Incentives can help us warm to community heating projects

HEATING accounts for nearly half of energy use in Scotland, and today only 1.4 per cent of it is generated from renewable sources.

The Scottish Government has set a target to increase that to 11 per cent by 2020 and its Climate Change Delivery Plan wants a largely decarbonised heat sector by 2050, with significant progress by 2030. It envisages a 46 per cent cut in heat-sector emissions over 2006 levels by 2020. These targets are stretching.

Various energy-efficiency measures can assist in securing the necessary reductions: insulation, draught-proofing, pipe-lagging, low-energy lighting, double/secondary glazing and boiler upgrades. If targets are to be met, we must improve considerably the overall energy efficiency of existing housing – addressing new stock alone will not be enough.

Combined heat and power (CHP) can produce 13 per cent energy savings in buildings, compared with business as usual. Community heating (a district heating network) with CHP can produce 56 per cent savings.

CHP is a source of generation that provides heat – and also, as required, electricity – to a building or buildings. Add more buildings and you have a district heating system.

This is not only about renewable generation. Sources of heat for a network include waste industrial heat, gas or biomass. Even the use of non-renewable CHP produces savings, as the efficiency of a good-quality, gas-fired CHP engine is normally around 85 per cent, compared with 35 per cent for the majority of Scotland's fossil-fuel power stations.

So, if CHP and district heating is such a good thing, why isn't there more of it? Historically, the answer lies in cheap sources of heat having been available, mainly in the form of gas.

Unfortunately, the present commercial and regulatory environment is not particularly attractive for district heating. This is because heat networks are expensive to install, payback periods tend to be lengthy and the market does not provide sufficient incentives.

But there have been successes. Aberdeen Heat & Power Company Limited was established by Aberdeen City Council in 2003. It has installed three district heating schemes and continues to expand.

Edinburgh University has installed CHP systems on its sites at Pollock Halls, King's Buildings and George Square, and there are good examples of industrial CHP, where waste heat and demand for heat can be matched within premises, such as that at Grangemouth.

The future looks better. In the local authority/commercial/retail sector, the CRC energy-efficiency scheme (CRC), which comes into force in April, may stimulate increased uptake of CHP, once the lower-hanging fruit of other measures have been picked.

The CRC will apply to about 5,000 organisations with electricity consumption above specified annual levels. These organisations will include supermarkets, major retailers, banks, local authorities and all central government departments. Annual allowances will have to be purchased (initially at 12 each) for each tonne of expected to be emitted, and then surrendered based on actual emissions in each year. The allowances will be tradeable and the revenue from these allowances will be recycled to all participants in the CRC, so that those who implement more energy-efficiency measures will receive more back than they paid, while the opposite will apply to those who do less.

The Climate Change (Scotland) Act 2009 imposes important duties on public bodies and on ministers. Section 44 requires each public body to carry out its functions in the best way to contribute to the delivery of the targets set under the act. Section 61 requires Scottish ministers to publish a renewable heat action plan and to review it at least every two years. This plan was published in November.

In April 2011, a renewable heat incentive (RHI) will be introduced aiming to encourage renewable heat measures. If set at the right levels, it should stimulate CHP and district heating schemes.

Financing district heating schemes has so far not been easy. Investors perceive risks with such schemes – is there a guaranteed uptake? – so financing tends to be costlier. But if guaranteed loads can be secured for a development, then these costs can be reduced. And the proposition becomes more attractive if there are incentives like the RHI.

• Charles Smith is a partner at Brodies LLP and an expert on energy and environmental law.