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I have a vision of Britain in which people have more opportunity and control over their lives, in which families are stronger and society more responsible, and in which our country as a whole is safer and greener.

This policy paper forms part of our commitment to making Britain safer and greener. It is based on a simple premise: that we need to give more power to the people. We need to move from a top-down, old-world, centralised system to a bottom-up, new-world, decentralised system.

Historically, producing energy in Britain has largely been the responsibility of government and big energy companies. This process has been heavily reliant on fossil fuels and too much energy is wasted in heat loss and distributing the power to the end-consumer.

There is a different way, based not on large centralised providers but on small, local ones. In other countries low carbon energy sources have led a process of decentralisation – in the Netherlands, for instance, in little more than a decade, combined heat and power (CHP) became the single largest supplier of the country’s energy needs.

I want to see a similar revolution happen in Britain. I do not take a view of which energy sources should be used – I simply want to see them operate on a level playing field. I want Britain to adopt micro-generation: small providers, including homes and businesses, producing energy for their own use, using a variety of methods from CHP to wind to photovoltaic power. This policy paper sets out how this will be done. A new system of ‘feed-in tariffs’, by which people are paid for the energy they produce, will stimulate diversity and decentralisation of our power supply, as well as incentivise energy-saving.

I have argued that Britain needs to move into the ‘post-bureaucratic age’. In this new age, social and commercial co-operation will take place through local networks, not through the national mainframe. This paper shows how this applies to one of the most important areas of all – the way we power our lives.

Contents Foreword by David Cameron ....................................................................................................................................................................................................1

Summary ............................................................................................................................................................................................................................................................................................2–3

1. Our vision for decentralised energy 1.1 Enterprise and environment hand in hand .........................................................................................................4 1.2 The climate change challenge ................................................................................................................................................................5–6 1.3 UK electricity generation today: ........................................................................................................................................................7 centralised and carbon-intensive 1.4 Why we need decentralised electricity ...........................................................................................................................8 1.5 Decentralised electricity generation: competing technologies ..................9–12 1.6 Decentralised electricity generation: large-scale and micro ...............................13–16 1.7 Micro-generation: our ambition .........................................................................................................................................................17 1.8 International precedents ........................................................................................................................................................................................18–19

2. First steps to a decentralised energy revolution 2.1 Green and local: creating a mass market for micro-generation ...............20–21 2.2 Feed-in tariffs to drive the change..............................................................................................................................................22 2.3 Universal access to feed-in tariffs .................................................................................................................................................23 2.4 Empowering the consumer ............................................................................................................................................................................24 2.5 How will businesses, community groups, ...........................................................................................................25–26 schools and hospitals benefit? 2.6 Measuring electricity from micro-generation ...............................................................................................27–28 2.7 Setting the tariff ..............................................................................................................................................................................................................................29–30 2.8 Who pays the tariff to micro-generators? ................................................................................................................31 2.9 What will happen to current grant ..............................................................................................................................................32 schemes for micro-generators? 2.10 Are there any limits to the number of micro-generators?...................................33 2.11 How will households finance the ............................................................................................................................................34 installation of micro-generators? 2.12 What planning rules will apply to the .......................................................................................................................35–36 installation of those micro-generators?

3. Next steps .........................................................................................................................................................................................................................................................................37

Power to the peopleThe decentralised energy revolution

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6th December 2007

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Summary

Change the architecture of Britain’s electricity supply, so decentralised energy can play a major part in satisfying our needs.

Enable every small business, local school, hospital and household in the country to generate electricity through micro-generation

Introduce a system of feed-in tariffs, so that a fixed price is paid for all electricity produced from decentralised, low carbon sources – such as wind power, photovoltaic, combined heat and power, biomass, waste and micro-hydro.

Allow any individual or organisation using an accredited professional to install a certified low carbon generating appliance of below 250kW to be eligible to receive these feed-in tariffs.

Empower the Secretary of State to set feed-in tariffs for each form of micro-generation, which will be added as credits onto the bill of every micro-generating producer according to the amount of electricity they produce.

Create a Decentralised Energy Fund, so that the electricity supplier’s net cost in paying the tariff will be met by Government.

Fund the scheme in the first few years through the abolition of existing grant schemes for micro-generation, with costs over the long term met by the revenues received from the auction of permits for the Emissions Trading Scheme.

Ensure smart meters, which measure electricity flowing out as well as into a premises, are available free of charge to anyone installing micro-generating capacity.

Work with the financial sector to develop long-term fixed-rate lending schemes so that the purchase of micro-generating capacity becomes easily affordable.

Adjust the planning system to make the installation of micro-generating equipment simpler and quicker.

Oblige the regulator, Ofgem, to reduce carbon emissions through the encouragement of decentralised energy.

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1. Our vision for decentralised energy1.1 Enterprise and environment hand in hand

1.2 The climate change challenge

In the face of the enormous challenge of man-made climate change, ‘business as usual’ or the incremental adaptation of our economy is not enough. Britain needs dynamic industrial change if it is going to compete and win in the new low carbon era.

For the market to deliver a globally competitive low carbon future, Britain needs ambitious political leadership and a government with real vision.

The UK energy industry will be at the forefront of our efforts to reduce carbon emissions dramatically and to create an entrepreneurial and competitive low carbon economy. But energy security and reducing emissions must go hand in hand. A radically decentralised electricity system has huge potential to help deliver those twin objectives.

Just as we believe in the benefits of decentralising political power – devolving decision-making to local councils, neighbourhoods and individuals – we are also committed to decentralising power in its literal sense: the generation of electricity. A decentralised electricity system is part of our vision of a post-bureaucratic age: power to the people as a key component of ensuring Britain’s energy security and keeping Britain safe from the risks of climate change.

There is clear evidence of global warming. Global temperatures rose by 0.6 degrees in the 20th century. Eleven of the last twelve years (1995-2006) rank among the twelve warmest years in the instrumental record of global surface temperature.1 Arctic sea ice may have fallen by as much as 50 per cent from the 1950s.2 The costs of global warming are increasing. Fragile micro-climates and ecosystems are being irreparably damaged. Extreme weather conditions are increasingly commonplace, and global drought has doubled over the past 30 years.3 Claims for storm and flood damages in the UK have doubled to over £6 billion between 1998 and 2003, compared to the previous five years, with the prospect of a further tripling by 2050.4

The potential economic impact of this warming is enormous. Most formal modelling has used as a starting point a scenario of 2-3 per cent global warming. In this temperature range, the estimated cost of climate change could be equivalent to a permanent loss of around 0-3 per cent in the global world output. But the Stern Review reported that those earlier models were too optimistic about climate change and, with 5-6˚C warming, the estimated cost rises to a 5-10 per cent loss in global GDP, with developing countries suffering costs in excess of 10 per cent of GDP.5

It is incumbent on us to act because, in the words of the Intergovernmental Panel on Climate Change, there is ‘very high confidence’ that the net effect of human activities since 1750 has been one of warming.6

In 2004, the world emitted 24 billion tonnes of greenhouse gases, with the UK contributing 2.3 per cent.7 There are many different greenhouse gases, of which by far the most prevalent, by volume, is carbon dioxide. And, globally, we are emitting CO2 at an ever increasing rate.

The Kyoto Treaty, agreed in 1997, commits the UK to reduce a basket of greenhouse gas emissions by 12.5 per cent from 1990 levels by 2008-2012. The UK Government has made three successive manifesto commitments to reduce carbon dioxide emissions by 20 per cent over 1990 levels by 2010, and is currently legislating for a 60 per cent minimum reduction by 2050.

1. Fourth Assessment Report (2007) IPCC: www.ipcc.ch/ipccreports/ar4-syr.htm 2. nsidc.org/news/press/2007_seaiceminimum/20071001_pressrelease.html 3. www.greenpeace.org/international/news/rita-katrina-global-warming-911 4. A Changing Climate for Insurance: A summary report for Chief Executives and Policymakers (2004) ABI: www.abi.org.uk/Display/File/364/SP_ Climate_Change5.pdf

5. Stern Review: The Economics of Climate Change (2006), Executive Summary, p.9: www.hm-treasury.gov.uk/media/4/3/Executive_Summary.pdf 6. Fourth Assessment Report (2007) IPCC, p.4: www.ipcc.ch/ipccreports/ar4-syr.htm 7. United Nations Statistics Division

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1.3 UK electricity generation today: centralised and carbon-intensive

Despite these commitments, carbon dioxide emissions have risen in the UK in four of the last seven years, including 2006.8 On current projections, the Government’s own 2010 target will be missed.9

Once the Climate Change Bill – proposed by Conservatives and now supported by all parties – has been passed into law, UK governments will no longer be able to avoid taking the long-term action necessary to combat carbon emissions. Future governments will have legal obligations to adopt policies that reduce emissions in line with the limits set by the new Act.

The electricity supply industry is a major producer of carbon dioxide and other greenhouse gas emissions. It currently accounts for around one third of total UK energy consumption and for around 35 per cent of carbon emissions – compared with 24 per cent of carbon emissions caused by transport, 22 per cent by industries other than electricity supply, 4 per cent by services, and 15 per cent by gas and oil powered heating and cooking in people’s homes.10

The fundamental architecture of the generation and consumption of electricity in the UK has changed little since the National Grid was first established in the 1930s, when almost all electricity was produced from coal. The system was designed to take electricity from large-scale power stations, in distant locations with access to coal, to towns and cities across the country. The polluting nature of old style coal-fired generation pushed power stations even further away from large population centres when government began taking air quality seriously in the 1950s.

Within this highly centralised system, most of our electricity is still produced by coal and gas fired power stations, emitting high quantities of carbon in locations far from the point of use. Today, gas fired generation accounts for some 37 per cent and coal fired generation for some 37.5 per cent of total electricity output, with some 18 per cent coming from nuclear generation. Renewable generating sources, such as wind turbines or photovoltaic panels, produce only about 4 per cent of our total consumption.11

8. Emission of Greenhouse Gases: 1990-2006, (2007) e-Digest of Environmental Statistics, AEA Energy & Environment, DEFRA 9. A DTI report from February 2006 projects that UK emissions of CO2 in 2010 will be about 10.6 per cent below the level in 1990, or about 9.4 per cent away from the domestic goal (UK Energy and CO2 Emissions Projections: Updated Projections to 2020 (2006) DTI)

10. Our Energy Challenge: Securing clean, affordable energy for the long-term (January 2006) DTI, Energy Review, Consultation Document, page 25: www.berr.gov.uk/files/file25079.pdf 11. UK Energy in Brief (July 2007) DBERR: http://www.berr.gov.uk/files/file39881.pdf

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1.4 Why we need decentralised electricity 1.5 Decentralised electricity generation: competing technologies

Part of the reason why our centralised electricity supply industry produces so much carbon is that a large part of the power it generates is wasted. A staggering two-thirds of energy used in large, centralised power stations never reaches the consumer – it is lost partly from wires that transmit the electricity large distances across the country, but mostly in the form of waste heat from the power stations themselves.12

Although some combined cycle gas turbines – increasingly powered by imported gas – can reach efficiencies as high as 60 per cent, UK fossil-fuel power stations have an average efficiency of around 40 per cent – meaning that around 60 per cent of the energy they consume is never translated into electricity, but instead disappears up the chimney as lost heat.

Of the 40 per cent of energy input that is translated into electricity, 1.5 per cent is then lost in transmission – but there are further significant losses in distribution from the generator to the point of use in homes and businesses.

By changing the architecture of the electricity supply industry and opening the way for decentralised generation, close to the point of use, we can open up opportunities for a range of technologies which are more carbon efficient, which waste less heat and which also avoid transmission losses.

The principal low carbon technologies that can play a part in a decentralised electricity generation system are:

● combined heat and power;

● small and medium sized wind turbines;

● biomass generators;

● energy from waste generators;

● photovoltaic panels; and

● micro-hydro.

1.5.1 Combined heat and powerCombined heat and power (CHP) generators typically use natural gas to produce electricity in the same way as a conventional generator – but with the waste heat retained and used to warm buildings or to provide hot water. Instead of converting only 30-50 per cent of the input energy into usable electricity (like a conventional generator) CHP generators can convert as much as 85 per cent of the input energy into usable electricity and heat.13

This significantly reduces the amount of energy consumed and the amount of carbon emitted in the production of a given amount of electricity and usable heat. But CHP is efficient only if the generator is decentralised and positioned close to the point where the heat is being used, since much of the heat would otherwise be lost in transmission across long distances. The first domestic CHP generators should be available in the UK from 2009 onwards.

12. Decentralising Power: An Energy Revolution for the 21st Century (2005) Greenpeace 13. Sustainable Energy by Design: a TCPA ‘by design’ guide for sustainable communities (2006) Town and Country Planning Association

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1.5.2 WindWind turbines are a form of low carbon generation for which Britain, with its windy climate, is well suited. But the large-scale on-shore wind farms that play a part in the current, centralised architecture of the electricity supply industry can cause significant environmental problems in terms of their impact on the landscape, and can consequently be highly controversial. If the architecture of the system is changed, and smaller-scale, decentralised wind turbines become more feasible, these landscape-environmental problems and objections from local communities can be reduced or eliminated. Small-scale wind turbines tend to be more expensive than their large-scale counterparts per unit of electricity produced and are not suited to all locations, especially low-lying urban areas. But, in the right locations, they can be carbon efficient, saving as much as one tonne of CO2 per year per home powered.14

1.5.3 BiomassBiomass generators use organic matter to produce energy. Because the plants or trees that are used to power biomass generators absorb CO2 while they are growing, the process as a whole is virtually carbon-neutral. But biomass generation is efficient only if the (heavy and bulky) organic matter that is burned does not need to be transported long distances. Biomass is particularly suited to a decentralised electricity architecture, within which the generating machines (which range in scale from the size of a garden shed to the size of a barn) can be located on or near to the farms where the plants or trees are grown.

1.5.4 Energy from wasteEssentially the same constraint applies to energy from waste generation, which uses anaerobic digestion, incineration or gasification to produce electricity, thereby avoiding the use of primary fossil fuels. This form of low carbon generation is more efficient if it is located close to the point at which the waste is produced – since the bulky waste otherwise has to travel large distances, producing large amounts of carbon.

1.5.5 PhotovoltaicPhotovoltaic panels (PV) are low carbon generators which convert sunlight into electricity. They do not require direct sun and will operate throughout the year, although as the map below shows they are more likely to provide efficient generation in southern parts of Britain.

14. Sustainable Energy by Design: a TCPA ‘by design’ guide for sustainable communities (2006) Town and Country Planning Association

Yearly total of global horizontal irradation (kWh/m2) UK and Ireland

Source: re.jrc.ec.europa.eu/pvgis/

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Their costs have been falling fast, as the technology develops and efficiency improves. Decentralised PV is also highly efficient in its use of space since it can be built into new homes or other new buildings or can be bolted onto existing buildings (for example, when roofs are replaced). In the right locations, about 40 square metres of PV panels – roughly the size of a normal roof – will supply all the electricity for a medium-sized house.15

1.5.6 Micro-hydroHydro-electric power currently provides around 0.8 per cent of total UK electricity supply, mostly from large-scale hydro-electric schemes in the Scottish Highlands.16 But, in a decentralised system, micro-hydro-electric generation can be introduced, making use of the power from smaller rivers and mill-streams which are not sufficiently powerful to sustain major hydro-electric dams. Rivers with a fall (or ‘head height’) of three metres or more can support such generation – which can be used to provide low-carbon electricity for neighbouring areas.

Technology

CHP Wind

Biomass/ Energy from Waste

PV

Micro-hydro

As well as the different technological forms of decentralised electricity generation, there are differences in the size of such generating capacity. For the purposes of this Green Paper, we distinguish between:

● large-scale decentralised generation, and

● micro-generation.

1.6.1 Large-scale decentralised electricityLarge-scale decentralised generation consists of CHP plants, medium-sized or large single wind turbines, biomass generators, energy from waste generators, photovoltaic panel arrays and micro-hydro plants which are big enough to generate electricity (and in some cases heat) for whole housing developments, large factories, large office blocks, large retail outlets, universities and large public buildings.

When decentralised energy is produced on this scale, the owner of the generating plant may often produce enough excess electricity and heat for it to make sense to sell it under contract to neighbours. For example, a large retailer may wish to install equipment to generate its own electricity, but also generate enough to supply an adjacent school, leisure centre or office development. Alternatively, a large-scale decentralised generator may be used to provide community electricity and community heat. A modern CHP generator sufficiently large to provide a whole neighbourhood with power and heat could fit easily into the basement of an office building.

We want to give businesses the incentive to meet their own electricity needs through establishing such large-scale decentralised electricity generation capacity, and we want to make it more attractive for new players to use that generation in order to enter local electricity and energy markets. If major retailers can sell car insurance, why not electricity too?

1.6 Decentralised electricity generation: large-scale and micro

Reduces waste heat Yes

Benefits from decentralisation because…

…heat cannot be transported efficiently over long distances

…there are landscape -environmental constraints on large wind farms

…bulky materials used as inputs otherwise have to be transported long distances

...it can be installed efficiently in buildings

…it can be used to extract power from smaller rivers

Low carbon-generating technologies that benefit from decentralisation

15. Sustainable Energy by Design: a TCPA ‘by design’ guide for sustainable communities (2006) Town and Country Planning Association 16. Questions about Hydroelectric Energy, DBERR website: www.dti.gov.uk/energy/sources/renewables/news-events/press-materials/background/ hydroelectric/page24353.html#BM24348

Reduces transmission losses Yes Yes

Yes

Yes

Yes

Intrinsically low carbon Yes

Yes

Yes

Yes

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1.6.2 Financial support to encourage large-scale decentralised electricityAlthough there is, at present, no substantial policy tool specifically aimed at encouraging the development of large-scale decentralised electricity in the UK, the closest existing tool is the Renewables Obligation scheme, introduced in 2002. This requires licensed UK electricity suppliers to source a specific and annually increasing percentage of the electricity they supply from renewable sources. The current level is 7.9 per cent for 2007-08 rising to 15.4 per cent by 2015-16. The principal mechanism in the administration of the scheme is the purchase of Renewables Obligation Certificates (ROCs) from renewable energy producers by energy suppliers.

The Renewables Obligation scheme has cost businesses and consumers approximately £1.8 billion to date,17 paid for through electricity bills. But the scheme is flawed in three crucial respects:

1. It is extremely bureaucratic – deterring all but highly resourced generating companies from participating.

2. It does not provide any support for forms of low carbon decentralised electricity which are not technically ‘renewable’ – such as CHP plants.

3. Because the electricity suppliers operating under the scheme are able to purchase the required amount of renewable energy from the cheapest source, they inevitably opt for the electricity produced by the forms of renewable generation which are already technologically secure and hence relatively cheap. The largest beneficiary has been land-fill methane gas, and the second largest has been large-scale onshore wind turbines. As a result, investors in these established renewable technologies have made large returns.18

By contrast, investors have had little incentive to invest in currently more expensive and emerging technologies that require further development to bring their costs down towards open-market competitive levels.

These defects led the House of Commons Public Accounts Committee in 2005 to criticise the operation of the Renewables Obligation scheme on the grounds that it was “currently at least four times more expensive than the other means of reducing carbon dioxide currently used in the UK” (HC 413).19 The Chairman of the Committee called on the Government to target subsidies at technologies which need them “to have a genuine prospect of becoming commercially viable”.20 In parallel, the Committee recommended tapering or phasing out Renewables Obligation payments “for lower cost renewable technologies which have limited growth potential”.21

The Government now proposes to introduce a system of ‘banded’ Renewables Obligation Certificates. This would have the effect of providing more financial support for emerging technologies than for the established and cheaper technologies such as large-scale onshore wind turbines – thereby addressing one of the defects of the current scheme. But this reform will do nothing to cure either the bureaucratic nature of the scheme or its failure to support important large-scale, low carbon decentralised technologies such as CHP.

We will therefore bring forward proposals in 2008 to replace the Renewables Obligation Certificate scheme with a new system of support for large-scale decentralised electricity generation. Our proposals will ensure that contracts already made by electricity suppliers with generating companies that have invested in renewable energy on the basis of the Renewables Obligation Certificate scheme are honoured. But we will restructure the mechanisms of support so that they are less bureaucratic and provide proper incentives for forms of low carbon, large-scale decentralised generation which have not hitherto benefited from the Renewables Obligation Certificate scheme. We will also be bringing forward plans to encourage more efficient use of heat in large scale generating plants, and to promote greater carbon capture and storage for fossil fuel power stations.

17. www.ofgem.gov.uk/Sustainability/Environmnt/Policy/Documents1/Ofgem%20response%20to%20Renewables%20Obligation%20 consultation%5b1%5d.pdf 18. UK Energy in Brief (2006) DBERR

19. House of Commons Public Accounts Committee, Sixth Report, (Session 2005-06) Department for Trade and Industry: Renewable energy 20. NATTA Journal’s Renew, Issue 159, (January-February 2006) eeru.open.ac.uk/natta/renewonline/rol59/7.htm 21. House of Commons Public Accounts Committee, Sixth Report, (Session 2005-06) Department for Trade and Industry: Renewable energy, page 6

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1.6.3 Micro-generation: a new definitionThe remainder of this Green Paper, however, is concerned with our proposals to promote the micro-generation of electricity in England.

By electricity micro-generation, we mean low carbon generators of below 250kW – roughly the size of generator that is required to provide electricity for 120 medium-sized homes, a large school, or a medium-sized business.22

1.7 Micro-generation: our ambition

Our ambition is to revolutionise the UK electricity sector by enabling every small business, every local school, every local hospital and every household in the country to generate electricity. This means generating, at the point of use, part and in some cases all of the electricity needed. We will stimulate new markets for locally generated electricity by rewarding self-generators for their own low carbon electricity, and incentivising them to sell back any surplus to their local electricity network.

There is now a huge opportunity to empower families, communities and businesses to create as well as to consume energy, to become more energy independent and energy efficient, to drive innovation and the adoption of new technology, and to develop new skills and jobs in Britain.

Rather than trying to graft low carbon energy onto an old system designed around large, remote, coal-fired power stations in the first half of the twentieth century, the decentralised energy agenda in general – and the micro-generation agenda in particular – are about re-inventing the sector to encourage and support local low carbon electricity that is generated more efficiently, far closer to the families, communities and businesses that use it.

We are determined to create a decentralised system for electricity generation that will help move us from laggards to world leaders in micro-generation.

22. At present, low carbon electricity microgeneration is defined in Chapter 26 of The Climate Change and Sustainable Energy Act 2006, which describes it as the generation of electricity by a generator of below 50kW where the technology used is: biomass, biofuels, fuel cells, photovoltaics, water (including waves and tides), wind, solar power, geothermal sources or combined heat and power systems.

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1.8 International precedents

Other European countries have shown what can be done. In Germany, there has been a micro-generation revolution, based principally on photovoltaic technology, over the last decade. In the Netherlands CHP generation has led the way to a decentralised system.

1.8.1 Germany: the photovoltaic storySince 2004, Germany has been the country with the highest annual PV installation world-wide. At the end of 2006, the UK photovoltaic market was just 0.5% of the German total of 2.6 GWp. There are currently around 300,000 PV installations in Germany.23 Industry estimates suggest that some 40 per cent of the photovoltaic systems installed in Germany have been in people’s own homes, and that another 50 per cent have been in blocks of flats and residential estates, public and social buildings, farms and commercial plants – with the remaining 10 per cent accounted for by large-scale decentralised systems.24 This revolution in energy production has been achieved through the introduction of a system of feed-in tariffs.

But the expansion of photovoltaic technology is only one part of the tremendous growth in decentralised, low carbon energy that Germany has achieved. Energy from waste plants involving the production of electricity through anaerobic digestion (primarily of agricultural residue, much of it in small-scale on-farm plants) and small-scale hydro plants have also been installed. Such innovation has contributed to the 12 per cent of German electricity produced from renewable sources in 2006 – around three times the proportion of electricity coming from renewable sources in the UK.25

1.8.2 The Netherlands: the CHP storyAfter the oil shocks of the 1970s, several European countries with high oil dependency and no oil reserves realised that they had drastically to cut their oil consumption through greater efficiency. The Netherlands in particular chose to pursue the combined heat and power route.

The first wave of CHP was aimed at business. Manufacturing firms and larger commercial and retail premises were encouraged to install CHP and cut fuel bills in response to the oil shocks of the 1970s. However, the latest generation of CHP in the Netherlands is clean, small, and almost invisible; it will typically sit in a cellar or utility room.

The Netherlands increased its use of CHP technology so successfully that, between 1985 and 1995, CHP grew to be the biggest single source of generation in Holland.26 According to a recent review by the Dutch government, CHP played the most significant role of any policy instrument in reducing CO2 emissions in the Netherlands between 1990 and 2000 and, crucially, was also the most cost efficient policy instrument for reducing emissions.27

Development of the German PV market

23. IEA Photovoltaic Power Systems, Annual Report (2006) www.iea-pvps.org/products/download/rep_ar06.pdf 24. Stryi-Hipp, G. (2007) Photovoltaics in Germany – Market Development, Technology and Trends, Bundesverband Solarwirtschaft BSW

25. Association of the Electricity Industry (VDEW), Berlin (2007): http://www.vdew.de/vdew.nsf/id/DE_PM_Erneuerbare?open&l=DE&ccm=300010 26. den Blanken, K. (2006) On the essentials of Combined Heat and Power (CHP) Cogen Nederland 27. ibid.

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2. First steps to a decentralised energy revolution 2.1 Green and local: creating a mass market for micro-generation

By contrast with Germany and the Netherlands, the British micro-generation industry is tiny. In 2005, the Energy Saving Trust estimated total annual turnover for the sector as £10-20 million, employing between 200 and 600 people (excluding micro and fuel cell CHP).28 Market transformation will come only from the creation of genuine mass provision of micro-generation and the economies of scale that such a step-change will create.

We want to create a new retailing culture in which anyone in England can walk into a supermarket or show-room and buy a micro-generator in the same way that people now buy white goods and mobile phones. We also want to enable innovative energy service companies to provide customers with a ‘one stop shop’ service that sells them the micro-generator, installs and finances it, gives full support to improve their energy efficiency, and handles all necessary paperwork.

At present, there is no such ease of access. Customers face considerable hurdles if they wish to install micro-generation. Homeowners must prove they already comply with a number energy efficiency targets. They have to apply for government grants, which require forms to be filled in, with the grants themselves often turning out to be unavailable by the time they are applied for. They must endure an often lengthy planning process. Finally, customers determined enough to overcome all these bureaucratic barriers then have to install the generator itself, together with new metering equipment, with no service available to make all of this simple and easy.

No doubt, if left to itself, the market will cure these ills – in time. The cost of micro-generating technology will fall (due to technological development prompted by mass markets in other countries). The need for financial support from the Renewables Obligation Certificate scheme and from government grants will fall away. And the retailers and energy service companies will step in to provide easy financing and installation packages.

But without decisive action now to create a radically new system of support, all of this is likely to happen much too late to enable micro-generation to play any meaningful part in enabling the UK to meet its energy security needs or its carbon reduction targets.

To create a micro-generation mass market quickly, and to make micro-generation in England progressively become the norm rather than the exception, we need to make purchase of micro-generating equipment cheap and easy. To do that we need to introduce a system of long-term feed-in tariffs.

28. House of Commons Trade and Industry Select Committee, First Report, (Session 2006-07) www.publications.parliament.uk/pa/cm200607/cmselect/cmtrdind/257/25702.htm

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2.2 Feed-in tariffs to drive the change 2.3 Universal access to feed-in tariffs

Long-term feed-in tariffs are the primary support instrument for decentralised, low carbon micro-generation throughout continental Europe.

European countries with long-term feed-in tariffs include Germany, France, Poland, the Czech Republic, Spain, Italy, Greece, Portugal, Switzerland, Bulgaria, Hungary, Latvia, Lithuania, Belgium, Slovenia and the Slovak Republic.

With a feed-in tariff system, a fixed price is paid for the electricity produced from decentralised, low-carbon energy sources, usually with different price levels set for different technologies. In Germany, for example, the basic tariff paid for electricity generated from solar photovoltaics was 0.518€/kWh in 2006, whereas tariffs paid for electricity generated from large-scale wind power were 0.0836€/kWh.

To make the system in England as simple as possible, we propose that:

● a tariff should be paid for each kilowatt-hour generated by a low carbon micro-generator of a given technological type (photovoltaic, CHP, etc.). The owner will be paid for the gross amount generated, not just the net amount exported to the local network;

● the household, business or community group that installs the micro- generation will continue to pay the normal, prevailing price for the electricity they consume;

● the two amounts – the tariffs received for generating and the tariffs paid for electricity consumed – will be shown on an electricity ‘statement’ that replaces the conventional electricity bill, and will be netted off against one another:

To avoid replicating the burdensome bureaucracy associated with the current grant applications, it is of the utmost importance that access to the new feed-in tariffs should be simple and universal.

We therefore propose that any individual or organisation using an accredited professional to install a certified low carbon generating appliance of below 250kW should automatically be eligible to receive feed-in tariffs for electricity generated, without having to do anything more than sign a standardised contract with their electricity supplier.

This universal entitlement can be built on the existing UK micro-generation certification scheme – which provides certification of micro-generation appliances and grid connection, and also provides accreditation for installers.

feed-in tariff x amount generated

electricity tariff x amount consumed

= net electricity income earned

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2.4 Empowering the consumer 2.5 How will businesses, community groups, schools and hospitals benefit?

To make a reality of this universal access, we will legislate to require electricity suppliers to produce standardised contracts containing the feed-in tariff, to sign such a contract with any customer installing certified equipment, and to provide a statement to customers who have installed micro-generation. This statement will show the cost of electricity supplied to the customer as well as the amounts owing to them as a result of electricity generated by their micro-generator.

We will back this with further legislation to amend the remit of the regulator, Ofgem, so that its primary duties include the delivery of substantial emissions reductions through the encouragement of decentralised energy.

The result of these measures will be a very simple system in which the household, developer, community project, public sector entity or business wishing to install a renewable micro-generator of up to 250kW of whatever technological type will have an automatic right to sell all generated electricity to their existing electricity supplier at a pre-set feed-in tariff.

Once a system of long term feed-in tariffs has been put in place, it will open the way for micro-generation not just in households but also in a wide range of commercial and community settings.

2.5.1 A new opportunity for small businessesSmall businesses – from farms to hotels – consume significant quantities of electricity and often have natural advantages in generating their own electricity.

Waste products (such as raw biomass in agriculture or discarded cooking oil in restaurants) can be used to fuel on-site generation. Water resources, wide roofs for solar panels and open spaces for micro-turbines can all be harnessed by small businesses of different levels.

Small enterprises, just like households, will be eligible to receive payments from their electricity supplier for each kilowatt-hour they generate – and they will be able to obtain competitive financing based on the long-term stable revenues offered by these tariffs. Moreover, where they use CHP equipment to generate heat and electricity at high efficiency levels, they will reduce their exposure to unpredictable fluctuations in the price of energy by reducing their total requirement for fossil fuel.

2.5.2 A real boost for local community projects Community groups and projects – such as village halls and community centres – will also benefit from our proposals.

When these community facilities are being built they will be able to invest in micro-generation equipment, typically adding only around five per cent to the cost of the construction. They will then have a stream of revenue from the feed-in tariffs over coming years.

This will help to overcome problems encountered by many community groups who often find it much easier to obtain grants for the initial building or re-building than to manage unexpected energy bills once the hall or centre is up and running.

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2.5.3 Good for schools and hospitalsLocal schools and hospitals can also benefit. Some pioneering schools, such as the Levenshulme High School in Manchester, are already experimenting with low carbon electricity generation – partly as an educational tool, enabling pupils to understand more about energy production.29 With feed-in tariffs, it will be easier for schools to invest in micro-generators.

The introduction of feed-in tariffs will have an even greater effect in hospitals – because each hospital already has to have back-up electricity generating capacity to provide security in case of a power cut. At present, this capacity represents a cost, but the resource is often very little used. With the advent of feed-in tariffs, each hospital will be able to replace and modernise such back-up capacity when it wears out with full service micro-generation, and earn a return on what was previously a largely redundant asset.

This will also provide an opportunity to achieve both environmental and cost saving objectives simultaneously – through the combined production of heat and power, the use of hospital waste to provide energy and the use of large flat surfaces to provide solar power.

2.6 Measuring electricity from micro-generation

2.6.1 Using smart metersTo make a system of feed-in tariffs work properly and smoothly so that a mass market in micro-generation rapidly develops, we need to use new smart-meter technology. These meters enable the householder, community group or business that installs micro-generation to measure both how much electricity their generator produces and how much electricity is used on the premises. They also enable this information to be transmitted electronically to the electricity supplier. The technology is available and the industry is ready to begin installation.

Smart-meters are currently in operation in Sweden, Italy, Australia, the USA and Canada. Italy has almost completed a programme to convert 30 million homes to smart-meters; Sweden has plans to introduce 5.2 million by 2009; and 5 million homes in Ontario are to be provided with smart-meters by 2010.

Comprehensive smart-metering programmes have multiple advantages. They cover both electricity and gas (and can also cover water use). And they offer accurate real-time information on the amount of gas, electricity (and water) being used by any given household, allowing accurate billing.

29. www.levenshulme-high.manchester.sch.uk/pdf/Levenshulme8ppBro.pdf

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Once people have installed micro-generation and smart meters, they are likely to become much more energy conscious. Either on the meter itself or via digital televisions or their mobile phones connected to the meter through the internet, electricity users become able to see their own patterns of use and patterns of electricity production. This can only help to make them more conscious of energy waste – since it enables users to see immediately the effects of any steps they take to make their homes or business premises more energy-efficient.

2.6.2 Smart metering – a 21st century approach to energyThe present Government has proposed a less advanced alternative known as a ‘clip-on’ meter or Electricity Display Devices (EDDs). Such devices do not include the ability to meter gas or water and do not connect to an outside network that can automatically provide accurate billing data. They offer no capability for micro-generation because they measure only electricity flowing into the premises and have no capacity to measure the output of electricity from micro-generation installed in the premises.

We therefore propose that, as well as legislating for the roll-out of smart-meters to all gas, electricity and water consumers over a ten year period, we will legislate to require the immediate provision of smart-meters on demand and free of charge to any customer installing micro-generation.

The installation of smart-meters could be undertaken by the District Network Operators (DNOs) who own local distribution networks, as proposed in the Conservative Quality of Life Policy Group report. This is the option that we are currently inclined to favour. But we will also consult on two other options:

1. electricity suppliers could have responsibility for installing smart-meters for all of their own customers, or

2. there could be a regional tender-based system, whereby the electricity suppliers would tender for the contract to install all the smart-meters in a given geographical area.30

2.7 Setting the tariff

We will legislate to give the Secretary of State the power to set feed-in tariffs for each form of nascent micro-generation technology (as in Germany and many other European countries).

The legislation will require the Secretary of State to set long-term (e.g. twenty year) tariffs, which will apply to electricity generated by each form of low-carbon micro-generation technology installed during the first five years of operation of this scheme. It will also require the Secretary of State to conduct a review of the initial tariffs after the first three years, and to set new long-term tariffs which will apply to electricity generated by low-carbon micro-generators established after the fifth year of the scheme. Similar reviews will occur at five-yearly intervals thereafter.

Such a system of pre-set, long-term tariffs will ensure that people investing in micro-generation (and the financial institutions arranging financing for them) have a high degree of certainty about the amount they will be able to earn over the years from generating electricity.

Since it is possible to make reliable predictions of the output from given renewable micro-generation technologies installed in given places, the availability of a pre-set price for generation will make it possible for the investor and any provider of finance to calculate the amount that will be available to meet the financing costs.

We expect that the result will be the development of mass-market standard financing packages that will become available on the high street. This will simplify the whole proposition for householders and small businesses, and will also greatly reduce the amount that has to be paid up-front for the equipment by the householder, developer, community project, public sector entity or business that is installing the micro-generator.

Once the new feed-in tariffs are established, micro-generation of under 250kW will no longer be eligible to benefit from the Renewable Obligation Certificate (ROC) scheme. We recognise that, without specific transitional arrangements, this could lead to people holding off from investing in micro-generation during

30. We also recognise that there needs to be an industry wide process to determine the gas and electricity balancing and settlement contractual regimes, so that the associated computer systems and processes can be designed to support those requirements and an implementation plan agreed.

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the period when the feed-in tariffs are being developed, in the hope of benefiting from them when they come into operation. To avoid such a hiatus, we propose that any existing micro-generators benefiting from ROCs at the time when the new feed-in tariffs become available will have the option of transferring from the ROC scheme to the feed-in tariffs, or of remaining with the ROC scheme.

2.8 Who pays the tariff to micro-generators?

The new feed-in tariffs will pay the micro-generator for each kWh of electricity produced. From the point of view of the householder, developer, community project, public sector entity or business that installs the micro-generator, all payments will come from that person or entity’s electricity supplier – and will be shown as a credit on the statement delivered by the supplier to that person or entity.

The supplier’s net costs in paying this tariff to the micro-generator will be met by a new Decentralised Electricity Fund to be established by the Treasury.

In the first few years of the scheme, this new Fund will be financed by abolishing the existing, ineffective grant schemes for micro-generation (see page 32).

Thereafter, we intend that part of the proceeds from selling permits under Phase 3 of the EU Emissions Trading Scheme (ETS) should be used to finance the Decentralised Electricity Fund.

In the early years after the new system is introduced, as the amount of low-carbon micro-generation increases, the costs to the new Fund of paying the feed-in tariffs will increase. Initial estimates suggest that, if installed capacity reaches 3GW by 2020, the annual cost of feed-in tariffs for micro-generation could by then be £200-300 million. The exact costs will depend on the exact tariffs set, on the mix of technologies installed, and on the amount of time each year over which the micro-generators operate (the ‘load factor’). However, they will be an order of magnitude lower than the amounts of money produced by the auctioning of permits for ETS Phase 3, which – at current estimates of likely carbon prices – are expected to raise many billions of pounds.31

Moreover, as recent studies carried out for the Energy Saving Trust indicate, the need for costly feed-in tariffs to support nascent micro-generation technologies is likely to decrease sharply as time goes on and the costs of these technologies continue to decrease. It is precisely because of the fact that the costs of these technologies will continue to decrease as they mature that it is justifiable to subsidise them initially through feed-in tariffs, to the point where they become mass-market technologies which can compete on equal terms with centralised generating plant based on existing, mature technologies.

31. The third phase of the ETS scheme begins in 2013.

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In total the Government have committed £86 million in 2006-2011 to promoting micro-generation through the Low Carbon Buildings Programme Phase 1 and 2.32 Funding for these programmes has been increased in recent years.

In November 2005, the budget was set at £30 million over 3 years. In March 2006’s Budget statement it was announced that there would be an additional £50 million over the period, and in the March 2007 Budget a further £6 million was given to specifically fund household micro-generators.33

The total amount of micro-generation that has come forward as a result of the Low Carbon Buildings Programme Phase 1 domestic stream is 4,553 household systems since April 2006.34 This compares with the 300,000 PV systems installations in Germany.

This slow rate of progress indicates that grant schemes at current levels are having no serious impact on the amount of micro-generation and decentralised energy in England. This is no doubt partly due to the frequent changes in the nature of the schemes, the complexity of the schemes and the fact that those applying often find that the grants have run out by the time they apply.35

With the introduction of feed-in tariffs, all of these schemes can be abolished. We propose that no further grants should be available from the start of the new scheme, although any pre-existing grant commitments will be honoured. Instead, all micro-generators will have access to feed-in tariffs, and future government funding for the grants will be used to help pay for these tariffs.

2.9 What will happen to current grant schemes for micro-generators?

2.10 Are there any limits to the number of micro-generators?

One of the most damaging features of the current Government’s ineffective grant schemes is the limit they place on the number of people who can receive support for micro-generation in any given period. This has led to immense frustration. Many individuals who want to install micro-generation apply for the grant, only to discover that all the grants for the period in question have already been allocated.

With our proposals, there will be no statutory limits to the number of renewable micro-generators that can be installed and that can receive a feed-in tariff for electricity generated. The complete removal of any limits means that all those thinking of installing micro-generation can do so.

Given that England has only a tiny amount of installed electricity micro-generation capacity at present, and given that the installation of new micro-generation appliances will occur gradually over time, there is no reason to suppose that the distribution systems, or the grid as a whole, will suffer from any technical problems as a result of an unlimited scheme. Experience from Germany, France and Spain (as well as other European countries) shows that even rapid increases in the installation of micro-generation can easily be absorbed by local distribution systems and by the National Grid without technical problems.

The only constraint which will have to be satisfied by a household, developer, community project, public sector entity or business that is installing renewable micro-generation will be the need to buy equipment which has been certified as safe, to install it properly, and to ensure that it is attached to a smart-meter.

32. www.dti.gov.uk/energy/sources/sustainable/microgeneration/index.html 33. £36 million for households, and £50 million for organisations. www.lowcarbonbuildings.org.uk/about/useful/

34. Statistics from DBERR’s Low Carbon Building Programme website: www.lowcarbonbuildings.org.uk/lowcbp/statistics/statisticsView.action;jsessi onid=0a0a071b30d7993b92bb23ef4450a4d9b2c8ff252d79.e34QbxePaxmQbO0LaNiTbxqSah8Le6fznA5Pp7ftolbGmkTy 35. www.ofgem.gov.uk/About%20us/PwringEnergyDeb/Documents1/16854-NotesMicrogenationSeminar.pdf

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2.11 How will households finance the installation of micro-generators?

2.12 What planning rules will apply to the installation of those micro-generators?

We envisage that households (as well as community projects, businesses and developers) will be able to obtain comprehensive and simple commercial financing packages for the installation of micro-generators once feed-in tariffs are introduced.

In Germany, the market for decentralised energy has been stimulated by subsidised low-cost finance. But setting pre-set, long-term feed-in tariffs of the sort we propose should allow normal commercial finance packages to be constructed that will cover a large part of the initial cost of the installed appliances.

We attach considerable importance to this feature of our proposals. In order to create momentum behind micro-generation and decentralised energy in England, and in order to realise eventually the economies of scale that will derive from mass take-up of micro-generation, we need to make this an option that is open to people whose budgets will not stretch to un-financed investments, and we need to call on the commercial finance markets to produce simple packages that make it as easy to buy micro-generation as it is to buy a mobile phone.

Because of the fixed, long-term nature of the feed-in tariff, acceptance by a householder or small business of a finance package need not create an additional burden of net household debt. The stream of revenue from generation of electricity will be sufficiently predictable to support the financing cost.

As part of the consultation resulting from this Green Paper, we will be entering into discussions with financial institutions to promote the development of long-term fixed-rate lending for micro-generation to match the long-term fixed-rate feed-in tariffs – where the financing institution rather than the owner of the appliance takes the risk of the quantity of generation being high enough to meet the financing cost. To make this transfer of risk easier, we will also be entering into discussions with the insurance industry, with a view to promoting mechanical insurance that can be offered by the retailer of the micro-generation equipment in order to protect the financial institution offering the financing package from the consequences of any mechanical failure in that equipment.

To create a micro-generation revolution in England, we need to go beyond the establishment of stable long-term feed-in tariffs and take action to change the planning controls that apply to the installation of such machinery.

While some forms of renewable micro-generation – such as CHP boilers and biomass generators – may be installed within properties and hence not be subject to planning constraints, other forms of micro-generation, such as solar panels and small wind turbines, are subject to planning rules.

We propose to encourage the wider adoption of these forms of micro-generation in three ways:

● through allowing the installation of micro-generators to be a ‘permitted development’ in non-listed properties;

● through adjusting the rules governing the installation of micro-generators in listed properties; and

● through giving local councils the right to go beyond existing national norms in encouraging micro-generation.

The effect of making micro-generation a form of permitted development in non-listed properties will be that owners of such appliances will not have to go through the full planning approval process before installing such equipment. They will merely need to inform the local council of their intention to proceed – and the granting of permission will then be a quick formality.

For listed buildings, particular attention must continue to be paid to the aesthetic impact of installing external micro-generating equipment. Granting ‘permitted development’ status in connection with listed buildings is therefore, in our view, not appropriate. But we propose to alter the rules so as to provide a presumption that permission for micro-generating equipment in (or in the curtilage of) listed buildings will be given whenever it does not detract from the aesthetic quality of architecturally significant facades or from the aesthetic quality of important landscaping.

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3. Next steps

We note that the Government has belatedly engaged in a consultation on extending committed development rights, and we hope that the necessary legislation will be forthcoming.

Finally, and consistent both with our desire to bring about a micro-generation revolution and our determination to decentralise political power, we propose to give local councils a specific power to set eco-standards for building in their localities which go beyond national norms.

The Merton Rule was introduced in 2003 and requires any new (commercial use) buildings to reduce carbon emissions by ten per cent through the use of renewable energy sources. On the back of the Rule, Merton Council won several national awards and was given the backing of the Housing Minister, Yvette Cooper, who called for all local authorities to adopt Merton’s approach.

The Merton Rule states that:

‘The council will encourage the energy efficient design of buildings and their layout and orientation on site. All new non residential developments above a threshold of 1,000 sqm will be expected to incorporate renewable energy production equipment to provide at least 10% of predicted energy requirements.’ 36

The justification sets out that where the incorporation of renewable energy equipment would make the development unviable it will not be expected. So, for example, for technical reasons it may not be possible to mount PV panels or wind turbines on a roof.

We have been alarmed to read of plans by the present Government to issue new planning guidance that could effectively prevent councils from imposing rules such as the Merton Rule in future. If such guidance is issued, we would specifically reverse it.

Our proposals for feed-in tariffs stem from the Policy Review conducted by the Conservative Party over the last two years. Both our Economic Competitiveness Policy Group and our Quality of Life Policy Group strongly advocated an important future role for decentralised generation – because of its effect on energy security and carbon reduction.

The Quality of Life Policy Group also conducted considerable investigations into the feasibility of feed-in tariffs as a method of encouraging decentralised generation and recommended that a Conservative government should adopt such tariffs.

At our Party Conference in 2007, Peter Ainsworth, Shadow Secretary of State for Environment, Food and Rural Affairs, announced that the Party had decided to adopt a policy of feed-in tariffs for decentralised energy. The purpose of this Green Paper is to set out in more detail the nature of the Party’s policy commitment as it applies to micro-generation.

We recognise, however, that there are significant technical, economic and environmental issues involved, and that it is of great importance to ensure that the detailed mechanics adopted for the introduction of feed-in tariffs should both benefit from the experience gained in other European countries and be fully consistent with the particular features of our own electricity supply industry.

We accordingly seek detailed comment on the proposals outlined in this Green Paper from all interested parties, particularly including participants in the electricity supply industry, manufacturers of relevant equipment, financial institutions that might be involved in providing financing packages for micro-generation, the insurance industry, consumer groups, academic energy experts and environmental groups.

In 2008, we will come forward with further proposals relating to large-scale decentralised and renewable energy.

36. www.merton.gov.uk/living/planning/plansandprojects/10percentpolicy.htm

Promoted by Alan Mabbutt on behalf of the Conservative Party, both at 30 Millbank, London SW1P 4DP Printed by TPF Group, Avro House, Harlequin Avenue, Brentford TW8 9EW.