Economies of Scale

In 12 years, the UK will have to generate seven times more energy from renewables than it does now. Microgeneration schemes offer a solution, and one that could prove lucrative for businesses and households. Ken Whittaker reports

In January this year, the EU put forward its wide-ranging proposal for climate action. This built on previously announced targets to reduce CO2 emissions by 20% by 2020 and to increase the share of renewables to 20% by the same date.

Today, renewables account for just 8.5% of final energy consumption.

The January proposal broke the overall aims into national targets and also contained measures for the development of the existing Emissions Trading Scheme, notably including a requirement for the power sector, that all emissions allowances should be auctioned from 2013.

The targets for renewables represent a massive commercial, political and technological challenge.

The renewables targets set out by the EU vary widely by country. Sweden has the highest target (49%), although this is from a very high base. Perhaps the greatest change is faced by the UK, where 15% of all UK final energy demand must be met through renewables by 2020.

This will transform the UK energy industry, given that currently just 2% of UK energy comes from these sources. The scale of the task is truly apparent when we consider that 15% of final energy demand is likely to mean that 30% or more of electricity generated needs to come from renewables. The crux of the issue is that, in just 12 years, the UK has to generate more than seven times the amount of energy from renewable sources than it does now. In other words, the UK will need to newly install six times the capacity that is already in place.

This is a massive undertaking and presents significant economic, logistical and technical challenges.

There is no silver bullet to solve this problem. Rather, policy makers, energy companies and businesses will need to consider all options. Large-scale developments, such as wind farms or tidal barrages, can make a major contribution to the target. However, planning constraints and environmental concerns may mean that not enough projects come on stream by 2020. Investment in microgeneration can not only increase the installed renewables base but also bring benefits to a much wider range of businesses and consumers.

In the UK, a mass of legislation will accelerate change for the energy industry. This includes bills currently in Parliament on energy, climate change and planning.

Strengthening the renewables obligation, addressing offshore electricity transmission and streamlining the planning process for major infrastructure projects are among the measures that could give a kick start to large-scale wind power and other developments.

But, even with all of these new measures in place, the biggest projects will still face opposition and raise genuine dilemmas. For example, a tidal barrage across the Severn estuary could, some have argued, deliver up to 5% of the UK's energy requirements. The downside is that the potential scale of the environmental impact is also enormous.

Large-scale wind power looks like the most obvious way for the UK to achieve its target for renewables. But similar issues still apply. The proposed Infrastructure Planning Commission - envisaged in the Planning Bill - should help to move forward more projects. But local opposition still means that wind power alone is unlikely to deliver all of our renewable requirements by 2020.

Some, more general, environmental concerns remain - for example related to the flight paths of birds. Moreover, there have been some recent defence-related concerns, with suggestions that turbulence from turbine blades could blind radar to aircraft approaching the coast. The findings were deemed so serious that NATO and the US military are now conducting their own investigations into the phenomena.

Globally, there have been great strides in solar power, driven by technical innovation - such as the advent of thin-wafer technology - economies of scale (with new manufacturing facilities that could have annual production of 1GW or more) and shifts to lower cost destinations, notably China. But, largely due to the climate and perhaps also regulation, solar power in the UK has been imaginatively applied but not widely adopted.

The UK has some of the world's most favourable wave and tidal stream conditions.

This is also an area where there has been positive R&D work and there are several UK-based technology companies. The shortage of large-scale projects may be due, at least in part, to the lack of an appropriate commercial plus regulatory framework to turn innovation into implementation.

Even the most technologically established of the large-scale renewable power generation schemes, hydro-electric power isn't the silver bullet. It too comes with challenges when it comes to bringing new capacity online by 2020. Many of the most obviously suitable sites for dams and turbines have already been developed and potential new sites are fraught with environmental issues and inevitably would be subject to long planning enquiries.

The role of business
There could be a tendency for many UK businesses to view these developments in a negative light. A dash for renewables may well bring higher electricity prices, at least until economies of scale and innovation drive down costs. The impact on energy costs is compounded by the rising price of oil, with prices passing £50 per barrel for the first time, and set to rise further still in the long run.

So, it seems, business either has to cut its energy requirements (demanding a significant investment in new manufacturing processes and equipment) or has to accept passing price hikes on to customers, which in the face of intense competition from low-cost developing nations is not going to be attractive.

Equally pressing is the need to safeguard energy supplies, so any strategy to reduce the impact of UK power price rises and reduce the carbon foot-print of the energy we use by sourcing green power from other EU nations will sit uncomfortably with both business and legislators.

However, microgeneration presents the potential for businesses to benefit from green power and make a real contribution to reaching the steep renewables target by 2020.

To achieve enough power from microgeneration schemes will demand a significant and comprehensive nationwide adoption of this technology and it certainly won't be easy. However, in the face of the challenges that hamper larger-scale projects, microgeneration is set to become an increasingly important part of the solution.

For one thing, it brings into play a large number of potential brown-field sites with lesser environmental concerns than for large-scale projects in remote areas.

Additionally, while microgeneration may not benefit from the scale advantages of, say, large wind turbines, it would reduce the need for new transmission networks and also reduce energy losses by locating production much closer to consumption.

Manufacturers and architects are also getting better at integrating renewable and energy-saving equipment into the built environment. For example, companies like DuPont have developed solar panels that can be part of the fabric of the building.

Furthermore, these microgeneration schemes provide a potentially lucrative revenue stream for businesses and households, enabling them to offset price-inflation from rising energy bills by producing much of the power they need themselves, and potentially selling excess capacity back to the grid.

Overcoming issues
Why do we not see more micro-generation today? Arguably, there are overlapping technology, policy and commercial issues to be overcome.

The technology challenge can be seen as a bit of a chicken-and-egg problem.

Economies of scale and learning effects from high-volume production will drive down costs, but many businesses and consumers may wait for costs to fall first before they opt for microgeneration. However, there continue to be advancements in CHP and renewable technologies, in part driven by the growth of the overall global market for clean technologies.

Other enabling technologies will also be of great importance. Notably, the wide scale roll-out of smart meters to businesses and households will allow energy companies to track production and consumption, with associated tariffs and payments, in real time.

This will facilitate the emergence of a new breed of energy "prosumers", who produce and consume their own energy but sell the excess to the grid.

If this happens on a wide scale, utility managers will face the highly complex challenge of managing local networks with thousands of producers generating variable amounts of output. Balancing supply and demand in real time will require precise information - again smart meters can help - and sophisticated, intelligent grids where energy flows can be controlled flexibly and at a granular level.

But, even with these technological improvements, there need to be appropriate commercial incentives to give microgeneration a kick start, and this is one area where the right regulatory framework can help.

One option that is gaining considerable support is for the adoption of feed-in tariffs which would offer guaranteed prices for electricity produced through microgeneration. Arguably, this has led to a much faster and wider take up in countries such as Germany than has been the case in the UK.

Looking ahead, there is potentially a significant green dividend for businesses and for UK Plc. Individual businesses can insulate against rising fossil fuel prices, and develop new revenue streams. Combined with measures to improve energy efficiency, this could have a strong, positive financial impact.

They also stand to gain from the positive publicity associated with a greener approach. Looked at another way, many organisations, serving both B2C and B2B markets are coming under increasing pressure to demonstrate genuine green credentials.

For the UK economy as a whole, wide-scale adoption of energy efficiency and renewable technologies could improve our competitiveness and also support the development of a new green technology industry - an area set for fast, global growth for decades to come.

Ken Whittaker is director of AMI and Intelligent Grids at Logica
www.logica.co.uk

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