APPENDIX 5
Memorandum from BG MicroGen
1. EXECUTIVE
SUMMARY
1.1 BG Group supports the "four goals
of our new energy policy" as stated in the White Paper and
in particular the placing of greater emphasis on environmental
policies within energy policy.
1.2 We agree with the White Paper statement
that the "cheapest, cleanest and safest way of addressing
our energy policy objectives is to use less energy." Energy
efficiency improvements by households are key to reducing carbon
emissions.
1.3 MicroCHP can contribute all four of
the goals of energy policy. It can
— reduce CO2 by around 1.5 tonnes per
household per annum;
— provide a highly diversified generation
source and reduce winter peak demand on the grid;
— reduce energy bills—by around
£150 per year for a typical household; and
— provide adequate and affordable home
heating—even in hard to heat homes.
1.4 We agree with the emphasis placed on
action and targets by the Environmental Audit Committee in its
July 2002 Report, but found the Energy White Paper lacking on
both, particularly with regard to MicroCHP. We hope that this
can be addressed in subsequent policy proposals.
1.5 Whilst we welcome the White Paper's
proposal to move more away from inefficient boilers, we are surprised
at the degree to which it focuses on condensing boilers. MicroCHP
can make even greater carbon savings than condensing boilers and
we would have expected at the very least an equally sharp focus
on replacing conventional boilers with MicroCHP.
1.6 MicroCHP is being launched next year—and
with Government support can make a major contribution to all our
of the Government's stated energy policy goals. The White Paper
estimates that cuts of 4-6 MtC could be achieved from household
energy efficiency by 2020 (Table 2.1). Whereas other schemes are,
in reality, limited in volume, around 13 million homes could convert
to MicroCHP—and this alone would deliver 5.2 MtC
1.7 Measures which will help achieve the
potential of MicroCHP and which have significant Parliamentary
support demonstrated by support for Early Day Motions are:
— The extension of 5% VAT to accredited
MicroCHP (EDMs 79 and 29).
— Access to enhanced capital allowances
for accredited MicroCHP (EDM 367).
— Direct grant support (EDM 47) and/or
EEC enhancements.
1.8 Although the White Paper did not deliver
specific action in support of MicroCHP, supporters of the technology
hope that the White Paper will be followed by specific action
in the April 9 Budget. We would stress that commercial launch
of MicroCHP is to take place next year and time for consultation
is fast running out—action is what is required.
2. FORMAT OF
EVIDENCE
BG Group welcomes the opportunity to give evidence
to this Committee. In submitting our evidence we have followed
your guidance with regard to format. Evidence has therefore been
submitted relating to the four points below.
(a) review key proposals in the White Paper
in the light of the Environmental Audit Committee's recommendations
in its July 2002 report and the Government's response;
(b) consider whether the White Paper represents
an adequate response to the recommendations made by the Royal
Commission on Environmental Pollution and the Cabinet Office's
Performance and Innovation Unit;
(c) review the progress made against key
recommendations of the Environmental Audit Committee's 1999 report
on Energy Efficiency; and
(d) identify the implications of the White
Paper in terms the specific actions now required of each relevant
Government department.
3. INTRODUCTION
TO BG GROUP
3.1 BG Group is one of the very few integrated
natural gas companies with expertise and experience from gas production,
through transmission, distribution and marketing to the consumer.
3.2 Part of the former British Gas, the
company now has interests in four main business areas; Exploration
and Production, LNG, Power Generation and Transmission and Distribution.
.
3.3 BG Group has interests in around 20
countries worldwide but its base is still solidly in the UK, which
accounts for 55% of current production. BG Group is a top 30 FTSE
Company.
4. INTRODUCTION
TO MICROGEN
4.1 MicroGen Energy Limited is a wholly
owned subsidiary of BG Group which has been established to develop
what the Group perceives to be a significant market opportunity
in Micro combined heat and power.
4.2 Following an extensive review of various
technologies, MicroGen selected and obtained an exclusive worldwide
licence to develop and commercialise, the linear free piston Stirling
engine. The resulting appliance is an innovative energy system
for individual homes and small businesses that generates heat
for water and space heating requirements and at the same time
produces electricity from a single compact unit. MicroGen intends
to launch the product commercially in 2004.
4.3 The unit, which fits into the same space
on the wall as a traditional boiler, can contribute to all four
of the goals of energy policy as stated in the Government's White
Paper—it can;
— reduce CO2 by around 1.5 tonnes per
household per annum;
— provide a highly diversified generation
source and reduce winter peak demand on the grid;
— reduce energy bills—by around
£150 per year for a typical household; and
— provide adequate and affordable home
heating -even in hard to heat homes.
5. REVIEW KEY
PROPOSALS IN
THE WHITE
PAPER IN
LIGHT OF
EAC RECOMMENDATIONS IN
ITS JULY
2002 REPORT AND
THE GOVERNMENT'S
RESPONSE
5.1 The Environmental Audit Committee in
its July 2002 Report stated "We see the Government's primary
task now as being to translate the implications of the PIU Report
into a set of specific policy commitments and an energy action
plan—with the emphasis on action. There has already been
huge levels of consultation in this area. If the White Paper simply
goes over the same ground as the PIU Review, it will be a failed
opportunity to address the immediate problems which are jeopardising
even the achievement of the 2010 targets. (118)
The development of specific policy commitments
will involve, for example, setting out in detail how the government
intends to implement the PIU recommendations on the 20% 2010 renewables
target, on carbon pricing, and on energy efficiency—ie what
policy mechanisms, targets and deadlines it will use to achieve
these aims. (119)
5.2 We agree with this emphasis on action
and targets but found the Energy White Paper lacking on both action
and targets, particularly with regard to MicroCHP. This emphasis
on supportive words and lack of action has unfortunately also
been our experience when dealing with DEFRA on these issues.
5.3 Page 33 of the White paper outlines
energy efficiency savings in 2010 and 2020. The 2020 scenario
talks of the "need for more innovative developments, which
combine efficiency measures such as MicroCHP. . ." . However
the outline of energy efficiency savings to 2010 makes no mention
of MicroCHP. It refers to "progressively raising efficiency
standards to that of the most efficient boiler type, condensing
boilers, and installing around 5 million, saving around 0.6Mtc".
5.4 Whilst we welcome the White Paper's
proposal to move more away from inefficient boilers, we are surprised
at the degree to which it focuses on condensing boilers. MicroCHP
can make even greater carbon savings than condensing boilers and
we would have expected at the very least an equally sharp focus
on replacing conventional boilers with MicroCHP.
5.5 MicroGen is at a very advanced stage
of development of its MicroGen unit, which has already under gone
successful field trials. Commercial launch is due to take place
in 2004—why then does the White Paper mention MicroCHP only
under the 2020 scenario? With Government support MicroCHP can
make a major contribution to all four of the stated energy policy
goals. The White Paper estimates that cuts of 4-6 MtC could be
achieved from household energy efficiency by 2020 (Table 2.1).
MicroCHP differs from other options in the sheer scale of its
potential. Whereas other schemes are, in reality, limited in volume,
around 13 million homes could convert to MicroCHP—and this
alone would deliver 5.2 MtC of carbon savings. Even converting
only 50% of these homes would deliver around half of the targeted
energy efficiency savings.
6. CONSIDER WHETHER
THE WHITE
PAPER REPRESENTS
AN ADEQUATE
RESPONSE TO
THE RECOMMENDATIONS
MADE BY
THE ROYAL
COMMISSION ON
ENVIRONMENTAL POLLUTION
AND THE
CABINET OFFICE'S
PERFORMANCE AND
INNOVATION UNIT;
6.1 The PIU report (Table 6.1) highlighted
MicroCHP as by far the most cost effective of all the carbon abatement
methods and stated that "Government support should be targeted
at the most cost effective solutions." It also stressed the
importance of targets. Despite this, the White Paper contains
neither a target for MicroCHP nor any measures to support it.
The White Paper was an opportunity to encourage a technology with
immense potential for carbon savings and the lowest carbon abatement
costs. That opportunity was not taken.
7. REVIEW THE
PROGRESS MADE
AGAINST KEY
RECOMMENDATIONS OF
THE ENVIRONMENTAL
AUDIT COMMITTEE'S
1999 REPORT ON
ENERGY EFFICIENCY.
7.1 The market for Energy Efficiency suffers
from a number of well-documented market failures one of which
is that, even where there are significant long term cost advantages,
the customer is driven primarily by upfront cost considerations.
MicroCHP, as a product that offers lower running costs but for
a higher capital outlay, is particularly disadvantaged by this.
7.2 One of the ways of overcoming this market
failure is to use Energy Services Company and offer some financing
arrangement, such as a lease, whereby customers can spread the
capital cost of the equipment over the period in which they will
be receiving cost-savings.
7.3 The Environmental Audit Committee's
(EAC) 1999 report on Energy Efficiency stated, "We regard
the development of energy services provision as fundamentally
important to the achievement of the UK's environmental objectives"
(Paragraph 57)
7.4 Unfortunately, the tax system acts as
a major disincentive to the type of domestic leasing arrangement
described. This is because the existing tax rules prevent the
equipment provider/lessor from obtaining tax relief on its equipment
costs. MicroGen have considered how the relevant legislation could
be amended to enable Energy Services Companies to achieve parity
in tax and a briefing has been sent to HM Treasury. Unless action
is taken in this area energy services companies are unlikely to
become a reality.
7.5 The EAC report on Energy Efficiency
stated, "We believe that it is high time that the `space'
for an effective energy efficiency strategy is filled with more
than warm words." We agree with this sentiment,—but
unless the White Paper is followed very soon by some specific
action in support of MicroCHP we believe all that is on offer
remains "warm words".
8. IDENTIFY THE
IMPLICATIONS OF
THE WHITE
PAPER IN
TERMS THE
SPECIFIC ACTIONS
NOW REQUIRED
OF EACH
RELEVANT GOVERNMENT
DEPARTMENT.
8.1 The HM Treasury Consultation Economic
instruments to improve household energy efficiency-July 2002 outlined
the failures in the energy efficiency market and sought views
as to any specific economic instruments that could be introduced
to improve energy efficiency.
8.2 In keeping with our view (and that of
the PIU) that Government support for carbon abatement measures
should be targeted at the most cost effective solutions, MicroGen
considered the most cost effective ways of providing that support
and recommended specific measures. The three measures we recommend
are listed below in paragraphs 8.3, 8.4 and 8.5.
8.3 Market transforming measures—eg:
specific enhancements within the EEC scheme for MicroCHP or a
form of technology "kick-start" grant scheme.
Such a measure would not need to be permanent
but could be used to "kick-start" the introduction of
MicroCHP—which delivers greatly enhanced benefits over both
condensing and traditional boilers. Once a critical manufacturing
mass is established within the MicroCHP industry, unit costs will
fall and MicroCHP will be able to compete alongside other energy
saving and carbon reducing technologies.
This measure has considerable support within
parliament, as demonstrated by the large number of signatories
(171) to Early Day Motion number 47 tabled by Dr Ian Gibson MP,
"Extension of the new technology grant scheme to domestic
CHP systems and domestic heat pumps" EDM 47 states "
this House. . . . believes that encouragement for new technology
is essential for achieving long-term reductions in emissions of
carbon dioxide; therefore calls for the extension of that grant
scheme to domestic micro-combined heat and power systems and domestic
heat pumps, both of which are new technologies with great potential
for the future; and notes that in the case of domestic combined
heat and power systems the recent report by the Performance and
Innovation Unit, in Table 6.1 identified MicroCHP as the most
efficient method of carbon abatement and that the Government's
Fuel Poverty Strategy stated that it also has a considerable potential
to reduce fuel poverty."
8.4 The extension of 5% VAT to accredited
MicroCHP.
Domestic customers currently pay 5% VAT on the
energy that they use but 17.5% VAT on energy saving devices. 5%
VAT is a recognised fiscal instrument, already used by government
to incentivise domestic consumers—it already applies to
energy saving materials, and this includes central heating and
hot water system controls. A customer who installs a MicroCHP,
which is among the most efficient energy saving devices available,
should also benefit from the lower rate of VAT.
Parliamentary support for this measure is demonstrated
by EDM 79 "Reduction of VAT on Energy Saving Materials"
and EDM 29 "VAT on DIY installations of energy saving materials",
which have gained a total of 260 signatures.
8.5 Access to enhanced capital allowances
for accredited MicroCHP.
In the March 2002 budget, the government extended
the application of Enhanced Capital Allowances on Good Quality
CHP to include leasing arrangements in the business sector. In
the domestic sector, basic rate capital allowances are also available
to the government's Affordable Warmth scheme. Extending access
to even basic rate capital allowances to all domestic sector leasing
arrangements for suitably accredited energy efficiency measures,
including MicroCHP would be particularly effective in encouraging
the establishment of "Energy Services". This is a business
model supported by the Energy Saving Trust that encourages energy
efficiency measures by allowing customer payments to be structured
such that the extra capital cost of the energy saving measure
(in this case MicroCHP) is paid concurrently with the receipt
of the benefits that the measure brings.
8.6 Unfortunately, the tax system acts as
a major disincentive to the type of domestic leasing arrangements,
which Energy Services Companies could usefully offer. This is
because the existing tax rules prevent the equipment provider/lessor
from obtaining tax relief on its equipment costs. HM Treasury
should act now to enable Energy Services Companies to economically
offer effective leasing schemes to consumers.
8.7 In support of this measure EDM (number
367) "enhanced capital allowances for domestic sector energy
services" was put down by David Chaytor MP, Chair of the
All Party Environment Group and has been signed by 195 MPs.
8.8 The White Paper did not deliver specific
action in support of MicroCHP. As things currently stand MicroCHP,
despite all it's advantages, is going to be treated, at best,
as though it were a conventional low efficiency boiler. Supporters
of the technology now hope that the White Paper will be followed
by specific action in the 9 April Budget. We would stress that
commercial launch of MicroCHP is next year and time for consultation
is fast running out—action is what is required.
8.9 Environment and Energy Ministers have
made clear their zeal for much greater energy efficiency and improved
air quality. Many of their policies are designed to help renewable
energy sources achieve that. Whilst we support this approach,
renewables are still in their infancy, represent a fairly small
part of generation and are, by nature, concentrated in some parts
and absent from other parts of the UK. Many renewable technologies
are, therefore, a solution in the medium to long term. This leaves
a gap, which with Government support MicroCHP can bridge. Critically,
MicroCHP can achieve this transition in a much shorter time-scale
than many renewable technologies.
March 2003
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