Written evidence submitted by Calor (CGE0027)

Executive summary

1. Calor welcomes the opportunity to respond to the Science and Technology Select Committee’s inquiry on technologies needed to meet Clean Growth emissions reduction targets. We support the government’s Clean Growth Strategy and the ambition to decarbonise heat and transport.
2. The UK’s heating market requires Government intervention to support the transition away from the highest carbon fossil fuels, to lower emission alternatives. A low-carbon heating policy needs to develop a consistent, long-term policy framework to support this transition.
3. Calor is Britain’s leading supplier of Liquefied Petroleum Gas (LPG) and our primary market is supplying homes and businesses located off the gas grid with LPG for heat in largely rural areas. Calor is proactively working to deliver affordable heating and tackle the twin challenges of rural fuel poverty and decarbonisation.
4. We support the government’s intention to phase out the use of heating oil and coal for properties situated off the gas grid. We believe that any future heat strategy should have green gas at its heart, which is why we are devoting significant resources to innovation and diversification, and to bringing new high efficiency heating applications and low carbon renewable fuels to the market.
5. At the same time, it is vital that the policies we pursue are affordable and do not increase levels of rural fuel poverty, which are currently worse than those in urban areas.
6. For these off-gas grid properties Calor introduced bioLPG an innovative new renewable fuel into the UK market earlier this year.  BioLPG is chemically identical to LPG, so it is a cost-effective drop-in that is compatible with existing boilers and appliances, meaning homeowners are avoiding the expensive conversion costs of replacing or upgrading their central heating systems. As such, bioLPG offers an affordable and long-term solution to meeting the Clean Growth Strategy’s targets to decarbonise the countryside. Government policy should support the development of different biopropane production pathways, all of which can be supplied by sustainable and scalable domestic feedstocks.

Decarbonising the countryside

7. In order to achieve the levels of emission reductions from the UK’s homes and buildings, the government is planning to transform how we heat our homes and how we build them. The majority of homeowners currently heat their homes with natural gas, typically through condensing boilers connected to the gas grid. Those in rural communities not connected to the gas grid (approximately 2 million homes) will either use heating oil, coal, electricity or LPG to do the same. To meet its targets, the process of transitioning rural homes to new low carbon heating systems will need to start by the early 2020s.
8. The Clean Growth Strategy states its ambition to decarbonise the countryside, and specifically off-gas grid residential properties during the 2020s. We support the government’s intention in the Clean Growth Strategy to phase out the use of heating oil and coal for off-gas grid properties towards lower carbon alternatives.
9. Fuel poverty is more prevalent in off-gas grid rural areas, due to a number of factors including higher energy costs, older properties, lower levels of insulation in hard-to-treat properties and the lack of support from government energy efficiency programmes. Households without access to mains gas tend to have fuel poverty gaps double the average mains gas household (typically over £600).
10. Given this context, decarbonising off-gas grid homes is one of the most immediate challenges facing the industry. Decarbonisation must be done in a way that does not unduly burden those already experiencing fuel poverty.
11. The Clean Growth Strategy outlines a range of low carbon heating technologies with the potential to support the scale of change needed as we transition to the decarbonisation of heat. The strategy recognises that at present it is not clear which approach will work best at scale and offer the most cost-effective long term answer, but we welcome the government’s commitment to work with industry and consumers to achieve a clear and shared understanding of the costs and benefits of different pathways.
12. To support the government’s intention to decarbonise the countryside, Calor is supporting the development of bioLPG as a low carbon, drop-in replacement for LPG and this is now available on the UK market.

Government support for biogas

13. LPG and bioLPG offer a strategic, long term solution for reducing harmful emissions. BioLPG is an innovative new fuel that is created from renewable materials, with the potential to reduce the carbon footprint of home heating by more than 80%[1]compared to heating oil.
14. Calor introduced bioLPG to the UK market in March 2018, imported from Neste’s existing biodiesel production facility in Rotterdam and made from a blend of waste, residues and sustainably sourced vegetable oils. It is a co-product of the biodiesel production process. During manufacturing the feedstocks undergo a series of complex treatments and are combined with hydrogen in a process called hydrogenolysis which separates and purifies their energy content. During the refining process a variety of waste ‘off-gases’ are produced that contain propane (the main form of LPG used in the UK) For every tonne of biodiesel, 50 kg of biopropane (bioLPG) is generated from this off-gas stream. This co-product is then purified to make it identical to conventional propane.
15. As it is chemically identical to conventional LPG and works with all LPG appliances, it does not require home owners to upgrade their heating systems or appliances such as cookers and gas fires and has no negative impact on performance. It is also a cost-effective and easy way for rural properties to move away from traditional fossil fuels and reduce their carbon footprint.
16. Many rural properties are most suited to high temperature heating systems. BioLPG can allow these properties to reduce heating emissions by the amount necessary for the UK to hit climate change targets.
17. Figure 1 below illustrates the annual GHG emissions of a rural off-gas grid house, with a typical annual heat demand[2]. The analysis considers the relative emissions of a range of heating technologies suitable for rural off-gas grid properties. As a starting point, the incumbent, old oil boiler produces just over 3.6 tonnes CO2e – given an assumed 76% efficiency rating (equivalent to SEDBUK band E).
18. A range of gas technologies can reduce emissions significantly in the near term. Switching to a new LPG boiler reduces emissions by close to 30%, whilst operating an LPG hybrid heat pump brings 43% annual savings.
19. For deep decarbonisation, a switch to a bioLPG supply would be needed. For existing LPG customers, bioLPG can provide a drop-in fuel alternative with no additional action required from the consumer. This renewable fuel can deliver over 80% reduction in emissions against conventional LPG, and 85% against kerosene – though carbon factors are dependent on feedstocks and production processes[3]. However, investment is needed in developing bioLPG production routes. Currently there is no incentive to supply low carbon fuels into the domestic heating sector, whereas the transport sector places a value on renewable fuels like bioLPG, driven by the price of Renewable Transport Fuel Obligation (RTFO) certificates.
20. Transitioning from heating oil and coal in the rural off-grid areas (where these fuels predominate) could be better supported by a renewable heating fuel obligation (RHFO), which rather than targeting specific technology deployment, instead obligates fuel suppliers to deliver a % of renewable fuel to customers. This would be similar to the existing RTFO. This obligation could be targeted at high-carbon fossil fuels initially and then extended to gaseous fossil fuels (both LPG and natural gas) at a later specified date in the 2030s. This staggered policy scope is reflective of the carbon content of the various fuels.
21. The % of renewable fuel required should gradually increase over time – as with the RTFO. Such a policy could set a gradually increasing requirement on suppliers and create a certificate scheme (such as with RTFOs) to provide a monetary incentive to invest in biofuel supply. This approach requires minimal consumer engagement, and instead challenges industry to deliver decarbonisation solutions. To support the roll-out of bioLPG, Government should:

• Continue with its plans to phase out the use of high carbon fossil fuels such as coal and heating oil used in off-gas grid Britain during the 2020s.  We support the calls for a firm date which would allow industry, and more importantly, consumers the time to adapt and find alternative heat sources.
• Introduce a Renewable Heating Fuel Obligation to encourage the supply of renewable biogases and speed up the transition away from fossil fuels to renewable sources.
• Government should continue to support the role of clean gas and explore opportunities with industry for domestic production sources for bioLPG.

Assessment of feedstock availability and levelised cost for biopropane production via gasification

22. Since March 2018 Calor has imported biopropane from Neste Oil’s Rotterdam biorefinery and prior to this it was considered a waste product and passed to a local power plant for co-firing.
23. Calor is actively pursuing domestic supply sources of biopropane. To this end, we commissioned Advanced Plasma Power (APP) and Drochaid Research to undertake a review into the commercial case behind biopropane. Propane is the principle constituent of LPG currently sold for heating in the UK.
24. Biopropane produced from biomass feedstocks can be split into three categories:

• Crops such as wheat or vegetable oils
• Residues from agriculture and industry such as straw and sawdust
• Commercial, industrial and domestic wastes such as demolition wood or mixed municipal waste

25. The key characteristics of the feedstocks are:

• Cost – the amount paid or received per tonne.
• Availability - the total annual availability of a given feedstock.
• Sustainability – an assessment of the GHG emissions and other environment impacts, such as biodiversity, of using a given feedstock.

26. Biomass has been used to produce fuels for transport and heating for decades and there are well established processes to assess sustainability.  The cost, availability and sustainability of feedstocks has been assessed by the Climate Change Committee[4], ARUP[5] and, most recently, Cadent[6].
27. Each of these reports assessed the availability of sustainable crops, residues and wastes produced in the UK. This involved:

• An assessment of current availability
• An estimate of changes in availability over time due to population growth, increased recycling or changes in agricultural practise
• A forecast of expected availability in 2030 and 2050

28. Overall, the consensus from the reports is that sustainable UK feedstock have the potential to produce around 100TWh of fuel in their medium forecasts and 250TWh in their high forecasts. The key feedstocks compromise of municipal waste, waste wood, straw, wood industry residues and energy crops. In addition to these domestic sources, it is possible to import biomass from countries with low population densities and higher agriculture outputs.
29. The key driver of availability is cost. Municipal waste attracts a negative cost, other wastes have low costs, residues are more expensive and energy crops have a relatively high cost.
30. Municipal waste attracts the highest gate fees at around £30 per MWh of feedstock. Around 18TWh of municipal waste is available. As gate fees decline food and wood waste become available. Once a facility is willing to pay for feedstocks, agricultural residues and energy crops become available. At costs above £12/MWh (£55/tonne) significant amounts of UK and imported energy crops would become available. This is supported by a recent report by Ecofys on energy crop production[7].
31. The total demand for fossil off-gas grid heating is around 23TWh. It will require around 40TWh of feedstock to produce this amount of biopropane, well below the amount that can be produced sustainably from UK feedstocks.

Affordable and sustainable alternative to existing fossil fuel heating

32. A key feature of biopropane is that it is a like for like replacement for LPG. This means that the infrastructure to use biopropane in heating is in place. Heating equipment and a distribution network that is ready to use biopropane is already delivering LPG to more than 190,000 customers so the costs are well understood.
33. In terms of comparison with other low carbon heating solutions, we have assessed biopropane against existing fossil LPG and a heat pump (see graph below).

• By 2030, biopropane produced from waste may be able to heat off-grid homes for a similar cost to fossil LPG but with 90% lower GHG emissions
• Heating a home using waste derived biopropane is expected to cost less than using fossil LPG and around 25% less than using a heat pump, based on 2030 power costs [8].

Levelised costs

34. Levelised costs are an indication of the sale price that biopropane will need to achieve in order meet investors’ hurdle rates of return.
35. The hurdle rates of return are discussed in detail in a 2015 report for BEIS by NERA Economic Consulting[9]. Broadly hurdle rates are around 12% for first of kind technologies but will fall to 6-7% for mature power generation technologies. Hurdle rates of 12% are assumed for first of a kind (FOAK) plants and 6% for nth of a kind (NOAK) plants.
36. The gate fees received for waste feedstocks or amounts paid for crops or residues have a significant impact on the levelised cost. At present there are more than 10 million tonnes of waste being sent to landfill and 3 million tonnes of residual waste exported to the continent. There is seems safe to assume that waste, with a gate fee of £15/MWh of waste, will be used for both FOAK and NOAK plants.
37. Levelised costs for LPG produced by FOAK and NOAK plants is shown below in the table below.

38. The price of £399/tonne for biopropane is higher than the current wholesale price of fossil LPG but is below forecasts of the LPG price in 2030. It is also within the range of wholesale prices over the last 5 years as shown in the graph below.

39. The FOAK price is significantly higher than current market prices and so government support will be required to incentivise the production of biopropane. An incentive of around £55/MWh is currently required to bridge the gap between biopropane and fossil LPG. Each MWh of biopropane will save 189kgCO2eq of GHG emissions. This results in a cost of £291 per tonne of GHG emission abated, in line with amounts paid to other low carbon source of energy at early stages of development.
40. The price will fall as the technology develops because:

• Hurdle rates will reduce as the technology matures.
• Plant performance will improve through learning from earlier facilities.
• Costs will fall as the supply chain for equipment develops.
• Plant size will increase as confidence in the technology grows resulting in economies of scale.

41. New power generation technologies such as wind and solar have seen dramatic falls in costs over time and biopropane can repeat this if support is provided in the early stages of its development. An NOAK plant has a cost of abatement of around £18 per tonne of GHG emission abated, far less than many decarbonisation technologies.[10]

Figure 1 - Decarbonisation potential of off-grid technologies

October 2018