Written evidence submitted by REA (DHH0052)
The Association for Renewable Energy & Clean Technologies (REA) is pleased to submit this response to the above inquiry. The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers. Members range in size from major multinationals to sole traders. There are over 550 corporate members of the REA, making it the largest renewable energy trade association in the UK. Of relevance to this inquiry are the REA Wood Heat Members Forum, who advocate for the modern wood biomass heating industry and its supply chains, as well as the REA Biogas Forum, who include biomethane producers who are helping to decarbonise the gas grid. The REA also have members involved in the deployment of heat pumps, biofuels for heating, deep geothermal and thermal battery storage technologies.
Given the breadth of technologies we represent, we would welcome the opportunity for our Chief Executive, Dr Nina Skorupska CBE, to also provide oral evidence to the committee as part of this inquiry.
1.1 The REA emphasise that there is no one solution to heat decarbonisation within homes, however, by taking a multi-technology approach, including energy efficiency measures, it is possible to see domestic heat almost totally decarbonised in line with the UK's legally binding net-zero ambitions.
1.2 Future heat policy must focus on ensuring the right technology is used in the right situation. This must consider a wide variety of factors including the level of energy efficiency within the property, the infrastructure availability for that heat source (including power/gas grid or feedstock availability), and the level of savings provided in terms of carbon abatement and cost.
1.3 The starting point for considering where heat policy should focus next must be with reviewing the current renewable heat sectors, understanding what has been achieved by the Renewable Heat Incentive (RHI) and how the UK must build on this foundation to continue to deploy renewable heat technologies. The largest contribution to heat decarbonisation across all buildings within the UK comes from established heat markets including biogas, biomass heat and heat pumps which can already be deployed affordably at scale, to realise immediate carbon reductions. These sectors have established knowledge, skilled workforces and supply chains which must be grown and maintained if the level of deployment required is to be delivered.
1.4 Further technologies such as deep geothermal, biofuels for heat, thermal storage batteries and heat networks are also of high strategic importance and, while nascent, are ready for significant deployment to contribute to the decarbonisation of both homes and businesses in the short to medium term. In the longer-term further strategic technologies such as hydrogen will also play a role, helping to decarbonise the gas grid. However, support for such innovation must complement, rather than replace, policies that deliver no-regret solutions, providing immediate carbon reduction, today. Delivery of such future strategic technologies will be dependent on their being a strong renewable heat sector already in place, rather than seeing existing markets contract in favour of future solutions.
1.5 The UK needs a step-change in heat decarbonisation policy. The RHI was successful in establishing a renewable heat sector in the UK across multiple technology solutions and at multiple scales, however, the proposed policy replacements for domestic heat (the Green Homes Grant and Clean Heat Grant) are narrowly focused and will prove inadequate for the scale of deployment required. With polices concentrating on small scale domestic (predominantly heat pump) deployment, contraction of renewable heat sectors like biomass, geothermal and larger-scale heat pumps are expected just as the UK needs to be doubling its deployment rate for renewable heat technologies.
1.6 The Governments Heat and Buildings Strategy needs to set out a deliverable strategy that both ensures the continued growth of all renewable heat sectors, across both domestics and non-domestic scales, in operation today and the delivery of strategically important technologies in the future.
2. The impact of The RHI and lessons learnt.
2.1. The RHI has been a success story for the establishment of the renewable heat industry in the UK. The tariff-based mechanism has provided a bankable solution for long-term investments in renewable heating systems across the domestic and non-domestic scale. As of September 2020, the RHI, has achieved 81,706 domestic heat installations and a further 20,483 non-domestic installations [1]. The REA REview 2020 identified over 32,000 direct jobs in the heat pump, solar thermal, biomass boiler, biomass CHP and AD sectors in 2018. This grows to well over 44,000 jobs when you also include those employed in ancillary services such as the production of biomass for fuel or maintenance providers [2].
2.2 The RHI has been subject to frequent reform by both DECC and then BEIS. This has been an iterative process and resulted in important lessons being learned. There are significant concerns that these lessons are not being carried forward into new support schemes for heat.
2.3 These lessons include:
- Strong installations, maintenance and fuel standards are required.
- A tariff degression system is required, but must be carefully designed so that industry has time to respond and avoid cliff edges in deployment.
- Providing options for the ‘Assignment of Rights’ for investors has overcome the challenge of tariff-based mechanisms requiring upfront capital.
- Consumer protection, through the adoption of consumer codes, is essential.
- Heat requirement surveys are needed to ensure the right technology is being installed in the right situation.
- Operational costs of renewable heat systems must be considered in comparison to a fossil fuel counterfactual. This is an issue well addressed by a tariff-based mechanism.
3. Schemes replacing the Domestic RHI are narrowly focused, without the breadth of the RHI
3.1 The Clean Heat Grant Scheme (CHG): The CHG is the proposed replacement for the Domestic RHI, starting in 2022, providing a grant of £4000 for systems below a capacity cap of 45 kW. Unlike the RHI, that supported projects across a range of sizes, this is a grant level focused on small, predominantly air source heat pump, installations. Analysis of RHI costs of deployment data from BEIS suggests a £4000 grant is unlikely to support schemes much larger than 10 kW before the cost to the consumer becomes too great. The average installation size, across all technologies in the Domestic RHI is currently 13.5 kW [1].
3.2 Green Homes Grant (GHG): Speedily opened for applicants at the end of September 2020, the GHG provides homeowners with a £5000 voucher for energy efficiency measures and low carbon heating technologies. While welcome, the speed at which the scheme has been delivered has raised concern that many of the lessons of the RHI have not been carried forward, especially around ensuring quality standards or grant administration processes. The committee should also note the discrepancy in funding between the two schemes. The GHG had an initial budget of £3bn to spend in six months, while the CHG has only £100mn over two years, suggesting a lack of ambition in the longer term.
- 3.3 Grant based schemes suffer from not addressing operational costs.
The move towards grant based support does not address the operational costs of renewable heat systems. For example, the GHG and CHG grants will support the deployment of heat pumps in on-gas grid properties. In 2019, the average domestic unit cost for electricity was 16.6 p/kWh compared to an average unit cost for gas of 3.79 p/kWh [3]. Any capital savings from the grant could be quickly negated. This needs to be considered if more households are to be incentivised to switch and ensure that those who have already done so do not revert to cheaper to run fossil fuel systems.
- 3.4 Policy Gap around Business and Industrial Heat Decarbonisation.
While we recognise that the terms of reference for this inquiry are around domestic heat decarbonisation, it is worth highlighting that the end of the Non-Domestic RHI is in March 2021 leaving a significant heat policy gap around business and industrial heat use. As it stands there is no equivalent replacement scheme for medium or large-scale heat decarbonisation projects. Given that many domestic installers will also install business heat systems, this gap means many are seeing market opportunities shrink. In considering the sustainability of the heat sector, the committee should also consider what further support is available beyond the domestic sector.
- 3.5 Green Gas Support Scheme
It is welcome that BEIS intends to bring forward a support mechanism aimed at increasing the proportion of biomethane in the grid as well as avoiding a hiatus in biomethane development. However, the Green Gas Support Scheme should include support for plant expansions of existing assets and include biomethane from thermal gasification, in line with support provided under the ND-RHI. In the longer-term industry want to move to a situation where real market 'pull' replace straight producer subsidies. The REA’s preferred mechanism would be a green gas obligation on gas suppliers to meet a gradually increasing GHG reduction targets.
A complete range of renewable heat technologies will be required to successfully decarbonise heat across all UK homes. The focus should be on ensuring the right technology is used for the right situation.
- 4.1 Heat Pumps: Heat pumps are of high strategic importance. Air source heat pumps are particularly effective in buildings with high energy efficiency measures, such as new builds, while ground source heat pumps are also able to provide higher heat loads. The simultaneous electrification of heat and transport needs to be carefully considered with upgrades to the electricity grid and household electricity supplies needing to be coordinated.
4.2 Biomass Heat: Biomass boilers are the largest contributor to heat decarbonisation in the UK today under the RHI. Biomass is a versatile alternative where electrification may not be possible, particularly where levels of energy efficiency are low, typically in off-gas grid rural areas. There are also on-grid opportunities, such as schools , hospitals or residential developments combined with heat networks. Despite having been crucial in achieving the levels of heat decarbonisation to date, the sector is facing an uncertain future as government policy aims to restrict it to a poorly defined ‘niche role’. This, in turn, is expected to see existing users impacted as the feedstock and maintenance supply chains contract.
4.3 BioLPG
Biopropane (sold as bioLPG) is already available in the GB market and, like biomass provides an alternative where electrification isn’t possible. Biopropane is chemically identical to conventional propane (LPG) so can be blended in any ratio with conventional LPG, allowing a smooth transition to 100% renewable product. An existing LPG boiler can use BioLPG, so disruption is minimal, making it particularly affordable. The UK’s liquid gas industry has committed to a 2040 100% renewable target.
Further work is required by BEIS to define the number of houses where high heat load technologies like biomass or BioLPG maybe required. BEIS modelled analysis suggests that around 20% of off gas grid fossil fuel homes may not be currently suitable for low temperature heat pumps[4] . We believe this figure to be a significant underestimation, but even with 1.3 million off gas grid properties in the UK, it suggests nearly 300,000 – 400,000 homes where a high heat load technology is required.
4.4 Anaerobic Digestion
Biomethane from AD is an established and commercially ready technology, offering a low-regrets, cost-effective way to decarbonise the gas grid today. BEIS has previously identified that biogas (including biomethane) has an important role to play both now and in the longer term, reducing greenhouse gas emissions and supporting jobs in rural areas [5].
4.5 Solar thermal
4.4.1 Solar Thermal provides baseload water heating which may be most suited to domestic or commercial settings with high energy efficiency levels, or low heating requirements.
4.6 Deep Geothermal
4.6.1 Deep Geothermal provides baseload dispatchable green heat perfectly suited to powering renewable heat networks, as it does in the Paris basin region which has over 40 geothermal plants feeding district heating networks across the city [6]. While the Non-Domestic Renewable Heat Incentive (ND RHI) brought geothermal projects close to successful deployment in the UK, Covid-19 related delays and the nature of theses infrastructure schemes means there is now a group of projects that are unlikely to meet the RHI March 2021 application deadlines. Given its potential, a proportion of funding within the Green Heat Network Grant should be ring-fenced to establish the UK sector. The sector could also offer opportunities and employment to people with the same skillset transitioning from the oil and gas sector.
4.7 Thermal Heat Storage Batteries
4.8 Hydrogen
4.8.1 Several projects are looking at the role that hydrogen can play in decarbonising the UK gas grid. It is worth noting that the CCC sees a limited role for hydrogen in supplying buildings heat. A recent report published by Frontier Economics [7], commissioned by BEIS, highlights that hydrogen may have the greatest decarbonisation value in industrial heat applications, at least in the near term, as industrial users are likely to have fewer alternative practical and cost-effective options than other end-user groups.
4.8.2 The REA believe hydrogen should only be supported if the production pathway is sustainable. Primarily this means green hydrogen but also recognise that blue hydrogen may have a role where carbon capture and storage is used.
5 Key heat policies for domestic decarbonisation to deliver net-zero
The Building and Heat Strategy must step up the Government’s ambition for heat decarbonisation. This means both increasing the deployment of ready to deploy technologies across both domestic and non-domestic sectors, while looking to the delivery of further innovative technologies in the future.
5.1 Amending the Green Homes Grant
Administration of the Green Homes Grant must be improved. It should also be expanded to include further technologies that will help decarbonise homes include biofuels, thermal battery storage, power storage and solar PV.
5.2 Low-interest Loans to further drive deployment
A low-interest government loan should be offered in conjunction with the GHG and CHG schemes to help cover the remaining project costs. This will help mitigate low quality or undersized projects by enabling consumers to consider more expensive installations. This is already available in Scotland as The Home Energy Scotland Loan Scheme, which provides 0% interest loans up to £17,500 for renewable energy systems.
5.3 Building Regulations and Future Homes Standard
Renewable heat systems should be mandated in all new builds.
5.6 Tax Breaks
Tax breaks could incentivise households to install renewable heating systems. For example, rebates on income tax, spread over 3-5 years, would further support investments. In Italy, people with renewable heat measures installed can take advantage of a 65% reduction in income tax due to an 'eco bonus’, with a maximum deductible limit of €60,000 a year. If combined with a carbon tax the scheme could be revenue neutral. Households making energy efficiency improvements would supply evidence to demonstrate the change, and apply for a reduction in their tax bill going forward.
5.7 Variable stamp duties and encouraging greener mortgage products
Discounts to house buyers could be provided if a property is above a given energy efficiency standard or has renewable heating installed. Discounted Stamp Duties, along with favourable mortgage terms for greener properties, would incentivise the retrofitting of renewable heating systems and strengthen the link between energy efficiency and house prices, at the point of sale - a time when a significant level of home renovations takes place.
5.8 A clear trajectory for escalating fuel duty or a carbon tax on fossil fuels for heat
As described above, the low cost of fossil heating, particularly gas, remains a barrier to wider deployment of renewable heat systems. A trajectory for gradually increasing the cost of using fossil fuel heating systems through a carbon tax, or an increase in the fuel duty levy, could be introduced. Having a clear trajectory in place, would make users consider the future costs of using fossil-based heating options when replacing heating systems and drive demand for renewable options, even if the additional cost were minimal to start with.
It is recognised that such a policy could negatively affect the fuel poor if introduced without careful consideration of appropriate protections. Such households could be provided a rebate on such a tax and tax revenue raised should be directly spent on enabling fuel poor households to make the switch to renewable systems and increasing home energy efficiencies.
5.9 Updating Energy Performance Certificates (EPCs) and the Standard Assessment Procedure
A major barrier to heat decarbonisation is that the Standard Assessment Procedure (SAP), which is used to calculate the EPC, does not use up-to-date figures on cost, efficiency, or carbon intensity. Out of date efficiency calculations for renewable heat technologies within the SAP regularly produces results that favour fossil fuel heating systems and fail to reward flexibility. Methodologies should be updated as soon as possible so that renewable energy is the primary focus within the SAP calculation, while taking into consideration the loss of that generated heat.
6. Where Should responsibility Lie for Delivery of Heat Decarbonisation
6.1 The REA believe heat decarbonisation should continue to lie with BEIS, although stronger cross Whitehall coordination is required to ensure polices do not contradict on another. A dedicated heat decarbonisation team should also be established in Treasury, to ensure the issue is prioritised within public spending considerations.
November 2020
Footnotes and Sources:
To comply with the suggested word limit for the Committee Inquiry, this is an abbreviated version of the REAs thoughts on decarbonising heat in homes. If Committee Members would like further information in relation to the above points this can be read here: https://www.r-e-a.net/resources/rea-draft-response-to-beis-select-committee-inquiry-on-heat-decarbonisation-in-homes/
[1] BEIS (2020) RHI monthly deployment data: September 2020 (Quarterly edition) https://www.gov.uk/government/statistics/rhi-monthly-deployment-data-september-2020-quarterly-edition
[2] REA (2020) REview 2020 https://www.r-e-a.net/resources/review-2020/
[3] BEIS (2019) Annual Domestic Energy Bills, https://www.gov.uk/government/statistical-data-sets/annual-domestic-energy-price-statistics
[4] BEIS and Delta EE (2019) Electric Heating in Rural Off-Gas Grid Dwellings: technical Feasibility, https://www.gov.uk/government/publications/electric-heating-in-rural-off-gas-grid-dwellings-technical-feasibility
[5] BEIS (2016)THE RENEWABLE HEAT INCENTIVE: A REFORMED SCHEME https://www.gov.uk/government/consultations/the-renewable-heat-incentive-a-reformed-and-refocused-scheme
[6] EGEC Geothermal (2019) Geothermal Energy Use, Country Update for France, http://www.afpg.asso.fr/wp-content/uploads/2019/06/EGC-2019-Country-Update-For-France.pdf
[7] Frontier Economics (2020) Business models for low-carbon hydrogen production, https://www.frontier-economics.com/media/4157/business-models-for-low-carbon-hydrogen-production.pdf