UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 180-i

House of commons

oral EVIDENCE

TAKEN BEFORE THE

ENERGY AND CLIMATE CHANGE Committee

Sub committee on local energy

LOCAL ENERGY

Monday 20 May 2013

DUNCAN BOTTING, GRANT BOURHILL, NIGEL CORNWALL and PROFESSOR JIM WATSON

MERLIN HYMAN, GRAHAM MEEKS, FELIX WIGHT and REBECCA WILLIS

Evidence heard in Public Questions 1 - 44

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Oral Evidence

Taken before the Energy and Climate Change Committee

Sub Committee on Local Energy

on Monday 20 May 2013

Members present:

Dr Alan Whitehead (Chair)

Barry Gardiner

Dr Philip Lee

Christopher Pincher

John Robertson

Sir Robert Smith

________________

Examination of Witnesses

Witnesses: Duncan Botting, Institution of Engineering and Technology, Grant Bourhill, Energy Technologies Institute, Nigel Cornwall, Cornwall Energy, and Professor Jim Watson, UK Energy Research Centre, gave evidence.

Q1 Chair: Good afternoon. Thank you very much for attending the first witness session of the local energy-community energy-inquiry. We are a sub-committee of the overall Energy and Climate Change Committee, which is why I am in the chair this afternoon rather than our Chairman Tim Yeo, but this Committee report will go to the full Committee and will come out as a normal Select Committee report. Could our first panel of witnesses introduce themselves, please?

Professor Watson: I am Jim Watson. I am the Research Director of the UK Energy Research Centre.

Nigel Cornwall: Nigel Cornwall from Cornwall Energy. We are a market consultancy that works with smaller players in the market.

Grant Bourhill: I am Grant Bourhill. I am the Director of Smart Systems and Heat at the Energy Technologies Institute.

Duncan Botting: Duncan Botting, representing the Institution of Engineering and Technology.

Q2 Chair: Thank you. What proportion of the UK’s current energy generation comes from medium-sized and community-sized projects? Do you have any thoughts on the extent to which this is likely to change in the future?

Nigel Cornwall: I have some numbers that might help. If you look purely at the RO at the moment, which is 12.3 GW, just over three are in the 5 MW to 50 MW band and 2 GW of the three are independently backed outside the Big Six. If you extrapolate that, looking at plants under construction, there is a further 500 MW that we are aware of and probably another 2 GW to 2.5 GW in that size range in planning, so it is significant.

Grant Bourhill: Previously the Energy Technologies Institute funded a project with the University of Manchester, Caterpillar and EDF, looking at the potential scale of micro-distributed energy within the UK. From the modelling that was carried out, we estimated an upper bound figure of about 43% of heat demand in the UK could be met by the 5 MW scale. Given the uncertainties associated with that, we think that a lower bound figure would be about 5% and that is based on the significant urban heat density significantly above 200 MW per hectare, so that is based on district heat networks really delivering into the dense urban environment. It is a lower bound figure of 5% and an upper bound figure of about 43% and the drivers dictating how much would actually be realised are quite complex, and that is what we are modelling at the moment within our smart systems and heat programme.

Q3 Chair: Clearly, a good proportion of that prospective contribution to the UK’s energy requirements will be provided in this instance by local authority schemes and smaller commercial organisation schemes. Do you know of any research that has been conducted looking at what that contribution might be and what particular issues might arise from that contribution?

Professor Watson: There is research on the role of local authorities. The University of Edinburgh is running the Heat and the City project for example, which is looking particularly at business models for local authorities. One of the projects conducted by the UK Energy Research Centre, which I direct, also looked at that in England. The thing we have found is that most local authority projects fall below the threshold of your interest in the 5 MW to 50 MW range. There are a few that go above that but not very many and a lot of different factors, including financing, capability, and so on would mediate whether you are going to get more of that in the future, but the potential is big. The interest among certain local authorities is quite keen, but there is certainly a long way to go in scaling up from the current handful of projects in that range to a substantial contribution.

Grant Bourhill: The Energy Technologies Institute engaged a couple of months ago with all UK local authorities, asking them to self-select interest in participating in a large-scale demonstration of a smart system and heat network. We received about 37 positive responses from local authorities and we are now going through a down-select process to identify those with the capacity and capability to be at the vanguard of that activity, but at the moment I think it is too early to say how many would participate and when that would happen.

Duncan Botting: I think there are some rather good examples of activity already in place with some case studies, the regeneration for King’s Cross for instance, which has driven district heating, certainly in a regeneration environment, to the point where it is a 67 acre scheme with 20 new streets, 10 new public places, three new bridges, enhancements to the canal area, and so on, and the re-use of 20 historic buildings within that. So I think there is already a lot of case history. If you look at Woking, a different scale, Thameswey Energy have been driving heat and electricity systems, fuel cell and so on, for something over 15 years now. You have other examples such as the Ashton Hayes low carbon network fund that have demonstrated how rural communities can play into the game as well. There is not only research, but physical examples of how things can be done.

Q4 Chair: Bearing in mind that certainly as far as electricity is concerned, capacity is about 90 GW, electricity from such schemes would contribute, as we have discussed, just a few per cent. Are there other reasons, in addition to simply marking up that percentage, that you consider might be beneficial as far as community and small-scale energy provision is concerned? Duncan Botting, in IET’s written evidence you talked about whole energy system perspectives. Is that perhaps a consideration in pursuing these particular levels of energy production, insignificant though they might otherwise be seen to be?

Duncan Botting: If we are looking to achieve our end goal, and low carbon is that end goal, you only have to look at DECC’s own energy flow diagram for 2011 to understand that power stations lose 50% of their energy in heat, basically, and transmission and distribution losses, and considering that carbon capture and storage is going to be installed as the saviour, that also reduces by another 30% the energy efficiency of those plants. It is therefore clear that if we opt for centralised generation, we will have a major problem in achieving our ends. At least with the networks of local energy, you can start to see some very interesting implementations, as I have just outlined, which are doing it against all possible odds, because from the business models it is very difficult to demonstrate return on investment. These business models are the key going forward to re-planning our use of heat, transport and electricity. I would suggest that local energy has a lot more of a role to play in energy efficiency, specifically on the reduction of use of energy rather than necessarily the use of energy.

Obviously, smart grids are capable of providing distribution level activity that will allow many of these enabling technologies to have a whole systems benefit, but unless we look at this from a technical, commercial and market structure perspective, it is very difficult to see how we move forward. Finally, we have optimised in silos to the point where we are running out of head room for optimisation in each of those silos. The real wins and real benefits are across whole systems analysis.

Professor Watson: I would echo that point on bringing heat and electricity and other things together on a local basis. There are a few other arguments you could make, and one is economies of mass production. We are very familiar with economies of scale in our power system. That is what has driven it, making power plants bigger and bigger over the years, since the Second World War really, but there are economies of mass production to be had from a lot of smaller-scale plants if there were enough of them. Clearly, they could add diversity and resilience to a system, because if one of those smaller plants goes down, that is not as serious as if a larger one goes down, all other things being equal. Another set of options, and I think it was implied by Nigel’s answer to the earlier question about the Renewables Obligations, relates to our renewables and broader climate targets, which will require renewables to play a big role, at least along current plans. Part of that strategy is not just large-scale offshore wind farms but plants at a range of different scales. I guess it offers you a lot of different options in the mix-degrees of freedom and flexibility-to meet our targets.

Grant Bourhill: The Energy Technologies Institute model the entire UK energy system-power, heat, transport and infrastructure-and we look nationally but also locally and, while I echo some of the comments that have been made, our model allows you to start to play scenarios, for example what happens if the UK does not do carbon capture and storage? In that case, the lowest cost energy system will build a lot more renewables and you need to still build plant to deal with the renewable intermittency. Our model does not show that the lowest cost solution to that is through local energy solutions but through central peaking plants, probably using hydrogen. I agree with the point that you have to look nationally and locally.

Nigel Cornwall: On a slightly different theme, not so much about the policy merits, I take policy as the starting point and we talk a lot about achieving targets but also about local energy development and community energy, and yet what I observe-and maybe you will be moving on to this later-is that the current institutional arrangements do not really work and allow the existing potential to be achieved. It is not just about growing the contribution; it is about meeting existing policy goals, and making sure that the current mechanisms and institutions allow you to do that, and we seem to be quite a way from that at the moment, in my view.

Chair: I think we may well be addressing some of those issues later on. Indeed, I think Barry may be about to do that.

Q5 Barry Gardiner: Professor Watson, the Energy Research Centre said in its submission that 69% of community energy projects had applied for or received grant funding. Do you think they are always likely to require grant funding? Is there any potential for them to move to other funding models in the future?

Professor Watson: I think the answer to your second question is yes. One thing to be aware of when reading that particular bit of our evidence is that it tended to focus on projects that were funded before the feed-in tariff came in or the feed-in tariff came in halfway through for some of them. If you were to run that survey again in a year’s time, you would find a different balance. Although, of course, feed-in tariff is still public funding, at least measured by some conventions, albeit from energy bills rather than from taxpayers, but the question really is whether community groups could get to a point where they could just self-fund these projects. That is partly tied up with the economics of the technologies they will use, especially if it is generation; saving may be a different matter. However, even if that does work, there is still the problem of getting the upfront finance to put the measures in, even if they are going to pay back, and linked issues of development funding and so on.

So I do not think they will always, in all circumstances, need public funding. I am sure funding models will change and some of the more successful community groups have been very entrepreneurial in accessing whatever funding is available and have been very nimble to shift according to policies changing. However, I think there still may be issues of making the business model work in terms of, for example, the upfront capital and the skills and expertise needed to develop and get a project off the ground.

Q6 Barry Gardiner: With some of the programmes we have seen in development funding, paying for planning or grid permits and things like that, that funding is hard to come by for community schemes or local authority schemes. Why is it so hard to raise that type of finance?

Professor Watson: There is a lot of uncertainty, especially when you have things like planning going on where you are not certain you are going to get planning permission. There is the problem of timescale. Money is not endlessly patient and if that kind of planning risk exists, that is going to make it harder. There is also an issue of scale in funding, which no doubt colleagues have picked up as well. If you are going to commercial lenders, they will often have a threshold below which they will still apply the same rigours and approaches to assessing proposals, but the costs associated with that are going to be very large proportionately for very small projects. There is the issue of being small but also the issue of risks along the way, and of course for many community groups there is lack of capacity, staff and in-house resources. They are very much relying on voluntarism. The groups that have done well tend to have some really good volunteers at their heart with a lot of that knowledge already that they are prepared to give.

Q7 Barry Gardiner: So we are agreed on the problems. Do you have any solutions for me?

Professor Watson: Solutions? I think you do need some sort of funding stream from somewhere, whether it be the Green Investment Bank, whether it be elsewhere, to provide particularly seed funding and development funding to take out some of that risk. Another solution might be partnering with another organisation like a local authority although, as we have pointed out in our evidence, local authorities have their own constraints on their ability to borrow or not necessarily the letter of their ability to borrow but their willingness to borrow, given the tacit rule and very explicit rule that they want to get their debt down not up. Even if from a formal cost benefit analysis point of view you can say this project is going to fly commercially, there is still a role for upfront funding, particularly for those groups that do not have that in-house capacity, whether it be the Green Investment Bank or something like that, I do not know.

Q8 Barry Gardiner: You mention the Green Investment Bank. Are we in danger of sticking everything into the Green Investment Bank that we need some money for? What sort of priority do you think it is going to take within the Green Investment Bank, or what sort of priority should it have in your view?

Professor Watson: I think relatively high because it is an area that does not get a lot of funding from elsewhere. The Green Investment Bank is being expected by all kinds of people to solve all kinds of problems. It is well beyond its capacity to fund things at the moment, especially since it can’t yet borrow, and even when it can borrow that may well still be the case. My view partly links to what Nigel said around the policy framework. This is an area that the policy framework really has not addressed very much historically because we have the system that we do and it does not include a lot of activity in that area. So if you start from that point, there is a rationale for saying that should receive more attention than perhaps some other areas to compensate for the fact that the overall policy framework is built for the very small and the very large.

Duncan Botting: Just to add to that, from the whole systems perspective, if capacity payments at the top end of generation are going to outstrip, effectively, the ability for the nascent demand side market to come of age, this is the problem. We have a whole systems issue here whereby people are seeing that return on investment for their buck is best put where they can see the return. There is a clear demarcation between centralised generation and capacity payment mechanisms and demand side for doing the same function, which is dealing with peaking. If you are not careful, if you put all of your incentives on one side, the other side is just never going to take off. So you cannot do this on a silo-based activity where you just have FiTs over here, capacity mechanism over here, strike price over there, and the technical infrastructure to deliver all of those things completely separate again.

Q9 Barry Gardiner: To focus on the Green Investment Bank more specifically, how do you envisage the bank supporting medium-energy projects?

Duncan Botting: There are some very good examples from Community Energy Scotland and the activities they have done up there where there are several mechanisms, not just directly loan-related but business rate-related and community funds coming back into jobs in the local community or schools or whatever. There is a portfolio of activity for which the Green Investment Bank may not be the right element. As Jim has already pointed out, there is a number of calls for very large funding activity and we are talking about lots of small funding pockets here, so it may not be the right vehicle to achieve that. The overhead costs may be too much for the small groups to take on board, so I think there is probably room for something else to appear in that space.

Q10 Barry Gardiner: As a lender to the intermediate market?

Duncan Botting: Yes, and I think there needs to be some pump priming of that, just as there has been pump priming for the top end.

Q11 Barry Gardiner: Are there any other comments or reflections that people want to add? In that case, let me move on to issues about privately-owned schemes. In the Energy Research Centre’s submission, you noted that of the 51 pathways identified for urban energy projects by the CLUES report, only 2% of these were private sector led. What was stopping the private sector having a larger role here? What was the problem?

Professor Watson: There is not necessarily a problem. I probably have to clarify what that evidence means. What we were trying to do in that particular project, which I was involved in before I took on my current role, was to look at the unique combinations of different ownership structures, lead organisations, whether it be private sector, public sector or whatever, technologies and other aspects of projects. I guess the 2% figure is showing that private sector led developments tend to follow a common pattern or a common model according to the criteria we applied at the time whereas some of the other areas like community energy, third sector, had a much more diverse range of different models. So, in a way, that is the way to interpret that rather than there are not many private sector projects out there. I think it was your evidence, Nigel, that set that out in a bit more detail around the Renewables Obligation and not only the variety but the number of different projects there. So I think it may be more an indication that in the private sector, for those companies that have made it work, there are some fairly tried and tested approaches that seem to work whereas I think particularly in the community sector it is much more a diversity, a lot of different approaches are being experimented with all at the same time by different groups.

Q12 Barry Gardiner: I wanted to explore that because, Mr Cornwall, your company said that some companies might benefit from investing in their own on-site energy projects. Can you just tell us a bit more about how they would see that benefit and, if it is there, why is it that more companies are not investing in on-site projects despite those benefits? Why don’t they see the bottom line on this?

Nigel Cornwall: I think because there are some very complex commercial interactions that you need to understand to be able to place a value on those issues. Until five or 10 years ago, a typical business industrialist would not think terribly long and hard about its procurement costs. That obviously has changed with the way energy prices have moved but the actual ability to identify and recover on-site benefits is something that requires knowledge of the complexities of network charging. It is something that draws from avoiding levies such as the RO, the Energy Company Obligation costs. If you can avoid significant reliance on importing from the public system, there are very real benefits on top of the usual advantages of having some hedge over your energy costs as well as maybe, depending on what fuel source you are using, the kind of corporate social responsibility benefits. It is an area that is beginning to receive attention. A lot of the intermediate schemes at the lower end of the band that you are looking at are schemes that are on-site, and that will grow, particularly as prices become higher and more volatile and the avoided costs become greater.

Q13 Barry Gardiner: Why do you think it is that more private sector organisations do not engage in PPAs from generators? Why do they always go through supply companies? Would there be an advantage to them from entering into Power Purchase Agreements?

Nigel Cornwall: You can’t really go anywhere other than to one of the large suppliers if you want a long-term PPA. There are a couple of more specialist operators out there at the moment. Statkraft are very aggressive in that market. There is an established consolidator, Smartest, but if you want to have an agreement that satisfies your bank, you have to go to an investment grade company and that means going to, effectively, one of the Big Six. What we have seen over the past three or four years is a dissipation of enthusiasm among some of those larger players to enter into contracts or they will take the ones that they want, and of course they also have their own investments and a portfolio of long-term contracts that they have already put in place. There is a lot of control over that market by a handful of players that I would suggest is not as ideal as it should be.

Q14 Barry Gardiner: Yes, interesting word "control". What you are describing sounded more like a stranglehold.

Nigel Cornwall: Yes, to a degree, I can see why somebody would take that view. There have been a number of positive signs in the off-take market, particularly with the FiTs regime coming in and there has been an evolution towards almost like a short-term PPA market based around FiT payment. That is a new area of the market and new suppliers are moving into that. Although at the longer term, you need the credit rating to bank the project and that does mean that there is a lot of selection that goes on by the largest players.

Chair: I think we need to explore some of these issues, particularly the transition, a little further.

Q15 Christopher Pincher: Mr Botting and Professor Watson, you both said in your previous answers that medium-scale projects fall between the two stones of central generation and very localised micro-generation. You explained some of the difficulties that that engenders. What do you think DECC can do about that problem to support medium-scale projects?

Professor Watson: There are alternatives. You have a regime that is predominantly designed for the large-scale. There are obviously massive changes happening to that regime with the Electricity Market Reform and the Energy Bill and there is a regime that has been established more much recently for small-scale, below 5 MW, with the feed-in tariff. The issue for the area that this inquiry is looking at, the range of scales, is that in principle they can access the Contracts for Difference and all the things that go with Electricity Market Reform but in practice, that is going to require a huge degree of sophistication and knowledge and so on in order to engage with it properly. As one of Nigel Cornwall’s company’s papers have made very clear, they will not get the same price for their power than some of the bigger generators will. The effective value of a Contract for Difference for a smaller-scale generator is likely to be much less than it is for a larger-scale generator, so they are not competing on the proverbial level playing field in that case.

I think something needs to be done in order to correct that particular issue. Whether or not we increase the threshold of the feed-in tariff, as someone suggested, there will still be a sizable proportion there that needs something, whether it be a green power market as has been suggested, to fill that gap. As I have followed Electricity Market Reform from its very start, this issue has had attention, people have said, "Yes, that is very important" whenever I have gone to meetings about it with DECC and others, but I am really surprised that it still does not seem to have been brought to a conclusion and fixed properly.

Q16 Christopher Pincher: So you are surprised but perhaps not alarmed?

Professor Watson: Alarmed if we want it to be part of the future, sure.

Q17 Christopher Pincher: Alarmed always sounds better, I think. What are your suggestions for making up the difference in the difference, if I can put it like that?

Professor Watson: I think there is a need for some sort of intermediary. We can’t expect necessarily all that power to be taken at a price that means they are effectively getting the same Contract for Difference directly, maybe with the Big Six. There may be something to do with transparency that is linked to the whole area of reviewing how the wholesale market works. I think it is very much bound up with that, but some of the proposals for a green power auction or green power market-which probably Nigel is better qualified than I am to talk through the details of-are the kinds of things I would like to see happen if we are going to tap this particular part of the market.

Q18 Christopher Pincher: Is this something that definitely needs to be done, in your view, through DECC and not through, for example, Ofgem?

Professor Watson: It is probably a combination of the two if you are getting into general competition issues as well. I do not think you can separate these, to use Duncan’s word, into silos, but I think the two go together very much for me.

Duncan Botting: I will just come in there. I think there is a real issue that we get focused purely on the price available for electricity but quite often there are revenue streams across the board that have not yet been created into a business model that make coherent sense for a bankable project, for instance heat output and the Renewable Heat Incentives do not necessarily mesh with the FiTs type activity. There is a lot of silo-based incentives. If we are not careful we are going to end up with people focusing purely on one or the other revenue streams when the benefit to the end producer is from numerous revenue streams, not just the one. Therefore, it becomes much more difficult to play that game, especially when you are trying to explain it to your investor.

Q19 Christopher Pincher: Do ROCs work for medium-scale projects?

Duncan Botting: They are certainly more well understood than the new EMR structures, and people are still unclear about all of the strike prices and so on. There is a huge uncertainty in the marketplace about what is investable and what is not so nobody is moving forward at the moment. In the local energy space, there is a play-off against that end of the market because there is opportunity if the market at the top end goes in a certain way, or if it goes in a different way there is a different opportunity. In that respect, the whole systems business model is very difficult to get your head around if you are a small player. If you are going to do that analysis, you have to have quite a lot of resource at your disposal.

Q20 Christopher Pincher: So there is an issue of understanding about the new regime and the structures that are the pillars of it. I am not entirely clear yet but are you all saying or are some of you saying that another pillar is required to meet the requirements of medium-scale projects, which is not a FiT for small-scale projects and not a CfD for large-scale central generation? If it is that third pillar, what would it look like and how would it fit in?

Professor Watson: For me, it is an add-on to the CfD, basically, something in addition to that to make that work for those smaller players. There are people who argue that that whole framework is designed for the big-scale players and that is what it should address and that should be fine, and if you want something to be done at the middle scale then you need a whole other set of policies. My view would be that if you are trying, as part of the Electricity Market Reform, to address the system as a whole-again to go back to Duncan Botting’s point about the supply demand, the need to stop siloing and to think about the potential for this medium scale-surely at the very least this framework should do no harm when it comes to some of these medium-scale players, if not address some of the particular issues they have.

Nigel Cornwall: Can I pick up a few of those points and give a different answer to the question, "Does the RO work for intermediate projects?" I think the answer is it depends entirely on the terms of the deal that you can negotiate with your counterparty. Even though one sees headline numbers quoted for values of ROCs with recycling, most developers are lucky if they can capture much more than 80% of the value across all the benefits available. There is an argument for that. The supplier typically is managing balancing risk. It is providing a route to market. So there is a case for some benefit share but what the developer gets is normally derived on a case-by-case negotiation and there is a lot of dissatisfaction generally among developers about their ability to get their expected value streams. That is one point.

Another key point is how that position will change with the transition to CfD FiTs and I think that again comes down to individual projects. If you are a specialist biomass developer, understanding a CfD FiT is not a problem. If you are a community energy developer and you see a 78-page list of heads of terms for a CfD FiT, you will be a little bit intimidated and you will not know what is going on, and then combine that with the fact that because of the basis risk that a developer sees, you are probably not going to get the same amount of money anyway out of a project. There are clearly issues that need to be tackled. I think DECC, with to a lesser degree Ofgem, are aware of these issues. I am not too sure how their analysis will be resolved and whether it will result in any interventions, but it is clear that without creating a third set of incentives above 5 MW, and maybe below 100 MW, there is a need to provide a framework within which counterparties can conduct their commercial negotiations because it is very one-sided at the moment.

A key to it is opening up, in my view, the short-term power purchase market. If you have a 15-year arrangement, the supplier reasonably will take a very pessimistic view of balancing risk. That is the main justification for the large discounts that are extracted. If you can move to a shorter-term market by having a guaranteed supply route to market, you probably have a very different set of possibilities.

Q21 Christopher Pincher: You have very helpfully answered my next question about PPAs so that will cut the Committee’s deliberations a little. However, on that PPA issue, you mentioned earlier on that the Big Six are-Mr Gardiner I think used the word-strangling some providers. Can you explain why that is so important, first of all, for those medium-scale projects and why bigger providers would want to smother a PPA?

Nigel Cornwall: The banks require it. The lenders require it. You need a long-term agreement for off-take. That conventionally comes with the associated environmental benefits and other benefits that arise in the system and it is the way it is. There is a short-term PPA market developing but it tends to be for where plants have come out of initial arrangements or have surplus power. It is very much the exception. What I would say is that in that short-term market-and a very good example of that is the e-POWER auction run by the Non-Fossil Purchasing Agency-we are seeing a lot more independent suppliers bidding for power. I think there were 14 in the autumn auction, four or five of those were the Big Six. That means there are at least nine other suppliers active in that market, including some of the independent suppliers we work with. If you can get away from that long-term focus, that can only be a good thing.

How you do it it is more difficult. Jim has already referred to the green power auction, which is one way of doing it because you can make the generator hold up to the CfD FiT strike price, and you know the auction would be coming along every six months. You could probably do it with another sort of mechanism along the lines of a FiT, which is to have a guaranteed route to market. As long as you know you can default to a contract and the banks are willing to accept that, you can take a punt on the shorter-term markets and you may not need the kind of green power auction solution. Existing markets might be allowed to evolve around that. So there are some options but, as Jim said, we have recognised this is an issue for quite a long time. Finding an actual way forward is proving very difficult because I think ultimately DECC do not want to intervene. That seems to be the case.

Q22 Christopher Pincher: Do you think they are going to have to intervene? You mentioned the Big Six have nine other players with whom they are competing. How do you see that competition evolving and are they happy for that competition or do you see them acting in a less than helpful way?

Nigel Cornwall: No. It is a healthy stimulant, but none of us particularly want it out of choice, I guess. Can I answer that in a different way, which is to say if one looks at the fixed FiT market, for instance, which was seen as a very specific area of the market, what we are seeing is a lot of competition for export power now outside of the administered rate. Companies like Good Energy have more FiT customers than RWE npower, ScottishPower, EDF Energy. That shows how routes to market, if properly fashioned, can be utilised. There is no reason why, if there is some kind of guaranteed fall-back, for example, a supplier of last resort solution for PPAs, similar competition can’t emerge across the market. That is my personal view. It might be difficult to define, but as a concept it needs exploring.

Q23 Dr Lee: Apologies for my late arrival. Moving swiftly on to heat and smart systems, we have heard that medium-sized energy projects could help to provide flexibility for the energy system to help balance peaks and troughs. Can you explain why this is?

Grant Bourhill: Perhaps I can start. As I have discussed previously, our model within the ETI looks at power-heat transport and infrastructure and delivers the lowest cost route to meeting the UK’s 2050 climate target. That solution, of course, has to be robust against renewables’ intermittency. We believe that the technologies from a macro scale help that but are not the full answer. For example, we are funding UK ESME at the moment to develop and demonstrate distribution-scale electricity storage. We are also looking at the possibility of diurnal heat storage at a distribution level for heat networks. However, as I said earlier, any solution for the future UK energy system has to be robust. There are uncertainties, and one of the uncertainties, of course, is will the UK pursue a CCS at the speed that it has to deploy that? If we do not pursue a CCS, then there will be something like five or six times the capacity of renewables within the UK energy system. I do not think it is possible for the macro scale solutions to cover exclusively that intermittency.

Q24 Dr Lee: Just to clarify CCS, essentially what you are saying is if you have a lot of base load guaranteed power coming down the system it would be an easier model, you would not need to do this so much. Presumably that applies to nuclear as well, does it?

Grant Bourhill: To a lesser extent with nuclear. The cost to the UK of not doing CCS or not doing bio-energy is significantly greater than not doing nuclear, from our modelling. In part, that means there will be a lot more renewables in a future low-cost energy system if the UK does not do CCS or does not do bio-energy.

Duncan Botting: If I could add to that, I think the four scenarios that we are working to on the fourth carbon budget are clearly what is driving the entire solution to how we meet the fourth carbon budget. Therefore, if you take something like the Smart Grid Forum who have taken those four scenarios and considered what that means for power generation and transmission and distribution networks in terms of how the networks have to react to this, the Smart Grid Forum Workstream 3 report has clearly identified different opportunities for different market solutions, heat pumps, transportation and so on, across a whole range of different technologies that could deliver. The problem is that all of the modelling in the world does not provide what the market will actually do. The market structures are such that people are only going to invest in particular technologies if they believe there is a return on investment. At the moment, there is a very poor clarity on which areas are going to be winners. We are struggling to get the sorts of conversion factors that heat pumps were meant to be installed and designed at on a constant basis. People are seeing trials going on at the moment that are giving quite poor results compared to what were expected. If we are going to play this game of modelling, we need to do the same at the same time with understanding the market structure and how the market structure needs to flex out to 2030 to achieve that.

Q25 Dr Lee: How dependent on all of this is having a smart grid in place?

Duncan Botting: I would state that the smart grid is the enabler for all of the technologies we are talking about. All generation has to be connected to consumers. The way that is done is via the networks. Unfortunately, it takes something around eight years’ lead time to be ready to accept many of the technologies that we are talking about in terms of large-scale infrastructure.

Q26 Dr Lee: The Energy Technologies Institute has suggested that district heating networks could have a significant role to play in providing heat to domestic and commercial sectors. Do you think DECC’s heat strategy will deliver more district heating networks? If not, what needs to change?

Grant Bourhill: The reason that we are looking at heat, of course, is heat demand in the UK is approximately 40% of the UK’s overall energy demand. Of that, about 75% arises from domestic and light commercial use. How to deliver heat to the UK sustainably and in a low carbon way is extremely important, which is why we have established our smart systems and heat activity.

I think DECC are pursuing a good strategy at the moment because there is uncertainty, as Duncan said, with large-scale solutions that the UK may need in terms of carbon capture and storage, offshore wind, large-scale demonstration of smart systems, say, for example, using 2% of the UK’s housing stock, which is about half a million houses. I think DECC are pursuing a strategy of demonstrating that type of activity at scale to provide the evidence to inform what the future national strategy should be in about 10 years’ time, which is when we need to start triggering deployment of the infrastructure. So I think pursuing that strategy is sensible.

Chair: We have run out of time, I am afraid, for this particular session. We are very anxious to receive thoughts on community engagement and acceptance and whether, for example, schemes are or might be in operation for people to gain benefits from community and local energy. If you have any thoughts on that that you might want to offer to us in written form, we would be most grateful to receive them. Thank you very much for your attendance this afternoon and for your very informative evidence.

Examination of Witnesses

Witnesses: Merlin Hyman, Regen SW, Graham Meeks, Combined Heat and Power Association, Felix Wight, Community Energy Scotland, and Rebecca Willis, Co-operatives UK, gave evidence.

Q27 Chair: Good afternoon. Thank you for coming along to the second panel this afternoon. Perhaps you could briefly introduce yourselves and we can proceed.

Rebecca Willis: Becky Willis representing Co-operatives UK.

Felix Wight: Felix Wight representing Community Energy Scotland.

Graham Meeks: Graham Meeks representing the Combined Heat and Power Association.

Merlin Hyman: Merlin Hyman from Regen in the south west.

Q28 Chair: As I am sure everybody is aware, we are looking at essentially medium-sized energy projects, but I think we all agree that that covers a large number of different projects. Could you perhaps tease out a little the distinction that you see between general medium-sized energy projects, community-owned projects, local energy projects, distributed energy projects? What do you see as the main differences between those particular categories and in the overall heading of smaller projects?

Felix Wight: I think they mean different things, which is the main distinction. Distributed energy means forms of generation connected to the distribution network. Local energy implies some locational element, however that is defined. Community energy implies some relationship to a community, whether that is a community of interest or a community of place. All these things could be interpreted as different forms of local energy, but it is a question of whether or not the Committee is minded to focus on one of those particular aspects. Our experience is working with the community-owned sector. Those are projects where the benefits from those projects accrue directly to a specific geographic community that manages those projects and uses the benefits as they see fit, but that is not the entirety of the sector.

Rebecca Willis: I am here very much representing the community and co-operatively owned energy sector. Having said that, I think it is really important to look at what the different sectors have in common, for example what we have in common and the extent to which we have common cause with distributed generation with heat networks, whether they be commercially owned and so on. What we have in common is that at that kind of mid-scale of energy generation is where our different sectors fit. We all play a role in that energy ecosystem at that level. It is at that mid-scale that you can get some really interesting solutions emerging in terms of linking demand and supply, in terms of engaging consumers and so on, which it is harder to do at the large scale. For that reason, I think you will find that all our organisations and all our sectors tend to have as much in common as they do separating them.

Graham Meeks: I would echo that. Within the CHPA’s own constituency we have pretty much the whole spectrum from heat to power to people who fundamentally are coming from the demand side and start from understanding their own energy use and then start investing in assets to help generate themselves, and the ownership structures vary from municipally owned right through to large multinationally owned. The common issue that we see is that once one steps outside what you might see as the professional centralised element of the energy sector, you rapidly get into an area where there is huge opportunity to realise benefit for the system as well as for the energy consumer and the community, but the capability, the capacity, the sophistication if you like, of the protagonists to deal with an energy system that is increasingly complex starts to act as a constraint on their ability to realise that benefit and that value. The critical issue that binds people together is that there needs to be a simplicity in terms of being able to engage in the market and bring the benefits forward.

Merlin Hyman: We have done some figures in preparation for this and there are about 50-48 to be specific-medium-scale projects in the south west currently operational. None of those I think at the moment would fit a definition of community energy. That said, we see a lot of opportunity for those kind of schemes and several are starting to come forward or are at an early stage of the pipeline as that sector matures. I think it is again true that there are some generic issues, as you might expect, I guess, across this kind of space. In the south west at least grid is a major issue; planning policies and the current state of planning policy are also issues. Finance in its different forms is undoubtedly harder at the smaller end of the sector than it is as you get larger.

Q29 Chair: We have heard that medium and smaller-scale sized projects may help to facilitate, for example, demand side response, demand side reduction, partly in view of their role within the district networks, for example, and partly because of their community orientation. Do you have any thoughts on how that may happen or do you think that is something that has perhaps been rather overstated?

Graham Meeks: One dimension that is particularly pertinent to Combined Heat and Power and district heating is the opportunity for thermal storage. One of the key things with heat, which we know, is it is not possible to transmit heat over the same distances that we transmit gas and electricity using those national networks. Heat is very much by its nature a more localised commodity when it is commoditised through a heat network or something similar. It becomes very much a distributed or a local element of the energy system so it really only works, only arises, only presents itself as an opportunity at a local level.

What we have seen if we look internationally, in Germany and Scandinavia, is heat networks, and particularly the thermal storage that is connected to those networks, providing huge value in terms of managing an electricity system that has the challenges of dealing with higher levels of penetration of variable sources of power such as wind. The systems in those countries are operating now with the right commercial signals being put in place to be able to provide very effective balancing and making sure that the energy that is being produced at times of surplus has a value to the system rather than the situation that we are seeing in the UK at the moment where quite often there is a huge cost involved in trying to get those plants to switch off. There is a huge economic benefit that is sitting there waiting to be realised if we can arrange our incentives, payment structures and commercial arrangements in the market in a way that incentivises people to realise that benefit.

Merlin Hyman: Where you have generation close to demand there are almost naturally greater opportunities to link those two factors. To cite one example, at the moment there is a town in Cornwall called Wadebridge that has a very active community energy group and set of initiatives. We have helped them work with Western Power, the local grid operator, on a low carbon network fund proposal, which is exactly that. They want to put more generation into Wadebridge than Western Power can accept at the moment. Rather than an expensive grid reinforcement project, the proposal is to develop a project that manages demand. You have the local active community there and there is the potential for various ways of managing that demand locally. One way is to use the electricity to generate hydrogen to then use in CHP plants in the domestic setting. Without that link between the generation capacity and the demand being close together and the organisations and the people being close together, I am not sure how that kind of project could happen.

Felix Wight: There are some specific regulated barriers in terms of creating a market for demand side management on the distribution network in that currently distribution network operators are discouraged from engaging with suppliers directly. It is on the supply side that you will realise the benefits of customers using electricity at the right times. That is something that needs to be addressed if that potential is going to be released. Equally, currently on the distribution network there is a real opportunity because generators that are being constrained do not receive constraint payments. They do not receive any compensation, so they could be massively incentivised to invest in demand side management and help release their capacity if there was a mechanism for them to be able to do that.

Q30 Barry Gardiner: Mr Wight, the Scottish Government have set targets for community energy projects and I think given loans as well. What impact do you think the policies of the Scottish Government have had and are there any other measures that they have taken that might be usefully applicable elsewhere?

Felix Wight: Yes, the 500 MW target is part of a portfolio of measures that the Scottish Government have put forward. To be clear, and we touched on this at the beginning, it is about definitions. Their target is for community and locally owned energy. They have a specific interpretation of that, but essentially it is not just community owned, rural SMEs and small businesses are included there. Its purpose really, I suppose, was to provide a benchmark and index progress and something to aim for. In terms of how that is being delivered, they only have certain policy levers open to them that are devolved powers, so they can’t do very much on grid and they can’t do very much in terms of macro UK incentives. However, what they can do relates to what was touched on in the previous evidence session in terms of some of the barriers to access to finance and de-risking the planning process. There is a loan scheme, which is an upfront, unsecured, risk-free loan to get projects through the planning process. If they succeed, they pay the loan back. If they do not, it is written off. Similarly, for projects that are consented, there is a loan fund for projects that are not able to secure commercial finance. These are interventions to try to address the high level of risk and also the market failure in terms of there being a limited pool of finance that is currently available for small-scale projects. I think both of those are of direct relevance. In fact, the first one is already being looked at and hopefully going to be put into practice by Defra.

Q31 Barry Gardiner: Can I ask the rest of the panel are there useful lessons there that we should be learning and rolling out in DECC?

Merlin Hyman: In terms of the Scottish approach to community energy?

Barry Gardiner: Yes, in terms of the Scottish approach.

Merlin Hyman: Looking at the numbers and the success of Scotland, it is clear that they are a long way ahead of England on community energy. That is partly perhaps because they are a long way ahead on renewables generally. I think there is a lot to learn from the focus that they put into this sector. The encouragement and the support that has gone into it is something that we could really learn from in England and also in the localities and regions.

Rebecca Willis: I think Scotland are doing a very good job but within the constrained circumstances of devolution. There are all kinds of ways in which the energy system as a whole, which is UK wide, makes life incredibly difficult for these projects. The Scots have a better sticking plaster than the English maybe, but it is still a sticking plaster. Life is very difficult for these projects at the mid-scale. I can only speak for the co-operative and community-owned projects, but it is incredibly difficult to get these projects off the ground. Osney Lock Hydro in Oxford has just done a co-operative share offer. It has taken them 12 years to get to that point. You can only do it by being determined to the point of stubbornness. You have to be amazingly determined and the reason for that is that the system is really stacked against them, in Scotland and in the UK more widely. We should not lose sight of the sense to which this is a point about regulatory capture because what we have is a system that is set up for the big players and that large-scale commercial system is the one that the companies and DECC understand, everyone in and out of DECC’s doors understand their systems and speak the same language. When I say regulatory capture, it is not malicious intent, it is just that everyone working in the system has the same background and shares the same ethos.

If you look in other countries, you see that the people in and out of the doors of the energy ministry are very different people. They are local authorities, they are co-operatives, they are farmer groups and so on. It is just a very different picture of the world. I think that we are in real danger of assuming that our system is as it is because that is just the way of it, whereas in fact it is a very specific system set up by and for specific people. If you try to fight against that, you find that it is really tricky to look at different routes to market, different types of company, different innovations.

Chair: Before we proceed, I think I am going to have to at this point indicate a technical change in what we are doing as far as evidence is concerned this afternoon. That is as from one minute from now, because I believe Mr Lee has to depart, we cannot formally record the rest of what we wish to hear about this afternoon as an evidence session. However, we very much want to hear particularly about advice and support services, heat, and planning and grid issues. What I intend to do is take that as a rather more informal discussion between us, which will look remarkably like a witness session but nevertheless will not be technically, and hopefully, with your agreement, proceed on that basis. Barry, perhaps I could ask you to continue on the particular issues you wanted to raise on advice and support services and take that as the first part of the more informal discussion that we will have this afternoon.

Sitting suspended.

On resuming-

Q32 Chair: Perhaps I could formally record at this moment that only half of your words were lost in terms of the official record because we can resume an official session.

Merlin Hyman: It was the best half.

Chair: Most of that previous discussion can be recorded officially and you may wish to weight your words carefully for the rest of the session, bearing in mind that we are now recording your answers for evidence in front of the Committee. Again, the Committee looks rather like it was two minutes ago only with a slightly more populated discussion.

Q33 Barry Gardiner: I do not know whether we are more like a tag team or a relay race. Co-operatives UK recommended the introduction of a co-ordinated advice scheme supported by Government and staffed by independent experts, didn’t you? How do the rest of the panel feel about that?

Graham Meeks: If we look on the heat side, there are interesting developments with the heat strategy that DECC have now put in place where they have in many respects adopted a model that London took forward. Having got a target for 25% of energy through distributed energy sources, London, the GLA, recognised that they needed to support that with capacity and capability and established a project delivery unit that co-ordinates work with the boroughs to put schemes in place, recognising that a lot of these are pretty complicated projects, dealing with 45 to 60-year-old infrastructure and so on. DECC has adopted a lot of that model and is now setting up a thing called the Heat Networks Delivery Unit within DECC, which is then intended to provide that capacity, ironically centrally when we are talking about decentralised, recognising that may well be the most efficient way to be able to deliver hand-holding and support to local authorities in particular who want to take the initiative but recognise that internally it is not great use of their resources to be able to carry that capability. We are only in the process of setting that unit up at the moment so one has to reserve judgment to see whether that can be transposed from a local initiative, albeit in greater London, to a national level, but it seems as if there is at least a model there to follow.

Felix Wight: I would like to go back to Rebecca’s point about the macro context in which these projects are being played out. You can have all the capacity building in the world and throw lots of support at this, but unless you fix some of the fundamental issues in terms of access to market, the predictability of incentives and access to finance, you are still going to get a very small number of projects coming through relative to the full potential. What we have in Scotland at the moment-about 25 MW installed, going up to about 40 MW by the start of next year-represents a superhuman effort on the parts of those people. I would argue that it is not really a sustainable model or it is not going to be able to go to scale unless we address some of these other issues. That said, capacity building does have an important role to play, especially if we are keen to ensure that these opportunities are accessible to all communities rather than just to ones with a suitable mix of retired professionals.

Q34 Barry Gardiner: Sure, but going back to what Ms Willis said about the different look of the people going in and out of the door in other countries and jurisdictions, would the response that the Minister or the industry might make to that not be, "Yes, but actually our energy prices are lower"? In the other jurisdictions this element of the market may work well but what you call regulatory capture by the Big Six-note I did not use those words, although I might be tempted on occasions-has actually provided lower costs than for our continental counterparts.

Rebecca Willis: However, you have to be careful on the price point. We have the lowest prices per unit of energy. That does not mean that people are spending less of their household income on heating and powering their homes because we also have the leakiest building stock in Europe.

Q35 Barry Gardiner: Of course, absolutely. We are going to a different evidence session here.

Rebecca Willis: However, that is the point. Obviously, we have to be mindful of the cost of energy and the cost of policies but not to the extent that we separate this out. Reducing the unit cost of energy is not a good thing if it means that people are spending more on heating their homes. The good thing about the mid-scale, what we are talking about in this inquiry, is that that is where the solutions lie to linking demand and supply, for the reasons we have already discussed. That is the scale at which you can actually get people properly involved in their energy system, not as passive consumers but as people who understand energy and understand what it takes to power their homes, and you get a different political debate. I was in Denmark last year. Energy prices per unit are vastly higher than here but it is not a political issue. I think we need to investigate that in the round and work out why, in fact, in other countries they can stand higher costs per unit because they are doing better stuff with it.

Graham Meeks: I think the other thing to be careful about in drawing comparisons internationally is the state of play of the energy system, particularly in terms of the supply and demand balance. We have low prices, or have had historically low prices for the last 10 or 15 years, because we massively built capacity. We have heavily over-built capacity during the time when the system was largely in public or quasi-public ownership. We have been able to benefit from being able to reduce the costs without making the investments that we should have been doing in this valuable depreciation period, if you like. That has not happened. I would expect that a lot of what we are seeing elsewhere, when we have a more catholic discussion in terms of who is involved, is that more people are realising that they need to take responsibility for their own energy security, their own energy supply, and are willing to step forward and present themselves in a discussion with governments in order to realise that opportunity. We are going to have difficulty building out the energy investment that we are going to need to meet our requirements for the 30 or 40 years forward.

We can’t afford in this country to restrict that discussion to a discussion with the Big Six, who have their own constraints on the amount of money that they are able to borrow and that they are then able to invest into our energy infrastructure. We need to be opening up pools of investment, pools of willingness to invest, that run right across the economy. It is really only enlightened self-interest that should be driving us to have these discussions at any number of levels with a plethora and a much greater diversity of actors, many of whom again will only be doing this because they see that there is a threat to their security of supply and ultimately the cost of energy supply.

Merlin Hyman: On that point about evolving, it was fascinating being in the south west at the frontline of the feed-in tariff, seeing a revolution going on about the engagement in energy from a whole bunch of people, farmers, businesses, tourism businesses, land owners, companies, who have never really thought about engaging in energy before. We run events like the Renewable Energy Marketplace with thousands of people coming along to find out about energy. You see the pages of the papers and the BBC Spotlight covered in this stuff. You see farmers co-ops like Mole Valley Farmers sending out four-page articles to all of their thousands of farmers. You saw a completely different engagement in energy when the feed-in tariff came in and that plays across to this medium-scale level.

There is another point here about the cost of energy and why we should act, particularly on the community side. It is coming, again, from the south west where this is a very hotly debated topic. There is no way that we will build the scale of distributed/renewable generation that we need without a better relationship between development and the public. People notice this stuff. It is there, it is in front of them, and they want to know why it is there and what it has to do with them. There is a huge appetite to engage, understand and gain benefit from it. If we think we can just sit there and build out the renewable energy of the future without a much better relationship between development and the communities then we are living in cloud cuckoo land, frankly.

Q36 Barry Gardiner: Who should actually pay for the support and advice services and what subjects do you think they need to cover, getting back to that?

Rebecca Willis: Speaking for community projects, they need some of the support and advice because the system is currently stacked against them, for reasons that we discussed earlier. If you take away some of those system barriers, which we could do through changes in the Energy Bill or the Community Energy Strategy, there are still going to be efficiencies to be had through just making sure people have access to the right information. This is not about getting a website. This is basically about interactive advice from one person to another, in other words. I think that if Government were to pay for that, it would get more energy online quicker. It would get more people involved quicker, but I do not think Government is the right institution to do that. I think the Scottish model, whereby it is paid for by Government but done by an independent organisation, is the right one. There is fairly basic stuff about legal matters, planning, financial support and so on. What you find at the moment is that it takes communities a long time to grind through that stuff. There is some very basic advice that you could give at the beginning about is this the right site for solar, is this the right site for wind, what does a bankable project look like. If you got good advice at the beginning, maybe through a peer mentoring system, which is something that Co-operatives UK are looking into, it would mean that any good projects did go forward and the ones that were not good from a technical point of view did not go forward and time was not wasted on those ones.

Felix Wight: I think it is important that whatever support is available is seen to be independent and trusted. That is a big argument in favour of it being state funded. It does not necessarily need to be a huge amount of money in the scheme of things. I think the CARES contract in Scotland costs around about £3 million a year, but on the back of that we are bringing forward 180 MW of capacity. Each megawatt in community ownership should be getting in about £100,000 net, so if we hit the 500 MW target that is billions coming back to Scotland at a very low level where you have all sorts of economic, health, social multipliers. It is a pretty small investment for the benefit.

Merlin Hyman: Regen runs a community energy support project and funding for that is extremely difficult. There is, unlike in Scotland, no central funding for that kind of work. At the moment we have some European funding, some local sponsorship and some thin air, really. At the heart of that is about getting communities together to share. We have some great examples of communities like Bath & West Community Energy, which has raised £750,000 and done a lot of things, and Wadebridge Renewable Energy Network. There is a lot of expertise there. I also find that the professionals who have been doing this on a more commercial scale-lawyers and accountants and industry-are very keen to share and to find ways of working effectively with community groups.

Again, I think there does not need to be a vast amount of money but there does need to be some support to help communities get together and share experiences, to understand the pretty complex legal and financial issues. When we get them together, a lot of them want to deal with the debates they are having in their local community about the role of wind energy and intermittency and these kind of things, and the same things as the companies, "What is Government policy going to do next? Are they about to change the feed-in tariff suddenly and I am not going to notice halfway through my project and then all that work has gone?" that kind of stuff. Just a little bit of energy, knowledge, know-how, GIS expertise can be really helpful and again it is not a huge amount. I do not think a national scheme in England would work. The Scotland, Wales, south west kind of scale is about right. I think a national scheme would just be seen as very alien by a town somewhere in Cornwall.

Q37 Chair: Can we briefly touch on community-wide heat networks, community networks as opposed to industry-based heat networks, CHP? I am looking particularly here to Graham Meeks. Could you briefly, Graham, outline the extent to which those community networks are presently in place in the UK and particularly what is the main type of organisation that is driving them?

Graham Meeks: At the moment, we are talking about something like 2% of public commercial and domestic heat demand in the UK is being met through district heating networks or block heating networks, some form of community heat networks. What that means is about 2,000 networks all in all of different scales, over 200,000 dwellings and around 1,700 commercial and public buildings. That is the sort of scale that we are at the moment, which is clearly a long way short of where we see some other similar rates of penetration in the Scandinavian countries. In Germany it is about commensurate with where France is, for example.

It is a very fragmented pattern of development that we are seeing at the moment, very different sets of drivers. We are seeing, for example, planning being a very important driver, particularly in London where a deliberate policy for decentralised energy, including heat networks, was introduced by the GLA. That is now providing a very important driver. I think one of the panellists on the previous session pointed to Nine Elms, King’s Cross and so forth. These major regeneration projects that are happening in London are all going in with district heating systems in place because the planning requirement takes people down that route. Once people evaluate it, it presents itself as being a fairly cost-effective way, but it is the planning driver that has been very effective in doing that in those regenerations and also new build housing developments. We are seeing quite a lot of new build projects going ahead in London and also in a number of other local authorities which have chosen to take the powers to be able to require a district heating connection from the developers, but they are still very much in the minority.

We are also seeing, through the CESP programme, Community Energy Saving Programme, and now into ECO, district heating is starting to become increasingly competitive as a cost-effective compliance option through those schemes. It took a little bit of effort on our part to ensure that district heating qualified within ECO but it is certainly now seen as being one of the more attractive measures. That is being driven forward as well. We are also seeing on a very piecemeal basis the wilful local authority where there is perhaps someone who understands enough and is committed enough to try to drive it through the process to make a district heating scheme happen. We tend to call these city-wide schemes. In fact, most of them tend to be connecting groups of public buildings that provide the secure heat load.

It is actually quite a scattered pattern at the moment and certainly what we are lacking is effectively an overarching model-model is the wrong word-a framework that would allow investment to happen at the sort of scale that the heat strategy is actually asking for, which is for up to half of the building heat load to be met from district heating by around 2035. That is going to need a very different set of drivers to get to that scale from the rather disjointed pattern that I have described.

Q38 Chair: You have mentioned the question of drivers. We have had suggestions that in fact, because of the question of networks, investment in networks, the question of differential loads in community schemes in different parts of the year, for example, it may be the case that incentives are needed to stimulate demand overall for such schemes in the long term. Do you agree with that or do you think in terms of what you have mentioned about the changing nature of Government schemes that there may be other ways forward?

Merlin Hyman: Just while Graham is thinking about that, there is an interesting scheme east of Exeter, a development called Cranbrook, which is a new build scheme going in with district heating at the moment. I think it does play out a lot to what Graham was saying. There had to be complete determination from the public sector and the East Devon Growth Point to making that happen against quite a lot of opposition from some of the developers involved. The planning and the determination of the local authorities to make it happen, although they are not actually a contractual partner in that case-they have kind of held the ring-was absolutely key.

The challenge in retrofitting is a rather different one. In the case of that new development, if you are aiming at zero carbon or code levels 4, 5 and 6, a site-wide solution was clearly the cheapest approach. In theory, if the regulatory drivers around new builds being low carbon are strong enough, I think you will see district heating become quite a normal part of new development. As I say, it is a whole different challenge to make it a normal part of retrofit.

Graham Meeks: I think Mr Hyman made that point. Retrofit is the bit that represents a huge challenge. When we talk about incentives, unfortunately we have become very conditioned to thinking in terms of feed-in tariffs and the like. I do not believe that a feed-in tariff type arrangement will be necessary to drive district heating networks. These are 45-year-plus lifetime assets. No one is going to bet on the availability of a feed-in tariff to be able to provide a revenue stream over that sort of period. We have to start thinking about these in the same way that we think about every other part of our energy, and indeed monopoly infrastructure-roads, railways and so on. We have a gas network and an electricity network, which both have established regulatory frameworks that help the investor to de-risk their investment both in terms of ensuring that the connections are there and also protecting the customers to make sure the customers do not want to walk off and go somewhere else and disconnect from the network and, therefore, leave the investor without a revenue stream.

If we are looking at the scale of ambition that DECC have now set out for heat networks, really we need to be thinking in the same terms and putting in place an investment framework that ultimately would allow the same sort of people who are investing in electricity networks and gas networks to be attracted to the heat industry as well. We are not going to get there overnight. There is still opportunity for other models to work in the short term, but we are going to have to have something that makes this look like what it is, which is a boring piece of utility infrastructure that is just a part of our everyday pattern of energy supply. That is what investors want. They do not want a rollercoaster. They want secure returns over the long term.

Chair: We are running out of time for our session this afternoon, but can I invite Robert to ask one particular question on planning and grid issues and then John on joint ventures?

Q39 Sir Robert Smith: Mr Hyman, in your evidence you said that a lot of projects were wasting money on appeals. Presumably they were successful?

Merlin Hyman: The success rate I think is about 56% for wind, perhaps slightly higher, so the majority are successful.

Q40 Sir Robert Smith: Do you think more could be done? What could be done to educate the authorities not to reject things that are going to be won on appeal?

Merlin Hyman: I think that we have a better situation where we have a local authority with some clarity about what kind of renewables it wants to see come forward and the kind of areas involved. That is not, "You are going to build six wind farms there and a solar farm there", but if you take the example of Cornwall, they are working on a local plan. They have a suite of guidance that sets out what they want. If you talk to a developer, they will say that working in Cornwall it is pretty tough to get through all of those hoops, so it is by no means easy, but if they have gone through all those hoops and the officer says, "Yes, you have done all of that", they are pretty clear-not absolutely certain but pretty clear-that they will get the go-ahead. In a lot of other jurisdictions there is no policy locally. There is very little clarity for the developer about what kind of development is expected. The development comes forward and then there is a reaction based on no clear evidence. The scheme is perhaps rejected and then goes through on appeal.

I think that we would probably be more successful at stopping bad projects-and we by no means think renewables in all places at all times is the right project-as well as encouraging good projects if each local authority had gone a bit further in setting out exactly what it wanted and setting out its evidence base.

Felix Wight: I think there is a particular confusion in the planning system in the assessment of community benefit payments and where they relate to socioeconomic impacts. To try to unpack that a little bit, if you have a community-owned project that is providing £100,000 a year to a community benefit fund, which is administered by local people and invested in that community to create jobs, affordable housing and so on, that at least in Scotland would be treated as a material consideration. The payment of money per se is not. This creates a lot of confusion among planners and councillors as to when it is not and when it is. They come under a lot of pressure locally to be considering a project that has strong levels of community support in a slightly different way from one that does not and is not delivering any of those direct benefits. At the moment, as the planning guidance stands, it is hard for them to be able to bring that out as a formal part of their decision. If that was addressed that would be a big incentive for commercial developers to have more creative arrangements working directly with communities, and likewise for more community-led projects to come forward because effectively they have been de-risked in planning terms.

Q41 Sir Robert Smith: The other big challenge is a lot of our renewable resource is in parts of the country that have not traditionally had great connections to the grid. Are there any imaginative solutions?

Felix Wight: Yes, there are lots of potential solutions. The challenge is persuading network operators to implement them in a timely fashion. Currently large swathes of the network in Scotland are not open to development at both the transmission and distribution level. That is the background for all these discussions. We can pick different forms of generation and we can pick different forms of ownership. If the infrastructure is not there, it is not going to be built. The key issue is the timing of investment in network infrastructure. At the moment, it is an inherently reactive process. The network operators can only reinforce once sufficient generators have put their money on the table to do that. In the current review of the distribution network operators’ business plans, which sets the scene out to 2023, RIIO-ED1, Ofgem is still not minded to allow them to make any form of strategic or anticipatory investment, which means we are locked into this backwards scenario. There has been improvement in terms of the way that incentives are structured to encourage alternatives to reinforcement, but in some situations reinforcement is the thing that is required. In our view, taking a longer-term public interest, that speedy reinforcement in advance of generators requesting it is the best way of securing we get affordable renewable capacity connected.

Q42 Sir Robert Smith: That is a problem in the south west, isn’t it?

Merlin Hyman: Yes. I endorse very much what Felix says there. We are in exactly the same situation. The rush of solar has meant that large parts of the grid in the south west now require reinforcement of the core network to proceed. The way that then works is that the developer that triggers that reinforcement is given that bill, "If you want to go forward it is going to cost you X million, maybe up to £9 million". If you had a really big project, 50 MW-plus, you would probably swallow that quite happily. It is the medium-scale projects that suffer from this problem. We have done some work with Western Power and Scottish and Southern in our area on scenarios for the future development and looking at the investment that is going to be required. There are starting to be measures coming forward to allow developers to share the cost rather than just coming all on one scheme, which I think has already been covered in Scotland, and that might take us some way forward. Although I do agree about the 2015 to 2023 business plans; the first one we have seen from Western Power-I think it was the first one to be published-has £2.8 million a year to invest ahead of need, effectively. They really see that as their bit to partner with developers paying the large majority of the cost when they might get some benefit from it as well.

Chair: We are going to have to move very quickly to John, to joint ventures. Thank you very much.

Q43 John Robertson: Just a little bit on joint ventures. Did the Camco Baker Tilly study, which suggested there was a potential of 3.5 GW, take these joint ventures into consideration?

Rebecca Willis: That study did not specify whether or not they would be pure community or joint venture, but we see a massive potential for joint ventures. For example, the renewables developer Falck, a wind developer-interestingly, a privately owned company-now offer as a matter of course the potential for joint ownership to the communities where their turbines are located. They have that as a standard offer and it is received very well by communities. They see that as one of their big selling points. There is now massive competition for decent sites for wind and one of the reasons that they managed to get those sites was that they offered a proper ownership offer to communities.

Q44 John Robertson: Should there be a mandatory portion of this development?

Rebecca Willis: In Denmark there is.

John Robertson: No, over here.

Rebecca Willis: Over here, I think to introduce that straight away would be hasty, but we definitely need to ask renewables developers to do a lot more with the community. What we would suggest is give them a couple of years, but the Government should make sure that developers know that they are serious about community ownership. They could do that by saying, "You can do it yourselves or in two years’ time we will mandate it". I think something like that, a combination of carrot and stick, would mean that renewables developers would find ways of doing it. They would innovate. They would take the odd risk and try to do things a bit differently and they would probably be pleasantly surprised about how much better these projects are, how much more public support there is for these projects. I think it just needs a little prod and you would get all kinds of interesting innovations emerging.

John Robertson: You answered my last question. That was very good.

Chair: Thank you very much for your evidence this afternoon. We are very grateful to you and also for your ready adaptation to varying modes of evidence giving. It is very much appreciated. If you do have any follow-up thoughts you may want to send us in writing we would be grateful to receive them. Thanks very much.

Prepared 29th May 2013