Written evidence submitted by SSE (DHH0061)
About SSE
SSE is a UK listed energy company operating across the UK and Ireland, employing over 12,000 people across its businesses. SSE has a range of interests across low carbon infrastructure in the UK which will be critical in helping the UK meet its net zero targets.
SSE has the largest renewable energy capacity across the UK and Ireland and continues to contribute significantly to building low-carbon electricity systems fit for the future. We are doing this in two key ways: through significant investment in its own renewable energy portfolio; and enabling more renewable generation to connect to its electricity network.
We are aligned with and supportive of the initial views provided by the Climate Change Committee (CCC) on the heat and buildings decarbonisation, which would be outlined in more detail in the upcoming 6th Carbon Budget analysis. It is important to scale up to a deliverable plan to decarbonise heat, which should include heat zoning within Local Area Energy Plans (LAEPs), but the Government should not delay on no regret options of energy efficiency, heat pumps and heat networks. SSE has also contributed to the response of Energy UK and supports their submission.
As a broad-based energy company, this submission reflects the views of a number of SSE’s business units, including:
SSE Business Energy
SSE Business Energy supplies over 500,000 business sites across Great Britain with electricity and gas, SSE Business Energy offers a wide range of energy contract solutions including fixed and flexible contracts to a broad and diverse variety of clients from micro businesses to large national corporates. All SSE customers are supported by UK based service teams providing support tailored to each business’s scale and scope.
SSE Enterprise
SSE Enterprise provides innovative solutions to build, own, operate and maintain energy infrastructure, covering both private and public sector across residential, commercial and industrial markets in the UK, including heat networks, local renewable power generation and smart energy.
Heat networks will play a key role in decarbonising the UK’s domestic and non-domestic buildings, with both BEIS and the CC suggesting they could provide around 20% of the UK’s heat demand by 2050. The main heat source for heat networks is gas-fired Combined Heat and Power (CHP), but heat networks also use waste heat from other processes and are increasingly supplied by low carbon heat sources, including electricity with heat pumps, geothermal, biomass or hydrogen. Supporting the growth of such a market with appropriate policies will support the transition to net zero.
SSE Thermal
SSE Thermal comprises SSE’s flexible generation and energy storage activities, with over 600 direct employees across the UK and Ireland. As part of its commitment to a net-zero emissions future, the business has a core focus on decarbonising its energy generation activities through emerging carbon capture and hydrogen technology, as well as exploring options to convert storage facilities to store low carbon fuels
Scottish and Southern Electricity Networks (SSEN)
SSEN delivers electricity to over 8m people in 3.8m households and businesses in the north of Scotland and central southern England. SSEN’s core purpose is to deliver electricity that powers communities in a safe and reliable way. This is achieved through responsible stewardship of its networks, helping to keep the lights on and invest efficiently in new and existing network infrastructure for the benefit of our customers. SSEN’s vision is to play a leading role in enabling the transition to a low carbon world that delivers for all customers. Its foundation as a progressive, innovative and customer-focused organisation will help it be at the forefront of this transition, helping to support delivery of the UK’s net zero emission targets.
SSE response to the specific questions
We do not view that the current regulatory framework as strategic nor long-term enough to give certainty to investors and enable the market to deliver at the required speed and scale. Low carbon heat is still a relatively nascent market and clear pricing signals are needed to encourage and incentivise technologies that often have marginal investment cases and are not yet competitive without policy intervention.
Key lessons are:
The forthcoming Heat and Buildings Strategy should hopefully represent a step toward a more comprehensive policy framework.
The Heat and Buildings Strategy should:
Key policy priorities include a revision of the carbon pricing signals, in order to incentivise lower carbon sources of energy (e.g. removing Climate Change Levy from heat pumps).
‘Future Homes Standards’ Regulations are key to future-proofing new buildings and should be finalised soon. In addition, stricter energy efficiency standards for domestic and non-domestic buildings would be important to incentivise the adoption of low carbon heating systems.
Finally, about 80% of homes expected to exist in 2050 have already been built, therefore a significant national retrofit strategy is necessary to encourage the low carbon heat transition of existing buildings. Significant private investment could be brought into upgrading the UK’s housing stock by targeting incentives, regulation and finance support at the point of housing change.
Recognising that meeting net zero will require the implementation of a variety of different approaches. A collaborative environment is necessary to facilitate this process. As part of this, consideration should also be given to the role of Local Area Energy Plans (LAEPs) which help aide consumer choices, highlight upcoming demand to supply chains and help infrastructure planning.
SSE is technology-neutral in its approach, however energy efficiency, heat pumps and heat networks will be needed at scale in any scenario. Therefore, the Government should focus on supporting those ‘no regret’ options, while ensuring emerging alternatives like hydrogen are not precluded and can be deployed where they deliver highest value, such as within industrial cluster. We anticipate hydrogen being used in proximity to industrial clusters, where plans are being developed to deploy the appropriate infrastructure.
Low carbon heat technologies, being a nascent market, are not currently commercially viable, without funding support. The end of RHI scheme and the lack of a strategic, long-term vision for funding which tackles both issues of capital costs and operational costs is a barrier to private investments. For example, based on an internal study, heat networks’ tariffs could increase substantially to remain competitive in the market, without incentives (CCC recommended a 10-fold increase in heat networks market by 2050).
To provide the market with certainty, and avoid unnecessary cost and disruption, the Government should establish Net Zero Ready areas. These will be areas that have the electricity network capacity, and other technology availability where applicable, to shift an area in its entirety to net zero heating chargers. This is a means of encouraging and unlocking the benefits of clustering. Clustering can reduce the cost of network reinforcement by about 12%. However, if it cannot be predicted in advance clustering could lead to an increase in network cost of about 29%.[1]
Having targeted areas for electrification is a means of encouraging uptake in a controlled, efficient manner and provides clear market signals. There is also an opportunity to harness flexibility provided by heat pumps, electric storage heating, and other low carbon technologies.
The lack of consumer awareness is another key barrier, as the communities will have to support and embrace the change. Upskilling and retraining the supply chain can help this process, not only because a wider supply chain can contribute to decreasing costs, but also because installers are often trusted advisors and can facilitate the low carbon transition, especially in the domestic sector.
New policies should prioritise low carbon heat targets for non-domestic and public buildings which are in a better position to absorb the costs and to shift to low carbon technologies. This would help growing the market and build the supply chain, driving costs down and which in turn would encourage domestic uptake.
As a general principle, SSE views that investment in low carbon infrastructure should be driven by market frameworks along with de-risking mechanisms to reduce the cost of capital for investors and the end cost to consumers, with additional costs of energy and climate change policy delivered through general taxation.
Funding heat policies through general taxation would present a more progressive approach to cost recovery, remove market distortions created by these levies and remove the administrative burden faced by suppliers, which itself translates into a cost for consumers. Excepting the proposed Green Gas Levy, policy costs are placed wholly on electricity bills and the proportion of policy costs is expected to grow. Policy levies already make up more than a quarter of an average electricity bill for an SSE Business Energy customer.
As the electricity system has decarbonised, electricity has become a less carbon intensive heating fuel than gas. In 2019, producing 1 kWh of central heating or hot water using gas produced 215g of carbon dioxide, while 1kWh from simple electric heaters produced 207g of carbon dioxide averaged over the year. Heat pumps can provide even greater efficiencies using electricity when prices are low when renewables are generating, with emissions as low as 50-100g/kWh.[2] As the power system continues to decarbonise, the carbon intensity of electricity for heating will fall simultaneously.
It’s important to ensure that the cost of policy levies on electricity does not discourage consumers from choosing lower carbon options. This is an area we would encourage the government to consider more closely as we progress towards net zero, so that consumer appetite for low-carbon technologies is encouraged.
Economies of scale will help deliver value for money, so consideration should be given to how stimulating uptake of measures in the non-domestic sector could help deliver cost benefits in the domestic sector.
Support like the Green Homes grant is helpful, although it is important to establish a medium/long-term support to achieve the needed scale, while ensuring a technology-agnostic approach. Artificially shifting too much focus only on one technology may run the risk of generating inefficient outcomes (e.g. discouraging heat networks connections versus less efficient individual heat pumps, due to subsidies). A comprehensive local approach is imperative to design efficient heat strategies.
There is regulatory gap on building standards for owner-occupiers. Significant private investment could be brought into upgrading the UK’s housing stock by targeting incentives, regulation and finance support at the point of housing change.
While not an incentive or direct regulatory measure, upskilling and retraining the supply chain, as previously mentioned, can help build long-term consumer awareness, remove barriers for adoption, and support a green recovery through the creation of jobs.
Government, together with local authorities and industry, should deploy a consumer engagement strategy to raise awareness about the benefits for low carbon heat and the different options available. Installers should also be enabled to advise customers and direct them toward lower carbon options.
We welcome regulations, such as the Heat Networks regulatory framework, which will enhance consumer protection, thus increasing confidence to switch to this alternative. Detailed local plans and coordination in conjunction with local authorities, utilities and community groups would help identify the priority decarbonisation needs, enabling the co-designing of plans for network investment
The UK Government should set overall targets and coordinate across departments all the key national policies (as per answers to questions n.1 and 2). However, heat is inherently a local challenge and local authorities should be empowered to play a key role. They are the best placed to map their territory and identify the most efficient solutions, based on local constraints and opportunities. Therefore, they should be encouraged and enabled to define Local Area Energy Plans (LAEPs) and implement a heat zoning approach, to select the most appropriate heat solution, based on specific conditions.
We should accept the principle that different areas of the country will be able to decarbonise at different rates, and to different targets, albeit aligned with the net zero by 2050. With that in mind, local authorities should also have flexibility to set local trajectories, based on their circumstances, in order to decarbonise heat in the most cost-effective way.
A national Coordination Body to oversee and coordinate local authorities’ activities could prove valuable, in particular providing advice, skills support and sharing of best practice.
[1] Vivid Economics (2019) ‘Accelerated Electrification and the GB Electricity System’.