Getting to grips with micro economics

How much should we spend to save a tonne of carbon emissions?

That’s one question raised by a report commissioned by the British Council for Offices (BCO), which attempts to attach some cold, hard numbers to the disparate costs and benefits of small-scale installations of technologies such as photovoltaic panels and biomass boilers. The authors have analysed 77 commercial developments in central London built between 2006 and 2010, when London planning guidance stipulated that they meet either 10% or 20% of their own energy needs with renewable energy generated on site, a requirement known as the “Merton rule”. Their startling conclusion is that developers are paying an average of £380 per tonne of emissions reduced and, in the most extreme cases, as much as £2,800.

“We’re not saying that microgeneration is bad per se, but overall the picture at the moment is quite disturbing,” says Gareth Roberts, director at Sturgis Carbon Profiling and one of the report’s authors. “The key thing we found is that the economics of producing electricity, whether from a nuclear power station, a coal-fired power station or from renewables, is remarkably similar. You wouldn’t ever propose to build a mini nuclear power station on a building, but that’s what we’re doing when we ask people to install renewables.”

Roberts wants to start a serious debate on whether microgeneration is really the most cost-effective way to reduce the environmental impact of the UK’s building stock. While the government subsidies currently attached to on-site renewables can generate a modest income for investors and occupiers, in most cases ongoing expenses such as maintenance and loss of lettable area add up to a financial burden. The annual net cost to developers of microgeneration is £174m, with taxpayers putting in £59m on top in the form of subsidies. According to the report’s calculations, this outlay yields just £18m-worth of social value in the form of foregone environmental damage.

In comparison, installing district-wide combined heating and power (CHP) systems would cost £175 per tonne, which would save £153m a year if applied UK-wide, and carbon capture and storage technology - currently deemed too expensive for widespread application - is estimated at $50-100 (£31-62) per tonne.

Scale is the key factor that determines the cost per tonne of emissions saved, because many of the costs of installing and maintaining on-site renewables are fixed, regardless of generation capacity. Roberts suggest that local authorities could set higher targets for renewables on large schemes that have the potential to make a major contribution, perhaps using tools like the London Heat Map to match supply and demand.

But for the rest, there should be other options. “Developers have got money and local authorities have a whole series of powers they can use to remove the barriers to installation of things like CHP. They could also bring forward opportunities for energy savings themselves. There might be ways to save far more energy in the community, for example, by using that money to install loft insulation in social housing, which could tackle fuel poverty as well. Developers might prefer to spend money enabling the local authority to do that rather than putting up a few square metres of solar panels.”

The case for

But does such a narrow focus on costs give the full picture? District heating and power systems may appear more cost-effective on paper, but they present significant legal and administrative challenges for local authorities before they even consider how to install the infrastructure in crowded urban areas.

“Renewables on buildings are controllable by the developer and operator,” points out Adam Mactavish, director of sustainability consulting at Sweett Group. “That’s not to say they should pay an exorbitant price. But where on-site renewables are cost-effective, they can make an immediate contribution, rather than developers paying into a fund for a project which may not happen for years.

“You wouldn’t ever propose to build a mini nuclear power station on a building, but that’s what we’re doing when we ask people to install renewables”

Gareth Roberts, Sturgis Carbon Profiling

Mactavish adds that arbitrary targets for on-site renewables can result in responses that are both expensive and poor value for money compared to other ways of saving carbon. “But that doesn’t mean renewables have no place, only that they should be included on merit rather than because of a policy dictat.”

There has already been a widespread backlash against blanket prescriptions like the Merton rule - the requirement for 20% of on-site renewables was downgraded to a “presumption” in the 2011 London Plan. But these sticks, and carrots like the Feed-in Tariff, have helped to bring down the cost of technologies like photovoltaics so that they now make much greater financial sense.

There is also the problem that any cost-benefit analysis, however detailed, is always retrospective. With many of the figures on which the calculations hinge constantly shifting, something that may not have paid back in the past may give a healthy return in the future. “You’ve got to do it, but it’s like looking at a crystal ball,” says Ant Wilson, director of sustainability and building engineering at AECOM. “You could say photovoltaics don’t pay back based on previous evidence, but they might do now because the costs have come down and the price of energy has changed.”

He also argues that few other investments are ever subject to this level of scrutiny. A frequently cited stumbling block to both energy-efficiency improvements and microgeneration is that it is often not the original investor who will reap the rewards. But this is hardly unusual in property: “It’s like a new kitchen or bathroom - it’s just going to help you sell the house, you’re not going to get that back. Certain things never pay back - no one works out the lifecycle cost of a new television. Yet when it comes to energy-efficiency investment, everyone wants to know when it will pay back.”

Mactavish also questions the focus on the loss of lettable area - potentially one of the greatest costs to developers. “What about the decision to put in a triple-height atrium or a fancy roofline? That can happen for a whole range of perfectly good reasons but it’s not subjected to the same level of analysis.”
Renewables are also expected to pay back far more quickly than other investments. The BCO report assesses the benefits over three payback periods - three, eight and 10 years. “People might expect a three-year payback on a discretionary investment, but not on a new building,” says Mactavish. “If we want to achieve the UK’s carbon targets, we will need to make investments with longer payback periods. We shouldn’t expect a three-year payback on a technology that will generate low-risk energy for 20 or more years.”

“Certain things never pay back. No one works out the lifecycle cost of a new television”

Ant Wilson, Aecom

But even setting the bar that high, there are some cases where renewables appear to make good business sense. For example, when installations with a lower cost per tonne are separated out and compared with a range of other energy efficiency and generation measures, they rank second, beaten only by improved lighting efficiency, and slightly above cavity wall insulation. Roberts says these installations would typically be ones that save 25-100 tonnes of carbon dioxide, are applied at scale, and in locations incurring low opportunity costs - “for example, a 100m2 solar hot water array on the roof of a building with a large heating demand”.

There are also a few installations that do pay back over those three years. “If they’re getting a return of 33%, that’s pretty good compared to returns on commercial property,” says Mactavish. “There are also quite a number who are getting 8-10%. Some investors would be happy with that rate of return, where the risks are low.”

The long view

Property developers may be driven by the bottom line, but local authorities must take into account a much wider spectrum of drivers. This is the focus of another report, just released as part of the CLUES (“Challenging Lock-in through Urban Energy Systems”) project led by University College London.

Drawing on case studies from around the world, it considers additional drivers such as social and community benefits that can’t be easily quantified in cash terms. Two hypothetical scenarios compare a future of greener centralised energy with a decentralised network with much higher rates of microgeneration. Though the overall carbon savings are similar, the decentralised world is characterised by an industrial renaissance in the UK, smaller energy imports, and engaged citizens who manage their own demand much more carefully.

“Much of the time, microgeneration won’t be cheaper,” says Dr Chris Goodier of the school of civil and building engineering at Loughborough University and a member of the CLUES team. “But we need to look at the wider value. There’s currently a big disconnect in the public’s appreciation of where energy comes from. People have it on demand, they just plug into a wall - whereas 100 years ago, you had an open fire that needed to be refuelled, and hence it was much easier to identify the original source of the energy. In a way, we are going back to that and microgeneration is helping to empower the community.”

The physical, economic and social changes that will be necessary over the coming decades to avoid catastrophic climate change, and secure the UK’s energy supply, are unlikely to be brought about with the short-term thinking typical of the property market, or ever to pay back in a way that could be quantified to satisfy developers. “To improve energy efficiency of the building stock, we’re talking decades and the rental property business model is not made up for that,” says Goodier. “Tenants rarely have any kind of long-term stake in a project - the rental office market is the worst.” If the mechanisms of the property market or the construction supply chain rule out investment in renewable energy … well, perhaps it’s not the cost of renewable energy that’s the problem, but the way the calculations are done.

Perhaps the bigger question is whether we can afford not to use microgeneration. Given how urgently we need to cut our carbon emissions, surely any proven technology is worth having in the mix? Even if on-site renewables could never replace large-scale power generation, they could reduce the cost of replacing the power stations that are now coming to the end of their lives, and our vulnerability to political turmoil elsewhere.

“If we don’t start chipping away where it is cost-effective, we’re just making the position worse,” says Mactavish. “Energy demand will go up, and it will be more difficult to meet that demand. It’s like turning the lights off or shutting down your computer at the end of the day. Individually, it’s not going to change the world - but if nobody does it we’ve got a huge problem.”