Combined Heat & Power

Demand Side Services

Energy Efficiency

Heat Networks

Response to Clean Growth Strategy

16 January 2018

The Association for Decentralised Energy welcomes the opportunity to respond to the Government’s Clean Growth Strategy.

Ambition for a competitive, and decarbonised, economy

We welcome the overall ambition set out by the Clean Growth Strategy, specifically that economic growth can be aligned with carbon emission reduction.

A concerted global effort is required to stop climate change, and countries are competing on who can transition most effectively. How each nation adapts to a carbon constrained world will determine its future economic competitiveness and ability to deliver lasting, sustainable growth and prosperity.

To best deliver these twin aims of a decarbonised, competitive economy, it is important that the Government’s strategy looks to seize the opportunity for businesses energy users to provide benefits to the energy system and lighten the load of this cost rise.

By receiving value for their contributions, whether by generating their own energy or reducing their energy demand, these businesses will be able to protect their profitability and competitiveness, and support inward investment. Businesses can lighten the load of this cost rise, and receive value for their contribution, protecting their profitability and competitiveness, and support inward investment.

We therefore welcome the Government’s creation of an Energy Intensity Ratio as a key metric for measuring success of the Clean Growth Strategy. It represents an important way to measure whether the economy is able to achieve more for less through its energy policies, delivering both economic growth and decarbonisation.

The need for new policies to deliver Clean Growth Strategy targets

We would note that the Strategy specifically states that it will require new policies to deliver the overall reductions required, alongside future technological innovations supported by the Government’s welcome Research and Development support for key sectors.

There are significant questions already, however, about whether the necessary funding and policy decisions are being made which will ensure the Strategy’s ambitions are delivered. In fact, some commitments made in the Strategy are already delayed or in jeopardy of failing to deliver their intended aims.

Carbon pricing

We welcome the decision by HM Treasury in Autumn 2017 to maintain the overall carbon price on electricity, including by extending the Carbon Price Support tax, to 2025. This will provide a significant amount of certainty to the electricity sector. However, there are additional areas of uncertainty, including the role of EU ETS post-Brexit, and what additional carbon taxation reforms will follow any departure from the European Union. There is a need to address these issues, as well as the Government’s long-term aims for carbon taxation beyond 2025, if the Clean Growth Strategy is to be effective.

Business energy efficiency

We welcome the Clean Growth Strategy’s commitment to improve business and industry energy efficiency by 20% by 2030, and its recognition that there are £6 billion in cost-effective savings available through business and industrial energy productivity improvements. We also welcome the role for increased use of renewable fuels in the industrial sector towards 2030.

Better energy productivity strengthens an individual businesses’ competitiveness, helps boost UK wide economic productivity, improves energy security and cut carbon emissions. Accounting for nearly 70% of UK electricity demand, energy users in the industrial and commercial sectors are particularly well placed to contribute to solving the energy system’s current challenges on cost, security and emissions.

Over the last Parliament, industrial and commercial businesses improved their energy productivity significantly. The UK produced £238 billion more goods and services in 2015 compared to 2010 using the same amount of energy, partly resulting from investments in energy efficiency. Final energy consumption decreased by 19 Mtoe between 2010 and 2015 as a result of improved energy efficiency, 37% of those savings from the commercial, industrial and public sectors.

However, we are concerned that the headline commitments to improve business decarbonisation made in the Clean Growth Strategy are not being delivered in practice.

  • The Government’s Industrial Energy Efficiency Scheme did not receive funding in the Autumn 2017 Budget, putting delivery of the scheme within this Spending Review Period in significant jeopardy.
  • Increasing the role of biomass in industry is becoming more challenging, not less, with new restrictions on the use of the Renewable Heat Incentive for large-scale, high-head demand industrial sites; and the ongoing inability for the combined CfD and RHI policy to deliver a workable mechanism for highly efficient, biomass combined heat and power. Significant policy changes are required to deliver on these industrial bioenergy ambitions.
  • The package of business energy efficiency measures expected in 2018 may help to address some of these areas of shortfall. It will be important that the consultation’s proposals explicitly aims to deliver the necessary policy changes to deliver the 20% in business energy efficiency savings required by the Clean Growth Strategy. It will similarly be important that the measures help support business competitiveness, not add additional costs and harm competitiveness.

The role of active business energy users in delivering a cleaner power system

In addition to energy savings, we believe the Clean Growth Strategy could more clearly show how business and industrial energy users who provide energy services through lower carbon generation, such as highly efficient combined heat and power, or through demand response, can effectively improve their competitiveness through increased revenue, while also displacing higher carbon coal and gas generation elsewhere in the system.

It would be helpful to more clearly link the Government’s business energy efficiency goals and its clean power goals, as set out in the Clean Growth Strategy. A decision to continue the successful and cost-effective Electricity Demand Reduction pilot (when compared with the cost of 15-year Capacity Market new build generation contracts), demand response service accessing market revenues, and new, decentralised, lower carbon generation investments, are all be part of a holistic approach to reduce business energy costs and carbon emissions.

Heat decarbonisation and the role of heat networks

We strongly welcome the clear role for heat networks in delivering a cost-effective part of all three heat decarbonisation pathways. This aligns with the view held by Government, the Climate Change Committee, and the Energy Technologies Institute that district heating as a key, no regrets part of a cost-effective approach to decarbonising the UK heat supply and meeting our emission reduction commitments under the Climate Change Act, no matter which pathway is chosen.1, 2, 3

Heat networks have a similarly positive impact on local jobs and growth. Analysis by IPPR has found that delivering the UK’s cost-effective heat network potential can create up to 81,000 local jobs and leverage up to £22 billion in private investment.

The Government’s direct support for increased heat network investment, with a Spending Review commitment for £320m, through the Heat Network Investment Programme currently sends a vital signal to the industry. Manufacturers, energy management companies, and local authorities responded by increasing resourcing and establishing partnerships, already delivering strategic network assets across 150 towns and cities.

It will be important that Government reaffirms its support, in line with the Spending Review commitment, for HNIP funding to 2021. Doing so will signal confidence for investors, enabling network development and long term energy and cost savings. We are already seeing significant investment from new external investors such as Aviva, Macquarie, and Fortum. The ADE is confident that, as with offshore wind, a long-term, stable, industry-Government partnership will deliver significant cost reductions and inward investment.

HNIP has also strengthened the sector’s ability to plan for the longer term, with the ADE having established the Heat Network Task Force. We welcome the Clean Growth Strategy’s recognition of the Task Force as part of building this long-term solution. The Task Force is an industry initiative to develop a framework for a subsidy-free heat network market, with powerful consumer protection, when HNIP funding ends in 2021.

It is important to recognise that HNIP is a foundation of such a partnership to achieve the cost effective, low carbon district heating market needed for Britain. By protecting and continuing these foundations for a strong industry partnership, the Government will help deliver transformative investment and change to Britain’s cities.

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