Written submission by Vattenfall (DHH0103)

Introduction

 

Vattenfall is pleased to provide our input into the BEIS select committee call for evidence on decarbonising heat in homes.    Our views reflect our experience as a major provider of district heating across northern Europe and our growing presence in the UK heat networks market

 

Questions

 

1.     What has been the impact of past and current policies for low carbon heat, and what lessons can be learnt, including examples from devolved administrations and international comparators? 

 

A:   The heat networks industry has received a welcome boost from the Heat Networks Industry Partnership (HNIP)    Going forward it is clear that , in order to deliver decarbonised heat in homes at scale and at pace, the industry will continue to need some direct financial support.      In Vattenfall’s view there needs to be more creative and strategic  thinking about how that support is applied – to support critical infrastructure investment and  to provide a boost across the supply chain.   The meeting the full potential of the sector ton contribute to the government’s net zero ambitions will require and a joined -up approach across government where fiscal policy, VAT and business rates come in behind direct government funding to support low and zero carbon technologies - to avoid a scenario where funding is given with one agency of government but taken by another.  

 

The market has seen growth in recent years, largely driven by the market responding to planning obligations on developers, but for speed and scale further, coordinated, government intervention needs to take place. In that regard we welcome not only GHNF and the emerging regulation which will deliver consumer protections and a market framework with mechanisms to address connection risk.

 

The planning driver is inconsistent across the country and focusses on heat networks serving new build properties. To deliver on net zero carbon ambitions, heat networks will need to supply low carbon heat at scale to existing buildings, where the counterfactual is (relatively cheap) gas.

 

We also hope that the current review of business rates delivers a high degree of alignment between the way in which such rates are designed and applied, and the climate change ambitions of both central and local government.

 

Looking to the devolved administrations we are encouraged by the direction taken in the Heat Networks (Scotland) Bill to create a regulatory framework for heat networks.   We particularly support the introduction of zoning via Local Heat and Energy Efficiency Strategies (LHEES) as a model for a market framework approach

 

2.     What key policies, priorities and timelines should be included in the Government’s forthcoming ‘Buildings and Heat Strategy’ to ensure that the UK is on track to deliver Net Zero? What are the most urgent decisions and actions that need to be taken over the course of this Parliament (by 2024)? 

 

A:  We see key policies emerging in the areas of consumer protection and the design of a market framework legislation alongside zoning. Zoning will need to address connection risk and encourage existing buildings to connect to heat networks where that represents the best option for low carbon heat.     

 

In addition the government, and parliament needs to make a strategic decision about the future role of the gas grid and the role of hydrogen for heat before 2024 without which we will start to miss climate change targets At the same time we need to see decisions on key technologies and design to take away the uncertainty that allows for example new gas boilers to be installed in new or existing buildings. 

 

As discussed above we would like to see a realignment of  fiscal policy which currently puts the costs of decarbonisation of energy on electricity bills but not on gas bills. The UK currently as some of the most expensive electricity in Europe and the cheapest gas –  one reason (we  believe) that  we are not seeing a significant uptake in heat pump deployment. This approach would, we believe, be more effective than the proposed RHI successor scheme – the Clean Heat Grant

 

As well as the above there needs to be a specific  emphasis on the entrenched problem of  retrofit, with bespoke solutions .   We also  believe that there should be a widening out of policies out to include building and housing developers.  This could take the form of  a requirement on property developers (new build with immediate effect) and building owners (retrofit – to ratchet up over time) to demonstrate how they will achieve zero carbon within their development. .  

 

 

  1.   Which technologies are the most viable to deliver the decarbonisation of heating, and what would be the most appropriate mix of technologies across the UK? 

 

A:    In the first instance Vattenfall believes that we should look to the better use of energy from waste, by maximising heat offtake from EfW plants, along with other existing sources of heat like geothermal.   Large scale heat pumps, used in the right place, will make a significant contribution  to heat decarbonisation, and will likely replace EfW sources at end of life.  This in turn raises questions about the  government's clear pathway to decarbonise the electricity sector and deliver 40GW of offshore wind by 2030.   Additional electricity network infrastructure will be needed enable the electrification of heat, bearing this in mind, it is important that the RIIO2 frameworks have a clear process in place to approve and progress with any upgrades.

 

Heat network technology will play a role here. Low temperature networks will enable the integration of heat pumps and waste heat sources. Heat networks with thermal storage can provide flexible loads which contribute to the decarbonisation of the electricity system.

 

We would challenge some current thinking that using hydrogen for heat decarbonisation is a simple solution.   Currently hydrogen at scale is expensive and whilst it has a role its use should be targeted at those areas where decarbonisation by other means proves difficult or prohibitively costly. 

 

 

  1.   What are the barriers to scaling up low carbon heating technologies? What is needed to overcome these barriers? 

 

A:  A major barrier for heat networks is the high level of initial capex allied with slow and uncertain rates of return.   Creating demand assurance – for example by requiring public anchor load buildings to connect to an available network – will begin to address this.  The introduction of zoning as part of a regulated market for heat networks will also be a vital step. 

 

Zoning can also help address the coordination challenge which is often an issue for heat networks projects. Various heat demands and low carbon heat sources need to come together in the right way at the right time, and are rarely under the control of a single entity. Incentives need to align across heat sources, building owners and heat network operators to pull together.

A fundamental issue is the relatively low cost of gas. To achieve net zero, existing buildings will need to replace gas boilers with low carbon heat sources. Heat networks can compete with other low carbon heat sources and have consistently been shown to be a significant part of a cost optimal pathway to decarbonising heat; however that does not translate into a clear business case for a building owner with no incentive or obligation to stop using gas.

 

 

  1.   How can the costs of decarbonising heat be distributed fairly across consumers, taxpayers, business and government, taking account of the fuel poor and communities affected by the transition? What is the impact of the existing distribution of environmental levies across electricity, gas and fuel bills on drivers for switching to low carbon heating, and should this distribution be reviewed? 

 

A:   We recognise that this is a crucial and fundamental problem and it relates to our response to 4, above.   Upfront capex is high for heat networks, returns are slow and the costs can’t be pushed automatically on to the consumer.    Vattenfall is engaged in a piece of internal research to examine these questions and will be delighted to share once it has been completed.  Meanwhile the key principles underpinning the ‘who pays’ question are:

 

 

  1.   What incentives and regulatory measures should be employed to encourage and ensure households take up low carbon heat, and how will these need to vary for different household types? 

 

A:   There needs to be a balance of incentive and mandation?   The point at which households are ‘compelled’ or encouraged to switch will be key eg change of tenancy or ownership, change or upgrade of heating system or point of sale? 

 

Measures could include :

 

Incentives 

Regulatory 

 

Inevitably the solution will require brave and decisive action from government, especially on the future of gas, and some level of intervention to deal with funding short falls in a way which does not push the burden on to individual customers or consumer groups.

 

  1.   What action is required to ensure that households are engaged, informed, supported and protected during the transition to low carbon heat, including measures to minimise disruption in homes and to maintain consumer choice? 

 

Our overarching view here is that heat decarbonisation and energy efficiency policies need to be  brought together more closely. 

 

In terms of more detailed recommendations we would suggest that there should be a requirement for communities to be consulted on the options for heat decarbonisation in their areas and for communities to have direct input into local energy efficiency and climate change action plans –  a good example is Camden Council and their citizen assemblies.

  

The promotion of district heating requires investment in programmes to increase awareness in communities that goes beyond just using established networks.  In addition, support and engagement programmes need to be long-term   -  one-off programmes and short term measures will not in our view deliver the required level of change.

 

Lessons can be taken from past area based programmes like Warm Zones which were area based energy efficiency programmes.   To meet net zero, we need to tackle existing buildings with both energy efficiency and low carbon heating. An area based approach (or zone) has benefits in both cases.   Warm Zones have proved that an area based  or street by street approach can also reduce disruption to householders, help with strategic planning and create other efficiencies. 

 

As a foot note we would add that whilst there is here strong focus on domestic heating, it should not be overlooked that district heating applies equally to non domestic buildings where bespoke solutions might apply.

 

  1.   Where should responsibility lie for the governance, coordination and delivery of low carbon heating? What will these organisations need in order to deliver such responsibilities? 

 

A:  Policy needs to be driven by central government which needs to provide  direction and a strategic pathway for both energy efficiency and heat decarbonisation.  Funding  and support measures also need to be provided by central government.   However there needs to be a strong local input into the deployment of these policies.

 

Local government is already tasked with developing local energy efficiency plans but may lack the resources or expertise to deliver against these plans.   This is the space where private-public partnerships should be facilitated and encouraged.

 

In terms of governance, we are looking to the emerging regulatory framework to set down principles and we anticipate that Ofgem to act as regulator.

 

It’s important to recognise that future decarbonisation in homes is not just an energy sector challenge.   It needs to be a goal and responsibility which is  shared across industry, the supply chain and housing developers as well as consumer groups.

 

 

December 2020