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From laggard to leader: How Poland became Europe’s fastest-growing heat pump market

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With the war in Ukraine compelling everyone to rethink their energy strategies and focus on getting rid of Russian fossil fuel imports, while maintaining what is left from the affordability of energy supply, the go-to tactics are achieving several energy policy goals at the same time. The Polish heat pump sector seems to be doing just that.

It is showing the fastest growth rate for heat pumps in Europe in 2021 with an expansion of the market by 66% overall—more than 90,000 units installed reaching a total of more than 330,000 units. Per capita, more heat pumps were installed last year than in other key emerging heat pump markets, such as Germany and the United Kingdom.

But this has not always been the case. For years Poland prided itself on being one of the most energy independent countries in Europe. Its coal mining sector and coal-fueled power plants provided carbon-intensive, but domestic, energy—both for heating and electricity.

Coal Dependent

Even now, with the recent growth of renewables making quite a dent in Polish coal reliance, the share of coal in electricity production and district heating is around 70%. In individual home heating, it is around 48%. Poles consume as much as 87% of the coal burned by all EU households in their homes for heating. The heating sector is responsible for nearly a quarter of CO2 emissions in Poland.

This reliance, however, has been proving less and less sustainable for a number of reasons — especially in the individual heating sector. First of all, the energy independence narrative no longer holds. Polish coal mines are notoriously labour-inefficient, but a bigger problem is that they become less and less economical to run for sheer geological reasons. The average depth of extraction is now close to 800 metres below ground, which brings immense cost—both economical and human.

Time has seen a steady decline in coal mining output, especially for the coal sorts used by individual boilers are in shorter supply. This has been replaced by imported coal mainly from Russia. Poland is currently buying €0.5-1 billion worth of Russian coal each year to heat its houses.

Even if we put aside the acute air quality problems that burning coal in old individual coal furnaces brings—which we should not as the list of 20 most polluted cities in Europe constantly features at least 10 Polish cities—this should be enough in the current circumstances to warrant a huge public policy shift directed at eliminating coal from individual heating altogether.

The preferable way of doing so would be a massive deployment of heat pumps and energy efficiency programmes whilst continuing to utilise more renewables for electricity generation at the same time. This would check the boxes for so many policy objectives, including increasing energy security, reducing carbon emissions and lowering long-term heating costs.

Long-Term Planning

Given Poland’s reliance on coal for heating, how did the Polish heat pump market achieve such remarkable growth? All signs point towards government policy. Through the ten-year Clean Air Programme that started in 2018, Poland will provide close to €25 billion for replacing old coal heating systems with cleaner alternatives and improve energy efficiency.

In addition to providing subsidies, many regions in Poland have begun to phase out the coal heating systems through regulation. Prior to those bans, heat pump installations rates were modest with limited growth over the years. This shows that policy can make a big difference in steering the market towards clean heating away from polluting fossil fuel heating systems.

Trust Building

The recent success is also a showcase of efficient market development by the heat pump industry association, PORT PC. Building customer and installer trust by developing and introducing industry guidelines, quality standards and certification, as well as conducting extensive training programmes, is now bearing fruit.

Further growth in the heat pump sector in Poland is expected and will need to take place in order to further replace coal heating. This can be achieved by implementing changes to the Clean Air Programme and other similar programmes designed to improve the efficiency of homes and heating systems, like the current tax breaks for investment in buildings insulation as well as the STOP SMOG programme designed to help local governments give targeted support to the poorest households.

Also, the recently announced new programme “My Heat” financed from the sale of EU ETS allowances through the Modernisation Fund and fully directed towards heat pumps, will provide additional sources of funding and hopefully build even more awareness among consumers.

Whilst the Clean Air Programme has so far promoted mostly gas boilers (over 40% of the total), the war in Ukraine has shown that natural gas will be a scarce and costly resource and should be used wisely. Heat electrification, rather than gasification, is surely the way to go.

Challenges Remain

Three challenges remain to be tackled for continued success. Firstly, for heat pumps to be most beneficial in terms of climate protection, electricity generation should continue on the pathway towards (quicker) decarbonisation.

Secondly, heat pumps should be an element of system flexibility, rather than a strain on the peak demand. For this, dynamic tariffs and smart solutions are fairly easy fixes but require regulatory intervention as well as consumer awareness and industry willingness to go the extra mile.

Thirdly, proactive measures should be taken to avoid potential supply chain disruptions and to secure enough of a skilled workforce. Poland is very well positioned in both areas, now being a highly industrialised country with excellent technical education.

Poland’s energy transition is picking up speed, and the growing heat pump market is a prime example of a policy push working with supply pull to deliver excellent results. The prospects are encouraging and there have never been more incentives to continue on this pathway.

This article previously appeared in Foresight.

The perfect fit: Shaping the Fit for 55 package to drive a climate-compatible heat pump market

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Removing fossil fuels from heating is a goal of policy makers around the world in order to decarbonise energy systems and to remove exposure to fossil fuel imports. Alongside efficiency measures, the key technology to replace fossil fuels for heating is heat pumps. In the EU, where fossil fuels — mostly gas — dominate the heating mix, rapid action on heat is needed and the share of heat from heat pumps is expected to grow at lightning speed. Heat networks, which simultaneously need to grow rapidly, are also expected to see much of the heat they transport produced from heat pumps.

This report — a collaborative effort between RAP, Agora Energiewende, CLASP, and the Global Buildings Performance Network — makes the case that the Fit for 55 package can drive a robust heat pump market in the EU, and that reform of the proposals is needed.

With decades of support given to fossil fuel heating technologies, the rapid deployment of heat pumps will need support. The report identifies the current barriers to making that happen, as well as the six areas where the Fit for 55 package can go further in supporting heat pumps at the scale needed:

  • Development of ETS 2 in the ETS directive, which would include buildings as well as transport sectors.
  • Revisions to Energy Taxation Directive to ensure electricity is always taxed lower than other fuels, which will have tax levels linked to environmental damage.
  • Recast Energy Efficiency Directive in which proposals are set to disallow energy savings from boiler installations, as well as introduce a standard for ‘efficient heating and cooling’ networks.
  • Revised Renewable Energy Directive, which includes higher targets for renewable heat use in buildings.
  • Revisions to the Energy Performance of Buildings Directive, which include the need for Member States to set out policies for fossil fuel heating phaseouts by 2040 and the need for new, zero emission buildings by 2030. Revisions also include uplifts to minimum energy efficiency standards.
  • Modifications to energy labelling and ecodesign regulations for heating appliances are being reviewed and rescaled in parallel to the package.

The report also details how Member State-level policy reforms can move ahead of the Fit for 55 changes in the shorter term. These policies need to be supported by clear government heat pump strategies and joined-up heat and buildings governance. Immediate action is needed to reform heat pump policy across the EU. The Fit for 55 package provides a window of opportunity for policy change that must not be missed.

Read our two-page summary here.

The Complex Landscape of Net Metering Reform in California: Why an Installed Capacity Charge?

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Rooftop solar in California has grown from an infant industry two decades ago to a 10-gigawatt resource that contributes significantly to customer and electric system needs today. The state is blessed with ample sunshine in many regions, and its urgency on this and other clean-energy innovations was born out of the energy crisis in 2000 and 2001, as well as the need to address climate change and improve public health. But a proposed range of reforms to net metering for residential rooftop solar has prompted debate about the future of that important market segment, as well as the broader trajectory of state energy policy.

Full retail rate net energy metering with monthly netting (“traditional NEM”) — the method initially used in nearly every U.S. state, including California — is easy to implement and understand. Traditional NEM, which opted for simplicity over precision and was intended to kick-start an infant industry, might not be ideal from the perspectives of efficiency or fairness, but the extent of those problems depends on the level and design of retail rates, as well as the overall resource mix, load patterns, and customer solar adoption levels.

The maturation of the solar industry and the modernization of the electric grid make an evolution from traditional NEM to more efficient and sophisticated rate designs both possible and desirable. The exact speed of that transition, and exactly which direction to head, is not necessarily obvious and involves tradeoffs that policymakers and stakeholders should understand and debate fully. RAP recently released a report for the Michigan Public Service Commission that seeks to help Michigan regulators and policymakers understand these tradeoffs as they consider improving their rate designs for distributed energy resources (DERs), as well as the broader tariff specifications and DER program structures.

In 2016, California took a substantial step away from traditional NEM to “NEM 2.0.” That step required solar customers to be on a time-of-use (TOU) rate along with other reforms. All else equal, those reforms were designed to reduce the level of compensation for a new solar customer. Residential solar installations dropped modestly in 2017 but the pace of residential installations has grown steadily since then. On Dec. 13, the California Public Utility Commission’s proposed decision on NEM reform signaled a new stage in this debate. The proposed decision found there has been a significant cost shift from new residential solar customers to non-participating customers under NEM 2.0 and includes a wide range of additional reforms to rate design for new solar customers.

These proposed reforms are well intended, and many have substantial merit — including more differentiated time-of-use rates, value-based export credits, encouragement of solar plus storage, and a range of equity measures. More controversially, the proposed decision included a new “grid participation charge,” which is structured as a $/kW monthly fee on installed capacity for new residential solar customers. A new “market transition credit,” structured as a $/kW monthly credit on installed capacity, would partially offset the grid participation charge temporarily for customers of two of the three utilities, at a level designed to achieve a 10-year payback period for new solar installations.

The basic concept of the grid participation charge is not new. It has been debated before and can be generically described as an installed capacity charge. An installed capacity charge is not tied to any reasonable metric of the size of the customer or their impact on or usage of the grid, but is primarily a way to spread certain categories of costs. The direct incentive provided to customers by an installed capacity charge, all else equal, is to install fewer kW of the resources covered by such a charge. In this case, the market transition credit is attempting to partially counteract this effect by ensuring a reasonable payback period for new customers. In that context, it is important to consider whether such a spreadsheet analysis is reasonably accurate and whether there are more qualitative considerations, such as the complexity of the newly proposed rates, that could further hinder adoption.

New York is implementing a similar rate structure for new residential rooftop customers starting in January 2022, which has been labeled a “customer benefit contribution” charge. This charge is designed to cover a smaller set of program costs, namely energy efficiency and clean energy programs as well as low-income discounts. New York’s situation is different: Without its advanced metering infrastructure fully deployed, more sophisticated rates are difficult to implement. The New York Department of Public Service previously estimated that this new charge will be between $0.69 and $1.09 per kW (direct current) of installed capacity, depending on the utility. Final rates, going into effect next month, were recently filed and range from $0.72/kW to $1.33/kW. This means that the size of California’s proposed $8/kW charge for installed capacity is unprecedented, even if it is effectively reduced to $4 or $6 per kW by the market transition credit in the first year of this new structure for two of the utilities.

Jumping into such unexplored territory comes with risks. History shows that rate designs like this spur customers and vendors to find innovative workarounds. For example, customers may try to avoid this new charge by fully disconnecting from the grid. While unlikely for many customers today, it may become a more popular option if costs for storage continue to fall dramatically. Alternatively, customers may be able to set up their solar and storage systems to avoid exporting to the grid and thus avoid any need to notify the utility and be exposed to the grid participation charge. Solar installers have experience with both of these options in Hawaii. Such behavior is likely suboptimal from the societal perspective, and would likely cause significant cost-shifting to other customers. The CPUC could try to prevent these reactions, but this could just push such behavior further underground. Other unintended consequences will also likely arise.

Of course, the proposal for the grid participation charge cannot be evaluated in a vacuum — without a comparison to the relevant alternatives. Regulators should be guided by this principle for efficient rate design (which takes on increasing importance as customers have more options to invest in generation, storage, and load controls): Rate design should make the choices a customer makes to optimize their own bill consistent with the choices that would minimize system costs. Continued reforms to residential time-varying rates is an important option we will explore more fully in a follow-up blog. For now, we note several other rate design options that can address cost shifts from solar distributed generation in a manner similar to the grid participation charge. These should be considered instead of an installed capacity charge, or in combination with a small installed capacity charge:

  • Reasonably sized customer charges ($5 for low-income customers and multifamily building residents, $10 for everyone else);
  • A distribution flow charge on both inflows and outflows;
  • A demand-based or connected load charge to cover line transformer and other site infrastructure costs (approximately $1-2/kW); or
  • A higher minimum bill.

RAP has long advised against major reliance on large customer charges and demand charges for efficiency and equity reasons. In many states and for many customer classes, these charges are far too high. But within proper limits, these options all have a stronger cost causation argument than an installed capacity charge. The distribution flow charge, defined as a cents-per-kWh rate on both imports from and exports to the grid, has not been implemented by any state utility commission, but is a concept that RAP put forward in our report for the Michigan PSC as well as a 2013 report on distributed generation tariff design. Demand charges can also be more difficult for customers to understand and manage than other types of rates, although this can be mitigated with education efforts and data provision.

Ideally, these options would be considered as part of broader reforms to rate design for residential customers. Not all residential customers need to be exposed to more complex rates, however. Another idea discussed in the Michigan report is segmenting the residential class into an “advanced” category and a “basic” category. That way, a broad swath of the residential class could be moved onto more sophisticated and efficient rates without risking adverse impacts to low-income and low-usage customers. Broader residential rate design reform was not a focus of the current California proceeding, but it should be considered as the full CPUC takes up the proposed decision.

The grid participation charge, and other alternatives to address similar issues, is not the only important public policy concern as California considers reforms to its DER program. RAP will follow up with additional blogs in this area in January, discussing issues such as the structure of time-of-use rates, the newly proposed value-based export credit system, community solar and locational value.

Health Benefits by the Kilowatt-Hour: Using EPA Data to Analyze the Cost-Effectiveness of Efficiency and Renewables

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Energy planners and regulators have traditionally valued the health benefits of energy efficiency and renewable energy at zero — because these benefits do not flow to energy users in proportion to usage and because decision-makers had no simple and feasible way to estimate them. But recent work by the U.S. Environmental Protection Agency is an important step forward in being able to quantify the benefits per kilowatt-hour of efficiency and renewables across the United States. The numbers are quite dramatic. The “BPK” tool shows that in many cases, the cost of new wind and solar resources is entirely offset by the sizable benefits to public health from cleaner air. The tool, first released in 2019, was updated in 2021 to include more granular regional data.

This policy brief explores the methodology behind BPK and recommends several ways in which regulators and policymakers can use this information, from air quality planning to energy efficiency programs and rate design.

Rebalancing energy levies is a practical way to increase the electrification of heat

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Every year households in the UK install about 1.7 million gas boilers. In May, the Heating and Hotwater Industry Council reported that 2021 looks to be a record year for gas boiler sales, with year-to-date sales up 41 per cent from 2020. So far, low-carbon heating occupies a small — although growing — niche in the heating market.

One important factor supporting a booming boiler market is quite simple: Gas is cheap and electricity is expensive. Residential electricity prices per kilowatt hour are currently around five times higher than gas prices. This means that switching to a heat pump, even with an efficiency of 300 per cent, does not offer bill savings for customers on a standard tariff.

This is partly a political choice. Legacy policy costs drive part of the difference in price. Most of levy-funded energy and climate policies, which make up 23% of the total household bill, are presently paid for through electricity bills. In the UK, these legacy costs include charges for policies such as feed-in tariffs, the Energy Company Obligation, Contracts for Difference, the Renewables Obligation and the Warm Home Discount.

Most levy-funded energy and climate policies are presently paid for through electricity bills.

Electricity is also effectively covered by a carbon tax, the carbon price floor. By contrast, gas carries a mere 2% of environmental and social levies, and is not subject to a carbon price. Research by Oxford University shows that the current levy structure provides an active disincentive to adopt heat pumps, which is clearly at odds with the UK government’s goal of mass deployment by 2028.

Pie charts comparing cost percentages between gas and electricity bills. The charts show 1.86 percent environmental and social obligation costs for gas bills compared to 22.92 percent for electric bills.

In the past, when electricity was much more carbon intensive, such an approach could have possibly been justified. But electricity has now become cleaner than gas and is projected to emit only half of the greenhouse gases resulting from heating with fossil fuels by the mid‑2020s. A much needed rethink of levy costs could provide energy users with incentives that complement the need to fully decarbonise heating.

Other countries are introducing incentives

But how to do this? The government could take two potential approaches.

First, legacy policy costs could be moved from electricity to gas and other fossil fuel heating bills. Such an approach could act as a carbon tax proxy, reflecting the falling carbon intensity of electricity and encouraging a switch to increasingly clean power. For the average dual fuel bill, it would make very little difference if the levies recouped from gas were equal to those previously recouped from electricity. The total bill of a dual-fuel household would increase slightly, as levies from the 28 million households with electricity would be spread across 24 million households currently using gas.

Such a change, however, could also support other policy goals. Households that currently use electricity for heating are twice as likely to experience fuel poverty. For them, energy bills would come down, helping to meet statutory targets to reduce fuel poverty.

The Netherlands, which has one of the highest penetrations of fossil-gas heating in the world, has recently decided to take a similar approach. The Dutch government will increase taxation of fossil gas by up to 43 per cent by 2026 (compared to 2019 levels) and will lower taxation on electricity.

Second, a direct but modest carbon tax on fossil heating fuels could pay for the legacy policy costs and reduce the levies on electricity. This is an approach currently being discussed in Germany, where a carbon price of €25 per tonne of CO2 in 2021 rises to €55-€65 in 2026, after which an emissions trading system for transport and heating fuels will operate. The German government expects the new system to generate revenues of €40 billion from 2021 to 2024. The revenues will be used to lower the renewables surcharge on electricity and for financial support programmes, making the use of electricity more attractive. Sweden has also used this approach as part of the country’s heat pump deployment strategy over many decades.

A pragmatic approach to switching fuel is needed

Both of these approaches require policy reform and may face significant political barriers. A more targeted and potentially more pragmatic method would be to exempt the electricity used for running heat pumps from levies. Under such a scheme, households installing a heat pump would receive a discount on the amount of electricity used for heating. This option is attractive because it would not require major reform of either levies or taxes, but still offers an incentive to households to switch fuels.

Pragmatic levy reform can eventually tilt the market in favour of clean heating solutions and make high installation rates of gas boilers a thing of the past.

To meet the government’s target of 600,000 new heat pumps per year, about 2% of additional residential electricity demand would have to be exempted. Levies on a per-unit basis would remain constant for existing electricity consumption. Denmark has recently done just that: Since January 2021, electricity used for space heating is subject to the minimum allowable tax rate of just 0.8 øre (0.01 pence) per kilowatt hour of electricity. The Danish government is hoping that this incentive will help them roll out heat pumps faster and at a larger scale.

Levy reform, in one form or another, will be necessary to present a clear business case to households and the market. Without it, subsidies and regulation will constantly face the uphill battle of fossil-fuel heating’s lower running costs, a situation that is politically difficult and economically unsustainable. Pragmatic levy reform can eventually tilt the market in favour of clean heating solutions and make high installation rates of gas boilers a thing of the past.

A version of this article originally appeared in Green Alliance.

Building a Next-Generation Mix of Energy Resources: Procurement Best Practices

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​In an interactive webinar presentation, panelists discussed a “next-generation” approach to utility procurement and evolving best practices, based in part on recent work done by RAP and RMI. The webinar offered recommendations on how to design clear rules for procurement processes that consider all available resources, are aligned with both utility and public-policy objectives, and result in outcomes that offer the “least regrets.​”

Making renewable heating ‘Fit for 55’

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The European Union has committed to several ambitious climate targets, including the reduction of carbon emissions by a net of 55% by 2030 compared to 1990. To meet these goals, the European Commission expects to rapidly decarbonise its building sector throughout the decade. One way to ensure the EU meets its targets and drives massive change is to replace older, fossil fuel-based heating systems with technologies such as heat pumps, solar thermal or geothermal.

There is a risk, however, that the lion’s share of the more ambitious renewable heat targets is achieved through increasingly unsustainable bioenergy. Therefore, without action, the EU’s more ambitious climate targets will lead to a renewable heat transition that protects neither the climate nor biodiversity.

We propose revisions to the Renewable Energy Directive (RED) that could help the EU to achieve its climate goals. In particular we propose four design features for a mandatory RES-H target:

  1. Caps on the use of unsustainable bioenergy.
  2. Allowing renewable electricity to count towards the target.
  3. A multiplier for ambient heat (including heat pumps — ground, air, water — geothermal, and solar thermal).
  4. Reporting requirements to ensure the Efficiency First principle is applied.

Pricing is just the icing: The role of carbon pricing in a comprehensive policy framework to decarbonise the EU buildings sector

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To meet the European Union’s carbon goal of reducing emissions by at least 55% net from 1990 levels, the European Commission wants the buildings sector to take the lead. The EU’s Climate Plan Impact Assessment sees building renovations and sustainable renewable heating system replacements cutting carbon emissions in the sector by 60% by 2030. At the same time, this transformation must be equitable. While this is a massive undertaking, it also presents an opportunity to renovate the EU’s building sector.

In Pricing is just the icing, authors Samuel Thomas, Louise Sunderland and Marion Santini make the case that a comprehensive framework is needed to tackle the market failures and barriers to buildings sector decarbonisation. Regulatory measures and carbon pricing can help drive the demand for energy efficiency and heating system replacements. But significant efforts are needed to mitigate the impact of increased energy prices on energy-poor, vulnerable and low-income households with the worst performing buildings.

The introduction of carbon pricing should be gradual and measured. This could happen at the national or EU level, as one part of a broader package of measures to meet increased Effort Sharing Regulation (ESR) targets. Relying on extending the EU Emission Trading System (ETS) — or setting up a parallel ETS — to meet the climate goal, would carry risks that might financially strain consumers and ultimately slow decarbonisation efforts. Only a comprehensive and ambitious buildings policy framework will deliver on Europe’s climate and energy goals.

Road Map for Power Sector Transition and Coal Generation Retirement in Northwest China: Policy and Regulatory Strategies

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Meeting China’s ambitious new climate and energy goals will require dramatic change within the power sector, transitioning from a coal-dominated generation mix to a more carefully targeted mix of non-fossil resources. This shift will require continued policy reform focused on advancing environmental objectives while improving operational and investment efficiency.

Northwest China, with its abundant renewable energy resource potential, has unique opportunities to advance the transition. However, the region currently has significant overcapacity in coal generation and is the pilot region for a new national coal asset restructuring effort. Meanwhile, curtailment of wind, solar and hydro generation has been high in the region in recent years, although curtailment levels have decreased.

This report recommends policy and regulatory strategies to support the power sector transition in Northwest China and take advantage of cost-effective opportunities to export renewable energy to other regions. We focus on three main areas: (1) taking a regional approach to grid operations to improve efficiency; (2) coordinating coal retirement initiatives across the central and regional levels; and (3) ensuring that planning processes work to identify least-cost options for meeting decarbonization and other policy goals. The 10 strategies we describe represent practical next steps that draw on international experience and the reform experience in other parts of China.

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