand for electricity
varies on a daily cycle, demand for low-grade heat varies on a
different cycle, which is both daily and yearly. This creates
particular problems for CHP, where electricity generation is essentially
a by-product of heat production, and is therefore in effect intermittent.
As Mr David Green, Director of the CHP Association, told us, this
subjects CHP to penalties under the New Electricity Trading Arrangements
(NETA) balancing mechanism. Whereas the Renewables Obligation
protects renewable generators to an extent from such penalties,
CHP remains "fully exposed to NETA" (Q 672).
8.18. The lack of any incentive for heat markets
resembling the Renewables Obligation is evidence of the point
made at the beginning of this chapter, that energy policy has
persistently overlooked the fact that heat is a form of energy.
We note that the Government continue to commission studies of
the practicalities of developing markets for heat.[90]
In light of these studies, it is time for the Government to
progress from analysis to action in promoting markets for heat,
particularly from renewable sources, and we so recommend.
8.19. Finally there is the issue of energy services.
Experience elsewhere in Europe is that households and businesses
connected into a community heating scheme tend to be so satisfied
that they do not seek to change heat supplier. Therefore, even
if the "28-day rule" applied to heat provision, users
of community heating see themselves as participants in a long-term
arrangement. This leads us to conclude that the energy service
function could also be applied to community heating systems.
8.20. An Energy Services Company (ESCO), in providing
a range of energy management services, functions as the interface
between the supplier of primary energy and the end user. Furthermore,
because energy management is their business, ESCOs are inevitably
aware of the life cycle costs of energy provision even where they
may not be a high priority for building occupants and managers.
An ESCO associated with a community heating scheme could in principle
establish long-term contracts to provide services for a number
of commercial and domestic premises, monitoring energy use, supplying
both heat and energy efficient products, and so on, while purchasing
primary energy from a range of sources. This would allow the establishment
of an economic base large enough to be commercially attractive.
8.21. In the case of Poseidon in Gothenburg,
an ESCO has been able to design, build, finance and operate heat
distribution systems, working with the local authority and the
primary energy supplier to mutual benefit. In the case of the
Berlin Energy Agency, application of the ESCO model has stimulated
€37 million of private sector investment in energy saving
measures, cutting the city's fuel bills and saving some 27,000
tC in emissions. We therefore welcome the announcement on 20 June
that London is to establish its own Climate Change Agency, which,
in the words of a press release, is intended to "establish
itself as a municipal company—in partnership with private
sector firms—which will design, finance, build and operate
low and zero-carbon capacity".[91]
8.22. We recommend that the Government explore
the application of the Energy Services model to community heating.
In particular, we believe that the establishment of the London
Climate Change Agency offers a welcome opportunity to apply such
a model on a large scale, with corresponding gains in energy efficiency
and emissions.
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