With 2020 closing in, the energy secretary has admitted decarbonisation of heat is lagging. Money is tight, the energy market is in flux, oil and gas are cheap. Where are the less difficult wins?
The drive to decarbonise the power sector means electricity looks set to deliver its share of 2020 targets. But heat is responsible for a far greater percentage of energy use and carbon emissions and is arguably much harder to decarbonise. The Energyst asked which policies, actions and incentives can deliver both progress and best bang for remaining buck?
Tim Rotheray, head of the Association for Decentralised Energy, thinks waste heat must be better utilised and incentivised. He argues subsidy rules around additionality should be relaxed so that projects can become economically viable by amalgamating all available support. Rotheray also believes local authorities should be given more resource to decarbonise heat, and users more say in decisions. Heat “is by definition is local”, he says. The only way to decarbonise it “is to design the policy framework that works for the user”.
The European Commission plans to give heat a major push this year and has committed to review the Renewable Energy Directive, under which waste heat from non-renewable sources cannot receive subsidy.
Whether rules change or not, it is reasonable to argue that subsidy is unsustainable. Others argue that without sufficiently attractive incentive, the money to decarbonise heat will stick where returns are higher.
Heat networks versus Hinkley
Heat networks are now a significant policy focus, with government pledging £300 million to support their development, but they divide opinion. They are seen as investible infrastructure that can deliver carbon reductions at scale. However, some believe them too disruptive and potentially too expensive.
Heat networks would require subsidy of 75p/kW hour to create the seven-year payback periods sought by investors, Wales & West Utilities director of asset management Chris Clarke recently told the Energy & Climate Change Committee.
Such subsidy would make Hinkley C look cheap and the ADE’s Rotheray labeled such conclusions “absurd”, given heat networks, like energy distribution networks, are multi-decade assets.
Dr Tanja Groth, decentralised energy manager at The Carbon Trust, agreed. “Most of the unsubsidised schemes that we work on have payback periods of 10-15 years, and in some cases lower than this,” she wrote in response.
Greater constraints, she said, include “the general lack of information and awareness about district heating and its potential advantages in terms of cost and carbon savings, lack of clarity around local authority planning policy power to support district heating development and constraints on access to low-interest capital financing.”
Government cash to fund up to 200 heat networks is a big help, according to district heating and cooling specialist Vital Energi. But the firm thinks returns might currently be too low for some investors.
“That funding has allowed local authorities to prepare detailed business cases to prove potential project viability,” says Vital Energi business development manager, Brendan Clancy. “What we need now is the funding to take these projects to delivery, which sets a new challenge. We welcome being invited to bring private investment into the projects. But it is important that investment is attractive to the private sector (IRR greater than 8%). In some public sector projects recently, we have seen indicative returns as low as 4-8%, which are less attractive and likely to require additional funding support.”
But infrastructure investors find returns acceptable.
“These projects will probably not attract traditional bank debt at the moment, but they do work for a longer-term infrastructure-type play,” says Jenny Curtis, a director at specialist investor and fund manager Amber Infrastucture. “I don’t think [the need for a seven year payback] is true at all.”
Investment has to take a long view, says Curtis, “because heat networks are about a long term partnership with the sponsoring body and they require long term-asset management. So you need to be in it for 25 years, not only to make your money back but also to make sense of the asset.”
Curtis thinks the real challenge is robust modeling and scoping. Numbers and data, even at a basic level, can be “pretty ropey”, she says. But a district heating project that comes to potential backers with full, robust background data can go “a huge way” towards successful delivery.
More subsidy or less?
While some argue for greater heat subsidy, Curtis says infrastructure investors “are always very wary of subsidy schemes, because they are very open to political risk.
“We haven’t invested heavily in any of those subsidy-based projects. We would rather do schemes that stack up on their own two feet or to be working with local authority covenants that we know will be there for the long term.”
End-users can be equally wary. James Tiernan, energy and environment manager at Unite Students, looks after 136 UK properties. He decided against applying for Eco funding for a heat network project not just due to hoops and hurdles, but because of the increased risk.
“If you predicate your business case on the funding, and you don’t actually get it, it is just too high a risk. Plus you have to have bridging funds in the interim anyway because [that Eco funding] is retrospectively applied.”
If projects manage to get support “it is then almost like a bonus,” says Tiernan. “In which case you don’t need it anyway because you have already had to write a viable business case. So it is almost irrelevant. The way we see it, something is cost effective and viable, or it is not. You have to build a business case that stands on its own two feet.”
…Or just better allocation?
Others think that existing support schemes could make a big difference if properly directed.
In the domestic market “most financial instruments don’t work,” says Andy Lewry, principal consultant at the Building Research Establishment’s sustainable energy team. In both the domestic and non-domestic market, “insulation is a much bigger issue”.
The problem with support in the non-domestic sector, says Lewry, is that while the Enhanced Capital Allowance (ECA) scheme is “a good idea, it doesn’t support fabric measures.”
He says a cynic may argue that is because insulation is not photogenic.
“ECAs don’t support insulation because it is not plant and machinery. Why isn’t there a mechanism for improving the fabric first? Because it is not sexy and it doesn’t provide a photoshoot.” Windows and roofs may not be sexy, says Lewry, “but surely there should be something alongside the ECA that provides incentive for building fabric?”
Adjusting schemes such as the RHI to prevent abuse would also ensure the available pot goes further, says Chris Jennings, strategic development manager at energy and carbon consultancy Sustain.
Biomass boilers, he says are often “inappropriately sized to maximise income from the RHI and not to be the most efficient installation.”
Proper regulation of operation and maintenance of assets is also absent, he believes.
“Improving operations and maintenance may be the most cost effective measure per tonne of carbon reduction,” says Jennings. “Better procurement practices to hold an operations and maintenance operator to efficiency performance targets would help.”
Heatpumps, nanotech and infrared
Others think policymakers move too slowly and risk paying over the odds for technological losers and that manufacturers should also step-up.
Former energy trader Toby Costin is CEO of Social Power Partnerships. He accepts the requirement for due diligence on technology support, but is frustrated at the pace of change.
“Government has got to fast-track technology quicker,” says Costin. “It always seems to be a year or two behind what the commercial people are looking at.”
Costin is trialing infrared heating panels within electrically-heated social housing schemes and believes they could make drastic efficiency gains. Along with nanotechnology insulation for walls and windows, he thinks such CE-marked technologies should be supported “because it will halve the amount of work that needs to be done”.
“We need to be faster,” says Costin. “Not two year deliberations.”
Costin says manufacturers must also do their bit. He questions why heat pumps, for example, are so expensive, given “this is not a particular difficult technology”.
Solar thermal and heat storage
While electricity storage appears to be making progress towards commercialisation, thermal storage appears to have been left out in the cold. But it would not take much to prove commercial viability, according to Chris Sansom, associate professor of precision engineering at Cranfield University.
Sansom says solar thermal panels are also overshadowed by their PV counterparts, “but there is enough energy falling on 6,7,8 square meters of roof panels to provide heat and hot water [for households] all year round,” he says. “That is fact, I’ve worked it out.”
Storing solar heat is the challenge – and Sansom is working on a solution that uses Epsom salts as a seasonal (i.e. for four to six months) heat store. He is hoping to secure funding for a commercial demonstrator with a housebuilder to prove it works “at the three or four house level”.
“We are not doing basic research any more. We are building this system to serve several houses. And once you build a demonstrator and show people that it works in reality, the commercial guys all come in.”
Sansom thinks a tightly directed fund from Decc or Innovate UK for applied research “with a company-led commercial plan at the end of it as part of the call” would cost no more than “a few hundred thousand pounds” or “low millions” to fund several projects.
“That is the stage we are at,” he says. “It really isn’t that far away.”
This article is also published in our free 2016 heat report. It contains a survey of Energyst readers about their views on technologies, subsidies and regulation, as well as views of other experts. Download it here.