Too many technologies and not enough infrastructure: How do we reach sustainability?

Delta Energy & Environment Ltd Registered in Scotland: No SC259964 Registered Office: 15 Great Stuart Street, Edinburgh, EH3 7TS Too many technologies and not enough infrastructure: How do we reach sustainability? Heating & Cooling to 2020 and beyond Dr. Lindsay Sugden, Senior Analyst, Delta-ee Contact: lindsay.sugden@delta-ee.com, +44(0)131 625 1006 www.delta-ee.com

Delta Energy & Environment Demand Delta-ee provides: Market insight & forecasts Techno-economic analysis Competitor analysis Strategy & tactics Energy Efficiency Photovoltaics Fuel Cell Micro-CHP CHP Generation Energy Services Electricity Storage Demand Response Heat Pumps Electric Vehicles Connected Home Networks Clients: Energy companies Manufacturers Finance sector Policy makers Research Services: Heat Pump Service Connected Homes Service Micro-CHP Service Microgeneration Insight Service Distributed Power Service Pathways & Roadmap Service Delta-ee: Experts in Heat & Distributed Energy 2

This presentation New low carbon heating technology will be important in the UK if carbon targets are to be met The limitations of the energy system infrastructure create a need for a balanced transition involving many technologies There are customer and installer challenges to overcome Disruptive business models & connectivity in the home may support change in the heating sector Delta-ee: Experts in Heat & Distributed Energy 3

This presentation New low carbon heating technology will be important in the UK if carbon targets are to be met The limitations of the energy system infrastructure create a need for a balanced transition involving many technologies There are customer and installer challenges to overcome Disruptive business models & connectivity in the home may support change in the heating sector Delta-ee: Experts in Heat & Distributed Energy 4

UK heating market today 1.8 million Low Carbon Appliances Electric Storage Heater Oil / LPG Gas boiler Gas boilers are responsible for the vast majority of CO 2 emissions from domestic heat 2012 2025 Delta-ee: Experts in Heat & Distributed Energy 5 Source: Delta-ee UK Pathways & Roadmap: Reference Scenario

Mainly rural Mainly rural/ some urban Urban / Suburban Reaching Sustainability: Decarbonising the heating market requires lower carbon gas boiler alternatives The scale of the challenge: 2015 residential heat emissions Flat - Gas (1945-2011) Flat - Gas (Pre 1944) Semi - Gas (1945-2011) Semi - Gas (Pre 1944) Terraced-Gas (1980-2011) Terraced - Gas (Pre1944-1980) Detached - Gas (1945-2011) Detached - Gas (Pre 1944) Flat - Electric (1945-2011) Flat - Electric (Pre 1944) Semi - Electric (1945-2011) Semi - Electric (Pre 1944) Terraced-Electric (1980-2011) Terraced - Electric (Pre1944-1980) Detached - Electric (1945-2011) Detached - Electric (Pre 1944) Flat - Other (Pre 1944-2011) Semi - Other (1945-2011) Semi - Other (Pre 1944) Terraced-Other (1980-2011) Terraced - Other (Pre1944-1980) Detached - Other (1945-2011) Detached - Other (Pre 1944) Gas: 22m homes Electric: 2.6m homes Others: 1.3m homes 0 5,000 10,000 15,000 Thousands of tonnes C0 2 /yr Delta-ee: Experts in Heat & Distributed Energy 6 Source: Delta-ee Heat Study for Energy Networks Association

UK heating market in 2025 growth of low carbon appliances 1.8 million Low Carbon Appliances Which technologies will make up the 400,000 low carbon appliances? Electric Storage Heater Oil / LPG Gas boiler 2012 2025 Delta-ee: Experts in Heat & Distributed Energy 7 Source: Delta-ee UK Pathways & Roadmap: Reference Scenario

Heat Pumps Which technologies will make up the 400,000 low carbon appliances which can displace gas boilers? 1.8 million Electric Storage Heater Oil / LPG Low Carbon Appliances 400,000 Gas boiler 42,000 2012 2015 2020 2025 2012 2025 Gas boiler plus solar thermal Fuel cell Gas heat pump Hybrid heat pump oil boiler GSHP Biomass Micro-CHP Hybrid heat pump gas boiler ASHP Delta-ee: Experts in Heat & Distributed Energy 8 Source: Delta-ee UK Pathways & Roadmap: Reference Scenario

This presentation New low carbon heating technology will be important in the UK if carbon targets are to be met The limitations of the energy system infrastructure create a need for a balanced transition involving many technologies There are customer and installer challenges to overcome Disruptive business models & connectivity in the home may support change in the heating sector Delta-ee: Experts in Heat & Distributed Energy 9

The limitations of the energy infrastructure 2010 UK heat & electricity hourly demand variability Design point for heat delivery system?? Peak electricity demand will exceed electrical grid capacity in future Design point for electricity delivery system Source: Energy Technologies Institute, 2012 Delta-ee: Experts in Heat & Distributed Energy 10

Number of appliances (%) What happens under a more balanced scenario? Balanced Transition a wider mix of technologies 100% 75% Heat networks Role for electric HP, hybrid, gas HP, micro- CHP storage, demand response 90% carbon emissions reduction 50% Electric Half the additional peak capacity required in the full electrification & heat networks scenario (24 instead of 48 GW) 25% 0% 2012 2015 2025 2035 2045 Gas Half the infrastructure investment costs required in full electrification (half of 16 28bn distribution grid, 4bn gas grid shut-down) Delta-ee: Experts in Heat & Distributed Energy 11 Source: Delta-ee Report for the Energy Networks Association - Balanced Transition Scenario

This presentation New low carbon heating technology will be important in the UK if carbon targets are to be met The limitations of the energy system infrastructure create a need for a balanced transition involving many technologies There are customer and installer challenges to overcome Disruptive business models & connectivity in the home may support change in the heating sector Delta-ee: Experts in Heat & Distributed Energy 12

upfront cost annual running cost Customer proposition for low carbon technologies The upfront cost of low carbon technology will fall over time. But running cost savings alone may not be enough especially without incentives Policy intervention is the market will be critical for new low carbon technologies gas boiler gas boiler time time Delta-ee: Experts in Heat & Distributed Energy 13

2012 installations In reality, there are challenges gaining customer buy-in Air source heat pump sales in 2012 Majority of the market Social Housing Owner occupiers are challenging 16,000 No customer pull? Renewables very rarely feature in my customers list of desires customers go off the idea with price and complexity of installation 12,000 Self-build Developer Installer 8,000 4,000 0 Social Housing new build Owner occupier Social Housing - retrofit Costly & time-consuming? The primary barriers to renewables are the cost and time for training, and for membership of an approved body. and there is a lack of interest from my customers Delta-ee: Experts in Heat & Distributed Energy 14 Source: Delta-ee Microgen Insight Service

In reality, there are challenges gaining customer buy-in Lack of awareness / trust? I want information from someone who does not have a vested interest in selling it [I would want] documented evidence that these [fuel bill] savings can be delivered I don t know how safe it is I would need a much longer warranty Too expensive? A big concern is the actual upfront cost finding the capital would be difficult if someone said they d put it in for free, I d say no problem, do it. Difficult customer journey so far? I want information from someone who does not have a vested interest in selling I m standing here with 8K and saying somebody please come and give me one of these things and the industry is saying no customer Customers don t like change? I don t really see the need to be changing my system [my gas boiler] is just very effective Delta-ee: Experts in Heat & Distributed Energy 15 Source: Delta-ee Microgen Insight Service

This presentation New low carbon heating technology will be important in the UK The limitations of the energy system infrastructure create a need for a balanced transition involving many technologies But there are customer and installer challenges to overcome Disruptive business models & connectivity in the home may support change in the heating sector Delta-ee: Experts in Heat & Distributed Energy 16

A glimpse into the future.? Business models We are selling a lot of heat pumps for multifamily homes in Switzerland because of the heat contracting offer from local utilities Major European Heat Pump Manufacturer Removing the risk of poor performance through a real ESCo is key to gaining consumer confidence in a new heating system Wolfram Moritz, MPW Legal & Tax (ESCo expert) Delta-ee: Experts in Heat & Distributed Energy 17 Source: Delta-ee Heat Pump Service

A glimpse into the future.? Connectivity Microsoft has a long term plan that has the console as the center of an automated home system ABB, Bosch, Cisco & LG Consortium Develops Open Standard for Smart Home Appliances monitor and control the heating & domestic hot water comfort save energy, heating costs and environment simple, easy to understand heat pump controls and remote diagnostics Delta-ee: Experts in Heat & Distributed Energy 18

UK one of leading countries in Europe for connected home energy products Annual sales of connected home energy products Battle between the utilities offering low cost, low functionality products 10,000s 1,000s 100s or less + + + + Delta-ee: Experts in Heat & Distributed Energy 19 Source: Delta-ee Connected Home Service

Changing our relationship with heating: How will connectivity support the low carbon transition? Builds consumer confidence through performance visibility Better control / more intelligence lower running costs Remote diagnostics reducing poor performance and reducing servicing costs Enables demand side participation in energy markets... Delta-ee: Experts in Heat & Distributed Energy 20

This presentation New low carbon heating technology will be important in the UK technologies to displace gas boilers are critical to achieve decarbonisation The limitations of the energy system infrastructure create a need for a balanced transition involving many technologies with a role for electricity and gas Gaining customer buy-in to low carbon technologies is critical incentives will help but there is still a need for awareness-raising, information dissemination and a strong focus on a positive customer journey Disruptive business models can support this change in the heating sector through breaking down customer barriers (e.g. upfront cost, risk ) Connectivity in the home can be a positive driver of low carbon heating through enhancing the customer experience, and changing out relationship with our heating system Delta-ee: Experts in Heat & Distributed Energy 21