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While the UK has a history of district energy going back over 60 years, there has been a big growth in interest in the past five years or so on the part of energy companies, planners, central government, and certain types of clients, underpinned by a technology that continues to advance in interesting ways. BSRIA has therefore decided that an in depth report on the UK market is needed. In many ways the history of district energy in the UK has appeared very different, depending on whether one is looking at residential or non-residential buildings. This is a reflection of the different social and economic drivers at work. One of the most intriguing questions which this report aims to answer is whether changing conditions mean that these sectors will begin to converge. In the non-residential institutional sector, district energy is now firmly established with more than 100 of the 250 largest hospital sites in the UK using Combined Heat and Power (CHP) with district energy and cooling, and about 15% of Universities and colleges deploying similar schemes. This means that district energy has arguably reached 'critical-mass' in this segment, with the technology and the benefits of district energy well understood. For a private client with well-balanced requirements for heating and cooling the payback period can be as short as 2-2½ years. Consequently, there is a readiness to extend existing schemes and implement new ones. The majority of major commercial city centres in England also have at least one district energy scheme either in operation or planned.
As far as residential heating is concerned, the UK still has one of the lowest penetration rates in Europe (less than 1% of current UK housing stock based on BSRIA estimates, though the share of non-residential heating is somewhat higher). Some aspects of the country's demography are favourable, such as the high level of urbanisation and the high proportion of older buildings where it is difficult to achieve major improvements in energy efficiency through insulation and similar measures alone. There are also formidable barriers.
• Relatively mild winters and temperate summers, making both heating and cooling less urgent priorities than in many other countries on similar latitudes • A high proportion of low-density housing, making connection to heat networks more expensive • A high proportion of owner-occupied housing-stock, rendering the process of converting existing housing to district energy more complex, and investment financially riskier • In terms of new housing, private developers exert huge influence and have so far generally been suspicious of district energy as a technology that is at best unfamiliar and at worst one requiring both significant up-front investment and long term commitment, neither of which fits well with their preferred business model • A recent history of relatively cheap and plentiful carbon-based energy resources, with coal succeeded in the 1970s and 1980s by natural gas, which has meant that the UK has not faced the same level of challenge from energy costs or energy import dependency as have some other European countries.
Fracking of shale gas may, if successful in overcoming practical and environment obstacles, further extend the 'tradition' of relatively cheap energy.
The low penetration of residential district energy has until recently risked being seen as self-perpetuating, with a low general awareness of the technology and of its potential benefits, and a shortage of skills and industry expertise resulting in both higher costs and too many poorly implemented schemes. After reaching a nadir in the 1990s, there has been a definite revival in the momentum of the UK residential district heating market in the past decade or so, though this was stalled at least temporarily by the recession that began in 2008 which is still casting a shadow over the UK economy.
Key factors behind this renewal of interest include the fact that:
• With the UK committed to an 80% reduction in greenhouse gas emissions by 2050, district energy has come to be widely seen as one of the key means of achieving major reductions in emissions, through a combination of improved efficiencies and better use of renewable energy
• Higher energy prices, set against stagnant or falling incomes, especially in the poorest segment of the population, have raised the profile of fuel poverty as a major concern. The result has been a raft of incentives and initiatives both from the UK's central government and from the devolved national governments and assemblies which encourage district energy either directly or indirectly. Key amongst these have been:
• Direct financial incentives for certain types of energy production (some of which are relevant to heat networks)
• Practical support and targeted funding from central government for specific heat network projects
• Potential of wider funding through the UK's Green Investment Bank and from the European Investment Bank
• Planning frameworks requiring energy-efficiency measures as a prerequisite for planning consent, with district energy potential being the most cost effective means of achieving this in many cases.
• Tightening of building regulations
• At the same time, the prolonged recession since 2008 has severely constrained the ability of central or local government to support district energy financially, especially given the high levels of initial capital investment needed.
There are now a range of Energy Service Companies (ESCOs) and consultancies active in the UK with a substantial track record in supplying and operating heat networks – in some cases encompassing experience in other countries where heat networks are more embedded, and which have the financial resources to commit to projects which will have a very long-term return on investment. While four major ESCOs account for a majority of the market, there are also a significant number of smaller providers, including some important "local" ESCOs. Growth; BSRIA believes that the residential market is now growing at a faster rate than at any time in recent decades. If current market trends, policies and incentives continue, the residential market will continue to grow, from a 2012 penetration of about 0.7% of all dwellings, to reach about 0.8% by 2105 and about 1.3% by 2021. While modest in absolute terms, this would represent a near doubling of the number of domestic connections in the space of 8 years, the same increase in numbers as was achieved in the previous 60 years. At this rate of expansion, it would still take until the mid to late 2040s for the UK to reach a penetration of about 14% of all homes - the kind of level seen by many as achievable.
The report looks at some factors which might accelerate this growth and others which could hinder it. Overall, BSRIA expects the value of the total UK district energy market to rise from about £350 million in 2010 to about £480 million in 2015, in spite of a recession that was especially severe in the early part of this period. Given the high proportion of older houses in the UK – well above the European average - and given that the oldest houses expend more than twice as much energy to heat the same area as the newest houses, heat networks will need to incorporate a significant proportion of older houses in order to help meet energy savings targets. A further significant finding is that growth in the short term is likely to be concentrated disproportionately within new privately-funded developments, which account for more than 80% of the new heat networks identified in the course of this study, as opposed to existing ones.
This preponderance is linked to a second salient factor; that development is disproportionately concentrated in Greater London, which with 13% of the UK's households, accounts for a clear majority of all new heat networks. In this context, it is significant not only that the Mayor of London is actively supporting heat networks, but that the devolved national governments in Scotland, Wales and Northern Ireland are each either pursuing policies to promote heat networks or investigating their potential. This leaves the regions of England more reliant on a combination of central government, local authorities and private developers to drive district energy forward. Some Potential Policies ; Based on the study, we believe that the following measures, planned or proposed, will have a major positive impact on the development of heat networks. Grants and Support and Financial Incentives; Until the UK heat market gains "critical mass" – probably at several times the current size, there is likely to be a continuing need for financial incentives and support either targeted specifically at heat networks, or otherwise likely to benefit them. This includes both incentives for the use of renewable energy sources, such as biomass, but also similar support for systems such as gas powered CHP, which, while not strictly renewable, result in substantial reductions in energy waste and unnecessary CO2 emissions. Standards and Regulation; The current initiative to arrive at standards agreed by the industry needs to be completed as soon as possible, to bolster consumer and supplier confidence and to enable networks to grow and interconnect in future, and also to ensure that all work is carried out to a requisite standard, and that heat networks deliver the intended benefits. Guidelines and codes of practice will also help local authorities and other parties to navigate the potentially complex process for negotiating and managing contracts for the successful implementation and operation of heat networks. A system of at least voluntary regulation of aspects such as pricing and service levels will also give both consumers and suppliers more confidence. Planning; Strengthening of the framework and guidelines already in place will make it easier for planners to ensure that heat networks are implemented as part of new developments where needed.
Learning Lessons from Overseas; While conditions in the UK are different to those in most continental European countries, some of the key positive lessons include:
• The importance of a consistent policy over time to instil confidence in suppliers, consumers and investors, given the potentially lengthy payback period of heat networks
• The importance of economies of scale, using larger or interlinked networks to provide the degree of capacity and flexibility
• The potential power of policies such as zoning, effectively obliging consumers to convert to district energy over time. While such a policy may not prove acceptable in the UK, for example for social or political reasons, it is one course of action that is most likely both to increase usage while reducing investor risk and hence cost.
Advances in technology; While all areas of technology associated with district energy storage are likely to see at least incremental improvement, the following are likely to have the biggest potential impact:
• Improved processes for the creation of biogas and biofuels. This will make these low or zero carbon fuel sources more commercially viable. • Improvements in thermal storage and energy storage in general. This will help networks to serve consumers whose demand varies greatly over time, and also make it easier to utilise energy sources which are themselves inconsistent and unpredictable • Developments in fuel-cell technology. In the longer term, this will provide a further source of relatively low-carbon energy.
Conclusion; While private district energy networks have been strong for some time, there has been a definite revival of interest in district energy in the residential and commercial sectors in the past 5 years or so The next 2-3 years are likely to prove a crucial turning point. Decisions taken by central government and regulatory bodies, along with the state of the UK economy, of the energy market, and of the importance attached to climate change, are all likely to have a critical effect on whether growth in heat networks continues to be gradual, in which case the UK industry will remain as a low single-digit percentage of heat supply, probably for at least another two decades, or whether it reaches "critical mass" at which point both investors and consumers – both private and commercial, gain confidence and the industry can expect to grow more rapidly through normal market forces. One development that is helping to accelerate this is the growth in large schemes in major cities, especially in London, which combine substantial commercial and residential development, and which help to enable residential developments to exploit the momentum and the economies of scale which are already available. Even at continuous compound growth of 10% per annum the UK would take almost 30 years to reach the level of penetration that other reports have describes as realistic, i.e. about 14% or more. To reach this level much more quickly is likely to require, at least initially, more substantial incentives than have so far been agreed to.
A. Executive Summary
D. Market Overview
E. Market drivers and obstacles
F. Market structure
G. Supply market analysis
H. Technology trends
I. Key Lessons for the UK Market from Other Countries
J. Opportunities and forecast
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