Needs-Challenges-Barriers-Opportunities

Needs/challenges, barriers, opportunities

Country

United Kingdom

Urgent Needs/Challenges

District heating is currently omitted from national legislation, and this needs to be rectified.

Currently, district heating struggles because of the high capital cost (which is thought to be higher in UK than in mature DH countries), lack of awareness, and the poor performance of some older existing schemes.

Operating in the liberalised market hampers district heating; whilst competitor infrastructure established previously was installed using mostly public (lower NPV) money. This removed risk, which continues to be taken out because it is shared across the whole regulated asset base.

Yet DH achieves well with respect to 3 government imperatives as set out in the Energy White Paper: carbon reduction, fuel poverty, and security of supply, failing only on the 4^th, namely competitiveness. Hence the need for incentives for DH.

Financial support is required - this technology is economically viable, just not financially viable to establish. There should be more incentives for CHP, which should be included even if fossil-based, in a similar arrangement as for renewables under the forthcoming Renewable Heat Incentive (RHI).

Government officials pointed out the need for consumer protection, which would give local authorities the confidence that consumers will agree to connect.

There should be an obligation on developers to join a DH network if one is nearby. There could be an obligation for local authorities to develop DE infrastructure. Once established, costs fall. Devise optimum resource allocation at spatial planning level. Give heat utility a franchise or license and a charging mechanism to recover their outlay through use-of-system charges.

DH is not a statutory undertaking, unlike the other energy supplies: this adds delay and cost where new systems are being implemented.

Main Driving Forces

Mandatory CO2 reductions for local authorities many of whom are redrafting their planning frameworks. Fuel poverty alleviation, and the growing issue of security of supply are also important.

Main Barriers

The lack of incentives, rather than specific barriers, is cited by some as the principal issue. Operating in a liberalised market, it comes down to cost and other benefits are difficult to recognise.

Tangible barriers were also mentioned including one that government has the opportunity to avoid: at present fossil-fired CHP (being not renewable based) is set to suffer under the forthcoming (2011) RHI. Thus, while renewables (that are not cost-effective but whose carbon saving potential is being recognised) will receive a boost while CHP (potentially saving more carbon) will not.

Capital cost is a major barrier; this technology requires a long-term view, but the financial markets do not support this long-term view. The public sector can accept lower NPV and lower cost of borrowing, but local authorities are cash-starved in revenue and capital.

VAT policy on fuel and power: due to sensitivities such as fuel poverty VAT is levied at only 5% (as opposed the full rate of 17.5%) on gas and electricity bills. Hence energy remains relatively cheap and the payback for capital-intensive carbon-saving technologies is artificially lengthened.

Undertaken 2 decades ago, the privatisation of the electricity industry hampered the establishment of DE. Current electricity trading arrangements make it difficult to sell electricity to the grid from local scale CHP.

Planning policy with respect to power stations means that developers have established them where there is no available heat load.

Lack of knowledge and awareness is also a barrier: politicians and pundits should talk much more about DE. So electricity and gas remain the presumed energy distribution networks.

Lack of experience in the contracting sector is also a problem: only a handful of companies can install leading to lack of competition expensiveness.

Arrangements for competition in energy markets such as the 28-day rule (within which time a consumer has the right to switch supplier). There was some relaxation to this rule for designated low carbon zones in order to encourage ESCO developments.

Some concern was also expressed about the risk of stranded assets if DH network is established, then in the future heat demands fall away.

Main Opportunities

At present the main drivers for DE are through planning system for new-build developments. However, the UK is a highly urbanised country so that the really big opportunity is in town and city centres across the country.

If properly configured, the RHI could incentivise CHP as well as renewables.

The public sector could be allowed to borrow capital where they intend to invest in revenue earning activities. Currently the Public Sector Borrowing Requirement makes no distinction between resources sunk and those which earn revenue.

The plan for a number of futuristic ‘ECO-towns’ provides an opportunity – at present these are being taken forward without a thorough consideration of energy.

2020 vision

Some expectation that public sector will drive developments in high heat demand density areas. There could also be more demonstration schemes established with some existing schemes expanding. It is expected that a three year plan to establish government and local level policies could then lead to medium size schemes being established by 2020 particularly based on groups of tower blocks. Potentially some major schemes could also get under way, most notably the Thames Gateway.