Power to the People: Making a market for microgeneration

From a societal position, it is necessary to pose the question as to what is the optimal penetration of microrenewable technology in order to achieve the 60% carbon reduction by 2050 as targeted by government. Currently buildings account for 47% of emissions, which equates to approximately 80 million tonnes per annum. A reduction of 60% would mean buildings account for around 50 million tonnes by 2050. Unless significant changes are made, at a rate of new build of 1-2% per annum, over 50% of building stock at nearly double the quantity of today will be existing build not up to the Building Regulations for new properties, other things held equal.

Focusing on new build avoids potential emissions, but the underlying problem is of existing building stock is not addressed. Therefore a combination of policies are needed to make the transition from new to existing build having both high thermal performance and integrated     renewables.  New build can be cost effectively tackled through government targets. For existing building stock, the replacement cycle of boilers and radiators, roofs, insulation, meters and other pipework needs to be considered. At these points, purchasing decisions are being taken, and these can be shepherded towards microrenewables and higher efficiency products through government incentives and disincentives.

The long-term market transformation of microrenewables needs to be consumer demand-led by energy supply-side changes coupled with government regulation and financial support to kick-start the market. Therefore government’s aim must be to create the environment for increasing demand for such technologies. The capital grant system can play a part in pump-priming the market for a period, but unless other, wider measures are introduced there is a danger that ‘more of the same’ will simply lead to white elephant demonstration projects and the market fails to reach a ‘tipping point’ once the six-year programme is finished. New buildings are the most cost effective starting point, but they are the tip of the iceberg. Building Regulations are driving good thermal performances in new build, thus the energy requirements are far lower than in existing building stock. It is imperative that the purchasing decisions of occupiers of existing buildings be influenced through the Microgeneration Strategy and Low Carbon Buildings Programme if it is to be hailed a long-term success.

Energy supply-side changes arguably have a greater effect than governmental demand-side capital spending. This can be seen in the case of declining fuel poverty during the 1990s and early 2000s, with the microeconomics of fuel price playing the single most important role in changing the status quo. Fuel and power price - whether it is through increasing costs of oil and gas or via government taxation – will play a similar role in making or breaking the uptake of microrenewables. Government monetary and fiscal support should be given in assisting society to make the decision as to where and when consumers switch resources away from current spending patterns towards microrenewables.

Supporting initiatives could include:

• Internalising the cost of carbon through a neutral carbon tax on households and businesses, which is recycled via tax breaks to households that take up microrenewables or subsidies for products and services
• Setting hard targets with housing associations, local authorities and planners to require developers to include microrenewables in new build specifications
• Allowing social housing landlords to recoup the cost of investment on microrenewables in existing buildings by allowing rents to rise
• Making the Code for Sustainable Buildings mandatory and including procedures for assessing sites for microrenewable suitability
• Reducing Stamp Duty on properties that incorporate microrenewables thereby making the property more attractive to purchasers

Background
There is mounting support for a move away from large-scale centralised power plant with its inherent inefficiencies and security risks, towards distributed generation centres for heat and power. At the individual building scale, this includes microgeneration. There are also significant concerns about the costs and security risks of oil and gas supply, leading to a desire to diversify fuel sources. The economic, social and environmental costs of burning fossil fuels are increasingly driving energy policies around the world. Renewable energy is therefore attractive on multiple fronts.

The move from a centralised to a decentralised system needs the support and participation of all members of society. Currently households and businesses have little say in the delivery of heat and power, relying on government and business to ensure supply. There is largely a captive demand. However, microrenewables has the potential to change this.

In order for government to help bring about this change, households and businesses must have a clear understanding of the costs of security and carbon-related environmental damage. Once this occurs, true market transformation can take place.

Key issues
The following issues were identified as being important in order for the strategy and programme to achieve success:

• Context of proposed strategy & programme
• Addressing market failure
• Kick-starting the market
• Planning & delivery
• Relative price of fuel

Context of proposed strategy & programme
In order to reach government targets of 60% reduction of CO2 emissions by 2050, radical changes are required to both supply and demand of energy.  Current policy initiatives are a combination of demand- and supply-side management. Domestic policy tends to focus on demand-side, with the exception of the Renewables Obligation, with European policy looking at supply-side.

Part L of the Building Regulations drives energy performance in buildings and therefore is potentially a powerful instrument if policed effectively. Currently there are no regulations as to the inclusion of microrenewables.

The Energy Efficiency Commitment is a demand-side initiative and is aimed at improving building stock quality through increasing thermal performance and is successfully achieving significant levels of energy savings.

Initiatives such as the Climate Change Levy Agreements and Enhanced Capital Allowances are focused on businesses. The EU Emissions Trading Scheme is targeted upstream at the combustion plant of power generators and covered other plant activities.

Should existing and future building stock integrate a level of microrenewable generation within the premises, the level of CO2 should come down and supply diversified. It is most cost effective to integrate microrenewables in new buildings in order to avoid a path dependency on non-renewables. This may result in a cost reduction in microrenewable technologies due to demand-led economies of scale, however it is not clear that this would be sufficient to make the technologies economically attractive to owners of existing buildings.

As an indicator, the existing government capital grants initiatives have failed to deliver significant cost savings over and above reductions through the slow growth in the market and the developing maturity of the technologies as they seek a client-base.

It is, however, vitally important to recognise that the proposed approach of pump-priming the microrenewables market does not in itself address the failure of the buildings sector to account for the environmental and social cost of carbon.

Addressing market failure
The market currently fails to identify a cost with using energy. Until there is clarity of this cost, any initiative involving capital grants will be playing at the margins simply seeking to reduce cost and demonstrate to members of the public that the technology works. It would be far more effective to make polluters pay for their associated emissions, which would shape demand.

The cost of oil, gas and electricity has been rising over the past year. Should the high costs continue, the whole life cost of microrenewables may become relatively competitive, and there will be an economic incentive to switch away from oil, gas and electricity for heating and powering. If the government is relying on this pricing mechanism to create the incentive, it is failing to draw attention to carbon costs and thus failing its responsibilities and commitments.

The CCL and EU ETS are the only policy initiatives that place a direct cost on pollution associated with energy consumption. It is unclear whether the EU ETS will internalise the true cost of carbon, being dependent upon a wide range of political and economic factors as well as targeting a limited segment of society.

If the price of power as a result of these policies should rise, economic theory would dictate that households and businesses would move towards greater energy efficiency and possibly microrenewables as an alternative, provided barriers are brought low enough. If the programme is seen within this context, then it has the opportunity to bring real value to the overall climate change programme. It may prove optimal to share the burden of internalising carbon costs both upstream with large-scale combustion plants – as is the case with the EU ETS - and downstream with the consumer, as is the case with the CCLA.

This latter route could manifest itself more widely as a carbon tax on households and businesses. The tax could be recycled in the form of tax breaks to households and businesses that adopt microrenewables, or subsidies helping to bring down the cost of products and services. The use of reduced council tax for households with microrenewables has been suggested as one such way of providing a ‘carrot’, while the carbon tax could provide the ‘stick’.

The market for microrenewable technology needs clear, easy to understand long-term signals in order to stimulate investment. A carbon tax on households and businesses with associated recycling would provide such a signal.

Kick-starting the market
Government can play a significant role in helping the market to get off the development ladder through fiscal incentives and disincentives. Capital grants form part of this process, but with limited resources there will never be enough to allow deep market penetration via this means alone. It must be recognised that the primary issue with buildings-related carbon emissions is not new build – with higher thermal performance driven by Part L – but existing building stock. Therefore, if there is to be deep penetration of microrenewables, it must be shown to be cost effective to this segment. It may be that only particular types of technologies are suited to this segment unless private investors make their purchasing decisions based not solely upon pure economic grounds. There is potential to tap into this behavioural characteristic.

Neo-classical economic thinking fails to adequately account for perceived value. An example is the car industry, where individuals are willing to pay significantly more for ‘higher-value’ brands, even though a cheaper car may have the same basic components and a similar performance. The important aim of the programme should therefore be to maximise the perceived value of microrenewables, so that purchasers in Britain’s wealthy society are willing to pay the difference.

A certain number of demonstration projects must help to build perceived value for the owners of existing building stock. Importantly, demonstrations must go into renovating existing properties as well as new build. This could take place within housing association that have large scale refurbishment programmes and high numbers of low income (and therefore vulnerable) households, and local authorities who operate large numbers of offices.

For new build, tenders currently go out with no requirement for integrating microrenewables and therefore contractors who bid for the projects are unwilling to include anything unspecified that pushes up the cost. Having microrenewables specified will allow contractors to compete on a level playing field and develop the necessary affinity with microrenewables. The Code for Sustainable Buildings can provide the template for developers and planners.

Therefore setting hard targets with local authorities and planners for the integration of microrenewables in refurbishment programmes and new build can provide an initial demand.

Central government can also play a role by reducing Stamp Duty on properties fitted with microrenewables, thereby sending a clear signal regarding the relative costs. The new Home Information Pack with Energy Certificate provides a good opportunity to highlight the relative merits of buildings with integrated renewables.

Planning & delivery
Organisations and individuals need easy to understand guidelines to follow when applying for funding. They also need to know that installers and consultants are trustworthy. An accreditation scheme could deliver such reassurance.

Self-regulating bodies, such as CORGI, can provide a cost-effective means for ensuring trustworthiness. Other entities such as Constructionline provide a valuable place for interested parties to learn about potential suppliers of goods and services. It would most likely be optimal if existing heating & power bodies were used to develop the standards. Government support could be given to subsidize set-up costs.

In order to ensure the correct products are being specified – particularly in large-scale programmes – it is often necessary to employ consultants with specialist knowledge to carry out reviews. A requirement to carry out an options appraisal could be built into the application stage. However, this incurs a cost and therefore support for developing such a study should be included in the capital grants programme.

For smaller scale programmes, the accreditation scheme could prove sufficient in ensuring installers are trustworthy and have achieved the required skills and training levels. The market is therefore able to operate with the least level of regulation.

With this in mind, in order for there not to be a supply-led shortage, government could fund training programmes for installers within certain key industries. An example of this would be heating engineers and plumbers attended training in the installation of solar thermal panels.  Electricians and M&E consultants could learn how to wire in renewable fired CHP and micro-wind. An information campaign should also be developed to educate architects and designers.

The lack of supply chain for biomass also requires attention. It may be that once there is clear demand generated by the initiatives identified elsewhere in this document, the supply chain develops. However, fiscal support may be required such as reduced VAT. Emphasis should be placed on nationally developed biofuels.

Relative price of fuel
The price of oil, gas and electricity is likely to be the largest driver of purchasing decisions behind upfront capital costs. A barrel of oil has doubled in price since 2004 on the back of demand-led shortage, supply-side risks and speculation. Wholesale gas prices are linked with oil and have contributed to step changes in the price of power. Should these high prices continue, as it appears likely to, then economic behaviour may change accordingly. Households and businesses will have firm incentives to switch to lower-cost fuel sources, which include microrenewables.

Utilising solar energy and wind as a fuel source is essentially free, although a higher capital investment is required. Heat pumps provide roughly three to four times as much heating energy out as electrical energy in. It is possible to foresee a niche developing for energy services-type companies linked with renewables, which uses the cost difference between high-cost gas, oil and electricity, and renewable fuel sources to achieve pay-back on investment capital over the long-term. It may be that rates of return are too low to attract the private sector and therefore government may play the role of investor. Further analysis is needed to understand the business case.

Moreover, changes to the regulations may be needed in order to allow the development of long-term contracts between the energy services companies and consumers.

However, there needs to be a long-term understanding of fuel prices in order to ensure that the capital investment by energy services companies can be achieved. The futures market is predicting high prices into the foreseeable future. A small carbon tax could provide the thin end of the wedge in the context of future fuel price uncertainty.

Currently the steep rise in prices is hitting bottom line accounts across industry and households, although inflation has as yet remained relatively low due to low cost imports, particularly from China, having a deflationary effect. While many analysts and traders are readjusting figures for the medium- to long-run price of around $50 per barrel of oil, oil companies have yet to do so for fear of over investment and therefore collapse of price due to oversupply. This is in part leading to supply constraints and hence higher prices still.

There are already cases where budgets are being blown on fuel, which is helping to drive purchasing decisions towards more efficient boilers and CHP. Adjusting to the new environment may prove inflationary, although a window of opportunity exists to shepherd purchasers towards microrenewables.

Conclusion
The Microgeneration Strategy and Low Carbon Buildings Programme can play an important role in assisting the development of better integrated microrenewables. This can in part be through the provision of capital grants for new technologies and should not be focused solely on new build. To do so would fail to address the issue of existing building stock. In order to tackle the issue of existing building stock, the programme should aim to maximise the perceived value of microrenewables in refurbishment programmes.

Unless it is part of an integrated approach to creating a demand-led movement of households and businesses toward taking up renewable energy technology, it runs the risk of failure to transform the market. Key to this is the transparent internalisation of the cost of buildings-related carbon dioxide emissions and the setting of firm targets in order to create a short-term demand, stimulate learning and knowledge, and provide demonstrations of successful projects.