Economics Essay

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Applied Energy 85 (2008) 528–544

www.elsevier.com/locate/apenergy

APPLIED

ENERGY

Prospects for and barriers to domestic micro-generation: A United Kingdom perspective

S.R. Allen *, G.P. Hammond, M.C. McManus

Department of Mechanical Engineering, University of Bath, Bath BA2 7AY, UK

Available online 19 November 2007

Abstract

Approximately 38% of current UK greenhouse gas emissions can be attributed to the energy supply sector. Losses in the current electricity supply system amount to around 65% of the primary energy input, mainly due to heat wasted during centralised production. Micro-generation and other decentralised technologies have the potential to dramatically reduce these losses because, when fossil fuels are used, the heat generated by localised electricity production can be captured and utilised for space and water heating. Heat and electricity can also be produced locally by renewable sources. Prospects and barriers to domestic micro-generation in the UK are outlined, with reference to the process of technological innova- tion, energy policy options, and the current status of the micro-generation industry. Requirements for the main technology options, typical energy outputs, costs to consumers, and numbers of installed systems are given where data is available. It is concluded that while micro-generation has the potential to contribute favourably to energy supply, there remain substan- tial barriers to a significant rise in the use of micro-generation in the UK. � 2007 Elsevier Ltd. All rights reserved.

Keywords: Distributed generation; Micro-generation; Low and zero carbon technologies (LZC); Innovation; Market barriers; Policy drivers

1. Introduction

1.1. Background

Changes in atmospheric concentrations of greenhouse gases (GHGs) affect the energy balance of the global climate system. The effect of human activities on these concentrations and the resulting anthropogenic climate change have been disputed and controversial topic in recent years, and had become increasingly prevalent in public awareness and discourse. The 2007 Intergovernmental Panel on Climate Change (IPCC) scientific assessment stated with ‘very high confidence’ that humans are having an effect on the climate [1]. In order to mitigate against significant anthropogenic alterations in climate, the Royal Commission on Environmental Pollution in the UK recommended a 60% cut in UK CO2 emissions by 2050 [2]. This has recently been adopted as a legally binding target by the UK Government [3]. The Tyndall Centre for Climate Change Research has

0306-2619/$ - see front matter � 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.apenergy.2007.09.006

* Corresponding author. Tel.: +44 (0) 1225 384550; fax: +44 (0) 1225 386928. E-mail address: [email protected] (S.R. Allen).

Abbreviations and nomenclature

BAWT building augmented wind turbine CCL Climate Change Levy CERT Carbon Emissions Reduction Target CHP combined heat and power CoP co-efficient of performance DTI Department of Trade and Industry (renamed as the Department for Business Enterprise and

Regulatory Reform (BERR) in June 2007) EEC Energy Efficiency Commitment EST Energy Saving Trust EWP Energy White Paper GHG greenhouse gases GSHP ground source heat pump HAWT horizontal axis wind turbines IPCC Intergovernmental Panel on Climate Change LCBP Low Carbon Buildings Program LPG liquid petroleum gas OFGEM Office of Gas and Electricity Markets PV photovoltaics RO Renewables Obligation ROC Renewables Obligation Certificates VAWT vertical axis wind turbine

Subscripts

e electrical th thermal

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called for more significant reductions of 70% by 2030 and 90% by 2050 [4], highlighting that the steepest reduc- tions in emissions must occur between now and 2030.

Alongside the issue of climate change are those of fossil fuel dependence, energy security and energy costs. Energy demand worldwide is growing, and finite fossil fuel supplies are able to provide for this demand for a limited time. However, there is considerable uncertainty over fossil fuel resources in the mid to long term [5], which will affect energy security and relative energy costs.

Against this global backdrop, the UK Government has four long-term goals for energy policy [6]:

• To put the UK on a path to cut carbon dioxide emissions by some 60% by about 2050, with real progress by 2020.

• To maintain reliable energy supplies • To promote competitive markets in the UK • To ensure that every home is adequately and affordably heated.

Micro-generation could be an effective mechanism to help achieve these targets and its use is being promoted by the UK Government. However, there are problems associated with some of the micro-generation technol- ogies and the ways in which they are funded and encouraged. These issues will be examined in this paper.

1.2. Distributed energy and micro-generation

The current electricity supply system of the UK is highly centralised, and relies heavily on the combustion of fossil fuels that produce pollutants including climate-changing GHGs. In 2004 energy industries (these

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include electricity generation, the use of fossil fuels for petroleum refining, and the production of coke and solid smokeless fuels) was the biggest single contributing category to the UK’s CO2 emissions, being respon- sible for about 58MtC or 38% of net CO2 emissions [7]. Most supplied electricity is generated by large thermal power plants that connect to a high-voltage transmission network, to be transmitted and then distributed to end-users via regional low-voltage distribution networks. This centralised model has delivered economies of scale and reliability but there are significant drawbacks. For example, the electricity supply system suffers an approximate loss of 65% of the primary energy input [8], predominantly as a result of heat wasted during electricity production, but also through transmission and distribution losses. Clearly, thermodynamic con- straints prevent elimination of these losses completely; however decentralised technologies such as combined heat and power (CHP) plants can dramatically increase the efficiency of fossil fuel use by capturing some of the rejected heat and supplying it for space and water heating. Heat and electricity can also be produced locally by renewable sources such as solar thermal systems and micro-wind turbines.

Decentralised or distributed energy supply refers to the generation of energy close to the point of use. It can denote a range of generator sizes; from community or district-level down to individual households. Micro-gen- eration is defined in Section 82 of the Energy Act (2004) as ‘‘the small-scale production of heat and/or elec- tricity from a low carbon source’’ [6]. It has further been defined as anything below 50!100 kW, with most household electricity-supply installations being below 3 kWe; slightly larger for heat-supply [9]. It has recently been predicted that micro-generation could provide 30!40% of the UK’s electricity needs by 2050 [9].

There are small pockets within the UK that are already taking steps toward a more distributed energy sys- tem. Woking Borough Council, for example, achieved a 49% reduction in energy consumption and a 77% reduction in CO2 emissions between 1991 and 2004. Woking invested the profits in renewable energy projects, and by 2004 had installed 10% of the UK’s solar photovoltaic (PV) capacity and the UK’s first fuel-cell com- bined heat and power (CHP) system (200 kWe). It has a network of 60 local generators, including CHP to heat and cool municipal buildings, social housing and town-centre businesses [6,10].

Kirklees Council in West Yorkshire now accounts for 5% of the UK’s installed solar PV capacity and has fitted over 160 houses with solar thermal water-heating systems along with supporting community micro-wind installations on both a local sports college and community centre. Seventy-nine energy efficient homes have been created, with owners installing solar PV or micro-wind turbines [6].

Other EU countries are proving that decentralised energy systems are feasible. Malmö in Sweden, for exam- ple, matches demand with localised supply from 100% renewables (on an annual basis). A 2 MW wind turbine, solar PV, heat pumps and solar thermal systems supply heat and electricity. Excess energy is exported, and imports are possible when there is a shortfall. Over a year, supply is designed to balance demand.

Decentralised supply and micro-generation are, however, yet to have a significant impact on the UK’s energy system. There are currently fewer than 100,000 micro-generation installations (most of which are pre-2000 solar thermal systems), which represent only 0.5% of the UK’s electricity supply [6,9]. All combined heat and power plants amount to only 7% of the total supply.

Decentralised energy supply is site specific in relation to both the energy resource and energy demand. Micro-generation can be suitable for the domestic sector, and also has some public and commercial sector applications (e.g. community centres and businesses). This paper will concentrate on domestic supply and demand.

2. Technological innovation and energy policy

2.1. Innovation systems

There is a large body of literature concerning innovation that includes recent emphasis upon the energy sector. The micro-generation industry, similar to the development of any technology, can be viewed from the perspective of innovation theory. An innovation system may be defined as ‘‘the elements and relationships which interact in the production, diffusion and use of new, and economically-useful, knowledge’’ [11]. Foxon et al. [11] provides a useful simplified representation (Fig. 1) of the process of innovation, which includes the various actors and institutions and the relationships between them.

Fig. 1. Roles of innovation chain actors (adapted from [11]).

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While Fig. 1 implies a linear process (from basic R&D to diffusion of a commercial technology), it is impor- tant to emphasise that in fact innovation is a dynamic, non-linear process; a concept supported by Foxon et al. [11]. Thus the final picture is more complex, as feedback loops exist between the different stages and there are important links between technological and institutional change that require consideration. A whole-system perspective of the innovation process is therefore appropriate (as opposed to considering each stage in isola- tion), and it is from such a perspective that policy guidance should be drawn.

2.2. Innovation and energy policy

The market penetration of a (successful) new technology typically varies in the manner of the hypothetical S-shape curve shown in Fig. 2. Take-up of the technology begins slowly, then as commercial viability is reached production ‘takes off’ and the technology rapidly diffuses before gradually slowing down as the mar- ket saturates. Correspondingly, the cost of production of a technology tends to reduce as production volumes increase; a phenomenon reflected by ‘experience curves’ (also known as technology-learning curves). Fig. 3 cor- roborates this concept, showing experience curves for a variety of electricity-generating technologies in the EU [12]. The causes of cost reduction vary, but can include learning-based improvements and economies of scale. It is clear therefore that higher costs for new technologies present a barrier to entry when competing with established technologies. This contributes to the ‘lock-in’ of incumbent technologies, and highlights the path dependence of development; both of which can discourage innovation. In order to promote innovation and create a market of diverse technology options, these processes must be considered in the context of policy- making.

The appropriate policy instruments will vary with the stage of a technology’s development. The dynamic nature of innovation suggests that each instrument will influence the market interactively and thereby the effectiveness of other policies. Some prevalent energy policy strategies are indicated in Fig. 2, and will be dis- cussed below in the context of the UK micro-generation industry. The various types of market intervention are as follows:

R&D support includes research programmes and grants encouraging public, academic and private R&D, tax credits and ensuring a supply of trained scientists. Over the period 1974–2004 there was a significant down- ward trend in both public and private R&D expenditure in OECD countries, which correlates broadly with oil price trends [13]. The UK Government’s Stern Report [14] of the economics of climate change called for a

Fig. 2. S-curve of technology development and policy categories (adapted from [11,16]).

Fig. 3. Experience curves for electricity-generation technologies in the EU, 1980–1995 (Source: [12]).

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doubling of global public energy-R&D funding (to around $20 billion annually) for the development of a diverse portfolio of technologies, which represents a drastic increase compared to past decades (of around $10 billion annually).

Technology subsidies include demonstration project funding and support for early-stage commercialisation. Examples in the UK relating to micro-generation include the UK Department of Trade and Industry’s (DTI) previous subsidy programmes: the Clear Skies and Photovoltaic Demonstration Programmes and the current Low Carbon Buildings Programme will be discussed later in this paper. The Stern Report [14] advocates a two

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to five-fold increase in deployment incentives from current levels of around $33 billion (in addition to a car- bon-price).

Market development policies include feed-in tariffs, specialised auctions, tax credits, accelerated depreciation and the creation of niche markets. Under these policies new technologies can develop with a degree of protec- tion from the mainstream energy markets; permitting simultaneous development of a range of technologies. Countries such as Germany, Denmark and Spain have achieved substantial growth in renewable energy tech- nologies, including wind power and solar PV, via feed-in tariffs (long-term policies in which a guaranteed fixed price for electricity typically reduces over time). The USA has a large installed capacity for renewables encour- aged by other means, such as tax credits and accelerated depreciation [15]. Moving in the direction of increas- ing competition are niche market policies, such as tradable certificates. The market is then left to determine the price of certificates, which can lead to price uncertainty (and increased risk to investors), but also promote cost-efficient solutions. Niche markets can exist at different levels; for example a higher level, inter-technology market for renewable electricity, or a niche market for a specific technology. Inter-technology certificate mar- kets risk encouraging technological lock-in of the short-term cost-efficient technology. Therefore if diversity of supply is required niche markets for specific technologies are more appropriate, as they are protected from alternatives during development.

Oxera [15], a UK energy consultancy, recently studied support policies for renewables in seven countries (Australia, Denmark, Finland, Germany, Italy, Spain, the UK and the USA). All countries deemed financial support for renewables necessary and, while the dominant mechanism has been feed-in tariffs, there is a trend towards certificate markets. Based on the EU research project ‘REALISE’, Midttun and Gautesen [16] argue that feed-in tariffs and certificate markets should not be seen as competing alternatives, but rather as comple- mentary policy-steps in the technology development cycle outlined in Fig. 2.

Competition policies are appropriate for technologies approaching maturity, and include higher level certif- icate markets, third party access policies and corporate governance policies [16]. The aim is to create support that is sufficient for furthering commercialisation of technologies towards full competitiveness in the main- stream energy market, whilst providing cost-effective energy to consumers. The current Renewables Obliga- tion in the UK is an example of an inter-technology certificate market, and will be discussed below.

A diverse range of energy policy instruments are in existence to support the UK Government’s aim of securing clean, diverse, and cost-effective energy supplies. There can be tensions between such objectives; for example short-term cost-efficiency may conflict with diversity of supply. Whatever the chosen approach, recent literature [11,14,17] highlights the paramount importance of a stable, consistent, long-term framework from governments. Political aspirations are not seen as sufficiently ‘bankable’ by industry, and the policy therefore needs to be designed to send clear, investment-inducing signals to business, such as firm targets for renewables far out into the future. Policies should also have a clear review process and exit strategies for fully competitive technologies [14], further reducing risk for investors.

Closer collaboration between government and industry is called for in the Stern Report [14], and the devel- opment of a shared vision between government, industry and research community is of vital importance [11].

The Stern Report also advocates a realistic carbon price as a vital part of future policy; indeed, it argues that failure to take account of environmental externalities (such as climate change) ensures that there will be under provision and slower innovation [14]. However, carbon pricing is still in its infancy, and even where it is implemented uncertainties remain about the durability of the price signals over the long term. Regulation and alternative policy approaches (such as some of those mentioned above) are therefore vital to promote the required investment in sustainable technology innovation.

3. Domestic demand and distributed energy supply

3.1. The UK market situation

Domestic energy demand across the UK varies per household for a range of reasons including household type; appliance use; number of occupants; behavioural patterns; energy source options and so on. To produce estimates of energy use for an average UK household, national domestic energy use separated by end-use and fuel type can be combined with UK household numbers [18,19], and is presented in Fig. 4.

Fig. 4. Average 2002 UK domestic energy consumption per household by end-use and fuel type (Source: [18,19]).

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The total end-use energy demand per average household is approximately 21,000 kWh/yr, which is supplied primarily by gas and electricity (70% and 21%, respectively). 61% of this demand is space heating; 23% water heating; 3% cooking and 13% lighting and appliances. Fig. 4 indicates that space and water heating are sup- plied primarily by gas; cooking by an approximately even mix between gas and electricity; while lighting and appliances are supplied entirely by electricity.

When considering the impact of energy use it is important to consider the primary energy consumed along- side end-use demand. In the case of electricity for example, only 35% of the energy input to power stations is delivered as electricity to the end user [8]. Therefore 1 unit of energy consumed in the household represents approximately 2.9 units of primary energy input into the power station. It is vital that this is considered when assessing the benefits of installing a micro-generator: it is the primary energy that needs to be offset rather than just the end-use energy.

Micro-generation technologies have the potential to supply energy for domestic consumption locally. Dif- ferent technologies will satisfy different end-use demands, with corresponding carbon and financial saving potentials that depend on the carbon intensity and the cost of alternative supply options respectively. Demand reduction and energy efficiency measures are highly recommended alongside any micro-generation installa- tion; indeed to gain access to UK Government grants (Low Carbon Buildings Programme) efficiency measures must be implemented. Such measures are likely to reduce demand from the average UK household represented in Fig. 4.

3.2. Solar thermal

Requirements in the UK for installation of solar thermal (water-heating) systems include a south-east to south-west facing roof space with minimal shading for most of the day; appropriate roof strength; and (in some cases) space for an additional water cylinder. The solar resource is well understood and relatively pre- dictable on a seasonal basis. Typically all the energy produced is consumed onsite: the UK’s Energy Saving Trust (EST) states that appropriate installations can provide almost all domestic hot water demand during summer months and an annual average of approximately 33% [20]. A side-by-side test of eight available sys- tems reported estimated annual outputs of a mean of 1,145kWh/yr and a range 954!1339 kWh/yr [21]. Com- paring these values with Fig. 4 indicates agreement with the Energy Saving Trust figure of 33%, when typical boiler efficiencies are taken into account.

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Solar thermal is currently the largest and most established micro-generation industry, with approximately 78,000 installations and an annual installation rate of 2000 units [9]. There are many different systems avail- able, with a variety of plumbing options, but, in general, capital costs for typical 4 m2 systems are between £2000 and £3000 for flat-plate collectors and between £3500 and £4500 for evacuated tube systems [20].

3.3. Solar PV

Solar PV installation requirements are similar to those for solar thermal. The energy that a solar device can provide in any given period is known as the ‘solar fraction’. In the case of PV it does not distinguish between electricity that is consumed onsite and that which is exported, to be replaced by imports later. A recent field trial covering 15 sites, representing 230 systems and 382 individual values, found that for the average system size of 1.6 kWp a solar fraction of 51% was supplied [22].

There are currently 1300 solar PV installations across the UK; with about 500 more projects allocated under the Low Carbon Buildings Programme (see section below). In many cases, electricity supply and demand profiles will not match, and hence the economics of exporting and importing will have a large effect on the financial feasibility of a grid-tied PV installation. Typical domestic installations cost around £4000 to £9000 per kWp installed [23].

3.4. Micro-wind

There are three broad categories of small-scale wind turbine available: horizontal-axis wind turbines (HAWTs); vertical-axis wind turbines (VAWTs); and building augmented wind turbines (BAWTs). The latter category further breaks down into three sub-categories: turbines situated on a building; turbines placed in a duct through a building; and turbines located between diffuser shaped buildings [24]. Micro-wind turbines for domestic energy generation are a currently emerging technology in the UK marketplace, and as such there is relatively little empirical knowledge concerning their performance and corresponding energy yield potential, particularly in grid-tied situations and/or in the built environment. The wind resource is highly site specific and less predictable than the solar resource.

Bahaj et al. [25] suggest that for open areas with appropriate wind conditions, and with suitable mounting heights, there is potential for micro-wind turbines to make significant impact on domestic energy generation. Micro-HAWTs with roof-mounting options have recently become available, but there is doubt, fuelled by the current lack of empirical proof, of their suitability for roof-mounting particularly in urban environments. There are suggestions within the technical literature that micro-HAWTs are in fact unsuitable for urban envi- ronments in general, due to the complexity of the wind distribution [25,26]. Mertens et al. [24] concludes that certain VAWTs are preferable to HAWTs for roof-mounting upon (high) buildings. VAWTs do not suffer as much from reduced energy outputs as a result of frequent wind direction changes, whereas HAWTs must yaw and track the wind to be able to extract energy economically.

Field trials are underway to help assess micro-wind’s potential contribution to domestic energy-supply, the results of which will be publicly accessible [27,28]. There are currently 650 micro-wind installations across the UK, with around 1500 more projects allocated under the Low Carbon Buildings Programme. As with PV, electricity supply and demand profiles may not match, and hence the financial feasibility of grid-tied micro- wind installations will be significantly affected by export/import economics. Currently available systems of approximately 1 kW rated power will cost around £3000, whereas those in the range 1.5!6 kW cost between £4000 and £18,000 [29].

3.5. Ground-source heat-pumps

A few metres below the ground the temperature across the UK is a reliable 11!12 �C throughout the year, which is a sufficient heat source for a ground-source heat-pump (GSHP). The primary requirement is space to install a ground loop. It is possible to use radiators for heat distribution, but under-floor heating is preferable because it works more effectively at lower temperatures (30!35 �C). Systems can be designed to meet 100% of space-heating requirements, and in some cases can pre-heat domestic hot water. A heat pump requires elec-

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tricity to drive system components in order to supply heat. The ratio of electricity required to heat supplied is known as the coefficient of performance (CoP). Typical CoPs range between 2.5 and 4; the higher end relating to systems with under-floor heating [30]. Retrofitting GSHPs can therefore be problematic; the best perfor- mance can require significant changes to the heat distribution system.

There are currently around 550 GSHPs installed in the UK, with 270 more projects allocated under the Low Carbon Buildings Programme. The consistency and reliability of the heat supply means that the financial feasibility of GSHPs is left primarily to the capital costs (which depend on the property and heat distribution system requirements), and alternative fuel costs. GSHPs can be viable investments now, when compared with electric or LPG heating, and the associated CO2 savings are also high in these cases [9]. Typical 8 kW systems cost between £8000 and £12,000 plus the cost of the heat distribution system [30].

3.6. Micro-CHP

By utilising the heat produced during electricity production, CHP can operate at significantly higher effi- ciencies than traditional thermal power plants. Suitable prime-movers for micro-CHP include internal com- bustion engines, Stirling engines and fuel cells, which have varying heat-to-electricity generating ratios. Internal combustion engines generate noise and vibrations making them generally unsuitable for domestic application [31]. Stirling engines have a higher heat to power generating ratio than fuel cells, and are therefore more applicable to larger dwellings with higher heat loads in order to concurrently satisfy electricity demand. Fuel cells, on the other hand, are currently more suited to smaller dwellings with lower than average heating demands [9].

An ongoing field-trial has reported poorer than expected efficiencies for �1 kWe micro-CHP units [32]. This has been the result of the relatively high thermal inertia associated with the units, in combination with inter- mittent heat demand that drives their operation. A micro-CHP unit must be operating at a fairly high tem- perature before it can generate electricity. During its warm-up period, it will provide some heat, but no electricity. Energy is absorbed while warming up the mass of the unit to operating temperature, of which little can be usefully recovered. Small-scale CHP for business (up to approx 25 kWe) has fared better in the trial, as the typical operating conditions were steady state and so warm-up losses were negligible. Modern boilers with a lower thermal mass may therefore be more appropriate than micro-CHP, especially for domestic use with typically more intermittent heat demands, in terms of energy efficiency and the resulting carbon performance [32]. The field trial is due to publish its final report in late 2007.

There are currently 990 micro-CHP units installed in the UK. The Whispergen micro-CHP unit is an avail- able Stirling-engine technology, sized for domestic application (1 kWe, 7!12 kWth), and costs approximately £3000 installed. Some simple modelling has estimated that for heat demands of 15,000–18,000 kWh per year (small to average heat-demand), around 2500 kWh of electricity would be concurrently generated, enabling financial paybacks of 3!5 years [33,34].

3.7. Other micro-generation options

Biomass heating and micro-hydro systems are among the other micro-generation options for the UK. They are relatively site specific regarding the required resource, but in appropriate areas they are amongst the most cost-effective technologies under current market conditions, along with ground source heat pumps [30]. A summary comparison of micro-generation technologies is presented in Table 1.

4. Policy and legislation in the UK

4.1. Background

There are numerous UK policy and legislative drivers for energy demand and CO2 emission reduction. Some of these outline commitments made for energy producers and suppliers, together with incentives for the production of energy using micro-generators. Privatisation of the UK energy-market commenced in the late 1980s with the gas sector, closely followed by similar moves in the electricity, coal and nuclear sectors.

Table 1 Comparative advantages and disadvantages of different micro-generation technologies

Micro- generation technology

Typical costs

Advantages Disadvantages

Solar thermal £2000– £4500

• The solar resource is relatively reliable and predictable

• Some systems operate renewably (e.g. solar PV powered pump)

• Proven/established technology • Visually unobtrusive • Provides hot water all year round (however

will not meet demand in winter)

• Some systems require grid electricity supply • Low cost-reduction potential due to established designs • Not currently cost effective

Solar PV £6000– £15,000

• The solar resource is relatively reliable and predictable

• Renewable • Proven in field trials • Visually unobtrusive

• High capital costs • Not currently cost effective

Micro-wind £3000– £5000

• Can be relatively inexpensive when situ- ated appropriately

• Renewable • Matches loosely with the diurnal energy

demand

• Very site specific resource • Least predictable intermittent renewable • Lack of available performance information • Some opposition (e.g. due to visual impact) • Not currently cost effective

Ground- source heat pump

£8000– £12,000

• Very reliable – ground temperatures are constant and predictable

• Can be cost effective within the current market

• Retrofitting can be problematic (most effective with under-floor heating)

• Requires relatively large electricity supply • Land requirement for ground-loops • High capital costs

Micro-CHP Approx. £3000

• Has the potential to reduce CO2 emissions related to fossil fuel use through efficiency gains

• Some technologies nearing cost- effectiveness

• Currently mostly fossil fuel powered • Has an inflexible heat to power generation ratio, which

can be problematic if this does not match the respective demands

• Carbon savings appear to be less than originally predicted • Lack of available performance information

Micro-hydro – • High energy yields possible • Can be cost effective within the current

market

• Application limited by the availability of suitable locations

Biomass heating

– • Can be cost effective within the current market

• Application limited by the availability of suitable locations

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Oil resources have always been privately controlled. Full privatisation was achieved in 1999 and now all con- sumers, both domestic and business, are free to choose their gas or electricity supplier.

4.2. Climate Change Levy (2001)

This (CCL) is a tax on the use of energy by industry, commerce, agriculture and the public sector. The CCL applies to all UK non-domestic users of non-renewable energy, including the public, industrial and commer- cial sectors. However, there are a number of exceptions including good-quality CHP systems; the transport sector; energy supplies used as a feedstock; or fuel used as a raw material, for example coal used to make car- bon filters. Under the CCL businesses can enter into Climate Change Agreements with the Government in order to obtain tax reductions in return for reducing carbon-emissions.

4.3. Energy Efficiency Commitment (2001) and Carbon-Emissions Reduction Target (2008)

The Energy Efficiency Commitment (EEC) requires energy suppliers to achieve targets for delivering energy efficiency improvements in households, thus contributing to the UK Government’s Climate Change

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Programme by cutting GHG emissions. It was set out under the Electricity and Gas (Energy Efficiency Obli- gations) Statutory Instrument 2001. At least 50% of the target must be met in relation to certain low-income consumers; thereby contributing to the UK Government’s Fuel Poverty Strategy [35].

The first and second phases of the EEC ran from April 2002 and April 2005 respectively. The third phase of the EEC (EEC3) has been renamed as the Carbon Emissions Reduction Target 2008–2011 (CERT), and is currently under consultation (ending 15 August 2007). It has the same underlying framework as the EEC, but following the Climate Change and Sustainable Energy Act 2006 it now includes micro-generation and behavioural measures within the scheme. The recent UK Energy White Paper [36] states that in the longer term, from 2012, the UK Government would like to develop the scheme to support a transformation toward a marketplace in which suppliers provide energy services instead of simply supplying units of energy, hence further encouraging energy-conservation.

4.4. Renewables Obligation (RO) (2002)

This (RO) was introduced by the UK Government in 2002 and requires licensed electricity suppliers to source a proportion of their supply from renewable generators. Renewables Obligation Certificates (ROCs) are issued to generators for each MWh of renewable electricity they generate, which can then be traded on to suppliers to enable them to comply. Suppliers can alternatively pay into a buy-out fund to meet all or part of their obligation [37].

The RO applies to all sizes of generators; however, access to ROCs has been complex for micro-generators as the scheme is aimed primarily at larger renewable-energy schemes [37,38]. The DTI is currently consulting about reform of the RO, and is considering changes to make ROCs access easier for micro-generators, along with proposing to introduce banding, to come into force in 2009 [36] that will offer differentiated levels of sup- port to different renewable-technologies.

The banding of the RO improves the prospects for the development of a range of renewable technologies, as they are competing then within each band, as opposed to with all renewable technologies. However, micro- generators are not separately banded under the new proposals, and hence support for development under this programme is lacking.

4.5. Climate Change and Sustainable Energy Act (2006)

This aims to promote micro-generation and the use of heat from renewable sources; to make provision for the reduction of greenhouse gases; and to aid in the alleviation of fuel poverty. It requires the Secretary of State to designate one or more national micro-generation targets in the period 1 November 2008 to 21 March 2009. If energy suppliers do not develop a system to buy-back electricity from micro-generators, the Govern- ment will intervene.

4.6. Microgeneration Strategy (2006)

The UK Government’s ‘Microgeneration Strategy’ [39], in combination with the Climate Change and Sus- tainable Energy Act 2006, aims to promote easier access to ROCs and to promote community energy projects. The strategy outlines opportunities for local authorities to be more proactive in promoting the incorporation of microgeneration through the use of planning policies. In addition it will provide a review of communica- tions activity to assess how to improve information provision [6].

The UK Government is also proposing changes to the planning system from autumn 2007, with the aim of making it easier for homeowners to install many of the available micro-generator technologies [36].

4.7. Low Carbon Buildings Programme (2006)

The Low Carbon Buildings Programme (LCBP) replaced the DTI Clear Skies and Solar PV grant pro- grammes. Phase 1 funds were available for households and for public, not-for-profit, and commercial organ- isations. It aimed to encourage applicants to consider energy efficiency measures alongside micro-generation

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technologies. Its value was lower than the scheme it replaced and was therefore labelled a ‘‘significant step backward’’ by industry [40].

Demand from homeowners was much higher than the programme allowed for: therefore adjustments were made including a capping of the available monthly funding [41,42]. This did not solve the supply shortfall, and after the allowance for March 2007 ran out within an hour (following rapid exhaustion in previous months), the programme was suspended by the DTI for review amid much controversy.

A second phase now runs until March 2008. Funds are available for the installation of micro-generation technologies by public-sector organisations and charitable bodies (not private households or businesses). Pur- chase and installation of technologies is limited to a specific shortlist of seven suppliers (‘‘framework suppli- ers’’), and to specific technologies: solar PV; solar thermal; wind; ground source heat pumps; and biomass [42]. The method of framework suppliers has been criticised by some as it excludes a large number of suppliers and installers across the UK.

4.8. Draft Climate Change Bill (2007)

The draft Climate Change Bill commits the UK to achieving at least a 60% reduction in CO2 emissions by 2050, and a 26!32% reduction by 2020, against the 1990 baseline. These targets may be amended in the event of developments in climate science or international law/policy, and the Government will be required to set five-year carbon budgets to place binding limits on aggregate emissions [36].

4.9. Energy White Paper (2007)

The Energy White Paper (EWP) [36], published in May 2007, sets out the UK Government’s international and domestic energy-strategies. Underlying these is the view that independently regulated, competitive energy markets are the most cost-effective and efficient way of delivering the UK Government’s objectives of tackling climate change and delivering secure, clean energy at affordable prices. The UK Government’s move towards zero-carbon homes, reduced VAT (5%) for some micro-generation technologies, and the Carbon Trust’s ‘Part- nership for Renewables’ (£10 million funds to support public sector organisations wanting to invest in distrib- uted energy) are existing measures intended to support the growth of distributed and micro-generation [36].

The Review of Distributed Generation [44], conducted by the DTI and the Office of Gas and Electricity Markets (OFGEM), informed the EWP [36] and was also published in May 2007. In order to remove barriers and encourage uptake of distributed generation (including micro-generation) the EWP outlines a number of planned measures, including:

• Improved information services for consumers, and guidance on technology options. • More flexible market and licensing arrangements for distributed, low-carbon electricity supply within the

licensed framework, to be implemented by the end of 2008. • Clearer export rewards for smaller generators from the different energy suppliers. Beyond this, the UK Gov-

ernment is engaging with industry with the aim of making it more cost-effective for suppliers to offer export tariffs.

• Making it easier to connect to and use the distribution network. Micro-generators under ratings of approx- imately 4 kW do not generally need to obtain permission to connect to the network, and new wiring reg- ulations will be published in January 2008 that will make it easier to connect micro-generators into existing electrical installations. However, there remain considerable connection difficulties for larger distributed generators – the UK Government states that it intends to address these issues [36].

• Reducing the carbon impact of heat. The generation of heat accounts for half of the UK’s total energy con- sumption by end-use, and 47% of the UK’s total carbon emissions (including emissions from electrical heat- ing). Approximately 75% of this heat is used for space and water heating, primarily in the domestic sector and to a lesser extent in the commercial and public sectors. The remainder is used as process heat in indus- try. The UK Government is conducting further work into the policy options available to reduce the carbon impact of heat and its use, in order to determine a strategy for heat [36].

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5. Prospects and barriers

There are a number of advantages to micro-generation that suggest they may have an important role in developing a more sustainable UK energy-system. These include their potential to aid the realisation of carbon reduction targets, and their ability to reduce dependence on fossil fuels and increase energy security. However there are also a number of disadvantages to micro-generation, and there are barriers to entry that can be broadly categorised as technical, economic, and information-related. There will be varying lead-times to the removal of these barriers, but ultimately all must be removed for micro-generation to contribute signifi- cantly to energy supply.

Technical barriers include grid-integration, planning permission and licensing. The current electricity net- work was designed for centralised generation and is optimised for one-way flow, so network changes will be required if distributed generators are to contribute significantly to the energy mix. However, for the short to mid-term, there is some indication that a relatively high penetration of micro-generators could be incorporated into the current electricity-network. Thomson and Infield [43] considered the technical impact of high pene- trations of solar PV on low-voltage distribution systems (11 kV, 400 V and 230 V), and indicated that voltage rise is unlikely to constrain PV for many years to come (up to a penetration of around 30%). A more diverse mix of micro-generators would clearly present more varied system characteristics; for example micro-CHP electricity generation profiles are typically determined by heat demand, compared with PV outputs that depend upon the solar resource. Heat generating systems will present other challenges. Alternative future con- figurations of micro-generators will be discussed further below.

The UK Government has proposed changes to the planning system that will make it easier for homeowners to install micro-generators, which will be a welcome development. Currently licensing and connection issues can be problematic for larger distributed-generators (these issues are under review [36,44]). While this does not directly affect micro-generation, such developments will support the growth of the distributed generation mar- ket, which is likely to provide knock-on benefits for domestic micro-generators (such as network alterations and industry learning-by-doing).

Improved information for consumers will benefit the industry. Guidance for micro-generators for obtaining the financial benefits of ROCs is to be published shortly as part of the Low Carbon Buildings Programme [44], which along with easier access to ROCs will improve accessibility for consumers. The recent Review of Dis- tributed Generation [44] for the UK Government outlined a number of measures to stimulate the uptake of distributed generation, including a new certification scheme and a campaign to raise public awareness about CO2 reductions in the home. However, information relating to the practical energy output of some micro-gen- erators is scarce. Improvements to this situation will benefit consumers, as well as future policy makers aiming to determine the best mechanisms for saving energy and reducing carbon emissions.

Economic barriers are complex and significant. From a whole-system perspective of innovation, it has been argued above that failures exist in current renewables innovation-systems, particularly between the stages of demonstration and pre-commercialisation, and between pre-commercial and commercial development. Con- tributing to this situation is an apparent lack of coherence and integration in the design of the policy mix; for example, where capital grants were introduced as an ‘ad hoc’ measure to address the failure of the early Renewables Obligation [45]. The LCBP (the capital grants scheme for micro-generation) has suffered from poor performance since its introduction in April 2006. Upfront costs to consumers are very high (Tables 1 and 2), particularly when compared to the cost of current alternatives (centralised supply).

As an example, the average domestic PV installation in the UK can produce 51% of average annual domes- tic house electricity demand (as previously discussed above). DTI statistics indicate that the average UK household electricity bill in 2006 was £338 [46]. The average cost of a domestic sized system is £10,400 [23], and the maximum grant available under the recently re-launched LCBP is £2500. Assuming all electricity is consumed onsite (i.e. a direct saving on the bill is made), the payback time would therefore be approximately 48 years. This estimation is purely for illustrative purposes; it does not take buy-back into consideration and the associated financial gains that could be made. Under current UK market conditions Butcher et al. [47] concluded that many micro-generators are uncompetitive, even with the aid of Government grants.

The changes implemented in the CERT (2008!2011), and the national micro-generation targets that can be set in 2008/2009 under the Climate Change and Sustainable Energy Act will encourage energy suppliers to

Table 2 Number of installed micro-generators and future projects funded by the LCBP (adapted from [9,40])

Micro-generation technologya

Total number installed (2005)

Estimated total cost

Avg. cost per install

Projects funded by the LCBP

Funds allocated

No. projects

Avg. fund allocated per project (historic)

Solar thermal 78,470 £357,696,065 £4558 £848,067 2122 £400 Solar PV 1301 £20,145,012 £15,484 £3,721,598 510 £7297 Micro-wind 650 £11,137,463 £17,135 £1,730,739 1493 £1159 Ground source heat

pumps 546 £5,156,751 £9445 £327,536 274 £1195

Micro-CHP 990 Not known Micro-hydro 90 £2,385,084 £26,501 £14,300 4 £3575 Biomass room

heaters £7841 16 £490

Wood fuelled boilers £168,002 116 £1448

a Includes community scale projects.

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support the micro-generation industry. Proposals in the recent Review of Distributed Generation [44] include clearer export-rewards from suppliers and new market arrangements for distributed generators, which will benefit the industry as a whole.

While the proposed reforms for the banding of the RO (certificate market) will create more appropriate niche markets for diverse supply, they will not directly benefit the micro-generation industry. Based on the EU research project ‘REALISE’, Midttun and Gautesen [16] argued that feed-in tariffs and certificate markets can be complementary policy steps in the technology-development cycle. The UK’s Marine Renewables Deployment Fund works along similar lines. It offers grants and a feed-in tariff, the latter to create additional revenue on top of the ROC price that is designed to support deployment of wave and tidal technologies. A similar system could also be beneficial for micro-generation.

Over and above all these economic changes, it is apparent that a stable, consistent and long-term frame- work is required from Governments. This would reduce risk and offer greater incentives for investment in micro-generation and renewables in general. The Draft Climate Change Bill commits the UK to long-term carbon reduction targets, and is therefore an important step in the right direction. Specific targets for renew- ables (under the RO) and indeed micro-generators (under the Climate Change and Sustainable Energy Act) are also welcome, but the effect of the latter in particular is currently uncertain.

6. Potential futures for micro-generation

There are a number of possible future configurations for micro-generator installations, some of which are currently possible and some of which are under consideration in the literature, with varying levels of decen- tralisation, including:

• (National) grid-tied. • Micro-grids (including islanding capabilities; see for example [48,49]). • Off-grid (energy storage; see for example [50,51]).

Grid-tied systems are currently common for electricity micro-generation. Their feasibility is very much affected by the practical changes required to the network but also in a change to the economic framework (buy-back, etc.). Safety is an issue that requires addressing during a move to more decentralised supply, which is perhaps more easily handled within the current centralised system. With a one-way network with few large- scale suppliers it is easy to ensure that no electricity is flowing during maintenance, but with a two way system with many small-scale suppliers it is more difficult to ensure safety. If all supplies are shut off, the possible energy security benefits of decentralised supply would be negated.

Micro-grids are semi-autonomous systems that have the capability of islanding from the main network. This is considered advantageous by many industrial, public and domestic users who wish to have a secure

542 S.R. Allen et al. / Applied Energy 85 (2008) 528–544

electricity supply (e.g. hospitals). However, there are technical, safety and legislative issues associated with this which need to be addressed at a national level. An off-grid configuration is a further option for micro-gener- ation, in which case energy storage becomes a key issue. Storage is problematic; currently batteries are the most applicable option, but the efficiency of cost-effective models is low.

The installation and use of smart meters are considered essential by Watson et al. [38]. These can be used to measure half hourly demand, can be linked to display systems that show current and historical consumption data and can also measure imports and exports for those with micro-generators. If micro-generation is to become mainstream this type of meter will allow easier measurements for the supplier and the purchaser. The UK Government is currently running smart meter and real-time display trials, and subject to the results will roll out smart meters over the next ten years. Real-time displays are to be fitted with any new meters fitted from 2008, and between 2008 and 2010 displays will be free-of-charge to any householder on request.

7. Concluding remarks

The UK Government acknowledges the potential for distributed energy and micro-generation to aid CO2 emission reductions and provide reliability of energy supply. It has been shown that, if appropriately installed, micro-generation could provide a significant proportion of energy supply (with demand reduction), for exam- ple typical solar PV installations providing 51% of electricity demand [22] and solar thermal systems capable of supplying 33% of hot water requirements [20]. This will lead to reduced carbon-emissions associated with energy supply, reduced dependence on fossil fuels and increased energy-security. There is also a significant demand from the public for engagement with micro-generation, as indicated by the speed at which the LCBP funds were exhausted in early 2007. This suggests good prospects for the market if cost and technical issues can be resolved. Any growth in the micro-generation market is likely to reduce the largely prohibitive upfront costs to consumers.

However, the required financial backing to support and stimulate the market is yet to be forthcoming. The LCBP (capital grants) is currently the major support mechanism for micro-generators, but it is frugal in com- parison to the capital costs of some technologies, and has suffered significant administration problems leaving many potential customers unable to obtain grants. It is unlikely that the amount of funding available will stim- ulate the market sufficiently to lower the capital costs of micro-generators in the near future, and therefore the uptake of distributed energy-systems will remain limited until other mechanisms are in place. In addition, there is a general lack of monitoring and information available about the energy generated by many of the technologies. Although the energy output of many micro-generator types will always be site specific, more information about the output generally obtainable needs to be studied and reported in the open literature.

The many UK Government policy and legislative measures indicate positive intentions, but with varying appropriateness and success, and there remains substantial barriers to a significant rise in the use of micro-gen- eration in the UK.

Acknowledgements

This material was originally presented by Dr. McManus on behalf of the authors at the British Embassy/ British Council One-day Conference on Microgeneration, Lisbon, which was associated with the AMBI- URBE - International Exhibition for Sustainable Development (9–12 November 2006). She is grateful to the British Council for funding her participation in that meeting. It was subsequently revised and presented at the 3rd International Green Energy Conference, Västerås, Sweden (IGEC-III, 18–20 June 2007). The pres- ent version has been substantially extended and updated. This research is supported by a research grant awarded to Prof. Hammond and his economics colleague Dr Adrian Winnett by the UK Engineering and Physical Sciences Research Council (EPSRC) [under Grant GR/T28836/01] as part of the SUPERGEN 3 ‘Highly Distributed Power Systems’ Consortia. It is co-ordinated by Dr Graeme Burt of the Institute for En- ergy and Environment at the University of Strathclyde and Prof. David Infield of the Centre for Renewable Energy Systems Technology at Loughborough University. All the authors are grateful for the interchange made possible with a range of academic and industrial partners under this SUPERGEN programme. The authors would like to thank Dr. Winnett for helpful comments on an earlier draft.

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