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SECTION 4: VALUE FOR MONEY ASSESSMENT

Introduction

4.1 This section of the report assesses the performance of the programme in Value for Money ( VfM) terms. It reviews the eligible technologies supported through the initiative, and relates these to the wider outcomes - economic activity/employment and carbon displacement.

Evaluation of eligible technologies

Household Stream Support

4.2 SCHRI provides a standard thirty per cent subsidy to support the installation of domestic renewables. The flat rate subsidy was designed to ensure that the scheme was simple and easy to understand for potential applicants. This contrasts with the Clear Skies programme for the rest of the UK, where support is set at different rates for various technologies. Wind and hydro schemes are based on a contribution of £1,000 per kWe, while all others are based on a fixed value grant, irrespective of cost or power output (Table 4.1).

4.3 The most popular technologies installed via the household stream have been solar water heating and ground source heat pumps ( GSHP). SCHRI provides a significantly higher level of support for solar heating and GSHP than the Clear Skies programme. The average level of grant for solar power is just under £1000, over double the Clear Skies subsidy of £400, while the average SCHRI grant for GSHP is over 2.5 times higher.

4.4 Support for wind installations is relatively similar between both programmes. However, as the costs of wind power are reduced through the introduction of roof-mounted micro-turbines (which are less expensive compared to free standing systems), the Clear Skies regime would provide much more favourable support. For example, in the case of a £1,500 1kW Wind Turbine, Clear Skies would provide two thirds of costs compared to one third for SCHRI.

Table 4.1: Support for households between SCHRI and Clear Skies

Source: SCHRI and Clear Skies

4.5 The only size restrictions associated with the SCHRI and the Clear Skies programme are a minimum output level of 0.5kW for wind and hydro installations, with no other restrictions on any other systems. The minimum size of installation is generally not less than 1kW, and so this is unlikely to constrain demand in any way.

Comparison of Technology Capital Costs

4.6 Feedback from installers suggests that they do not expect the cost of technology for solar heating, biomass and heat pumps to reduce any further. Micro-wind is likely to experience cost reductions as a result of the introduction of roof mounted wind turbines, which can be produced and installed at a lower cost than those which require a tower support. As the level of demand for these turbines increases, production unit costs will be reduced through greater economies of scale.

4.7 The payback period associated with all of these technologies generally ranges between ten and twenty years. The electricity generating technologies, wind and hydro, have the potential to qualify for Renewable Obligations Certificates, which will provide an additional subsidy of around £60 per annum per kW, reducing the payback period further on these technologies. The cost of fuel is likely to be a key factor which will influence future payback on these technologies, with rises in fossil fuel prices making them more cost competitive with conventional alternatives.

4.8 The figures in table 4.2 demonstrate a much lower capital cost for biomass systems compared to other technologies. However, capital costs are still significantly higher for a wood fuel system compared to conventional oil boiler which would be around £60/kW -£80/kW compared to around £250/kW for a biomass system. Nevertheless, although the upfront capital costs are high, a recent research report suggests that the ongoing running costs are now lower than for conventional systems such as oil fired and LPG boilers ⁶.

Table 4.2: Comparison of eligible technologies

Source: Halcrow and Department for Trade and Industry

4.9 There is significant potential to further develop biomass heating systems in Scotland. The harvesting of commercial conifers planted during the 1960s and 1970s will result in an excess supply of timber over the next ten years. This provides an opportunity to provide much more targeted support at increasing the number of biomass heating facilities in Scotland, in order to ensure that these resources are managed in the most effective way.

4.10 Care should be taken that the current measures designed to accelerate the market penetration of biomass do not distort the market in favour of electricity generation over direct heat systems. Biomass now qualifies for ROCs through co-firing with fossil fuels in conventional power stations and through dedicated biomass power stations, although there is currently no similar support for heat in terms of a renewable heat obligation. There is a clear target for the generation of electricity for renewable sources, but no such measure exists for renewable heat.

4.11 In terms of most effective resource use, there is a strong case to focus on direct heat biomass systems compared to electricity generation. These provide a significantly more efficient energy conversion rate of over ninety per cent, which is three to four times as high as the rate for conversion to electricity, although the development of combined heat and power ( CHP) in the next ten years would be considerably more resource efficient. In addition, given the significant demand that would be created by a centralised power station, this could also have the potential of crowding out other potential users of timber, including more small scale decentralised biomass heating systems.

Additionality and Deadweight

4.12 Additionality assesses the extent to which something would have taken place without public sector intervention. The level of project additionality varies considerably between the community and household stream. Community projects exhibit much higher levels of additionality with over sixty per cent unlikely to have taken place without SCHRI funding (Figure 4.1). This compares to forty-five per cent in the household stream.

4.13 Over one quarter of projects in the household scheme would have taken place in any case, compared to none of the community projects. The role of the development officers in appraising community project additionality ensures that projects that are likely to have proceeded without SCHRI funding can be sifted out. This contrasts with the household stream, where it would not be feasible to include project additionality as part of the assessment criteria, due to the standardised nature of the application procedures.

Figure 4.1: Project additionality

Carbon Displacement

4.15 The EST Evaluation Unit has produced estimates of the annual and lifetime levels of carbon displacement arising from the household stream and lowland community capital grants. As more information becomes available regarding the performance and lifespan of micro-power systems, these estimates will be increasingly based on empirical evidence, further improving their quality and robustness. No equivalent data is currently available for the Highlands and Islands community stream.

4.16 The 45 community installations funded by EST in 2003/2004 and 2004/2005, led to estimated carbon savings of over 400 tC per annum, and just under 7,000 tC during the lifetime of the projects (Table 4.3). The GSHP and biomass systems generated the highest level of carbon savings per installation, with lower levels for solar water heating and wind turbines.

4.17 It should be noted that carbon savings are highest when the replaced systems are oil or coal fired heating systems, which has been the case in many of the GSHP and biomass systems. When the systems are replacing mains gas, which is more likely in the case of solar water heating, the levels of carbon saved can be significantly lower.

Table 4.3: Carbon displacement from EST community grants, 03/04 and 04/05

Source: Energy Savings Trust and Halcrow

4.18 The 314 household grants allocated in 2003/2004 and 2004/2005 across Scotland have resulted in estimated annual carbon savings of 150 tC (Table 4.4). The biomass systems such as wood chip boilers exhibit the highest levels of carbon displacement per installation, while the figure is lower for solar water heating systems. Generally the installed capacity of a biomass installation will be higher than most solar water installations. However, it is not possible to directly compare installed capacity as three different units of account are used across the technologies.

Table 4.4: Carbon displacement from household grants, 03/04 & 04/05

Source: Energy Savings Trust and Halcrow

4.19 Comparing carbon displacement with the level of SCHRI funding associated with these installations, provides some indication of the effectiveness of the initiative in value for money terms. Overall, the figures demonstrate that the money allocated to the community stream provides a relatively similar level of carbon displacement compared to the households grants (Table 4.5). Although economies of scale mean that the £ cost per kW installed will be lower for a larger community based installation, the household grants generally attracted a higher level of leverage from other sources of funding, so that SCHRI funding contributes to a lower proportion of total project costs.

4.20 Caution needs to be taken in interpreting the values for specific technologies, as the type of system which is being displaced plays a significant role in influencing levels of carbon displacement. Therefore it is recommended that further research is undertaken to "control" for other factors which influence the level of carbon displacement in addition to the type of technology

4.21 Overall, the solar water heating projects exhibit a lower ratio of carbon displacement per £1 of SCHRI funding compared to the other technologies. Biomass systems exhibit the highest ratio, with domestic biomass systems representing the highest ratio for the lifetime of any system.

Table 4.5: Carbon displacement per £1,000 of SCHRI capital grant

Source: Halcrow and Energy Savings Trust

4.22 Using these figures provided by EST, an indicative estimate of total carbon displacement arising from the programme can be calculated. This is based on the average carbon savings per £1,000 grant for each of the technologies. The value for 'other' technologies (which includes a number of space heating, hydro and combined systems) is based on the average for all technologies.

4.23 These figures are then multiplied by the total value of capital grant allocated against each of the technologies by May 2005, which amounted to £3.6 million in community capital grants and £0.7 million for the household stream. This suggests that the programme has contributed to annual carbon displacement of around 1,250 tonnes, of which the community stream accounts for over four fifths of the impact, equivalent to its proportion of overall funding. (Table 4.6)

Table 4.6: Estimated total carbon displacement by SCHRI funded capital grants to May 2005

Source: Halcrow and Energy Savings Trust

4.24 In terms of taking account of the counterfactual situation, the survey of beneficiaries suggests that only one per cent of community grant funding is deadweight, meaning that virtually all of the carbon savings associated with these funded projects can be attributed to the programme. This contrasts with the household scheme whereby just under forty per cent of the funding was calculated as being deadweight, meaning that 125 tC of annual carbon savings arising from household grants can be attributed to the programme.

Employment

4.25 By May 2005, there were just under thirty renewable energy installers in Scotland accredited to install renewable energy systems through SCHRI. Consultations with a number of these companies suggest that the existence of SCHRI funding has been very important to the development of the small scale renewables sector in Scotland. Although, there is no evidence that firms have been established as a result of the initiative, it is considered to have provided a significant stimulus to demand in the sector, leading to increased employment in a number of these firms.

4.26 EST estimates that around ten to twenty gross FTE jobs are directly supported in these installers as a result of the SCHRI programme. However, this employment can generally be considered as being displaced from elsewhere within the energy sector, as if a renewable energy system was not installed it is likely that a conventional system would have been installed in its place.

4.27 The main net employment gains will result from technologies that generate employment in the supply chain, which would arise from technologies that have a manufacturing base in Scotland, or make use of local raw materials. This is most relevant in the case of micro-wind, which has a developing manufacturing presence in Scotland and biomass, which will stimulate demand for local timber.

4.28 The micro-wind market is a developing technology, where Scotland is emerging as a market leader. There are a number of firms based in Scotland that manufacture micro-wind turbines as well as new building mounted turbines.

4.29 One of these companies, which currently employs 23 FTE staff, stated that of the seven employees that it had recruited over the past year, half could be attributed to the existence of SCHRI. Given that the company manufactures the turbines on site, and currently has very little competition in Scotland, the displacement associated with this employment is very low.

4.30 Another of these companies currently employs twelve people and also sub-contracts to a local R&D specialist that employs a further four people. One of its main manufacturing sub-contractors is based in Scotland, where around 35 staff are supported by the micro-wind product.

4.31 Due to the established market for other technologies such as biomass and ground source heat pumps elsewhere in Europe, other countries such as Sweden and Austria have developed a market lead in these sectors. Solar water heating is also a relatively established technology. There is one manufacturer of this technology based in Scotland, while another operates an assembly function, importing components from a number of sources in both Europe and Japan.

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