Renewable heat: the next big challenge?

This month, the temperature in Las Vegas reached a record temperature of 47.5°C. Earlier in the year, the Esperanza station in the Antarctic reached 18.3°C, setting another sweltering record. These are both obvious consequences of global warming which is, at least in part, a direct result of the 13.3 giga tonnes of CO2 which are produced annually by the domestic and industrial heating sector.

Although we have made great confident strides in decarbonising electricity, we are still taking tentative baby steps and holding on to the furniture when it comes to heat.

Two numbers put this into stark contrast: 27% versus 11%. In 2020, 27% of the world’s electricity production came from renewable sources, mainly wind and solar. From a standing start just over 20 years ago, this is clearly impressive stuff and cues much back slapping at expensive industry award nights about how well we all are doing to save the planet and make money at the same time.

What is perhaps less cause for champagne-fuelled celebration is the story when it comes to heat. Heating for buildings and industry is the largest use of energy on the planet and accounts for just over 50% of total energy consumption. However, only a measly 11% of this is produced from renewable sources. The balance is produced by burning fossil fuels which contributed to 40% of global CO2 emissions in 2019. Not so many industry award nights when it comes to heat it’s fair to say.

Despite the gains in renewable electricity, it is clear that we are going to have to address the grey snorty elephant of heat in the room if we are to make serious progress against climate change. Unfortunately for the planet, it is much harder to decarbonise heat than it is electricity.

The main obstacle is that unlike electricity, it is very difficult to efficiently transport heat over long distances without huge energy losses so it is mainly generated within close proximity to the building where it is being used. This is why there is a gas-fired boiler for heating the water in your shower whereas the electricity that powers the pump may come from an offshore wind station hundreds of miles away. Obviously, there are exceptions such as district heating systems in Nordic cities. However, these are uncommon and in any case it is very hard to retrofit district heating to existing housing.

Some brave innovators are trying to develop heat batteries coupled with integral heat exchangers where salt or similar phase change material is heated to a liquid with waste heat (from say a waste to energy plant) and transported to a distant site where it is allowed to reform and hence release the energy. A brilliant idea, but it is still very early days and the economics of trundling heavy shipping containers full of liquid between sites is less than compelling.

The obvious alternative is local heat generation based on renewable sources. Biomass-powered boilers are the obvious solution here and biomass is leading the charge with over 90% of renewable heat coming from biomass boilers. However, the optics of this industry are not great. Although the biomass used tends to be the by-products of timber production, this fact gets lost in the general shouty noise around biomass and – to the man in the street – it looks like we are cutting down virgin trees and shipping them across vast oceans in order to try to save the planet. Drax power station, for example, uses 8 million tonnes of wood per annum and although this is sustainably sourced, their press relations department are no doubt kept pretty busy explaining this every single day.

The alterative to biomass is the now mainstream technology of air and ground source heat pumps. To my very simple understanding, these both rely on compressing a gas within a heat exchanger inside your building hence releasing the energy for heat then returning the liquid to a gas outside the building hence absorbing more energy and so the circle is complete. Whenever this is explained to me somebody invariably says “Michael, it’s just like a fridge in reverse” which only works as an analogy if you know how a fridge works. However, there are 13.5 million heat pumps in Europe so obviously somebody somewhere understands how they work.

A variation on heat pumps is simple energy storage whereby the heat in buildings from the summer months is captured and stored underground in aquifers, which is then released in the winter months to reheat the building. This technology is astonishingly effective and is widely used in the Netherlands for district heating of new build.

Biomass, heat pumps and energy storage are all technically possible and relatively well developed technologies, but still not widely adopted. If we are to move the dial on that measly 11% then this has to change.

Government have a role to play here and as ever the main policy levers are the carrots in the form of subsidies and sticks in the form of regulations. The UK government tried the former with the Renewable Heat Incentive and whilst this was successful in parts, there were accusations of widespread abuse with unscrupulous developers heating hitherto empty buildings just to claim a subsidy. At one point the regional government in Northern Ireland was suspended for years because of a mismanaged renewable heat scheme and no doubt other governments will be sucking a thoughtful tooth and watching this saga unfold.

The stick of regulations is probably easier. The Dutch Government have led the way by passing legislation that all new builds cannot be connected to the gas main hence forcing developers to make deals with alternatives. The UK is about to follow suit by phasing out all new gas boilers by 2025 but tellingly both governments only target new builds which is less than 1% of housing stock. Imposing regulations on profitable developers is a lot more politically palatable than imposing it on home owners who vote.

When it comes to industry, the main stick remains the carbon tax but with most industrial processes still being heated by fossil fuels, this is clearly not working. Only about 70 countries actually have any form of tax on industrial carbon emissions and the notable exceptions include India and the US. If we are going to be serious about decarbonising heat, all governments need to take tougher action on heat and consider mandatory targets for global industry.

However viable these policies are, they only work if the banks play the game and actually fund these renewable heat assets. Heat is harder than electricity to make work from a project finance perspective because the invariably localised nature of the asset means you have lots of individual counterparties rather than one big national grid. If the counterparty goes out of business and stops paying for the heat the banks get stuck with a surprisingly well embedded asset in an unexpectedly empty building. The risk of a single counterparty failure is mitigated over a large portfolio, but the risk is still there whereas it isn’t when you are selling locally generated power to the grid.

In the domestic scenario, enforcement becomes more of a public relations issue. Banks are acutely aware of the reputational risk of leaving bad debtors in freezing cold flats, and so may be hesitant about entering the market at all rather than give the anti-bank lobby more ammunition. Again, portfolio size is the mitigant here and the Dutch case study shows that non-payment for renewable heating is more a theoretical than actual risk.

Assuming governments and the banks can start singing from same hymn sheet, then renewable heat could well be the next big thing. Renewable electricity is largely solved at least in the west and is now cheaper than fossil-based alternatives. Within our lifetime, it will become the dominant source of electricity and no doubt, this will be the catalyst for a few more fancy awards dinners.

With heat, the future is less certain. It’s tempting to say renewable heat is the Cinderella of the renewables industry but as any parent will be aware, she did actually go the ball and ended up marrying a wealthy prince so not a bad night’s work all things considered. With only 11% of global heat consumption, renewable heat is still stuck in the attic patiently waiting for the fairy Godmother of coordinated government intervention to make the dream of a planet heated by renewable sources actually happen.