Carbon Reduction Versus Affordable Warmth - The Real Challenge For Sustainable Development

by Yan Evans, BEng(Hons), CEng, EurIng, MCIBSE, MEIT, MEI
Director of ENER-G Switch2

Government and European Legislation, Building Regulations and planning requirements are driving the residential new build sector to consider and adopt technologies such as bio-diesel boilers, biomass boilers and heat pumps to support the delivery of low carbon developments. However, some of these more ‘exotic’ solutions have high fuel costs, compared to traditional technologies or energy efficient natural gas primed technologies like  CHP, and  can require more onerous and costly operating and maintenance regimes.

This is a real challenge for sustainable housing development. How do we achieve the delicate balance of delivering low carbon homes and district heating schemes together with affordable warmth?

The Carbon Reduction Agenda

Building regulations and planning requirements mean new-build projects must drive down carbon dioxide emissions, with increasing stipulations on factors such as:  building fabric, air tightness and the technologies to be deployed to generate heat, hot water and electricity on site.  As the Code for Sustainable Homes becomes more stringent, the carbon reduction challenge gets more difficult.

Over the last few years communally heated developments and district energy schemes have re-emerged. As such, multiple residential dwellings, often mixed with commercial and retail properties,  are served by a single energy centre - meeting the needs of diverse heating and hot water loads.  To reduce the carbon footprint of the development, technologies such a gas-fired CHP, bio-mass boilers and bio-diesel fuelled boilers are being used as the lead heating providers, with more conventional gas fired boiler plant  supplementing the thermal outputs during periods of high demand.  Using a CHP unit or bio-mass boiler as the lead appliance means it is sized essentially for the base thermal load. This maximises operating hours and provides environmental benefits from displacing conventional natural gas boiler fuel. In the case of CHP, it also displaces grid supplied electricity. 

Project developers and scheme operators need to be mindful that some of these low carbon/renewable technologies can attract higher operating and maintenance costs as well as higher fuel costs, particularly those operating on bio-mass or bio-diesel. CHP tends to be more economical because it generates both low carbon heat and electricity and is usually primed by lower cost natural gas.  These potentially higher costs have to be factored into the overall scheme operating costs, and either the operating company or residents have to pay.  The challenge is getting this balance right for all parties involved.

Delivering Affordable Heat

In the residential sector, and in particular communal heating and district energy schemes, where there is often a high proportion of social housing, the need for affordable warmth places a ceiling on the unitary price of heat. When the development is entirely residential, with no commercial or retail element, then the balancing act between low carbon and affordable energy delivery becomes extremely difficult and affordability from the resident’s perspective is often overlooked.

A good starting point may be to consider how the heat tariff is arrived at. Generally it comprises a fixed charge and a variable rate.  In some cases the fixed charge can be as much as 60% to 70% of the overall heat tariff, depending on what is factored into the calculation.  For example, it could include: the operation and maintenance of the plant within the energy centre; bulk (utility) meter standing charges; maintenance of the heat distribution pipework; maintenance of the heat interface units and heat meter within each apartment; metering and billing administration costs, as well as the cost to pump the heat from point of generation to point of use.  It might also include bad debt provision and a ‘sinking fund’ to cover the cost of replacing major items of capital plant at end of life.  The variable rate takes into consideration the cost of primary fuel and the efficiency of the district heating network up to the point of heat use.

This level of fixed charge is in line with other European countries, in particular, Germany and Denmark, where the district heating market is far more mature and district energy is the norm.  The UK market will need to acknowledge and accept such a pricing structure, particularly if legislative issues drive projects down the communal heating/district energy route.   

A popular method of setting communal heating scheme energy tariffs is to benchmark against a competitor fuel, such as gas or electricity.  This enables the landlord or scheme operator to offer a competitive price for the heat delivered by the communal heating plant when compared to alternative utility suppliers, but can be extremely risky. This may not bear any resemblance to the actual cost of producing and delivering the heat to the point of use, as it does not take into consideration critical factors such as those outlined above.  The danger is that payment for heat by the residents may not cover the cost of the primary fuel supplied through the bulk meter. An actual cost pricing methodology offers greater accuracy and provides a model that is application specific.

The ESCo Challenge

Increasingly, specialist Energy Services Companies ESCo are being engaged to operate communal heating and district energy schemes, typically over 15 to 20 years, taking on responsibility for administering  metering, data validation, billing and debt management services.  This presents a three-way financial challenge involving developer, Housing Association and ESCo.

In order for the scheme to be financially viable for the ESCo, it must deliver a particular  Internal Rate of Return (IRR) . For example, the ESCo may make a one-off 'lease' payment to the developer for the energy centre and district heating infrastructure in return for the right to sell energy to residents and other consumers on the heat network.  The scheme attracts fixed and variable operating costs and there is ‘ceiling’ for the residential heat tariff, above which affordable warmth could not be delivered.  It is worth noting that the sale of heat still remains unregulated in the UK. 

The Challenge and Solution

Delivering a low carbon, affordable heat supply requires a fine balancing act, often made more challenging when the required return on investment by the ESCo has to be considered as the ESCo's IRR criteria and the available heat tariff may not be financially aligned.

What’s the solution?  Unfortunately, there is no silver bullet and every scheme needs to be technically and financially modelled to determine the optimum solution for all parties.  This means that registered social landlords, local authority planners, developers, design engineers, equipment suppliers and ESCos need to discuss the affordability of low carbon generation  early in the development cycle.  The question we must keep asking ourselves is “who really pays for carbon reduction?

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