By James Samworth, Partner, Foresight
Whilst the world continues to strive towards higher renewable energy usage, trying to leave fossil fuels behind, the fundamental challenge remains: renewable energy is simply more expensive than its fossil fuel counterpart. Early adopters, or countries who are diligently implementing renewable mandates by developing renewable projects bear the brunt of these costs, while the laggards of the renewables world continue to burn fossil fuels, keeping short term costs down, getting a "free-ride”.
This plays out very visibly in energy intensive industries such as chemicals and, my former employer the steel industry, where the price of this switch to renewable energy is simply not sustainable. When faced with competition from places with lower energy costs, these businesses cannot compete. However; renewables projects designed with the effective use of heat in mind, including waste to energy, can use resources efficiently and can eventually bring down the cost of energy.
An area that presents a substantial opportunity and where there has been little progress is renewable heat. This is a substantial opportunity for many Energy from Waste facilities, which look with envy at the heat networks available to their Scandinavian peers.
Whilst a few cities in the UK have developed small heat networks - Sheffield, Leicester and Bristol being prominent examples - the country is well behind those such as Denmark and even Russia. If we’re serious about reaching DECC’s objective that 20% of the country’s heat will be from renewable sources by 2030 (we’re currently at 2%), we’ve got a lot of work to do.
Renewable heat through combined heat and power involves a compromise, as taking high quality heat from a power generating process will inevitably reduce the amount of electricity produced. To be physically transported, heat requires complex local networks, creating a credit risk among offtakers. The extra risks for investors in distribution mean that heat must be worth more than electricity on a comparative basis in order for the trade off to be worthwhile. Unfortunately, the existing Renewable Heat Incentive is not aide enough; there are a number of barriers that exist, stopping renewable heat from becoming a viable option.
The basic question is "Who will fund the first mile?”.
The initial stages of a heat network require a substantial amount of upfront capital investment that does not offer attractive returns to investors. After initial construction, the uptake from users is typically slow until the network reaches a critical mass, meaning that any early income would be reliant on a small number of users and their economic stability. The credit risk involved with developing a network with unpredictable revenues requires someone to stand behind the purchase of heat so that generators can be guaranteed some payment until the network reaches an appropriate level of complexity.
Unfortunately, heat does not hold utility status in the same way that electricity and water do, meaning that bilateral wayleave negotiations are often the norm. This often causes protracted "hold-up” negotiations, which can mean that many opportunities to develop heat networks are lost.
There has also been little public education about the benefits of heat networks, leading naturally to some scepticism. Housing developers report that people will pay less for houses if they are built with a heat network installed. This misunderstanding of heat networks in the wider community makes heat networks hard to get off (in) the ground.
The point I’m making here is that for what it will take to graduate heat to an economically viable source of renewable energy, the market cannot do on their own. The returns are too fragile and investors will not shoulder this risk without some help, whether that be credit support, grants or guarantees.
There was good news in the recent budget that £320 million will be made available for renewable heat over the next five years. From what I’ve heard, the government hasn’t yet decided how to allocate this funding, and I believe that they are looking to the market for suggestions. Well, because you asked…
I’d like to see the government using the funds to solve the structural problems in the market that the industry cannot solve itself, like the early stages of networks and heat with utility status. If investors know that they are guaranteed some income with a minimum offtake payment, the risk of pouring capital into the development of a heat network is dramatically reduced and the project becomes instantly more palatable.
Now that we have the promise of some sort of support from the government, £320 million of it to be exact, I hope that the Energy from Waste industry can play its part in making efficient use of the resources we manage, and contribute to the long overdue growth of renewable heat in the UK.