Brodies discusses combined heat and power schemes

Charles Smith at Brodies LLP, considers the outlook for combined heat and power (CHP) schemes in the UK.

The UK trails behind countries such as Denmark, Germany and the US when it comes to CHP schemes, even though it has the potential to meet the raft of targets set by the Government.

The EU Renewable Energy Directive obliges the UK to ensure 15 per cent of overall energy consumption is from renewable sources by 2020.

The Government's Renewable Energy Strategy, published in July 2009, envisaged that this target should be implemented through 30 per cent of electricity, 10 per cent of transport energy and 12 per cent of heat, all from renewable sources.

At present, only 1 per cent of heat is currently produced from renewable sources.

The Climate Change Act 2008 sets the UK on a course to achieve at least an 80 per cent cut in greenhouse gas emissions by 2050 and a 34 per cent reduction in those emissions by 2020.

There is also the Carbon Reduction Commitment Energy Efficiency Scheme (CRC), introduced in April this year, which applies to the public sector.

Its effect will be to drive energy efficiencies (otherwise additional costs will be incurred through the need to acquire additional permits).

Among other energy reduction measures, district heating and CHP have a role to play in the implementation of the CRC.

On the policy front, there are two important UK Government protocols relevant to heat.

The first is the Strategy for Household Energy Management published in March 2010.

This Strategy points out that carbon emissions associated with energy use in our homes account for about a quarter of all UK emissions.

Progress has been achieved through the Carbon Emission Reduction Target (CERT), which imposes a legal obligation on energy companies to improve energy saving in homes, but this programme will expire at the end of 2012.

It is intended that CERT will be replaced with a new obligation on energy companies, and one important aspect of this in the public sector context is that the new obligation will require energy companies to work with local authorities (LAs) to identify and implement energy-saving opportunities.

Separately, the Strategy sets out a framework to increase credibility in the market for district heating with particular reference to dense urban communities, including blocks of flats and social housing.

The Strategy notes that the public sector estate has a fundamental role to play in providing heat loads for new networks, and a commitment is being considered where all public sector properties should be connected to heat networks where it is feasible, economic and consistent with the UK's short and long-term climate change targets.

The Strategy also undertakes that a National Heat Map will be prepared to enable clear assessment of the potential for district heating, and that a Heat Market Forum is to be established to consider and advise on the role of regulation in the heat market (currently more or less unregulated).

Three things are striking about the Strategy.

First is the recognition of the key role that the public sector has to play, whether in light of the significant estate that it owns or operates, or in light of planning and other statutory powers.

Secondly, the acknowledgement of the role that district heating must play in achieving the UK's Green House Gas (GHG) emissions reduction targets, allied to the potential benefits of district heating schemes for the relief of fuel poverty.

Thirdly, the recognition that Government intervention and assistance will be required to enable the district heating market to develop both in terms of regulation and in terms of the supply chain.

The second policy instrument is the draft Renewable Heat Incentive (RHI), consulted upon by the Government in February this year.

The RHI, a subsidy for renewable heat generation and use, and proposed for implementation in April 2011, it will operate through tariffs on specified forms of renewable heat generation.

The general aim is to provide a rate of return of 12 per cent on the additional capital cost of renewables.

It is not yet clear how the tariff will be funded, but the legal basis for the RHI is the Energy Act 2008.

The consultation notes that district heating can be a useful and cost effective alternative to individual heating systems in individual properties.

The RHI tariff will, therefore, be available for district heating (provided of course it is renewable).

The consultation also notes that district heating requires the installation of pipes and other infrastructure, which is costly.

In cases where district heating may be the only viable option for delivering renewable heat, the consultation suggests that the proposed tariffs would not be sufficient and that a district heating uplift might need to be paid so as to increase the potential uptake of renewable heat.

The consultation calls for evidence as to what level that uplift should be set at.

So, in light of the background, what are the potential benefits of district heating and/or CHP to the public sector? 1 - There is a role for district heating in implementing the public sector estate's obligations under the CRC and thereby reducing costs, energy consumption and GHG emissions 2 - The public sector estate can take the lead in projects, particularly at LA level, through knowledge of the local area, planning powers, and the provision of anchor heat loads 3 - For LAs and Registered Social Landlords (RSLs), there is a significant potential benefit in the relief of fuel poverty through district heating 4 - There is a clear role for the public sector and district heating in the urban regeneration space 5 - Financial incentives are proposed for renewable heat which should enhance the viability of district heating using renewable energy sources 6 - For LAs, the proposal that there should be closer partnership working with the large energy companies to present a synergy of expertise and opportunity.

None of this is to say that district heating schemes are easy.

They require careful planning and structuring, and financing them, (at least through private sector capital) is not yet straightforward.

But the opportunities are there and set to improve, so now is the time for strategic planning and feasibility studies.

Charles Smith is a partner in the renewable energy group at Brodies LLP.

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