2050 Pathways for Domestic Heat Final Report

Transcription

1 Delta Energy & Environment Ltd Registered in Scotland: No SC Registered Office: 15 Great Stuart Street, Edinburgh, EH3 7TS 2050 Pathways for Domestic Heat Final Report 25 th September 2012 Contacts: Analyst, Director,

2 Report aim, scope and methodology (1) Delta-ee has been commissioned by the Gas Futures Group of the Energy Networks Association to: provide a desk top study on the optimal appliance technology pathways, by property type, based on known and emerging heating technology, required to meet carbon and renewables targets, highlighting the impact on consumers (cost to change and behavioural) and the potential load changes on the gas and electricity distribution networks out to Methodology Delta-ee has developed a residential heat model that explores the above aims through: A housing stock model, segmenting the UK housing stock into 35 segments according to fuel availability and use, age, and building type. For each segment the thermal demand, and how this changes decade by decade to 2050 is defined. A technology performance model, forecasting future cost and performance has been built covering: gas boiler; gas heat pump; low electrical efficiency micro-chp; high electrical efficiency micro-chp; gas boiler + solar thermal; air source heat pump; ground source heat pump; hybrid gas boiler + air source heat pump; biomass boiler; district heating; direct electric (storage) heating. A customer choice model, that incorporates physical fit of different technologies with different parts of the housing stock; customer uptake based on payback and upfront cost; and customer attitudes to different technologies. This residential heat model has been used to determine the future appliance mix under three scenarios 1. Customer Choice allowing the customer to chose based on physical fit, customer economics and attitudes 2. Electrification and Heat Networks Delta-ee defining a pathway where these solutions dominate in Balanced Transition Delta-ee developing a pathway where electric heating, heat networks and gas all play a role in Assumptions Wherever possible, Delta-ee has relied on public / official sources as inputs to its residential heat model. These include DECC energy price forecasts; National Grid forecasts; English Housing Condition Survey (and other equivalents); Zero Carbon Hub; Poyry / AECOM s 2009 district heat report; and various projections for future thermal demand of buildings (including by GL Noble Denton for National Grid). The technology performance model has the fewest available sources (for future cost and performance). Delta-ee has consulted widely, with more than 30 organisations, to develop these assumptions (and for the wider overall report). These are listed on the following slide. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 2

3 Report aim, scope and methodology (2) Organisations Delta-ee has consulted with (in the UK and internationally) include the following We are grateful for the time spent by these organisations by naming the organisation below we do not necessarily imply they endorse our assumptions & approach: AECOM British Gas Bosch Thermotechnology (Germany) CHPA Daikin Daikin (Belgium) Danfoss (UK) Danfoss (Denmark) District Energy Association E.ON Energy Networks Association (Gas & Electricity Futures) Fraunhofer Institute (Germany) Geothermal International Glen Dimplex Ground Source Heat Pump Association Heat Pump Association HHIC Imperial College, London Kensa Heat Pumps Mike King Mitsubishi National Grid Oftec Renewable Energy Association Robur (Italy) Solar Trade Association Solar Twin Sorption Energy SP Institute (Sweden) Vaillant Vital Energi Windhager Worcester Bosch Expertise from within Delta-ee The project has also pulled upon existing Delta-ee international expertise, including that from Delta-ee s on-going research services: Micro-CHP Service Air Source Heat Pump Innovation Monitor GB Microgeneration Research Service We have also utilised our knowledge base from previous research on topics such as gas heat pumps, district heating and the wider residential heating market. About Delta-ee Delta-ee is an energy consultancy specialising in the technologies, markets and policies on the customer side of the meter. We provide consultancy, research services and Summits for energy companies; manufacturers; the finance sector; and policy makers and influencers. For more information, please visit For more information on this report please contact: Jon Slowe, jon.slowe@delta-ee.com Jennifer Arran, jennifer.arran@delta-ee.com, Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 3

4 Glossary of terms Abbreviation ASHP BT CC Combi COP CHP DH E&HN GSHP HHV HWT mchp PB SOFC Full term Air source heat pump Balanced Transition Scenario Customer Choice Scenario Gas Combination Boiler Coefficient of Performance (inthis report used equivalently to SPF Seasonal Performance Factor Combined heat and power District heat Electrification and Heat Networks Scenario Ground source heat pump Higher Heating Value Hot water tank Micro-combined heat and power Pay-back period Solid Oxide Fuel Cell Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 4

5 Contents 1. Executive Summary 5 2. Decarbonising Heat how this report examines the challenge Heating technology options and assumptions Fuel price & carbon assumptions Housing stock segmentation Modelling methodology and scenario development Results 72 Customer perspective 73 Customer choice Electrification and heat networks Balanced transition Carbon and system impacts 105 Comparison 113 Sensitivities 116 Conclusions Policy implications 127 Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 5

6 Key messages New research by Delta-ee, commissioned by the Energy Networks Association (Gas Futures Group) analyses how the residential heating sector can be decarbonised (Government target is for total decarbonisation by 2050). The analysis focuses on the customer, breaking down the 2050 housing stock into 35 segments, and modelling the performance of different heating appliances in each segment. Eleven heating appliances are analysed (by cost, performance & fit with housing stock) many of these are immature (globally and / or in the UK) and future development is uncertain. Key findings: 1. Customer Choice scenario allows customers to choose, based on upfront cost, running cost and fit with the housing stock: Carbon reduction targets for the residential sector will not be met by a combination of reducing thermal demand allowing customers to chose their heating appliance (without government intervention). Even when strong progress is made on low carbon heating appliance cost and performance, and with 75 TWh of biomethane, carbon reductions ( compared to ) of 46% are achieved. Gas boilers continue to be used in 19 million homes, based on their low capital & running costs & excellent fit with UK homes. 2. Unsurprisingly, the Customer Choice scenario fails to meet the 2050 carbon reduction targets - two alternative scenarios are constructed: The three scenarios are compared by their impact on customers (customer economics & ease of retrofit) and their impact on policy (carbon & energy system impact) Customer Choice gas dominates Electrification & Heat Networks A two horse race Electrification and Heat Networks (E&HN) assumes virtually all homes use either electric heating (heat pumps & direct electric) or heat networks, fed-by zero carbon heat. There is no role for gas. 96% reduction in carbon emissions (from levels). Balanced Transition (BT) has an approximately even split across three heating types: (1) heat networks (dense urban areas & new build), (2) low carbon gas appliances (suburbia), (3) electric heating (some suburbia, rural and new build). This includes 75TWh of biomethane. 90% reduction in carbon emissions 3. Sensitivity analysis on levels of biomethane, electricity grid decarbonisation & carbon intensity of heat supply for district heat shows noticeable but small falls in carbon reductions for all scenarios. Balanced Transition multiple solutions Implications: Balanced Transition can be achieved with less government intervention (and at less cost) than Electrification & Heat Networks, while achieving 90% (rather than 96%) carbon reduction from today to 2050: High efficiency gas appliances, have lower running costs (and in some cases upfront costs) for certain parts of the housing stock than electric alternatives, in addition to easier retrofit into existing homes with gas boilers. This gives them stronger customer appeal, and potential for a lower level incentive. A greater mix of technologies, has lower impact on the energy system the addition of hybrid heat pumps and gas appliances to the mix, results in a additional peak electricity generation demand 50% lower than under E&HN, and district heat is focused solely on high density housing (rather than stretching into suburbia) limiting costs. Key: further from the centre = desirable Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 6

7 Keep a variety of options open This report suggests that keeping a variety of options open to decarbonise heat gives lower risks, and potentially a lower cost path that pursuing a narrower end point. Although BT achieves a 90% (rather than 96%) carbon reduction from today to 2050 it has two key benefits: The scale of the challenge Under BT 12million less homes mostly in suburbia - need to undergo transition from gas to electric heat pumps or district heat It avoids moving an additional 12 million homes completely away from gas where the highest customer costs are imposed. Lower impacts on the energy system -, additional peak generation demand grows to 24GW, rather than 48GW, as under E&HN. Costs (discounted, opex and capex) to re-enforce the electricity distribution network are 8bn lower. Part of the 4bn cost to shut down all of the gas network is avoided. However success in both scenarios requires 1) Reduce thermal demand Delta-ee has assumed 21% reduction in thermal demand from current buildings interventions such as the Green Deal will be required. 2) Development and wide-spread expansion of district heat growth of district heat will require major intervention under both scenarios (more so under E&HN). It will require a new regulatory framework (potentially mandating that customers connect). 3) Need for technology, product & supply chain development - to ensure efficient appliances are brought to market & can be successfully retrofitted to homes (including efficient gas appliances under BT). 4) Decarbonisation of electricity grid, decarbonised heat supply for district heating and biomethane growth (for BT) are all required. 5) Major energy system upgrades & additional peak electrical generating capacity These impacts are lower in BT but upgrades to the electricity distribution system will be required, and decisions will need to be made about decommissioning parts of the residential gas grid. Flat - Gas ( ) Flat - Gas (Pre 1944) Semi - Gas ( ) Semi - Gas (Pre 1944) Terraced-Gas ( ) Terraced - Gas (Pre ) Detached - Gas ( ) Detached - Gas (Pre 1944) Flat - Electric ( ) Flat - Electric (Pre 1944) Semi - Electric ( ) Semi - Electric (Pre 1944) Terraced-Electric ( ) Terraced - Electric (Pre ) Urban / Suburban Mainly rural Mainly rural/ some urban Mixed housing Detached - Electric ( ) Detached - Electric (Pre 1944) Flat - Other (Pre ) Semi - Other ( ) Semi - Other (Pre 1944) Terraced-Other ( ) Terraced - Other (Pre ) Detached - Other ( ) Detached - Other (Pre 1944) 2015 emissions from residential heat (Thousands of tonnes C02/yr.) Hard to switch: Significant incentives needed Incentives for DH: Low carbon if stay electric Want to switch: Low level incentives needed 0 2,500 5,000 7,500 10,000 12,500 15,000 2% of carbon emissions in M homes 2.6M homes 1.3M homes New build: Driven by regulation 9M homes (by 2050) The scale of the policy challenge becomes clear when we look at the existing housing mix gas dominates, and is the biggest contributor to residential carbon emissions. Moving gas customers from boilers to low carbon technologies will be essential to get close to 2050 carbon reduction targets Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 7

8 The scale of the challenge to reduce carbon emissions ~80% of carbon emissions from residential heating in the UK are from on-gas properties, the vast majority of these are in suburbia. The slow turnover of housing stock means these properties remain the challenge in 2050 Major changes in the UK heating appliance mix have historically required government intervention or customer pull 1950 Intervention Clean Air Acts Customer pull Town gas to natural gas Central heating 2012 Condensing boilers DECC s target is full decarbonisation of residential heat by Growth in biomethane and reducing thermal demand alone will not meet this target (or get close to it). A major change in the heating appliance mix is therefore required. There are many potential low-carbon heating appliance options but technologies & markets are, in most cases, very immature today There are no examples, globally, of large-scale switches away from gas boilers for existing buildings although some smaller-scale switches are emerging in a few markets. Volumes of low carbon heating appliances are, in nearly all cases, very low (and therefore costs are high) There are massive opportunities for learning and innovation in retrofitting low carbon heating technologies to existing UK homes Where gas is available, gas boilers are an excellent fit with customer wants Low capital cost Reliable, low maintenance High efficiency & low-cost fuel (DECC forecasts relatively stable future gas costs) Compact Excellent fit with UK heat distribution systems (high temperature radiators) Easy to use instantaneous hot water Large-scale switching away from gas boilers will be challenging and require (strong) interventions Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 8

9 How this research explores the challenge to decarbonise residential heat 1 This research was designed and carried out from the customer point of view focusing on the challenges of retrofitting different technologies to different parts of the housing stock Detailed housing stock segmentation segmenting the housing stock according to age, house type, and fuel type 35 segments in total. We used this as a basis to analyse the fit of different heating appliances to each segment of the housing stock We also examine the impact of different heating appliance mixes on policy makers and the wider energy system The star diagram below is applied to three scenarios for the future heating appliance mix. 2 Technology development assumptions for cost, performance and retrofit challenges of 11 different heating appliance technologies through to 2050 Carbon 3 4 Energy and carbon assumptions using DECC / National Grid and other assumptions as necessary* Running cost, capital cost of each heating appliance technology in each housing stock segment as well as the practical retrofit issues for homeowners Customer economics Energy system impact 5 Customer choice scenario modelling what heating appliances will customer in each housing stock segment chose, decade by decade to 2050, based on Delta-ee market research (separate to this study) Ease of retrofit 6 Creation of two alternative scenarios based on detailed insight of the fit of different technologies in each part of the housing segment. The scenarios that are developed and modelled are customer-led (focusing on the customer impact, shown above), with the consequential policy impacts then examined. Stakeholder consultation: This research drew upon Delta-ee s market research with customers, international expertise in low carbon heating systems and the UK microgeneration market. In addition, we consulted with over 30 companies from the UK & continental Europe including the heating industry; energy suppliers; district heating companies; researchers such as universities and R&D institutes. *Base case assumes 75 TWh of biomethane available in residential sector by 2050 less than one fifth of current residential gas supply for heating Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 9

10 Technology options to decarbonise heat Many technology options exist, but there is uncertainty about their scope for cost reduction, performance improvement and their widespread retrofitability to the UK housing stock Our assumptions for each technology were based on global and UK volumes increasing and continuous learning & innovation. On-going industry investment and engagement is necessary to increase volumes and maximise the learning opportunities. This will require positive signals from government without this industry investment may not be forthcoming Electric Heat Pumps 1. Will under our base case - result in higher upfront costs and running costs than gas technologies 2. Requires an outdoor unit, hot water tank and typically some modifications to the heat distribution system (radiators + possibly pipework). 3. Will be more challenging in homes with very high heat demands (as a 3 phase connection will be required) Electric storage heaters may be an effective solution for homes with very small thermal demands (e.g. new flats) Micro CHP 1. Carbon emissions critically depend upon assumptions for marginal electricity that is displaced 2. Have large (but uncertain) potential for cost reduction and performance improvement 3. Are a relatively straightforward retrofit (generally larger / heavier than a boiler & requiring hot water storage tank) produce high flow temperatures. Gas heat pumps 1. Are only emerging today, with high (but uncertain) potential for cost and performance improvements 2. Will bring similar (but slightly lower) retrofit challenges to electric heat pumps potentially without requiring a hot water storage tank Hybrid heat pumps %* of heat demand from ASHP, rest form boiler 2. Flexibility in operation helps to avoid electricity system impact 3. Simpler retrofit than pure heat pumps Solar Thermal 1. Relatively straightforward retrofit, providing south facing roof and hot water storage tank District Heat 1. Requires a district heating connection into a house and a hydraulic interface unit (like a boiler), without hot water storage tank. 2. Flexible heat source from energy centre (can be local or remote from residential customers) 3. No experience in UK in connecting existing owner-occupier homes to district heat networks (commercial risk in building new schemes). Biomass 1. Some retrofit challenges - requires fuel storage (manually or automatically fed to boiler) and a larger heating appliance 2. Good fit with high flow temperatures in existing heat distribution systems. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 10 *Different variants are possible producing more heat from the ASHP

11 What happens if customers are allowed to choose? Customer Choice Gas dominates Number of appliances (%) 100% 75% 50% 25% 0% Heat networks Electric Gas * * All assumed to be oil in this report Without any intervention, customers chose gas appliances less than 1% of gas customer switch to an alternative fuel Existing homes Gas heating appliances offer low to moderate upfront cost, and low running costs Micro-CHP grows on the back of product maturing and electricity prices rising substantially faster than gas prices. Gas heat pumps mature but gain minimal market share Some switching away from oil New build is dominated by heat networks and electric heating (driven by regulations). Carbon targets missed but low impacts on customers and the wider energy system Carbon By definition of this scenario, customers chose low capital cost, low running cost appliances that are relatively straightforward to retrofit. Carbon reductions arise from growth in biomethane (75 TWh out of 327 TWh or 23% of total gas consumption for residential heat), reduction in thermal demand and some growth in lower carbon appliances However, carbon emissions only fall by 46% in compared to levels. There is some growth in peak demand on the electricity system from growth of heat pumps (in new build and off-gas grid properties), but this only amounts to 8 GW. Heat networks grow but nearly all in new build. Customer economics Ease of retrofit Energy system impact Key desirable impacts are furthest from the middle Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 11

12 Exploring customer decision making focusing in on post-war ongas semi-detached homes Key customer challenges, in an example segment 1. Awareness is low, and low carbon heat is an emerging market in the UK: Customers are largely ignorant of low carbon heating technologies and our market research shows most are very cautious of new heating technologies. This is important today, but we assume attitudes can shift completely in a couple of decades. 2. The retrofit challenges for many low carbon heating technologies are substantial: for many homes this challenge can be overcome, but for others it will always remain a significant barrier. Overcoming the challenge requires both homeowner acceptance of these challenges, and major development of the UK installer network and heating supply chain. 3. Gas appliances have, under our base-case assumptions, substantially stronger customer economics than alternative technologies: Gas boilers have, by some way, the lowest upfront cost even factoring in large increases in global volumes for other technologies. DECC projects electricity prices rising more than gas this results in lower running costs for gas technologies (factoring in performance improvements for gas, micro-chp and electric heat pumps). On-gas, semi-detached, built in This shows the customer perspective (based on our model outputs), decade by decade, for different heating appliances in one of the largest and most challenging housing segments to decarbonise. The vast majority of these homes are in suburbia (Thousands) Upfront Cost ( ) Boiler cost Cost ( ) Annual Running Costs Boiler running cost Notes 1. Uncertainty exists in these assumptions they represent our best view based on stakeholder consultation 2. Our district heat model analyses costs on a per-dwelling basis for a scheme of 1,000s of homes (mixed loads are incorporated, as is a perfect day one connection rate). The network costs are amortised over a 30 year period at 10% discount rate. The capital costs are then split across an upfront cost for the homeowner (set just above a gas boiler) with the annual bill comprising the heat cost and the rest of the capital cost Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 12

13 What happens under an electrification and district heat only scenario? Under CC, carbon targets are not met, so Delta-ee has developed two alternative scenarios by fixing the 2045 end point (through segment by segment analysis of opportunities for different technologies in each part of the housing stock) and developing realistic pathways. Electrification & Heat Networks no future role for gas Number of appliances (%) 100% 75% 50% 25% 0% Gas Heat networks Electric Significant interventions will be required to shift customers away from gas appliances and onto either electric heating or heat networks. Similar to the DECC heat strategy, which sees not future role for gas, and almost completely decarbonises heat: 61% homes on electric heating / heat pumps 34% of homes adopt district heat (and heat networks have to reach into suburbia). All homes switch away from oil and gas 5% adopt other solutions biomass as the only solution for some hard to heat homes. Delivers carbon targets but at high cost to customers By definition of this scenario, all customers are moved to electric heating and heat networks. Although this delivers on carbon targets (96% reduction*) it imposes high cost on customers, involves challenging retrofit issues, a major roll out of heat networks, and results in major impacts on peak electricity demand. There is significant growth in peak demand on the electricity system from growth of heat pumps an additional 48GW of capacity will be required, along with major upgrading of the distribution network ( 16 28bn to 2050, including that for electric vehicles and PV) and shut-down of all gas networks. Significant growth in heat networks even into areas with less dense housing (All urban, and some suburban homes). Customer economics Carbon Ease of retrofit Energy system impact Key desirable impacts are furthest from the middle * Reduction in compared to Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 13

14 What happens under a more balanced scenario? Under E&HN scenario, there are some extreme impacts, on both the customer and on the system. Delta-ee has developed the Balanced Transition scenario, as a more compromised position, which can achieve significant carbon results at lower cost to customer and the energy system. Balanced Transition multiple solutions Number of appliances (%) 100% 75% 50% 25% 0% Heat networks Electric Achieves significant carbon reductions while minimising impacts on the customer and the energy system. BT imposes higher costs on customers than CC, but for certain customer groups (primarily suburban customers currently on the gas network) lower than E&HN. It offers a wider range of technologies to make retrofit less challenging. Delivers significant carbon savings (90% reduction*), but this is dependent on 75TWh of biomethane being available. There is growth in peak demand on the electricity system an additional 24GW of capacity will be required, along with upgrading parts of the distribution network ( 8 14bn to 2050, including that for electric vehicles and PV) and shut-down of parts of the gas networks. Significant growth in heat networks but only into dense urban housings, suburban on-gas homes can opt for gas or hybrid technologies. * Reduction in compared to Gas Very strong growth in heat networks and electrification of heating but with gas still playing a significant role in suburban homes. Ambitious decarbonisation and fuel switching needs to occur but the hardest to switch homes are able to stay on gas (or gas / electric hybrids) Customer economics 67% homes on electric heating / electric heat pumps 27% of homes adopt district heat (dense urban rollout only). Fuel switching completely away from oil A range of low carbon gas appliances (including electric heat pump gas boiler hybrids) are adopted 30% of customers stay on gas (16% hybrid) Key desirable impacts are furthest from the middle Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 14 Carbon Ease of retrofit Energy system impact

15 Sensitivities balanced transition is relatively robust to sensitivities examined We tested the scenarios against four sensitivities overall Balanced Transition is less sensitive than Electrification and Heat Networks to risks in decarbonising electricity and in zero carbon supply of heat to district heat networks, although it shows some sensitivity to lower amounts of biomethane. If only a fraction of the assumed level of biomethane is available, BT delivers 79% (rather than 90% savings in 2045 compared to 2015) carbon saving. If the electricity grid is mostly (150g/kWh) but not fully decarbonised by 2050, then under E&HN carbon reductions become 85% (rather than 96%). BT savings are less sensitive, falling from 90% to 85%. If there is some residual carbon in heat supply for district heating (50g/kWh rather than 16g/kWh), carbon reductions for E&HN become 93% (rather than 96%) for E&HN. BT savings falling from 90% to 88%. We assume technical advances with air source heat pumps mean that even on the coldest evening the average COP is 2.2 if we assume a COP of 1.7, then additional peak demand from heat pumps rises by 11 GW for E&HN (5 GW for BT). Slower electricity grid decarbonisation 0.15g/kWh, rather than 0.02g/kWh Less / more biomethane in res. gas network 20 TWh / 100 TWh, rather than 75 TWh District heat is not fully decarbonised 50g / kwh rather than 16g/kWh Lower electric heat pump COP on coldest day COP of 1.7 rather than 2.2 (in 2050) Metric Carbon reduction in 2050 Carbon reduction in 2050 Carbon reduction in 2050 Peak additional demand from electric heat pumps Electrification and heat networks 85% (from base of 96%) No gas in this scenario 93% (from base of 96%) Rises from 48 to 59 GW Balanced transition 85% (from base of 90%) Less biomethane = 79% More biomethane = 95% (from base of 90%) 88% (from base of 90%) Rises from 24 to 29 GW For the Customer Choice scenario, we tested the impact of lower electricity prices (18 rather than 21.5p/kWh) and higher gas prices (8p rather than 5.7p/,kWh. There were no major impacts other than a substantial switch from micro-chp to gas boilers, and a very small increase in gas heat pumps ( million installed base) and air source heat pumps (0.3 to 0.5 million). No major changes in carbon emissions result from this sensitivity. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 15

16 Comparing the scenarios by appliance mix and retrofitability in selected housing segments Different housing segments have very different challenges (and opportunities) in decarbonising heat This slide shows some of the challenges for selected example housing segments, and the different solutions adopted in the different scenarios. A broader range of technologies opens up a wider set of options to decarbonise heat. The gas and oil segments all have high temperature heat distribution systems today - this will present some challenges for gas & electric heat pumps (but not for hybrid boiler heat pumps). Gas, Terrace, Pre M homes Space constraints are key both in terms of the heating appliance and a hot water tank (many of these homes have combis) CC 90% boilers, 10% high-ee micro-chp E&HN 60% district heat (high density housing), 40% electric (nearly all heat pumps) BT 45% district heat, 10% gas HP, 5% gas boiler, 15% heat pump, 25% hybrid boiler - HP Flat, Electric, M homes No gas supply electric resistance heaters in each room, no hydronic / communal systems. CC all remain electric E&HN 75 % district heat, rest are electric (20% storage heaters, 5% heat pumps) BT same as E&HN Gas, Semi, M homes Gas, Detached, pre M homes Oil, Detached Pre M homes Space constraints are key for the heating appliance, an outdoor unit (if req.), and (for some) space for a hot water storage tank CC 90% boilers, 10% high-ee micro-chp E&HN 75% elec. heat pumps, 20% district heat, 5% biomass in hardest to treat homes BT mix of technologies, primarily: one third boiler elec. heat pump hybrids; 25% elec. heat pumps; 20% gas heat pumps; 10% micro-chp. Space less of a constraint but low thermal density means no heat networks. Electric HPs may struggle in very large houses CC 53& boilers, 43% micro-chp, 4% gas heat pumps E&HN 75% elec. heat pumps, 25% biomass in hard to treat homes BT mix of technologies: 30% boiler elec. heat pump hybrids; 25% elec. heat pumps; 25% gas heat pumps; 10% micro-chp, some boilers & biomass Less constraints some homes with large thermal demands may need 3 phase electricity supply CC 65% remain on oil, 22% switch to biomass, 13% to elec. heat pups, E&HN all switch, mostly to HPs (75%), some biomass (20%) and 5% to district heat BT 85% switch to HPs, 15% to biomass Number of homes based on number in Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 16

17 Urban / suburban gas heating systems present the biggest policy challenge 1) The challenge 2) The nature of the challenge (emissions from residential heat) 3) The solution The key challenge under any scenario is how to shift customers away from their current system, to a low carbon heating technology. Gas is the dominant heating fuel today, and is the biggest contributor to residential carbon emissions. Moving gas customers to low carbon technologies will be essential to get close to 2050 carbon reduction targets, and likely require stronger policy interventions than other segments. Oil and electric segments are easier to resolve, with smaller incentives and the process of electricity grid decarbonisation, and new build can be driven effectively with strong regulation. Different solutions will be suitable for different segments BT enables less switching in difficult gas segments Switching customers away from gas boilers presents the biggest challenge to 2050, gas technologies generally have stronger customer appeal (easier to retrofit with attractive economics). Under BT there is a lower impact on customers, as not all are required to shift completely away from gas, with the hardest to switch segments able to stay on gas. Switching to district heat - Under both scenarios, switching to district heat is desirable to help manage the impacts on the network particularly in dense urban areas. However if the griddecarbonises as projected, no switching is technically required to meet the carbon targets in this segment. Switching customers away from oil - Customer research shows customers in these segments are interested in switching away from oil. As oil prices continue to rise, only a small push from incentives will be required to encourage uptake of alternative technologies oil segments are the easier to win segments under both scenarios. Regulating new build: The challenge in new build is to encourage developers to adopt low carbon solutions. This can be done effectively with strong regulation which continue to build on existing policy and mandate zero carbon solutions. Urban / Suburban Mainly rural/ some urban Mainly rural Mixed housing Flat - Gas ( ) Flat - Gas (Pre 1944) Semi - Gas ( ) Semi - Gas (Pre 1944) Terraced-Gas ( ) Terraced - Gas (Pre ) Detached - Gas ( ) Detached - Gas (Pre 1944) Flat - Electric ( ) Flat - Electric (Pre 1944) Semi - Electric ( ) Semi - Electric (Pre 1944) Terraced-Electric ( ) Terraced - Electric (Pre ) Detached - Electric ( ) Detached - Electric (Pre 1944) Flat - Other (Pre ) Semi - Other ( ) Semi - Other (Pre 1944) Terraced-Other ( ) Terraced - Other (Pre ) Detached - Other ( ) Detached - Other (Pre 1944) 2015 emissions from residential heat (Thousands of tonnes C02/yr.) Hard to switch: Significant incentives needed 22M homes Incentives for DH: Low carbon if stay electric 2.6M homes Want to switch: Low level incentives needed 1.3M homes 0 2,500 5,000 7,500 10,000 12,500 15,000 2% of carbon emissions in 2050 New build: Driven by regulation 9M homes (by 2050) E&HN BT Common to both 2015 emissions from residential heat (Thousands of tonnes C02/yr.) Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 17

18 Balance Transition could result in lower customer policy costs to 2050 Under a more balanced scenario the policy costs of generating the required level of switching could be lower. The additional cost of the extra 6% of carbon savings under electrification and heat networks scenario, above and beyond the balanced transition scenario, requires a step change in the level of incentive. An additional 12m homes need to be moved completely away from gas. This would require on-going intervention for the next 30-40years and pushing district heat into the more costly suburban areas (less dense housing) Under Balanced Transition, smaller incentives could be used to push some customers to higher efficiency gas technologies or hybrids while still achieving significant carbon savings. However this scenario does require significant biomethane growth (75TWh). Scenario Challenge Timeline Electrification and heat networks 96% reduction in carbon emissions Balanced transition 90% reduction on carbon emissions All customers in all segments switch to electric heating or district heat. Significant numbers of customers switch to electric heating and district heat however, biomethane and a small amount of natural gas enables the most challenging segments (suburban, on gas, high thermal demand) to stay on high efficiency gas or hybrid appliances. Examples of incentives / regulation RHI / Tariff incentive required for on-gas homes for at least 30 yrs. Electric & DH never competitive without this Up-front grants could be effective to encourage switching from oil Up-front grants could be effective to encourage switching from oil to 2030 s Regulation / minimum performance standard for retrofit appliances (mandating shift from gas) Smaller homes will need an RHI upfront cost prohibitive Up-front grants could be effective to encourage switching to high efficiency gas and hybrids Regulation / minimum performance standard for retrofit appliances (mandating shift from gas) RHI / Tariff incentive for on-gas / oil homes, but this can come later and at lower value hardest to heat homes adopt high efficiency gas appliances Regulatory drivers + investments required under both scenarios Reduce thermal demand insulate where economic and use government schemes such as the green deal where appropriate Grow the district heat network growth of district heat will require major intervention. It will require a new regulatory framework (potentially mandating customer to connect) manage connection risks. Starting with social housing roll out in urban areas. The cost grows as district heat is pushed into suburban areas (as required in our electrification and heat networks scenario) Invest in R&D and awareness raising to facilitate uptake investment needs to be made to ensure both that emerging technologies mature and that the supply chain has the right skills. There is also a role in raising awareness among end users for both government and the industry. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 18

19 Implications for the Energy System Here, we analyse the network requirements for the two alternative pathways to 2050 * The Electrification & Heat Networks scenario requires (1) large-scale roll out of heat networks, (2) upgrading of electricity distribution networks outside of these areas, and (3) a managed exit from the gas network. The Balanced Transition requires similar, but lower challenges as (1) and (2) above, plus large growth of biomethane injection into the gas network. A market-based approach may result in duplication of networks for example one area having a reinforced electricity network, district heat network and gas network A planned approach can avoid network duplication - for example on area being designated a district heating zone (similar to Denmark), another being a gas zone, another being a reinforced electric zone. * Other solutions such as biomass or local heat networks may be suitable for some rural areas Electricity supply & demand tens of GW of additional peak demand Peak demand from electric heat pumps will add 48 GW to the winter peak under E&HN, and 24 GW under BT unless novel forms of thermal storage can significantly decouple heat pump operation from the timing of thermal demand. Impact on electricity distribution networks Using the same model as the Smart Grid Forum WS3 report, heat pump growth in BT and EH&N has been taken with DECC midrange estimates for electric vehicles and photovoltaics uptake. Additional investment in electricity distribution networks (capex & opex, discounted, over ) is calculated. BT can deliver significant investment savings compared to E&HN reducing investment by 8bn or more if smart solutions are not adopted to tackle the challenges for the distribution network, Heat networks Both BT and E&HN require large-scale roll-out of heat networks. In BT, heat networks reach 9.8 million homes mainly new build and higher density city centre homes. In E&HN, heat networks reach an additional 12.4 million homes in less-dense areas. Gas networks E&HN sees no role for gas in homes in 2050 Under BT 12.5 million homes still use gas for all or part of their thermal needs. Both scenarios require a managed exit from some or all of the gas network a complete exist will cost 4 billion. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 19

20 Keep a variety of options open This report suggests that keeping a variety of options open to decarbonise heat gives lower risks, and potentially a lower cost path that pursuing a narrower end point. Although BT achieves a 90% (rather than 96%) carbon reduction from today to 2050 it has two key benefits: It avoids moving an additional 12 million homes completely away from gas where the highest customer costs are imposed. By allowing more choice, and via high uptake of hybrid heat pumps, additional peak generation demand grows to 24GW, rather than 48GW, as under E&HN However success in both scenarios depends on achieving the following challenges: 1) Reduce thermal demand Delta-ee has assumed 21% reduction in thermal demand from current buildings interventions such as the Green Deal will be required. 2) Development and wide-spread expansion of district heat growth of district heat will require major intervention under both scenarios (more so under E&HN). It will require a new regulatory framework (potentially mandating that customers connect). 3) Need for technology, product & supply chain development - to ensure efficient appliances are brought to market & can be successfully retrofitted to homes (including efficient gas appliances under BT). 4) Decarbonisation of electricity grid, decarbonised heat supply for district heating and biomethane growth (for BT) are all required. 5) Major energy system upgrades & additional peak electrical generating capacity on both the electricity side, and on decommissioning the gas grid, will be required although the scale of the challenge is lower for BT. The scale of the challenge Under BT 12million less homes mostly in suburbia - need to undergo transition from gas to electric heat pumps or district heat Flat - Gas ( ) Flat - Gas (Pre 1944) Semi - Gas ( ) Semi - Gas (Pre 1944) Terraced-Gas ( ) Terraced - Gas (Pre ) Detached - Gas ( ) Detached - Gas (Pre 1944) Flat - Electric ( ) Flat - Electric (Pre 1944) Semi - Electric ( ) Semi - Electric (Pre 1944) Terraced-Electric ( ) Terraced - Electric (Pre ) Urban / Suburban Mainly rural Mainly rural/ some urban Mixed housing Detached - Electric ( ) Detached - Electric (Pre 1944) Flat - Other (Pre ) Semi - Other ( ) Semi - Other (Pre 1944) Terraced-Other ( ) Terraced - Other (Pre ) Detached - Other ( ) Detached - Other (Pre 1944) 2015 emissions from residential heat (Thousands of tonnes C02/yr.) Hard to switch: Significant incentives needed Incentives for DH: Low carbon if stay electric Want to switch: Low level incentives needed 0 2,500 5,000 7,500 10,000 12,500 15,000 2% of carbon emissions in M homes 2.6M homes 1.3M homes New build: Driven by regulation 9M homes (by 2050) The scale of the policy challenge becomes clear when we look at the existing housing mix gas dominates, and is the biggest contributor to residential carbon emissions. Moving gas customers from boilers to low carbon technologies will be essential to get close to 2050 carbon reduction targets Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 20

21 Contents 1. Executive Summary 2. Decarbonising Heat how this report examines the challenge 3. Heating technology options and assumptions 4. Fuel price & carbon assumptions 5. Housing stock segmentation 6. Modelling methodology and scenario development 7. Results Customer perspective Customer choice Electrification and heat networks Balanced transition Carbon and system impacts Comparison Sensitivities Conclusions 8. Policy implications Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 21

22 The scale of the challenge to reduce carbon emissions ~80% of carbon emissions from residential heating in the UK are from on-gas properties, - the vast majority of these are in suburbia. The slow turnover of housing stock means these properties remain the challenge n 2050 Major changes in the UK heating appliance mix have historically required government intervention Historically, major changes in heating UK homes have not been left to the market government intervention has been required: 1950 Clean Air Acts Town gas to natural gas 2012 Condensing boilers DECC s target is full decarbonisation of residential heat by Growth in biomethane and reducing thermal demand alone will not meet this target (or get close to it). A major change in the heating appliance mix is therefore required. There are many potential low-carbon heating appliance options but technologies & markets are, in most cases, very immature today There are no examples, globally, of large-scale switches away from gas boilers for existing buildings although some smaller-scale switches are emerging in a few markets. Volumes of low carbon heating appliances are, in nearly all cases, very low (and therefore costs are high) There are massive opportunities for learning and innovation in retrofitting low carbon heating technologies to existing UK home Where gas is available, gas boilers are an excellent fit with customer wants Low capital cost Reliable, low maintenance High efficiency & low-cost fuel (DECC forecasts relatively stable future gas costs) Compact Excellent fit with UK heat distribution systems (high temperature radiators) Easy to use instantaneous hot water Large-scale switching away from gas boilers will be extremely challenging Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 22

23 How this research explores the challenge to decarbonise residential heat 1 This research was designed and carried out from the customer point of view focusing on the challenges of retrofitting different technologies to different parts of the housing stock Detailed housing stock segmentation segmenting the housing stock according to age, house type, and fuel type 35 segments in total. We used this as a basis to analyse the fit of different heating appliances to each segment of the housing stock We also examine the impact of different heating appliance mixes on policy makers and the wider energy system The star diagram below is applied to three scenarios for the future heating appliance mix. 2 Technology development assumptions for cost, performance and retrofit challenges of 11 different heating appliance technologies through to 2050 Carbon 3 4 Energy and carbon assumptions using DECC / National Grid and other assumptions as necessary* Running cost, capital cost of each heating appliance technology in each housing stock segment as well as the practical retrofit issues for homeowners Customer economics Energy system impact 5 Customer choice scenario modelling what heating appliances will customer in each housing stock segment chose, decade by decade to 2050, based on Delta-ee market research (separate to this study) Ease of retrofit 6 Creation of two alternative scenarios based on detailed insight of the fit of different technologies in each part of the housing segment. The scenarios that are developed and modelled are customer-led (focusing on the customer impact, shown above), with the consequential policy impacts then examined. Stakeholder consultation: This research drew upon Delta-ee s market research with customers, international expertise in low carbon heating systems and the UK microgeneration market. In addition, we consulted with over 30 companies from the UK & continental Europe including the heating industry; energy suppliers; district heating companies; researchers such as universities and R&D institutes. *Base case assumes 75 TWh of biomethane available in residential sector less than one fifth of current residential gas supply for heating Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 23

24 Contents 1. Executive Summary 2. Decarbonising Heat how this report examines the challenge 3. Heating technology options and assumptions 4. Fuel price & carbon assumptions 5. Housing stock segmentation 6. Modelling methodology and scenario development 7. Results Customer perspective Customer choice Electrification and heat networks Balanced transition Carbon and system impacts Comparison Sensitivities Conclusions 8. Policy implications Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 24

25 Technology assumptions Summary A majority of the future technologies are only just emerging in the UK, almost all have some issues with retrofitability Although a number of technologies could be considered mature globally, leaving minimal room for technology development, the UK microgeneration market is only just beginning to emerge due to the dominance (and easily available supply) of natural gas. A key barrier to overcome, will be challenging customer perceptions to these technologies so they become more familiar to UK customers but also overcoming the retrofit challenge will be key finding ways to address the difficulty of installing these technologies in UK homes, in an affordable way. Global market maturity UK market maturity Potential for cost reductions in UK Potential for performance improvement Retrofitability Air source heat pump (ASHP) Ground source heat pump (GSHP) Hybrid heat pump Gas heat pump (GHP) Biomass Micro-CHP (mchp) Solar Thermal District heat (infrastructure) NA = Strong =Weak Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 25

26 Technology Assumptions risks and uncertainties Micro CHP Micro-CHP is an emerging technology globally, which gives it huge future potential, as it has significant scope for cost reductions and technology development. It is also a technology that has potential for large hard to heat homes, on the gas network. However it s future will depend on: Continued investment in R&D Explosion in production volumes internationally Development of different capacities & electrical efficiencies (heat to power ratios) Synergies with other industries (e.g. automotive) Solar Thermal Solar Thermal is a developed market globally and today is a commodity based product. The key uncertainty in the future is: The price of raw components (these could go up) Competition with PV (limited roof space) Risks and Uncertainties The future prospects of the key domestic heating technologies are highly dependent on a number of key sensitivities including: Biomass pellet boilers are a mature technology, although product, and supply chains in the UK are only just emerging. Strong growth in volumes could lead to some cost reductions The most significant challenge for future biomass uptake will be customer perceptions biomass performs poorly in customer research today. Biomass Future uptake will be dependent on: Security of fuel supply competition for resources with transport and large generation Commodity prices Development of UK supply chain ASHP and GSHP are both relatively mature technologies. For ASHP a number of components are shared with the globally giant airconditioner market, and the European experience with both technologies are also strong and spans decades. However for emerging products, hybrid heat pumps and gas heat pumps technology costs are much more uncertain, as future cost breakthroughs depend on them reaching the mass market which cannot be guaranteed. For all heat pumps products future uptake is also highly dependent on: Straightforward retrofit to existing buildings The rate of grid decarbonisation and electricity price The pace of technology development efficiency improvements being realised European / global production volumes Straight-forward retrofit to existing UK homes Installer and supply chain engagement Heat Pumps District Heat District Heat is an emerging technology in the UK - retrofitting the aging UK housing stock will present a significant challenge to 2050 if heat networks are to fulfil their key role in a low carbon future. There are a number of key risks and uncertainties around district heat future uptake will be highly dependent on: The development of an appropriate regulatory framework Investment and construction risk a key challenge will be getting developers to invest, lead times are long, connection rates difficult to guarantee and the cost of capital high. Success in uptake in the owner-occupier sector hardly any examples exist in the UK Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 26

27 Carbon Performance of different heating appliances (1) This graph shows the carbon intensity of heat supplied for the different appliances based on our technology assumptions and carbon assumptions under a baseline scenario The year could be replaced with rate of grid decarbonisation (both electricity grid and gas grid). We use DECC electricity grid decarbonisation projections which show the electricity system being largely decarbonised by kg / kwh These figures are based on large amounts of gas still in the system in 2050 in the next slide we show our Balanced transition scenario, which has less gas in the system, but with the same biomethane content and hence lower gas carbon intensity. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 27

28 Carbon Performance of different heating appliances (2) Here, the carbon emission of different technologies are shown under the Balanced Transition scenario, where gas use for residential consumption falls substantially, and biomethane makes up a two thirds of total gas supplied to the residential sector Emissions from gas technologies fall substantially in later decades as biomethane increases its proportion of total gas supplied kg/kwh Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 28

29 Running cost of different heating appliances (1) This graph shows the cost of heating a three-bed semi-detached house using different heating appliances. It assumes a 21% reduction in thermal demand from today s levels * Heating cost per year ( ) Strong price increases for electricity put pressure on running costs for electric storage heaters, and for a lesser degree electric heat pumps (COP improvements have a stronger effect than rising prices). Modest increases in gas prices are offset by falling thermal demand. Micro-CHP particularly high efficiency micro-chp fares well due to the widening spark-spread. * Our modelling approach sets the upfront cost for district heat at a price only just above a condensing gas boiler all other costs (opex and capex for heat supply, district heat infrastructure & in-house costs) are then loaded onto the heat supply price. An alternative approach could be to set the upfront cost higher, and have a lower annual running cost. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 29

30 Technology assumptions Base case technologies Market view: ~ million gas boilers sold each year in the UK Oil, LPG and gas boilers mature technology, very little opportunity for reduced costs / increased performance Electric storage heaters some improvements in controls, customer appeal could improve as these occur Gas boilers 85% efficiency (HHV), increasing to 88% by ,250-2,750 installed cost (remaining flat) Oil boilers 85% efficiency (HHV) 4,900-6,125 installed cost (remaining flat) Requires space - internally for a hot water tank (HWT), externally for an oil tank the oil tank is replaced every 10-15years. Electric Storage heaters 2,400-4,000 per property (price range of per heater depending on brand and style with 5% reduction in price per decade) As controls improve, so will the proposition as less topup heat will be required (decreasing from 10% today, to 5% by 2050) UK Housing stock Risks and uncertainties ~5% Other central heating* (oil, solid fuel, LPG and microgeneration) ~10% electric heating (storage heaters / resistance heating) ~85% gas boilers *For simplicity, we only consider oil, not LPG, in this research There is an additional cost associated with switching from electric heating to a hydronic heating system this requires additional upgrading which we have assumed the following costs (Poyry/AECOM) Flat: 2,500 Terrace: 3,500 Semi-detached / detached: 4,500 Electricity cost will also significantly affect the customer proposition for storage heaters. For this study the assumption is based on current prices for an Economy 7 tariff, and the price difference being maintained as electricity prices rise however in the future the value to the network of storage heaters will increase, we could see more innovative tariff offerings for both storage heaters and heat pumps, improving the proposition. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 30

31 Technology assumptions Air source heat pump Market view: Globally, air-water heat pumps sell in their 100,000 s - UK is a medium sized European Market (~12,000/yr.) European markets became established in the late 1990 s, Largest markets for air-water products in Europe sell mid 10s of thousands per year (Germany and France) Product is mature closely linked to air-conditioner market, many components are the same European volumes in the range of 100s of thousands by 2050 Efficiency (COP) 2015: 2.5 Retrofit / 2.6 New build 2025: 2.8 Retrofit / 3.0 New build 2045: 3.0 Retrofit / 3.3 New build The biggest gains in performance to be made in installation quality and improved controls. A mature technology - no single technology breakthrough expected. Heat exchanger design, compressor efficiency, new refrigerants etc. are all possible improvements. Cost (for medium sized 8.5kW system) Today: 8, : 7, : 6,624 Potential for cost reduction from economies of scale as European market volumes continue to grow, and competition between manufacturers strengthens. The market in Europe has potential for three doublings in market size Physical fit with housing stock Technically suitable for all properties but more challenging in homes with high heat loss. Requires internal space for thermal store this could be challenging in smaller properties Requires space for an external unit potential visual and noise impact. Expanded upon in next slide Customer perception / behaviour Very little understanding today of ASHP technology. Negative reaction to outdoor unit, and concerns over performance in very cold temperatures Once installed customers will need to adjust to lower flow temperatures and to running their heating system more continuously. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 31

32 Heat pumps how suitable are they for existing homes? (1) We hear very different views about the suitability of heat pumps to existing UK homes in many cases different heating industry players have very polarised views, represented by the statements below. Heat pumps are only suitable for very well insulated homes with low thermal demands or Heat pumps can be installed in almost any home so long as they are sized correctly Why there are differing views? 1. Heat pumps operate most efficiently at low flow temperatures 2. If operating at low flow temperatures, the heat emitters (radiators) have to be correctly sized to get enough heat into the home 3. If operating a low flow temperatures, a higher flow rate of water around the heating circuit is needed compared to conventional boilers 4. Heat pumps require space for an outdoor unit and the outdoor unit brings potential noise implications 5. Heat pumps require space for a hot water tank 6. For higher capacity heat pumps, the cost rises more quickly with capacity than it does for boilers 7. Above ~18 kwth output, a three phase electricity connection is required for the heat pump 8. For air source heat pumps, heat pump output decreases as the outdoor temperature falls. The Delta-ee view heat pumps can be installed in most but not all UK homes, but are not a straight forward retrofit in many homes. Key challenges: 1. High capacity heat pumps command a much higher premium above boilers than low capacity heat pumps. 2. Heat distribution system in most cases requiring some radiator replacements, in other cases more significant work. 3. Space for hot water storage tank. 4. Space, and in some cases planning permission / noise challenges for outdoor unit. Where practicable, best to reduce heat demand first but not at all costs (i.e. trade-off between cost of reducing heat demand and cost of installing heat pump able to heat home without first reducing heat demand). Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 32

33 Low flow temperature operation Heat pumps operate most efficiently at a low temperature difference between the heat source (the ground, or outside air) and the water temperature for space heating & hot water The best application for heat pumps is under floor heating, with heat distribution (flow) temperatures of 35 o C. However the vast majority of UK heating systems are designed for o C although the radiators are often oversized and larger than they need to be to heat rooms when using this flow temperature. Options to address the low temperature operation challenge: Heat pumps how suitable are they for existing homes? (2) o Run at moderate flow temperatures and upgrade (some) radiators to higher output radiators o Use a refrigerant that performs better at high flow temperatures (e.g. CO2) o Run the heat pump at high flow temperatures and accept lower heat pump efficiency Sizing heat pumps and peak demand Heating systems are typically designed to provide a home with sufficient heat on the coldest winter days If heat pumps are designed in this way, they would operate at part-capacity for most of the year (heat pump costs rise quite steeply with capacity, unlike gas boilers) Another option is to rely on an additional heat source either an electric immersion heater, or a backup (or existing) fossil heating system for the coldest days. End user operation Heat pumps operate best in trickle heating mode, providing low constant levels of heat input - the same is true for boilers, but these usually operate on a more cyclical basis. End users need to use heat pumps in the above way rather than expect heat pumps to rapidly warm up rooms or a whole building, as they are typically used to with a boiler. Outdoor unit Heat pumps require an outdoor unit (evaporator), containing a fan and heat exchanger. Often the whole heat pump system is incorporated into this outdoor unit (a monobloc heat pump), in which case the system also contains a compressor. There is some noise from the fan and compressor although heat pump manufacturers are now working hard to reduce noise levels as far as possible. Hot water tank Heat pumps trickle heat hot water, which is then stored in a hot water tank. Some homes, which currently have combi boilers, may be reluctant to lose space to accommodate a hot water tank. Approximately 9 million homes have combi boilers with no hot water tanks (this number is growing ). Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 33

34 Heat pump sensitivities grid decarbonisation The carbon performance of heat pumps can be a contentious issue and depends on 2 key sensitivities: 1) The rate in which the grid decarbonises 2) What electricity heat pumps use compared to the average or the marginal plant. 1 2 CO2 emissions in typical gas segment (on-gas detached 1944-Present) Tons CO2/yr. (thousands) A 10 year delay in the projected griddecarbonisation would have serious carbon implications for a high heat-pump pathway gas would be greener until the 2030 s Tons CO2/yr. (Thousands) Heat pumps generate significantly more emissions than a gas boiler in the short term Assuming the grid does decarbonise within the projected timescales for heat pumps to achieve zero carbon it has to be compared to the average grid intensity, rather than the marginal plant. In the longer term, the carbon savings based on marginal grid carbon intensity offered by ASHP over a boiler are small until the mid 2030 s Today Gas Boiler ASHP (Average grid carbon intensity) ASHP (Slow decarbonisation) 0 Today Gas Boiler ASHP (Average grid carbon intensity) ASHP (Marginal grid carbon intensity) Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 34

35 Heat pump sensitivities Annual heating cost ( ) Impact of efficiency on annual ASHP running costs COP Electricity price of 0.20/kWh (2025) Gas boiler (2025), gas price of 0.052p/kWh The annual running cost of heat pumps is influenced by the COP. In our baseline scenario we assume performance will improve from a COP of 2.5 today to 3.0 by 2050 for retrofit installations. If efficiency does not rise as expected, or installations continue to be poor, heat pumps will struggle to compete on running costs with a gas boiler customers are unlikely to adopt. The proposition is stronger in new build, where a COP of 3 can be achieved by 2025, 3.3 by 2050 Impact of electricity price on ASHP running costs Annual heating cost ( ) 1,400 1,200 1, COP 3.0 Gas boiler (2025), gas price of 0.052p/kWh. The economic proposition for heat pumps is also highly dependent on electricity price Projections indicate without intervention gas will continue to be significantly cheaper than electricity. Even at relatively high COP of 3, low gas prices make it hard for heat pumps to compete in on-gas homes Electricity price ( /kwh) Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 35

36 Technology assumptions Ground source heat pump Market view: European market ~ 100,000 install p/yr. and dominated by Scandinavian markets. GSHP are a niche product in the UK (~4,000 installs p/yr.) Product volumes low / costs high Largest markets in Europe 20,000 30,000 installs per year Even by 2050 in the UK, GSHP will be fairly niche (~10,000-20,000 sales per annum) Efficiency Today: Retrofit 2.5 / New build : Retrofit 3.03/ New build Retrofit 3.8 / New build 4.8 The biggest gains in performance can be made from improved installation quality and improved controls. Some incremental improvements to the product are expected but the technology is already mature - no single technology breakthrough is expected. Cost (8kW Borehole system) Today: 16, : 15, : 13,100 There is limited scope for cost reduction the technology is mature, and installer margin is already relatively low as it is a complex install. The price of drilling may present an opportunity to reduce costs, as more companies enter the space however this cost is unlikely to drop significantly as already it is competitive with Swedish prices. Physical fit with housing stock Technically suitable for all properties Requires internal space for thermal store this could be challenging in smaller properties Ground-works require space boreholes are technically possible in smaller properties but are more costly and the plant equipment requires access. Customer perception / behaviour Conceptually customer appeal, no visual impact after installation and high efficiency but cost is high very few customers are willing to invest so much in heating. Significant upheaval in installation process is a key barrier Once installed customers will need to adjust to lower flow temperatures and to running their heating system more continuously. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 36

37 Technology assumptions ASHP/Gas Hybrid Market view: 100s /yr. sold in Europe an emerging product Brings together two mature, existing products gas boiler and an ASHP. Different product configurations possible larger the size of ASHP, higher proportion of thermal needs met by heat pump, but higher the cost. Many large heating manufacturers either have a product on the market or are developing one but products are only just reaching the market. Efficiency Today: : : 3.3 Main areas for performance improvement include: the development of more intelligent controls, correct specification, design and use (learning rates), innovations in refrigerants and other known areas for general heat pump improvements. The proportion of thermal demand met by the heat pump depends very much on sizing of the heat pump and the control system. We assume 50%, rising gradually to 58%. Cost (3.5kW HP / 10kW boiler) Today: 7, : 4, : 4,276 Cost is driven by boiler and ASHP price boiler is a mass market product and if the product users a small ASHP, it can tap into the room air conditioner market (millions of units / year in Europe) therefore accessing much lower costs than a conventional pure ASHP. Physical fit with housing stock The only physical constraint is the outdoor unit the unit can function as a combi, without a hot water tank (some current products use small buffer tank). The indoor unit is only slightly bigger than a typical wall hung boiler. Customer perception / behaviour Very little change in customer behaviour is required interface and feel of technology is like a boiler. The bolt on of the gas boiler reassures customers. Customers appeal could also be stronger because if flexible electricity tariffs become the norm, customers will be able to choose when to use electricity and when to use gas to optimise cost. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 37

38 Technology assumptions Gas Heat Pump Efficiencies (for retrofit) Today: 1.3 (COP) 2025: 1.5 (COP) 2045: 1.8 (COP) Scope for improvement in performance from improved system design and operation, improved refrigerants, improved heat transfer and cascading process. Current R&D into gas heat pumps is orders of magnitude less than electrical heat pumps many opportunities for learning, incremental and step change improvements if the gas heat pump industry becomes much larger. Market view: An emerging product (at the residential scale, but more mature for larger buildings) not currently available for households in the UK Early / first generation of products available for residential customers in Germany A number of products under development from large heating manufacturers and small innovators with a range of technologies and approaches Challenge is system engineering & reaching scale, rather than technology breakthroughs. Cost (8.5kW Gas heat pump) 2015: 13, : 8, : 6,290 Achieving these costs relies on gas heat pumps growing in a number of markets and reaching high volumes. Some are targeting much lower costs. There are no inherently expensive components / materials but supply chains are poorly developed, and volumes are currently very low. Installer experience in the UK is non-existent, although nothing more complicated than an electric heat pump is required. Compared to electric heat pumps, GHP has different refrigerant, burner rather than electrical compressor, slightly smaller outdoor unit (and other system differences). Physical fit with housing stock Current product in UK is too big for domestic properties we expect a domestic product in the market by 2015 Requires space for outdoor unit, like an ASHP (slightly smaller & quieter), and hot water tank (combi product without hot water tank possible in the future). Will likely be larger than gas boiler, although one company targeting product same size as gas boiler. Customer perception / behaviour Customers feel reassured by technology which uses gas but some will be put off by an outdoor unit. Works most efficiently with longer operating hours, and lower flow temperatures customers will need to adapt. Some product designs use ammonia as the refrigerant - may put off some customers. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 38

39 Carbon performance and retrofitability of GHPs GHP (high eff) carbon intensity of heat with 20% biomethane GHP (low eff) carbon intensity of heat with 20% biomethane Retrofitability Gas heat pumps face similar retrofit challenges as electric heat pumps, as shown on slides 30-31, including: Outdoor unit (although a slightly smaller outdoor unit is required) Low flow temperatures (although they are slightly better than electric heat pumps with regard to this issue, and products could be developed with an additional gas burner boosting flow temperatures when necessary similar to electric gas boiler hybrids) End user operation (similar challenge) Hot water tank similar challenge, although hybrid products providing instantaneous hot water (via a gas boiler) could be developed, although for these carbon savings would be lower Sizing and peak demand again, a boost gas burner could be used to increase output on the coldest days. GHP (high eff) carbon intensity of heat GHP (low eff) carbon intensity of heat 51% 32% Reduction compared to gas boiler Boiler carbon intensity of heat with 20% biomethane Boiler carbon intensity of heat Base case today For this illustration, high efficiency = SPF of 1.8, low efficiency = SPF of Carbon intensity of heat (kg / kwh) Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 39

40 Technology assumptions Biomass Market view: A mature product, with an immature market in the UK Globally in the region of 50,000 units sold a yr UK is less than 2% of this Germany and Austria are biggest European markets Scope for European volumes to double or treble by 2050 Efficiency Today: 75% -70% HHV 2045: 80-85% HHV Product is mature, leaving little scope for improvements in efficiency. Step changes could come from a shift to condensing operation, or pellet fuelled stirling engine mchp (one major pellet boiler manufacturer is currently trialling such a system). Cost (15kW semi-automatic pellet boiler) Today: 11, : 9, : 7,715 Little scope for step-change cost reductions, but if volumes (in Europe / globally as well as the UK) multiply, then moderate cost reductions will occur. The final price will remain highly variable from installation to installation. Physical fit with housing stock Suitable for all thermal demands and can be easily installed in leaky homes. Homes need space internally for water tank and a slightly larger-than normal boiler unit. Space for fuel storage is required. Customer perception / behaviour Minimal awareness and understanding of product Some end-users view a return to solid fuel, and management of the system a step backwards Concern over security and cost of fuel supply. Requires customers to change their behaviour and be more involved in their heating system (depending on level of automation) Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 40

41 Technology assumptions Solar Thermal Market view: A mature product with sales of thousands / yr. in the UK UK market has shown steady growth in the last 10 years recent decline with focus shifting to PV Market volumes remain much higher in continental Europe The technology is particularly popular with social housing providers Efficiency (Thermal output kwh/yr.) Today: 1, : 1,800 Limited scope to improve thermal output of the panels themselves but some scope for system improvements through better controls and integration with the boiler. Cost Today: 4, : 3, : 3,275 Cost reduction will be small to 2050 the technology is mature and high commoditised linked to steel and copper prices. Integration of cylinders offers some scope to lower system prices. Potential for lower margins along the value chain in the UK will also bring down cost somewhat if volumes increase. Physical fit with housing stock Requires roof space, with near southerly direction but size is not an issue (average 4m 2 will fit most) Best suited to homes with high / medium hot water demand Requires space internally for hot water tank Customer perception / behaviour Positive perception solar technologies are viewed as mature and well understood No change required in customer behaviour integrates with existing system Add on technology, viewed as less risky and appeals to customers who want to appear green. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 41

42 Technology assumptions micro-chp Market view: Globally, micro-chp markets are in their infancy (~10,000/yr., mainly in Japan) and the UK is only accounts for a tiny proportion of installs to date Mostly brand new technology & manufacturing lines (some exceptions) European markets for individual households are embryonic (v low 1,000s), biggest market is in Japan (over 10,000 / yr.). Opportunity for 100x increase in European market volumes by 2020, and more than 10x increase in global volumes Significant difference between low electrical eff. and high electrical efficiency products Interest from all major European boiler brands + large Asian corporates Range of micro-chp technologies Thermal efficiency ORC Stirling Low elec. eff ICE Electrical efficiency PEM FC SOFC SOFC up to 55% electric efficiency, so very low heat output: e.g. 1 kw electricity, 0.2 kw thermal, so suitable for homes with low thermal demand High elec. eff ORC = organic Rankine cycle, under development in UK Stirling = Stirling engine, early market introduction in UK + rest of Europe, two Stirling engine manufacturers ICE = internal combustion engine, on market in Germany (recent intro.), Japan (>100,000 since 2003) PEM FC = proton exchange membrane fuel cell, on the market in Japan (~10,000/yr.), trial in Germany SOFC = solid oxide fuel cell, market intro in Japan (100s/yr.), trial in Germany, CFCL Bluegen available in UK Cost and performance improvement The product today is proven (it works) but at early stages of development first generation product. Significant scope for innovation, improvement and learning to improve product performance, reduce size & weight etc. and bring down cost. Significant scope to increase production volumes to bring down cost (possible synergies with automotive industry for fuel cells) Uncertainty about level and timing of these improvements high dependency upon growth in international markets. Currently natural gas & LPG models available: biomass-driven systems under development / trial. Today: Low ee 8,250 High-ee 14, : Low-ee 4,200 High- ee 7, : Low-ee 3,402 High-ee 5,700 Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 42

43 Technology assumptions mchp Carbon emissions Burn more gas than a condensing boiler but displace electricity (and associated carbon emissions) from the grid. Carbon performance critically dependent upon assumptions for what central generation plant is displaced: What is actually displaced often low capital cost / low efficiency generation such as OCGT (today). Fuel cells will operate closer to base-load (running 5,000+ hrs. / yr.) displacing cleaner plant than low electrical efficiency products, which will run for 2-3,000 hours per year (particularly during winter peaks), displacing dirtier plant. Reference power plant EU Cogen Directive compares micro- CHP to CCGT Average grid carbon intensity We use marginal carbon intensity in this report using National Grid assumptions. Physical fit with housing stock Heavy and most (but not all) need hot water storage tank. Suitable for high flow temperatures. Range of sizes (v. similar to wall-hung boiler, to fridge-freezer size). Low elec. efficiency needs moderate high thermal demands, high elec. efficiency suitable for nearly all homes. Current systems need hot water storage tank potential (for low ee products) for combi systems Carbon intensity per unit of heat (kg/kwh) Base case - low elec eefficiency Balanced Transition - low ee BT and slower elec grid decarb - low ee Base case - high ee elec. efficiency Balanced Transition - high ee BT and slower elec grid decarb - high ee Carbon emissions are highly sensitive to: 1. Assumptions on the carbon intensity of electricity displaced by micro-chp 2. Carbon intensity of the gas grid (i.e. biomethane) We assume low elec. eff. micro-chp displaces dirtier power generation than high elec. eff micro-chp as it operates in a peakier manner. Marginal grid emissions are taken from National Grid projections. *These figures are for a pre-war, detached house Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 43

44 Technology Assumptions - District heat District heat is a heat delivery infrastructure, not a form of heat supply A DH scheme comprises: Heat generation plant could be a mix of heat pumps, gas boilers, gas CHP, solar thermal, biomass boilers etc.. and could change over time District heating infrastructure heat mains, typically underground, running e.g. up streets / close to buildings Branches connecting buildings to heat mains Interface inside the house connecting space heating system and hot water to the branch (HIU, or heat interface unit). A mature & widespread concept in several EU markets but minimal GB penetration District heat development on-going since 1950 but only 1-2% of UK heat demand is met by the technology. Much of this installed in 1960s (variable quality). A range of UK residential schemes: e.g. individual tower blocks or apartment buildings; linking public buildings and several blocks of flats; city-wide schemes Recently a number of new-build district heating schemes (to meet Building Regulations and for planning compliance) Cost and economics Highly sensitive to discount rate & amortisation period. Costs in GB higher than continental Europe -.potential for UK costs to fall if large growth in DH Further costs & economics details on following slides Key risks + uncertainties Connection rates uncertainty around uptake Lead time / construction risks Absence of any regulatory framework Physical fit with housing stock Technically no restrictions on the housing type / thermal demand but connecting the HIU inside the house to the heat main is challenging in retrofit (in theory HIU could be outside). Retrofit requires 2 x 5cm pipes (outer diameter this includes insulation) running to HIU No hot water storage tank required. Customer perception / behaviour Minimal understanding and awareness of DH today no strong public opinion Possible concerns over being tied into a long-term contract and a perceived loss of freedom of their heating. Minimal change required to behaviour interface and controls like a boiler, and connects to existing system. Evidence of high customer satisfaction once connected. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 44

45 Cost overview for district heat complex economics driven by four main cost elements 1 2 Heat generation cost Capex of heat plant Opex of heat plant Operation & maintenance Fuel cost Capex of energy centre (highly variable from scheme to scheme) Infrastructure cost Depends on heat density and network design Lower cost / kw than individual systems, and in some cases higher performance Lower capacity (kw) per dwelling than individual systems due to load diversity & easier thermal storage Cost of heat plant / dwelling depends upon overall DH scheme size (size depends on no. of households and no. of non-residential heat customers) For CHP, variation in types of customers results in longer running hours -> better economics Some additional heat losses compared to individual systems Necessary to build in some redundancy for maintenance Space for low carbon heat plant may be a challenge in very dense urban areas e.g. for large-scale biomass boilers or heat pumps. Alternative is to pipe heat from less dense areas 3 Branch cost dependent on house type and density Distance from heat main to dwelling Possible for e.g. semi to share connection to heat main Assumes flats already have communal heating system, otherwise additional costs In-house cost: 2,300 for all properties 4 Heat interface unit Heat meter Installation Installation cost dependent on HIU being near Branch entry point to house & need to change radiators Additional costs for hydronic distribution system if displacing elec. heating HIU replaced every years, in Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS region UK I T: +44 of (0) ~ / yr maintenance I cost 45

46 Carbon performance of district heat Flexibility in heat supply Low carbon heat options for DH heat supply include: Waste heat from industry / power plants variable availability across urban areas Heat pumps air source, ground source (may be limitations in capacity depending on space / heat source) Gas CHP low carbon depending on the power plant being displaced very low carbon heat in 2010s, but unlikely to be low carbon heat in 2050 Biomass either heat-only or CHP Waste-to-energy Assumption for heat supply to district heat over time various different permutations are possible Percentage of heat supplied to heat network 100% 80% 60% 40% 20% 0% Biomass boiler Waste heat recovery Electric heat pump Gas boiler Gas CHP Carbon intensity of heat from district heat much lower than gas boilers if a low-carbon mix of heat supply is assumed 0.25 Carbon intensity of heat (kg/kwh) Emissions from a gas boiler (with increasing biomethane under our base case) District heat blended carbon emissions Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 46

47 District heat economics and potential Calculating DH economics on a per dwelling basis To help understand sensitivities to DH costs on a per household basis, we have constructed a simple economic model. However we lean heavily on the detailed DH study carried out by Poyry and AECOM for DECC (2009). This model focussed on the relatively dense areas of heat demand (which take in 90% of all flats and 20% of terraced households). It compared DH (fed by various different heat sources) to existing heating systems (gas boilers and electric heating). Key headlines of this study: Very low discount rates (substantially lower than regulated network businesses) are required to drive scheme take-up Potential is primarily limited to dense housing flats and some terraces Limitations of this Poyry / AECOM study It compared DH to low cost heating systems. If compared to low carbon heating, the potential may be larger The government s shadow carbon pricing is unlikely to sufficiently to shift customers completely away from natural gas to any other forms of low carbon heat, so higher carbon prices may be necessary than assumed in the Poyry / AECOM study. District heating potential under different scenarios from the Poyry / AECOM study. Carbon pricing Discount rate CAPEX reduction Customers targeted No 10% 0 All 0 No 10% 0 Electrically heated only No 6% 0 All 0 Households (millions) 0.07 No 6% 20% All 1.6 Yes 6% 0 All 0.3 Yes 3.5%. 0 Social housing Yes 3.5% 0 All 3.3 = 7.9 Delta-ee modelling of DH We have constructed a relatively simple DH model which includes some optimistic assumptions around connectivity and use for a scheme of ~1,000 homes, assuming some mixed use. Key assumptions / methodology: Costs largely taken from Poyry / AECOM study. Upfront cost to customer assumed to be only very slightly higher than a boiler all remaining costs (remaining in-house and heat plant, energy centre, infrastructure) built into heat price An alternative approach could be to price the upfront cost to recover the capital, and price the heat more competitively Base case of 10% discount rate and 30 year amortisation period (flexed in the scenarios) Assumes a changing blend of heat supply initially gas CHP and gas boiler, through to heat pump and biomass boiler by Assumes 100% connection from day one. Assumes 3 5 kwth per household Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 47

48 Contents 1. Executive Summary 2. Decarbonising Heat how this report examines the challenge 3. Heating technology options and assumptions 4. Fuel price & carbon assumptions 5. Housing stock segmentation 6. Modelling methodology and scenario development 7. Results Customer perspective Customer choice Electrification and heat networks Balanced transition Carbon and system impacts Comparison Sensitivities Conclusions 8. Policy implications Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 48

49 Fuel-Price Assumptions There is uncertainty over retail and wholesale prices, for gas, electricity and oil post For the purposes of this report it has been assumed that prices remain stable after this date p/kwh DECC Central Scenario to 2030 (early investment in electrification 90% of electricity overnight at lower rate / 10% boost during the day. The difference between a standard tariff and Economy 7 is 7.7p/kWh this is maintained. Heating oil price assumed to rise by 3% per annum (based on conversations with industry) DECC central scenario to 2030, with slight rise in based on Redpoint report assumptions to reflect a worst-case scenario for gas to Electricity (retail price) Electricity (Economy 7) Gas (retail price) Heating oil (retail price) *Electricity price projections are taken from the latest DECC forecasts, this may not include all upgrade costs so our scenarios consider a best-case scenario for electricity to 2050 Biomass Pellet price is not shown above however we assume price rises steadily from 5p/kWh today to 6.5p/kWh by In line with DECC 2030 forecast. Price will depend on competition for wood, and the balance between supply of pellets and demand for pellets. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 49

50 Carbon Intensity National Grid - Average Year gco2/kwh Committee on Climate Change Fourth Budget The National grid assumptions for Average Carbon content of electricity follow the DECC / CCC trajectory. National Grid: Marginal for MCHP Micro-CHP will use marginal grid electricity to reflect the power station mix as it changes over time High and low elec. efficiency micro-chp will use different marginal numbers as e.g. Stirling engines operate more at the peaks, and e.g. fuel cells are more baseline Baseline numbers taken from National Grid (see following slide) Other fuels: gco2/kwh Gas Oil Biomass domestic Biomass - community Carbon content of gas is based on assumed biomethane available under Customer Choice scenario. Under Balanced Transition, falls to 62 g/kwh in 2045 Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 50

51 Marginal electricity grid carbon intensity assumptions Marginal - for low elec. eff micro- CHP Marginal - for high elec. eff micro- CHP and CHP for district heating Average grid carbon intensity g / kwh These numbers are taken from National Grid forecasts, the grid average carbon intensity projections align with the central DECC scenario. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 51

52 Biomethane Assumptions TWh Conservative assumption for base-case: The Redpoint Green-Gas Scenario is conservative compared some DECC scenarios Assume 60% available for domestic use 2015: 5TWh 2025: 15TWh TWh 2045: 75TWh By 2050 this equates to ~25% of gas demand being met by biomethane in the base case scenario (66% in Balanced Transition) Biomethane availability will be a key sensitivity The future availability of biomass is uncertain, for the base-case assumptions Delta-ee have chosen a medium range estimate for biomethane availability. It is likely that by 2050 there could be more or less biomethane available for domestic use Delta-ee will explore the impact of these scenarios in the sensitivity analysis for this report. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 52

53 Contents 1. Executive Summary 2. Decarbonising Heat how this report examines the challenge 3. Heating technology options and assumptions 4. Fuel price & carbon assumptions 5. Housing stock segmentation 6. Modelling methodology and scenario development 7. Results Customer perspective Customer choice Electrification and heat networks Balanced transition Carbon and system impacts Comparison Sensitivities Conclusions 8. Policy implications Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 53

54 Housing Stock Segments & Rationale Segmenting the GB housing stock In order to map the suitability of microgeneration technologies onto the GB housing stock, and to model technology performance within different types of properties, Delta-ee has broken the GB housing stock into 35 segments. Category Segments considered Rationale for Inclusion of segments Property type Detached house Terraced house Semi-detached house Flat Denotes space availability Denotes roof size / availability Used to interpret thermal demand, which denotes output of system required & feeds into running costs. Construction date Pre Post 1980 Used to interpret thermal demand, which denotes capacity of system required & feeds into running costs. Where thermal demand in each segment is within 5% the segment is merged (as customer behaviour, economics and physical fit will be the same) Heating system Gas central heating system Electric heating system Other central heating system (including coal or solid fuel, oil, LPG) Denotes gas availability/unavailability Denotes hydronic / non-hydronic heating system Feeds into 'fuel cost' Feeds into 'fuel efficiency' Feeds into 'installation cost Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 54

55 Housing segmentation - overview Gas Electric Other Detached Urban Suburban Rural Rural 5.7m Properties 31% CO2 emissions 300,00 Properties 3% CO2 emissions 800,000 Properties 5% CO2 emissions Semi-Detached 6m Properties 23% CO2 emissions Urban Suburban 275,000 Properties 2% CO2 emissions Rural 330,000 Properties 2% CO2 emissions Rural Terrace 6.8m Properties 20% CO2 emissions Urban Suburban 500,000 Properties 2% CO2 emissions Urban Suburban Rural 155,000 Properties >1% CO2 emissions Rural Flat 3.4m Properties 6% CO2 emissions Urban Suburban 1.5m Properties 5% CO2 emissions Urban Suburban Rural 7,000 Properties >1% CO2 emissions Rural UK Housing stock segmentation today Existing stock: 26 million properties Demolitions: DECC assumption used 0.1% per year (~25,000 properties) spread evenly across the stock Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 55

56 Housing Segmentation Thermal demand Total Thermal Demand: 2012: 385TWh 2050: 316TWh This is between the Level 2 and Level 3 DECC trajectories for domestic heat demand. Assuming: 30-80% loft insulation 50-75% cavity wall 25 70% Solid wall Internal temp 18C Thermal demand for space and water heating reduces decade by decade: Base Case Technology: Retrofit gas central heating system : Gas Boiler Retrofit electric central heating system : Electric storage heaters Retrofit other central heating system : Oil boiler New build gas central heating system : Gas boiler + PV (to 2025) ASHP or district heat (from 2025) New build electric or other central heating system : ASHP/ DH Delta-ee assumptions based on previous research carried out by GL Noble Denton for National Grid. Assumes all realistic improvements to thermal demand have been taken up by 2050 no incentives so evenly spread over each decade Checked against sources including- Low Carbon Hub (new build). In technology model thermal demand determines the size of technology,influencing cost Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 56

57 New Build Changing base case The changing base case for new build: Delta-ee customer research with housing developers found microgeneration is only installed in new build where regulations require it, and that developers opt for the least cost option. From 2016 new regulations will come into force that will set carbon compliance levels for new builds based on the kgco2/m²/year properties are permitted to emit this will force microgeneration into the sector. Assuming that the lowest cost technology is installed, the base case will change by decade, and by segment: On Gas: Zero carbon regulations can be met in new build using a gas-boiler, and some PV to off-set the carbon this is the lowest cost, easiest to install option. Off Gas: ASHP or biomass are the lowest cost option, however developers do not like installing biomass as there is a perception this can affect sell-ability - we have assumed ASHP will therefore be the most selected technology. As the grid decarbonises, the volume of PV required to off-set the carbon emissions from a gas boiler will be rise, resulting in higher cost than an ASHP, and not possible at all in larger properties. We have assumed that post 2020, the base case on-gas will also shift to an ASHP as the least cost option. Number of new builds per year , , , ,000 80% on Gas 20% Off Gas 56% Terrace / Flat 30% Semi 14% Detached New build volumes: ~9million new builds completed by 2050 Delta-ee assumption on new build based on conversations with relevant stakeholders. Base case for 2012 of 100, ,000 new build properties per year No expectations that new build volumes will increase dramatically to 2020, current economic climate will limit growth. DECC assumption of 1.1% growth per annum on total housing stock would result in 40.2m households by 2050, however industry expectations are for property demand to ramp up, rather than remain at a flat rate - Delta-ee scenario results in ~35m households by A majority of properties will be built in locations with access to gas grid (this does not imply gas will be the chosen heating fuel) There will be greater demand for smaller family homes to reflect demographic change. Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 57

58 Contents 1. Executive Summary 2. Decarbonising Heat how this report examines the challenge 3. Heating technology options and assumptions 4. Fuel price & carbon assumptions 5. Housing stock segmentation 6. Modelling methodology and scenario development 7. Results Customer perspective Customer choice Electrification and heat networks Balanced transition Carbon and system impacts Comparison Sensitivities Conclusions 8. Policy implications Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 58

59 Techno-Economic Model Define thermal demand Pick up technology assumptions for chosen decade Compare to base case for that segment Upfront cost, payback and carbon outputs Example pre-war semi-detached home with access to natural gas in decade Base case 1. Define thermal demand (decreases over time) 2. Select appropriate size boiler for base case 3. Pick up capital cost of boiler 4. Pick up efficiency of boiler 5. Pick up fuel cost 6. Pick up carbon factor of natural gas 7. Calculate annual fuel consumption (1 divided by 4) 8. Calculate annual cost (7 x 5) 9. Pick up maintenance cost 10. Total running cost = Carbon emissions = 7 x 6 Repeat for all other technologies to give 12. Alternate capital cost 13. Alternate running cost 14. Alternate carbon emissions Comparing base case to alternate technology when existing heating system needs to be replaced 15. Calculate marginal cost of alternate technology (12 3) 16. Calculate marginal running cost of alternate technology (10 13) 17. Payback (15 divided by 16) applicable is lower running cost 18. Carbon savings (11 14) Repeat above for each of 23 segments representing existing homes Repeat for all alternate technologies relevant for that housing segment Repeat decade by decade to 2050 Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 59

60 Soft-Factors Delta-ee customer research has shown that there are a series of filters which customers go through before deciding to install a new heating system. Whether or not the technology fits into the property is the initial barrier to overcome. Secondly we know customers are concerned about upfront cost, and payback these are the primary barriers to uptake. A final filter is customer preference as we know customers are not economically rational in some cases a technology will be rejection because a customer simply does not like it. The soft-factor modelling captures these three filters in turn Physical fit is used as the initial filter as some technologies will be automatically ruled out or have lesser uptake if it is difficult to install Economics is used as the second filter as the primary decision factor for a majority customers is the cost of the technology. If the economics are very poor, only innovators will take up a technology Customer preference is used as a final filter as after cost, customers have to choose which technology to adopt, important factors here can be aesthetics', and the impact on their behaviour. % of homes in housing segment that will adopt 100% 1 Physical Fit Economics Customer Preference 2 3 Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 60

61 Soft-Factors Physical Fit 1 Zero 0% Physical fit Ex diff 10% Assumes perfect economics to capture buildings where different technologies can be easily installed Diff 25% Moderate 50% Good 75% Per 100% 2015 GHP M-CHP SE M-CHP FC ASHP GSHP ASHP-Boiler Solar Thermal Biomass DH Electric Flat Ex diff Zero Ex diff Ex diff Zero Ex diff Zero Zero Per Per Terraced Diff Diff Diff Diff Ex diff Diff Diff Ex diff Per Per Semi-detached Mod Good Good Good Mod Good Mod Diff Per Per Detached Per Good Good Good Good Per Good Good Per Per 2025 GHP M-CHP SE M-CHP FC ASHP GSHP ASHP-Boiler Solar Thermal Biomass DH Electric Flat Diff Zero Diff Diff Zero Diff Zero Ex diff Per Per Terraced Diff Zero Zero Diff Ex diff Mod Mod Ex diff Per Per Semi-detached Good Good Good Good Good Good Mod Mod Per Per Detached Per Per Per Good Per Per Good Good Per Per 2035 GHP M-CHP SE M-CHP FC ASHP GSHP ASHP-Boiler Solar Thermal Biomass DH Electric Flat Mod Zero Mod Mod Zero Mod Zero Ex diff Per Per Terraced Mod Zero Zero Mod Ex diff Good Mod Diff Per Per Semi-detached Per Per Per Per Good Per Mod Mod Per Per Detached Per Per Per Good Per Per Good Good Per Per 2045 GHP M-CHP SE M-CHP FC ASHP GSHP ASHP-Boiler Solar Thermal Biomass DH Electric Flat Good Zero Mod Good Zero Good Zero Ex diff Per Per Terraced Good Zero Zero Good Ex diff Good Mod Diff Per Per Semi-detached Per Per Per Per Good Per Mod Mod Per Per Detached Per Per Per Good Per Per Good Good Per Per Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 61

62 Rationale for physical fit (1) ASHP Space required for outdoor unit opportunity for innovation in design, placement of outdoor unit to make this easier in the future. Most challenging in flats, then terraces Noise from outdoor units potential for noise to be reduced (but not eliminated) Space required for indoor hot water tank challenging in flats and terraces where combis popular For homes with high heat losses (some detached and semis), 3 phase electricity connection may be required. For some (minority of) homes, changes to hydronic heating system may be prohibitive GSHP Ground loop requires either borehole (getting drilling equipment onsite, plus space for borehole) or trench (requires major disruption to garden) novel approaches to drilling boreholes in pavements for social housing being developed. Space required for indoor hot water tank challenging in flats and terraces where combis popular For some (minority of) homes, changes to hydronic heating system may be prohibitive Gas HP Space required for outdoor unit opportunity for innovation in design, placement of outdoor unit to make this easier in the future. Most challenging in flats, then terraces. Slightly smaller & quieter outdoor unit than electric heat pumps. Noise from outdoor units potential for noise to be reduced (but not eliminated) Space required for indoor hot water tank challenging in flats and terraces where combis popular, although combi gas heat pumps possible in the future Hybrid boiler - ASHP Space required for outdoor unit opportunity for innovation in design, placement of outdoor unit to make this easier in the future. Most challenging in flats, then terraces. Smaller outdoor unit that pure electric ASHP Noise from outdoor units potential for noise to be reduced (but not eliminated) No hot water tank required No change to hydronic heating circuit required Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 62

63 Rationale for physical fit (2) Micro CHP Larger than a boiler Heavier (in some cases much heavier) than a boiler, although improvements in engine (and possibly fuel cell) design mean weight may come down significantly in the future Space required for indoor hot water tank challenging in flats and terraces where combis popular, although combi micro-chp systems are on the market in continental Europe (only for low electrical efficiency micro- CHP) Solar Thermal Require hot water storage tank challenging in many terraces and some semis. Require south facing roof Biomass Larger than a boiler. Requires hot water storage tank Requires space for fuel storage (either for manual feeding into the boiler, or a dedicate store room with automated feed). District Heat Heat interface unit approximately size of boiler No hot water storage tank required Expertise in Decentralised Energy. Delta Energy & Environment Ltd I 15 Great Stuart Street, Edinburgh EH3 7TS UK I T: +44 (0) I 63