The Government is currently consulting on the next steps towards achieving a low carbon economy through the recently released Heat and Energy Saving Strategy Consultation, together with a consultation on an extension to the Carbon Emissions Reduction Target and the introduction of the Community and Energy Saving Programme. The package of measures includes:

  • extending the existing obligations and targets relating to energy efficiency and saving measures under the Carbon Emissions Reduction Target (CERT), an obligation on gas and electricity suppliers;
  • introducing a new scheme alongside CERT called the Community Energy Saving Programme (CESP) which extends the obligation to promote carbon-reduction measures for domestic energy users to electricity generators, and creates an additional obligation on gas and electricity suppliers;
  • the Renewable Heat Incentive to facilitate and encourage the renewable generation of heat by providing subsidies for producers of heat from renewable sources such as biogas;
  • the deployment of district heating schemes in areas of high heat density by encouraging property developers to include the potential for these schemes in their planning for new projects; and
  • encouraging increased deployment of Combined Heat and Power (CHP) plants by providing further financial incentives and targets for CHP.

These measures are being proposed against the background of an EU wide commitment to reduce CO2 emissions and the obligations under the Climate Change Act 2008 requiring an 80% reduction in emissions by 2050 in the UK with the Government to set the first of its five year 'carbon budgets' by 1 June 2009.

Powers to introduce new measures to boost the production of low carbon heat and electricity were included in the Energy Act 2008 by means of changes to the Renewables Obligation, the Renewable Heat Incentive and the introduction of Feed-in Tariffs for small scale low-carbon generation. The Climate Change Act also provides enabling legislation for several energy saving mechanisms including the Carbon Reduction Commitment, CERT and CESP.

Introduction

The Strategy Consultation introduces a new Government target to reduce carbon emissions from homes to a level approaching zero by 2050. The consultation invites views on Government policy and measures to meet this target, with a general distinction drawn between the approach to be taken up to around 2015 and the approach to be taken after this date. The significance of 2015 is that around this date the Government envisages that opportunities for the cheaper type of insulation improvements currently delivered by CERT will be exhausted and that a more radical policy approach will be necessary to deliver and finance more costly improvements necessary to meet the 2050 target.

The consultation document expressly questions the future beyond 2015 of the current supplier-led approach taken by CERT. This is despite the Government's intention stated in the 2007 Energy White Paper to continue with a supplier obligation until at least 2020. At this stage, all options are said to be open for discussion, but it would appear that Government favours delivery by a central body although the arrangements for financing improvements, and the extent to which this will fall upon suppliers, are less clear.

Short-term policies: CERT and CESP

CERT and CESP are two mechanisms which aim to reduce CO2 emissions by promoting energy efficiency in the domestic sector. CERT has been in operation for several years and is an obligation on gas and electricity suppliers (with more than 50,000 domestic customers) to assist domestic customers with improving energy efficiency in their home. Suppliers have to achieve at least 40% of their target by helping households on income related benefits and tax credits. CESP is a new programme and will be an additional obligation on energy suppliers (with more than 50,000 domestic customers) and electricity generators (who generate more than 10 TWh/yr) to promote carbon-reduction measures to domestic energy users. The obligation is expected to cost suppliers and generators in the region of £350 million and was justified by the Government in lieu of the 'windfall' tax that had been called for to remove perceived profits gained from the free allocation of allowances under the EU Emissions Trading Scheme. Measures taken under CESP must relate to households in deprived areas as identified by DECC in the consultation document.

In the short-term, the consultation document proposes that CERT should continue until December 2012 (the current scheme ends in March 2011) but that a more coordinated community-based approach, of a type that will be piloted by CESP, should be adopted to consider the needs of the 'whole household'. The Government indicates an intention to rely heavily on CERT and CESP and similar schemes up to 2015. Only a few other relatively minor energy saving measures are proposed in parallel to these, such as a Government-funded energy advice service to provide tailored in-home advice by independently accredited experts, and an accreditation scheme for installers of energy efficiency equipment. The Government is also considering widening building regulations to require energy savings measure to accompany certain types of building works.

The CERT consultation contains Government proposals to increase the overall CERT target by 20% to 185 million lifetime tonnes of CO2. There are also proposals to provide new incentives to encourage loft insulation and Real Time Display Devices as well as increasing the proportion of a suppliers' obligation that can be met through 'innovation activity' from 6 to 10%. Many of the other features of CERT are not being changed.

CESP will specifically target certain areas of Britain that DECC have pin pointed as most deprived and suffer the highest rates of fuel poverty. While the overall target for CESP has yet to be announced, DECC has proposed that will be split evenly between suppliers and generators. The obligation will be discharged by delivering carbon abatement measures in homes such as providing insulation (loft and wall) and replacing old boilers with more efficient models. Each measure will be allocated a points score related to the amount of carbon which the measure will save. A bonus will be available on top of the individual scores where several measures are delivered in one home or a number of homes are treated in a particular area.

DECC has set out in the consultation document a list of the suppliers and generators that will have an obligation under CESP and the size of their individual obligation. For some of the smaller generators fulfilling their obligation under CESP may prove to be expensive, therefore the Government proposes to allow both a transfer of completed actions (i.e. where completed qualifying actions, for which a carbon score has been obtained, can be transferred to another party) and the ability to trade away a proportion of a CESP obligation to another party to reduce the size of the obligation.

The Government are keen that generators and suppliers work together with community action groups, local authorities and charities when discharging their obligations under CESP. They believe that taking a 'community approach' will enable energy suppliers and generators to identify potential areas for measures, tailor CESP projects to the specific locations and give local credibility to schemes. This approach will be undertaken by the energy companies on a voluntary basis and is not expected to be prescribed in the legislation.

Long-term policy: new delivery and financing mechanisms

More significant policy changes are proposed for the period after 2015 although at this stage the Government is considering general matters of approach rather than specific measures.

Delivery

The consultation document casts doubt on the ability of the supplier-led approach by CERT and CESP to deliver measures after 2015 which will be more costly and increasingly tailored to individual homes. The Government states that it wishes to have an open dialogue about future options, but it appears to be in favour of creating a central coordinating body working to Government-set savings targets, although few details are provided as to how this body will operate.

Financing

As result of the shift from low-cost insulation improvements to improvements entailing higher up-front costs, it is proposed that new financing options will be offered to householders. Whilst Government is open to the option of a supplier-led subsidy mechanism like CERT, it is leaning towards households contributing their own money to invest in energy saving.

Normal commercial finance is seen as unlikely to assist households, and so the consultation presents a number of options, including:

  • the provision of finance by companies such as energy suppliers to cover installation costs using the subsidy mechanisms available;
  • the ability for companies to install equipment and charge customers for their use over a defined contract period; and
  • suppliers offering customers longer-term energy service contracts with arrangements for payment embedded within the customer's energy bill.

Renewable Heat Incentive and Feed-in Tariffs

The consultation invites views generally as to ways in which small scale heat and energy generators can be supported financially. The consultation document supports the use of the Renewable Heat Incentive powers contained in the Energy Act 2008 to promote renewable heat generation and the role of feed-in tariffs to promote small-scale low carbon electricity generation.

However, the consultation questions whether the current ability of suppliers to install small-scale generation technologies and count them towards their CERT targets should be continued once these measures are supported by a renewable heat incentive or feed-in tariff regime.

District Heating

The consultation document considers the future role of district heating schemes – a scheme whereby the heat for an area is produced centrally and hot water or steam is transported to the buildings through a network of pipes. DECC's current view is that the lack of district heating experience in the UK coupled with the relatively high cost of installing new equipment and the long pay back period means that district heating is not an attractive option at present. The Government is clearly at a relatively early stage in its thinking and is undecided as to whether a separately regulated heat market should be established due to the regulatory barriers that currently exit. The consultation document invites views as to the commercial and regulatory barriers and how these might be best overcome.

Combined Heat and Power (CHP)

The consultation document considers the role of CHP as vital in helping the UK meet its emissions reduction targets and increasing the use of renewable energy. CHP can save energy, reduce carbon emissions and lower fuel costs when compared with the separate generation of heat and electricity. A general distinction is made between renewable CHP and fossil fuel CHP for the purpose of financial support.

CHP is currently supported by a number of existing policies, including favourable allocations of allowances under the EU Emissions Trading Scheme and an exemption from the Climate Change Levy. For renewable CHP, Renewable Obligation Certificates can also be acquired. Enhanced Capital Allowances are available for spending on qualifying plant and machinery.

The Carbon Reduction Commitment will introduce carbon trading for large non-energy intensive industries and, under this scheme, heat exported from CHP plants will be treated as if it were zero carbon, even if it comes from fossil fuels, so acting as another policy that will support the deployment of CHP. Electricity exported from CHP will, however, be treated no differently from other grid electricity.

The consultation invites views on whether any further measures are required to provide sufficient support for CHP as it has been suggested that in addition to supporting CHP through the long-term carbon price, the Government could send a strong market signal by setting new targets for the growth of the CHP sector.

In terms of fossil fuel CHP the consultation warns that as electricity generation overall becomes less carbon intensive, the relative advantages of CHP powered by fossil fuels will reduce, and that there may be a point at which this type of CHP should not receive further incentives.

Next Steps

The Heat and Energy Saving Strategy consultation and the CESP consultation require interested parties to submit responses by 8 May 2009. Once the CESP consultation is completed, the draft Statutory Instrument will be laid before Parliament and debated in both Houses. Once the Order has been approved it should come into force in early Autumn 2009.

The CERT consultation requests that responses are submitted to DECC by 14 April 2009. This consultation only applies to the CERT scheme that ends in March 2011 (the arrangements after March 2011 are contained in the Heat and Energy Saving Strategy Consultation). After considering responses, the Government will lay before Parliament a draft Order amending the existing CERT Order, with a view to it coming into force in Summer 2009.