United Kingdom
Renewable heat and the crucial part that it must play in the UK's climate change solution
According to statistics quoted by the Department of Energy and Climate Change (DECC), heating our homes and offices accounts for half of the UK’s final energy demand and contributes the single largest proportion of UK carbon emissions at 47 per cent. If the UK is to achieve its target of 15 per cent of its energy needs from renewable sources by 2020, then a significantly higher proportion of heat will need to be sourced from renewable energy.
Currently the majority of our heat in the UK comes from burning gas; only 0.6 per cent is generated from renewable sources. This represents a huge challenge if the legally binding carbon reduction targets (‘Carbon Budgets’) announced by the Chancellor in his April 2009 budget are to be met.
The decarbonisation of heat
The Government believes only a small number of technologies are capable of increasing renewable heat in the UK in the quantities and within timescales necessary to make a difference:
- Creating heat from burning biomass waste
- Micro generation technologies including water heating from solar panels or from ground and air sourced heat pumps
- Combined heat and power plants (CHP) which in turn can be fuelled from either renewable or fossil fuels
The UK heat market is complex and decentralised in nature relying heavily on traditional boiler (mainly gas) delivery systems that convert to heat on site. To achieve our carbon budget target (34 per cent reduction in carbon emissions by 2020 based on 1990 levels) a major departure is required from current delivery systems. There has been little penetration of renewable heat to date for a number of reasons including:
- high cost of retrofitting new technologies
- low level of financial incentives available
- absence of a meaningful carbon price
What 2020 heat needs to look like
In the UK the most significant contribution to (comparatively low overall quantities of) renewable heat is from biomass, particularly woody biomass and heat generated from burning waste with high biomass content. Micro generation technologies such as solar thermal water heating units and ground air source heat pumps also exist, but in tiny amounts. The prevalence of these technologies needs to increase by a factor of 20 or thereabouts by 2020.
The policy challenge
New measures have recently been introduced by the government recognising that a significantly higher level of low carbon heat is needed in the UK, These include:
- Enhanced capital allowances on all CHP eligible capital expenditure
- Business rates exemptions for certain CHP power generation plant and machinery, and
- Most recently, Climate Change Levy exemptions for energy produced from CHP were announced in the April 2009 budget.
However, constraints on swift rollout of this technology within the building planning process have not been fully addressed. Neither has there been significant revision of building regulations to ensure incorporation of renewable CHP systems, coupled with district heating schemes, into new developments in the timeframes necessary.
The prize for UK industry
Part of the £4 trillion carbon market envisaged by Government by 2050 will be represented by the technologies necessary to achieve decarbonisation of heat into both residential and non-residential buildings in the UK.
Timescales are short and for much of this technology, supply chains are not sufficiently well developed to roll out existing equipment in the volumes necessary. It will also be the case that the technologies do not currently exist in the form necessary to make them commercially viable. Further investment in research and development will be required for the necessary technologies to develop.
The Government should look to ensure that incentives encourage the UK manufacturing sector, encouraging employment in related industries and research & development of related technologies.
UK homes and businesses, and the energy infrastructure which supports them, are substantially reliant on generation of heat by burning gas at the point of use. Solar, heat pump or CHP interventions will require significant investment. The Government appear to have got a very clear message from respondents to its Renewable Energy Strategy Consultation paper that only a Renewable Heat Incentive (i.e. carrot) rather than a Renewable Heat Obligation (stick) scheme is considered workable
A blueprint is needed from Government which sets out the profile and targets associated with new heat technologies. This will send clear messages to UK industry which in turn will be able to plan its response and make its investments accordingly.
How can BDO help?
BDO’s Energy and Utilities team can work with you to build a picture of the likely impact of these changes on your organisation, and specifically the impact on your financial statements. We would be delighted to meet with you for an exploratory discussion.
Please contact Ian Plunkett, Partner, BDO.
Useful links:
The importance of heat (.PDF < 1.7 MB)
Carbon reduction commitment (.PDF < 208 KB)