Dr Richard Lowes, Yannick Monschauer, Andreas Graf and Polly Billington.

Q50 The Chair: Good morning, and welcome to our inquiry into the Government’s Boiler Upgrade Scheme. In today’s session we are looking at the evidence from other jurisdictions. A transcript will be taken and the witnesses will have a chance to correct that. We are going out live on a webcast that will be available on parliamentlive.tv. I encourage any Members with an interest to declare to do so.

Today we have three witnesses in the room: Dr Richard Lowes, the senior associate at the Regulatory Assistance Project; Yannick Monschauer, energy analyst at the International Energy Agency; and Polly Billington, chief executive officer of UK100. Joining us remotely is Andreas Graf, senior associate EU energy policy at Agora Energiewende. Thank you for making the time to be with us today. We are hoping that this session is as insightful as our previous ones have been.

I shall kick off with the first question. What do you see as the pros and cons of the Government's Boiler Upgrade Scheme, when you compare it to schemes in other jurisdictions, in trying to meet the ambitions to increase the number of homes that have low-carbon heating systems?

Dr Richard Lowes: Basically, as you know, the Boiler Upgrade Scheme is a grant-based scheme. It gives everyone who applies for it £5,000 for an air source heat pump or £6,000 for a ground source heat pump. When we look at policies around the world to support low-carbon heating, these sorts of grant-based schemes are the basic type of scheme that we see in lots of places and lots of jurisdictions, because they are simple. They are used so frequently because the switch from a fossil-fuel heating system to a heat-pump system, or indeed from no heating to a heat-pump system, is a relatively high capital investment for households. You might be looking in the region of £3,000 to £5,000 more than for a gas boiler, depending on the size of the house. When people are already struggling for the basics, that additional cash can be quite difficult to find. The schemes are grant-based because of these increased capital costs.

I spent a lot of time looking at the DRHI scheme, which was doing something very different: it was paying a tariff over seven years for households or over 20 years for businesses. The issue always with that scheme was that it did not provide that capital. Unless there was a really complicated financial model behind it, households with low incomes could not benefit from it.

In general, the move to a Boiler Upgrade Scheme is extremely beneficial. It is worth saying that before 2010 we had a scheme called the Clear Skies programme, which provided grant schemes. So we have spent some time investigating other models, but the simplicity of the Boiler Upgrade Scheme is why it is useful and why it is used all around the world. We also think it is quite a fair way of funding it. The actual money is coming from the taxpayer base, which is more equitable than through bills, just because of the way taxes are raised.

Something that is quite interesting when looking at the numbers for the upgrade scheme is that the number of heat pumps is highest in rural areas. That makes sense, because that is where people have oil heating—or, I should say, are more likely not to have gas heating. We are seeing big upticks in the south-west, for example, where I live, so it is really positive to see the market ballooning.

So the main benefits are simplicity and the fact that it can be fairly equitable.

Andreas Graf: I will look at it from the perspective of Germany first. A few things stand out when looking at the Boiler Upgrade Scheme from afar. The first is the relative simplicity for the consumer as it is currently designed. The eligibility criteria are relatively clear, as is the potential support offered. It is quite easy for a consumer to understand what the scheme will mean for them. It might not add up in many cases, so it might still not be attractive, but it is clear. The German system, where there are very many different elements to determining support—you get different kinds of support depending on which technology you choose, and so on—is much more complex than the upgrade scheme.

It is also an installer-led scheme, which brings a certain aid to the consumer. From my understanding, the Boiler Upgrade Scheme is largely one where the consumer pays an amount for the offer with the support already deducted, so the household only covers that element. In Germany, you will apply for the support scheme for the heat pump, you will pay the full bill, you will usually enter into the project only after you have received approval, but you also receive the money back only after the project has been completed and you have submitted all your bills. There are other support mechanisms such as reduced-cost loans—cheap loans that are offered to consumers so that they are able to afford this. None the less, I argue that the Boiler Upgrade Scheme as currently designed is simpler for the consumer, at least from the point of view of how to receive support.

As for cons, from my observations, the budget is quite insufficient for the ramp-up of heat pumps that we will likely need to see over the coming years. To my knowledge, roughly £450 million has been budgeted for this programme over the next three years. To put that into context, it is roughly what Germany was spending on heat pumps several years ago in support. Today, the German heat pump market is scaling significantly, but so is the German budget for efficiency and heat pump measures, which are now budgeted at €56 billion until 2026. To be clear, that is not for heat pumps alone, but it is a sufficient budget volume to cover any additional increase. That is roughly €13 billion to €14 billion per year for efficiency and heat pump measures.

Also, the support is not linked to the cost of the project; that is the trade-off with the simplicity of the £5,000 support. In Germany, it is again a slightly more complex scheme, with support ranging between 25% and 40% of the investment cost depending on whether you are replacing a gas boiler that is older than 20 years, an oil boiler, which is also supported at a higher rate, or a ground source heat pump, which is supported to a higher extent in the Boiler Upgrade Scheme. This system is better able to keep up with the increases in costs that we are currently seeing in materials and labour.

Finally, the Boiler Upgrade Scheme as currently designed is relatively generous for biomass boilers, with support equal to that of heat pumps in absolute terms. In Germany, in the past support was also relatively generous for biomass pellet boilers, but this is changing significantly from 2023. The German Government are currently undergoing a national biomass strategy, looking at the overall biomass needs in a net-zero economy and where the biomass will be sourced from, while still increasing land use sinks. In that process, they are also starting to identify the need to reduce support for biomass boilers and to take a more targeted approach, so to receive support from 2023 you must couple it with solar thermal, meet specific pollution requirements but also specific and much higher efficiency requirements, or couple it with a heat pump. These are all measures not to make it impossible to invest in biomass or support biomass boilers but to require a much higher threshold for this support to take place.

Polly Billington: The biggest pro is the Boiler Upgrade Scheme’s ambition. It intends to create and shape a market for low-carbon heat in this country, and it acknowledges that there has broadly, until now, been a policy gap for those who are able to pay. However, the definition of “able to pay” in the current cost of living climate might be somewhat inaccurate. People who own their own homes, who might therefore be assumed to be able to pay, will experience similar squeezes to other people. So the scheme helps to meet the Government’s 2030 target of making it as cheap as possible to buy and run heat pumps as it is to buy and run a gas boiler as possible, and it targets those able to pay.

I am afraid the list of cons is somewhat longer. The one-to-many model means that we are getting quite low take-up: there have been only 9,000 applications so far in the first six months and only £34 million-worth of vouchers have been issued. To fulfil the potential of the scheme, the Government need to spend another £116 million before April and £16.6 million every month between November and April, which does not look like it is going to happen.

We know that if you have a locally delivered scheme you are much more likely to get the impact that you want, with the money invested and delivered. For example, the local authority delivery element of the green homes grant was much more successful than the fundamentally centralised system of national government issuing vouchers to individuals. Although there is simplicity, it does not seem to be reflected in take-up.

The scheme also does not include energy efficiency measures. Anybody who has explored having an air source heat pump will find pretty soon that, with our notoriously draughty but very beautiful Victorian homes, which is a large portion of the housing stock in this country and will be up until 2050, you need not just an air source heat pump but energy efficiency measures as well. That is not included in this. In fact, there is no energy efficiency measures support for the “able to pay” sector at all. That is part of the problem.

The scheme also supports less than half the cost of an air source heat pump. In this cost of living environment, making that extra leap into the rest of the money might be challenging.

I would be keen to hear the other panellists’ understanding of this, but as I understand it the only properties that can apply are those with energy performance certificates, which precludes many homes that would benefit from this kind of effort: people who have owned their homes for far longer than there have been EPCs, and indeed many rural properties; EPCs recommend measures that do not apply to rural properties, so they do not get them. As a sidebar, that is a good argument for reforming EPCs.

Again, you will not be surprised to hear from somebody who has been arguing for support for the decarbonisation of the energy system for some time that there is a funding cliff edge with this. We can see what the consequences are from, for example, the solar industry when that kind of money gets cut off. This scheme’s ambition to create and shape a market so that people will comfortably shift to low-carbon heat options risks not developing the kind of industry, supply chain and workforce that we are looking for.

The Chair: We had other evidence that made that point. Certain providers of evidence have pointed us to the French example, where they have been doing this for 10 years to create that certainty for the market.

Yannick Monschauer: I fully agree with the points that have been made. I will try to add some additional insights based on the international comparisons that we have made.

To come back to the point that it is easy for consumers to use the scheme, what is special about the scheme is that it is the installer who takes on the application for the grant and supports the applicant throughout the process. That makes it really easy, and it is not always the case in many schemes we have seen in other countries.

Another interesting aspect is that it can be combined with other policy measures. That is also not always the case in other countries. From what I understand, in the UK there is also a zero VAT rate, which brings the cost down even further. That is an impactful addition.

We have talked about EPCs. It is important to have those minimum efficiency requirements, because a well-insulated home really makes a difference; it reduces the size of the heat pump and therefore its cost, and the running costs over its lifetime. It is important to have these measures in place, but it seems there is insufficient support for them. That would be a point to make on the cons list.

One more point on what is interesting about the scheme is that it excludes gas hybrid heat pumps. We have seen that in over half the schemes that are available internationally.

Coming to more of the cons of the scheme, I fully agree that the funding volume is relatively low compared with other countries. Andreas mentioned the German budget. I also point to the French example, where three times as much is being spent on heat pump grants per year. I think it reached 70,000 people this year alone.[1] That is definitely a big difference.

Another point is that support for low-income households should be higher, because it is more difficult for them to afford a heat pump. Even though £5,000 is generous for a lot of households, that might not be the case for low-income households. That is a feature that we have seen in around half the schemes that are available internationally. By “internationally”, we are talking about 30 grant schemes that cover around 70% of global heating demand worldwide.

Another point is support for geothermal heat pumps. The level is lower than in other countries in some respects. Geothermal heat pumps are more expensive, but they are also more efficient, so over their lifetime they save consumers money. Therefore, support could be higher. Andreas also pointed to the fact that in Germany it is based on the percentage cost of the heat pumps. That ensures that a higher cost share is covered. I will leave it there for now. We can get back to other points later.

Q51 Lord Lucas: Another characteristic of moving to heat pumps in this country appears to be ending up with higher energy bills. Is that true in other countries too: that the running costs are higher?

Yannick Monschauer: Looking at the running costs, in some cases energy taxation does not favour heat pumps to the extent that it should. The running costs for electricity should be lower than those of gas. None the less, in the regions that we have looked at, the running costs with a heat pump are already lower than running a gas boiler. In the UK, it would be a saving of over £200 a year for the consumer.

Polly Billington: It is to do with the energy market in this country. A significant amount of the burden of the decarbonisation of the energy supply is weighted on electricity bills. Therefore, gas looks cheaper. That is not a natural market reality but a consequence of regulatory choices made over time. The Energy Bill tabled by the Government suggests that decoupling electricity prices from gas prices would again make electricity prices fall. Both those changes would make a significant difference to the costs of running air source heat pumps and other forms of low-carbon heating, which is predominately fired by electricity.

Dr Richard Lowes: There are other things that you can do on running costs. I agree with Polly that reform of the electricity market is central to this. I saw something from the Committee on Climate Change this morning saying that if we can now get onshore wind for 3.5p per kilowatt hour, which is significantly cheaper than gas, and if we can see those prices come through, we can get some very cheap heat pump running costs.

I have a heat pump in my house that is running extremely efficiently. I am getting heating that is much cheaper than gas, because it has been set up well. I knew what to do and who to speak to. I also have solar panels. About a million houses in the UK now have them. If each of them had a heat pump, it would bring their bills down, because you could use the solar energy some of the time for hot water.

It is possible to get to a situation where you can easily have lower running costs with a heat pump than with a gas boiler. There are a few small policy tweaks that can be done relatively simply to get there.

In Denmark, there is a scheme whereby the Government have said that if you are an electrified house with a higher-than-normal electricity demand, we assume that is because you have electric heating. They then provide a discount on the electricity beyond a certain level. You pay a standard electricity rate for your normal use, for such things as lighting and appliances. However, if you have a heat pump, they make the heat pump electricity rate cheaper, meaning that naturally you have cheaper running costs for the heating element compared with the alternative, which in Denmark would most likely be gas.

Polly Billington: One further point is that if you do not have the energy efficiency measures, there is a very high risk of high costs and of it not being effective.

Andreas Graf: I would add that across Europe right now we are seeing that the increase in wholesale gas prices and the basic costs of supplying gas have fundamentally changed the economics of heat pumps. Although everything that has been said about the regulatory environment—tax levies, et cetera—is true, it is equally true that if prices were simply left to trickle through to gas consumers, in many cases heat pumps would be the winner. In Germany, we went from a situation in which, despite other policies being in place such as carbon pricing and heat pump tariffs, heat pumps, when all costs were included, were not ultimately cheaper than running a gas boiler. However, that has changed, due to the turmoil in the energy markets.

We are also seeing government price interventions across Europe often stopping that change in the economics, so gas prices are being capped at artificially low levels while electricity prices are being allowed to skyrocket and are not being given the same support, or the support is delayed. In Germany, there has been a longer conversation about a gas price break and an electricity price break.

In the end, we estimate that in most cases the design will still make a heat pump more attractive for most consumers. However, it is incredibly important that the design of any kind of energy price intervention also makes it more attractive for heat pumps when the economics would otherwise be in favour of heat pumps. That means ensuring that when supporting households suffering from higher gas bills, we do not also artificially punish those trying to make the switch to a structurally more sustainable investment.

Q52 Lord Lucas: To what extent should financial support schemes such as the Boiler Upgrade Scheme be relied on to drive the uptake of low-carbon heat compared with other policy measures, and what suite of measures would optimise the success rate?

Dr Richard Lowes: What a big question to answer. The starting point is, “What are we trying to do?” We have 28 years to transform an entire fossil-fuel based heating system into one based on renewables. When we look at international examples of countries that have moved rapidly to heat pumps, it is Nordic countries that have the most experience of this, with their cold climates but their abundance of renewable electricity. Those transitions have taken at least 30 years. Therefore, we must bear in mind that we are trying to do this more quickly than anyone has tried to do it before. However, it is the same for countries such as the Netherlands and Germany.

The response is that you need to do quite a few things. The Boiler Upgrade Scheme has been targeted to drive the domestic heat pump market. That is important, because when we look at the analysis done by the CCC and others, heat pumps in buildings appear to be the cheapest options for most houses in the UK. Therefore, the requirement to grow that market is very large. It is not the only option. We are also talking about heat networks in urban areas. They also need significant support, because we are looking at quadrupling the growth of those.

Returning to heat pumps, what currently exists in the Boiler Upgrade Scheme is a simple grant giving the households £5,000 or £6,000 if they get a heat pump installed. That will only appeal to those who want to do it. As we have learned already, the running costs of a heat pump can be less, but they can also be about the same as gas. If you have oil, the difference is better. That is why we are seeing an uptake in rural areas, but that is a relatively small segment of the market. We are talking about the people who are on oil or in off-gas-grid areas, who have actively made that decision to do something.

We have done some work recently on optimal policy mixes in other jurisdictions around the world. I have a toolkit to deploy heat pumps, which must include four elements. You need to get the underlying economics right, because if it is still going to be cheaper to have fossil fuels, that will not get lots of people on to heat pumps. Therefore, you must do something to make heat pumps a natural or economically rational choice, but it must be subject to real concerns about doing it equitably, because the capital is a lot of money for some people.

The other part of it is providing finance for people to do it. That is where schemes like the Boiler Upgrade Scheme come in. That provides capital. You might also want to think about loans or service-based schemes, such as those for renting mobile phones. A good mobile phone costs over £1,000 now, and we are talking about £3,000 for a heat pump. You can see those rental-type schemes emerging as electricity costs come down and people become more engaged and more concerned.

The final thing is appliance standards and bans, because we ban things that are bad. We banned leaded petrol and inefficient appliances. At some point, the Government will have to make a decision about banning things, because legally you cannot meet your climate change obligations unless there is no fossil fuel use in buildings.

Those three things—the economic shifting, the provision of finance, and bans—are the key policy elements. All that has to be tied together with some kind of co-ordination, management and local planning, and that is just for heat pumps.

Yannick Monschauer: First, on the banning point, I think the UK already has a boiler ban that will start in 2035. On international comparisons, it is great that this ban has been planned. A lot of countries do not have them, but the countries that do will do this much earlier. In Norway, for example, a ban for fossil fuel boiler installations is already in place. Germany is implementing one in 2024 and the Netherlands in 2026. That is about 10 years earlier than the current UK plan for the ban of fossil fuel boilers in existing buildings.

On the additional measures that could be taken regarding financial support, I think Richard mentioned loans as well. It is something we have seen in other countries, where they combine grants with low or zero-interest schemes to make the total cost of the heat pump more affordable for consumers. We already talked about operating costs.

What is important for manufacturers and installers for long-term certainty is to have targets and underlying policies that tell the industry to transform to make decisions to invest in production capacity as well, because it is one thing to have demand, but we also have to have the production capacity, we have to have the installer base in place. These are both elements that are a problem in many countries, including the UK. Targets can definitely help with the underlying policies.

I would also point to a target in Germany, which I think is planning to have half a million heat pumps installed annually by 2024. I think the UK target is 600,000 by 2028. Again, that is something to flag.

I think Richard mentioned heat networks. An interesting point to make about low-carbon heat is that it is not just about residential heat pumps. We have other solutions. Some interesting schemes are popping up throughout the UK as well. There is a district heating scheme in the north of London that takes waste heat energy from the Tube network and uses large heat pumps to supply heat to homes. There are other low-carbon heat schemes working with a different kind of heat-pumping technology that are also very valuable.

Andreas Graf: I will comment on the proposed measure of a regulatory ban, of sorts. It is important to see that what is often described as a ban in individual countries is a suite of different measures in different countries. We have outright bans proposed or in place in countries like Germany, Norway, Austria and Belgium for oil boilers. This is a clear example of a regulatory ban to say that this technology can no longer be installed.

In most other cases, it is slightly differently implemented. In Germany, what was described as a ban on boilers is actually a renewables obligation for heating appliances. Germany is still working out the final details, but it is planning to introduce a 65% renewables obligation for heating installations. Essentially, the obligation is on the building owner in this case when they choose to purchase a heating appliance. Based on the rules as they will be set up, there will be some leniency on what can be installed if, for example, a district heating network is going to be installed in the neighbourhood over the coming years, but the basic threshold to meet will be a 65% renewables target. That still permits a hybrid heat pump solution in some cases if the size of the heating load provided by the fossil fuel boiler component in a hybrid heating system is low enough to still meet the 65% renewables threshold.

Another example of a slightly different approach from outright banning a whole set of technologies running on fossil fuels is a current discussion at the EU level to introduce eco design standards for space heating and water heating appliances. The Commission has proposed the introduction, from perhaps 2029, of some kind of efficiency threshold for heating appliances of perhaps 110% or 125%. That means that any heating appliance sold in the single market would need to meet this threshold. Any heating appliance put on the market before 2029 would not have to meet this threshold—so we might see warehouses filling up before 2029—but from 1 January 2029 it would. This effectively means that only appliances that can meet that efficiency requirement will be permitted: in many cases, hybrid heat pumps or certain types of thermally driven heat pumps.

There is another system in the Netherlands that is a minimum hybrid heat pump requirement from 2026. That will be the minimum threshold. That is an obligation put on installers, so the installer is legally obligated. Again, that is a different way of regulating the same thing.

Finally, I know that in the UK you are discussing a manufacturer obligation for a minimum share of heat pumps that will need to be produced. It is not exactly the same thing, but I would put it roughly in this broader set of measures.

With all these measures, the supply chain gets a very clear regulatory signal about what it needs to produce. That is what is so incredibly important about it. Yes, we signal to the future that things will be greener, but the manufacturers, installers and building owners get a clear signal: “My next heating appliance will be a heat pump”, or, “The next heating appliance production line that I have to develop in my manufacturing sites will be for heat pumps”, or, for the installers, “The next training course I needed to take will be for heat pump installation”. These are incredibly important measures. They are different ways of achieving the same goal.

Polly Billington: I would back up what Yannick said about the problem with the regulation of low-carbon heat. The target of 2035 means that fossil fuel heating systems will continue to be installed for the next 12 years. The average boiler lasts for 15 years. That definitely means that you will end up with some in 2050, which makes the net-zero target very difficult.

For some practical reality about the costs, an air source heat pump costs around £10,000; the grant is for £5,000. A boiler costs between £1,200 and £3,200. The rational-actor decision of, “I’m having my house redone”, or, “It’s conked out. What can I afford?”, points towards people defaulting to what they know rather than what they need in effect to future-proof their homes. Even in normal times people would balk at that. Right now, it will be even harder.

Q53 Lord Lucas: Yannick, you talked about heat networks, which are pretty undeveloped in this country, whether shallow or deep geothermal, or using waste heat from processes—maybe even using the Thames. Where does it work really well in Europe? Are we really just talking about something that works with new housing developments, or can you retrofit these?

Yannick Monschauer: District heating is much more widespread in central and eastern Europe in particular. In Germany, the problem with the existing networks is that they are heavily carbon-intensive. The challenge is to use the existing networks, and to use heat pumps, and waste heat sources, which can be from underground networks, industrial waste heat or wastewater. There are also lots of potential sources that could be sourced with large electric heat pumps.

But the challenge is more to decarbonise the existing networks. Building new networks is definitely also an option, but it has to be well co-ordinated with other policy measures so that you do not end up developing a new network where people already have heat pumps installed. There really has to be some heat planning. I think the others might have points to make on that.

Dr Richard Lowes: I have looked at the Netherlands in my time as a researcher. The very different ownership structure of networks in the Netherlands means that it will be difficult, but you can still do it because the power and gas networks are municipally owned. Heat networks often sit in those portfolios as well, and often the municipality has a controlling stake on the board or owns the company in its entirety. So you can see those transitions from gas network to heat network in places like the Netherlands or Denmark, which is another example of where they just went for it early. You can see that ownership structure having real value just in allowing that planning and decision-making.

We have such a different structure in the UK, with totally privatised gas and electricity networks. It is not the norm everywhere to have this—often foreign—ownership, and people trying to grab on to their assets to ensure that they can keep investing in them, and so on. As someone who has grown up in the UK, I have always thought there was a role for local authorities to have a stake here and some sort of involvement. The difficulty is that local authorities do not have any capacity for that at the moment, and they certainly do not have any expertise.

We may come to the question of local planning, but something has to happen, some sort of governance change, that devolves some responsibility for heat on to local authorities. Wherever you put a heat network, the local authority has to be involved for reasons of planning, social housing, road access and all those sorts of things. Without the local authority on board, you just cannot do it. What is interesting for me is that I put a heat pump into my terraced house in a dense urban area—albeit in Cornwall—but the area is much more suitable for a heat network than it is for a heat pump.

Polly Billington: I wholly agree with what Richard said. We have an example of a local authority in this country managing a heat network and making the investment via the public sector decarbonisation scheme in Leeds, where they have more than £25 million. That retrofitting supports Leeds Playhouse, civic buildings and 2,000 new flats and is a combination of new build and old. It effectively creates a spine for that heat network that can then be added to over time. They had to make a big decision to do that, because they could not leave it to the market to do.

I have heard Chris Stark, the head of the CCC, say that he sits in his bedroom, working from home, looking out on to a hospital in Glasgow that would be a great source of a heat network for his home and many others, but there is currently no structure that would enable homes to be connected up to places that are basically a source of heat, such as a hospital, and effectively retrofit those homes. That would need regulatory change. We have seen some moves from Ofgem on that, as well as some recommendations from the CCC, but there needs to be more work on governance for that to happen locally.

To go back to the point about air source heat pumps, if we want to be able to deliver, local authorities, which know their communities well, are much better placed to help to deliver those air source heat pumps and get the money properly spent on a house-by-house and street-by-street basis than anything that Whitehall can do. I know that Whitehall is reluctant to admit that, but we can see from many examples, most recently the pandemic, that if you want an organisation that knows its streets and residents, you need a local authority. They would be able to get what was needed to the people who needed it.

Andreas Graf: On the governance point, we are seeing the first solutions being offered and legislated for at the level of both the EU and Germany. In Germany, there is an ongoing consultation about municipal heat planning. Germany plans to introduce mandatory heat planning for all local authorities over a certain size; I forget the exact threshold, but it might be around 30,000 inhabitants. That provides the basis, as has already been suggested by other speakers, for where it makes sense to develop a heat network because of sufficient heat density and the availability of renewable resources in the area.

Asking what kind of heat network would make sense is the logical first step. It is so fundamental and so important to the development of a heat network industry in any country that is behind that it needs to be legislated for and made an absolute governmental governance priority over the coming years. Here again, it is a requirement that will apply to all municipalities across the whole of Germany above a certain threshold, a threshold that is there because it does not make sense to apply this to rural communities where the heat density simply will not make the economics add up.

Secondly, after two years of debate and not committing to supporting heat networks, Germany has finally committed to a larger support programme for heat networks. One of the most fundamental elements of the support programme is, again, funding district heating companies that already exist—or companies that want to develop a new heat network—to develop a transformation plan or a long-term decarbonisation plan that puts their developments or their network in line with the climate goals.

That is incredibly important, because often those companies do not have the current budget space—at least, that is how it is perceived at the moment—to go forward with some of this planning. That provides an additional incentive for every company involved in heat provision to plan in line with the long-term goals, so that they can also deliver on whatever the local authority comes up with in its heat plans over the coming years. There are other elements of that support. Once the plan has been developed, there is investment support and operational support. Currently the envelope is roughly €3 billion for the next three or four years, but that will also likely grow.

Q54 Lord Grantchester: We are looking at the Boiler Upgrade Scheme at the moment, but I am interested in the question, which seemed to open a door, on the relative merits of financing a scheme with other technologies as well. The Government here have mostly been trying to claim that they are technology-neutral. They have started off down the road of encouraging low-carbon heating, yet we all know that different technologies are at different stages of development. Until we suddenly started going down the road of the Boiler Upgrade Scheme, it seemed as if the Government were going down the path of a hydrogen scheme, but that now seems to be lost.

Is the Government’s role to try to keep technologies competing all the time so that different competitive technologies can come on at different development rates, such that there is then a stronger competitive market altogether that includes those technologies, or do we go along pushing down the open door of what is ready on the shelf now to try to encourage it?

What has also tended to happen in this country is that Conservative Governments—bless them—frequently like to use the on/off switch, and what has been happening is undermined by using the off switch. Do you have some fundamental experiences from elsewhere that might help us to approach these subjects in the UK even now? We thought that hydrogen was going to be developed region by region using the same pipe network, but all of a sudden that looks to be a long way away and we are pursuing the heat-pump model. Okay, we are looking at the Boiler Upgrade Scheme specifically, but I just wonder, in terms of finance helping technologies to develop, whether there are more fundamental lessons that we could be learning.

Yannick Monschauer: Regarding hydrogen, our report focuses on the horizon of 2030. That is why we say that heat pumps are the central technology that can be applied to decarbonise heating, because hydrogen for heating is still at an early phase. It is also not the most efficient use of energy, because you have to go through some transformation processes to produce the hydrogen. You have to make sure that it is green—that it is coming from renewable energy—to really have the carbon benefit. These are the main aspects of why it is not so much on our radar, and not so much on the radar of other countries, for the heat sector.

We also have to consider hydrogen supply. It is difficult to produce enough green hydrogen at the scale that is needed for other sectors as well, because we are not talking about heating alone; we are also talking about industry, aviation and long-distance transport, where hydrogen might have better uses.

Polly Billington: I would support Yannick on that. There is an excitement about the possibility of hydrogen being a quick fix for heating, which, contrary to Lord Grantchester’s perspective, I would suggest has slowed us down in adopting electric heat.

Now we have a Government who are going to make a decision about the relative role of hydrogen electrification in 2026. Yes, we have some hydrogen clusters that may well develop and be suitable in certain places—hydrogen may be suited to heating around the big industrial clusters we have in parts of the country—but the rest of us really need to get on with it and decarbonise our heat now rather than waiting for a solution that, for all the reasons that Yannick has given, is probably not as technologically and economically suitable as what we can do now.

Lord Grantchester: If I might push back slightly, as we were approaching the Boiler Upgrade Scheme we were thinking that it may be more suitable for some homes than others.

Polly Billington: It is more suitable for some homes than others; that is true. However, from my perspective as chief executive of a network of local authorities, the people who are best placed to plan the delivery of low-carbon heat are the ones who know their communities and understand the typologies of homes and tenures. You have all those things to factor in, and the idea that this can simply be a centralised government grant scheme to an individualised market slightly misses the reality of the challenges and suggests that everybody can make an individual consumer decision rather than the country needing to make a strategic one.

Q55 Baroness Boycott: Thank you very much. That was all completely riveting. I have a couple of questions. First, how much investment did Germany make in training? The training levels here are pretty thin. Polly, can you tell us more about Leeds and the importance of a government cut-off at the point where it becomes illegal to have these things?

Andreas Graf: I do not have an exact figure. There are a number of different types of programmes that one could compile, from educational funds to new training funds. I am sure they would add up to €100 million or so. That would be my guess. The most recent addition is a €25 million support programme directly targeted to training heat pump installers, in line with government commitments on the 500,000 heat pumps target.

There are still a lot of challenges with regard to getting the certification right—making sure that installers are sufficiently qualified to do a proper job but, on the other hand, not holding back the market by having unnecessarily complex training requirements for things that are often not directly related to heat pumps, for example. We are seeing that heating engineers who are already trained to install for example a gas boiler are, if anything, mostly making use of the very cheap training courses of the heat pump manufacturers. The manufacturers are also increasingly offering a whole range of tools to the installers to simplify their lives, whether it is billing and applying for support or simply designing the system, et cetera.

As important as we think government support might be—for example, funding part of those training costs—especially to incentivise installers who may be older and hesitant to change from a system they know how to install very well and have great proficiency in, we also see an important role for manufacturers. The manufacturers link their installers to the specific product they are providing. You could say that this is positive or negative, but they are investing in providing that supply chain and are just as interested in making sure that the heat pumps they produce—and are now scaling up the production of manyfold—are also able to be installed so that they do not lose market share via the regulations that are increasingly taking place.

Let us work as closely as possible with manufacturers, see what they are doing and ask them what support they need but also rely on them to some extent to deliver. In many cases, they are doing an excellent job.

Dr Richard Lowes: To give some personal experience in the British context, we are seeing some very positive things on skills from some of the big companies involved in the sector. Companies are bringing people in, and people are applying for these installer jobs, which is great. Actually, if you are already a plumber—somebody who can do pipe work and fit systems—retraining for heat pumps is not that difficult. It is not rocket science.

The real difficulty in the UK—as well as having quite a tight workforce at the moment—is that we are seeing the number of plumbers reducing because it is an ageing workforce. There are more people retiring than there are going into it. So the actual upskilling part seems relatively straightforward; it is getting people into that sector initially that is really difficult.

There is no government strategy to do this. It is often a very passive process: you would most likely be doing your GCSEs when it would be suggested that you do your level 1, which is basic plumbing, and when you are effectively in college you would do level 2 or an apprenticeship. However, there is no one driving anyone into that. It is very passive, so numbers are not increasing, and at a time when we know that we need a lot more people going into the sector.

So there is a governmental skills question here about how the Department for Education makes people go into these quite critical sectors. If you do not have enough plumbers, even beyond heating you cannot maintain houses and so on. It is looking quite tricky. This will catch up with us because of the time it takes from someone making that decision now when they are 15 to being fully trained when they are 18. There is a three-year delay, which we are catching up with.

Polly Billington: I would like to add to this issue of skills. We know that skills were one of the issues that made the green homes grant fail; there were simply not enough people qualified to do the work. We know that local authorities have a key role in convening both the private and the public sector to understand the skills gaps in their areas.

The heat and buildings strategy should have been able to send a strong enough message to the market that the private sector, as Andreas said, would say, “Right, we’ve got to get on with this and upskill our workforce,” and then start making a demand for the kind of qualifications that Richard has been talking about. That did not happen, because, fundamentally, the message was not strong enough.

Local authorities are going to their private sector employers locally and asking what green skills they would like, and the private sectors are saying that they do not know yet because they are not getting enough of a strong sense of direction—going back to my point about 2026 and gas and air source heat pumps versus hydrogen. If you are not actively persuading people that they can go into these really good, well-paid, skilled jobs from an early age, you will have a gap in the workforce.

Interestingly, Stoke also has a district heating network in the centre of the city, and it has established a training academy alongside it to ensure that it is developing the workforce that can support its district heat network. That kind of joined-up thinking is done much better when people have a place-based approach to solving their challenges in decarbonising and in economic growth.

Baroness Boycott: Would you be able to send us more information on Stoke and Leeds? Coming back to your point that 2035 is fundamentally too late, as people will still buy boilers, would you want the Government to bring in a target, like Germany, much sooner?

Polly Billington: If they did it, on its own it might end up with loads of perverse incentives. We would need to be careful about understanding how earlier targets have worked in other countries. However, the evidence that we have heard this morning—how to ensure that you give strong signals to the manufacturers and the installers, good skills provision and so on, as well as a financial product that supports this market to be able to grow—shows that people’s fundamental anxiety at the moment is that it is too expensive to install and to run. Unless and until you can change those incentives, people will resort to what they know until they can no longer do so.

A target would be all very well, but it requires some financial support as well as regulatory change in order to get that shift earlier.

Lord Colgrain: Coming back to what Richard said at the beginning about upfront payment schemes being as common as they are, are we more or less generous than Europe?

Dr Richard Lowes: It is £5,000, or £6,000 for ground source, so in general it is a little more generous for air source but less generous for ground source. Having said that, the way the schemes are designed elsewhere varies a lot. In the Netherlands, the amount of money you get depends on how big your heat pump is in order to make it a flat and equitable level. We are not 100 miles away from other countries in terms of generosity.

Lord Colgrain: How many heat pumps are installed every year in Germany? Can you give us a figure so that we can compare it against what we are installing here?

Andreas Graf: Last year, 650,000 gas boilers were installed. That is a good benchmark for understanding how many heat pumps were installed last year, which was 154,000. There is still a huge gap between the two. However, the recently announced target, which was already mentioned, is that Germany aims to reach installation levels of 500,000 by 2024, and by the end of this year the market is likely to have increased to 230,000 installations. That is a very significant increase of almost 50%.

There must still be a doubling of installations in just a couple of years to reach this target, but this will be in the same year that this new 65% renewables obligation has been implemented, so households will no longer have the choice to install a gas boiler. That is important context. The heating appliance manufacturers are saying that this is just enough time to scale the production. We have seen major announcements from a range of manufacturers over the last year.

Obviously, Germany’s market is scaling more quickly in absolute terms than some of the other countries in the neighbourhood. We do not anticipate the manufacturing being unable to scale with the demand. The biggest bottleneck that we are still concerned about is sufficient training and qualification of the installers.

We hear across the industry that the manufacturing capacity is no longer considered a bottleneck in the short term for Germany.

Lord Colgrain: Polly is the only person so far who has mentioned EPCs. I know that they are very imprecise and blunt instruments. Is there a way that we could use EPCs as an entry point and say to people, “If your house isn’t at level C, there’s no point in looking at an air source heat pump because it won’t do what you want it to do”?

Polly Billington: The EPCs are not designed to support decarbonisation and energy efficiency in that way. That is part of the problem. I can send you a briefing that we have done on the challenges around EPCs. There are national targets to get a certain number of homes to EPC C by a certain point. Many of our local authority members choose EPC as a measure and a target because, without it, they have no way of establishing that they are increasing energy efficiency. However, it does not necessarily work towards decarbonisation.

Again, as I say, one of the big challenges in rural areas is that rural homes are unsuitable for many of the things that an EPC will tick off. It becomes a tick-box exercise that does not apply to a certain number of homes—not lots, but enough for it to be a problem—and drives adoption of measures which may or may not help to decarbonise.

Until we significantly transform them, they will not necessarily get us to where we want to be on net zero. They are designed to do something else. They are okay for the time being, but they are only really being used for want of something better.

Dr Richard Lowes: I will add something on one of the many issues with EPCs. If you put a heat pump in, it will predict your running costs. If you put the model number in, it will use the data on that heat pump. On mine it says, “You’ve got an X model heat pump, it runs at this efficiency”, which it pretty much does, “and this is your running bill.” However, if you do not put the model number in, it just assumes that it is an average heat pump with a very poor performance. I know people who have a heat pump and have seen their EPC go from B to D.

Polly Billington: That is a really good example of why it does not work, and better than I would have done.

Q56 Baroness Young of Old Scone: Goodness, there are so many areas that we could explore. Before I ask my question, I revert to the topic that Polly raised about whether the current Boiler Upgrade Scheme is intended by the Government simply to prompt and develop the market. If that is the case, bearing in mind that it is not working and that it is very short term, is this not going to develop the market—to the point that we will face a cliff edge at the end of the scheme?

Polly Billington: It is an example of hope over experience. The green homes grant suggests that this kind of approach of vouchers targeted to any individuals, when it is centralised, gets poor take-up and installation problems, and you do not get the transformation that you require.

I definitely think that is what they wanted to do. It is hopeful but it has not got the requisite elements to make it work, particularly in combining it with energy efficiency measures. The CCC has pointed out that there is a lack of policy on energy efficiency measure support for the “able to pay” market, so that is a key problem.

ECO, for example, which you will all be aware of, is mostly targeted towards the vulnerable and the poorest. That is one of the key things. Again, the delivery point is really important. If you want to reach a significant number of people at scale, you will need local delivery bodies, and using local authorities as a partner in that will be a key way of improving that.

Baroness Young of Old Scone: From what you see of our scheme, and what you have seen anywhere else in the world that you have experienced so far, is it a viable concept that you can run a short-ish scheme to prompt the market and then retreat and let the market take over?

Andreas Graf: I guess it would depend on the economics outside the support scheme. I will put it this way: currently, no. As the economics stand on overall competitiveness with other technologies, this will not be sufficiently attractive to meet the goals that you have set for yourselves. If the economics were fundamentally changed and more onus was put on energy prices then maybe you could see much greater interest even without support in the future. However, the fundamental balance between electricity prices, gas prices and heating oil prices would have to fundamentally shift.

I mention this because there are some markets, say, Spain, which, okay, has limited heating needs—that is one element—but also does not have generous support for heat pumps and none the less has significant uptake, in part because of cooling and in part because it just makes sense for homes. It is not that every single market will need this programme. However, if you want to meet your climate and energy targets at very ambitious levels and you do not have the economics working in your favour, you certainly cannot let such a support scheme phase out after two or three years and expect to meet your goals.

Baroness Young of Old Scone: Does anybody want to disagree? Yannick?

Yannick Monschauer: No, I do not want to disagree. When we look at the markets where we have seen the highest take-up of heat pumps over the last two years or so, the ones that stand out are Italy and Poland. In Italy a very generous scheme is still running that covers energy efficiency in general, so energy efficiency retrofits but also heat pump installation. The way it works is completely different because it is an income tax rebate. Eventually, you get back more than what you paid. They call it a 110% super-bonus scheme. That has led to a massive take-up of heat pumps. If the money is there, the market follows.

In Poland, similar, bigger schemes have been implemented, in some cases for other reasons, because it comes from a different perspective. For example, one of the main objectives was to phase out coal boilers for local air pollution reasons. Each country comes with a slightly different perspective on why it does it, how much it spends on it and how urgent the issue is. Continental Europe has a lot of gas that used to come from Russia, which it is trying to phase out as quickly as possible. That is another incentive on top of the climate change concerns.

Dr Richard Lowes: I want to say two things. In response to your question, there is an amazing graph that I can send to you afterwards from either Sweden or Denmark—I cannot remember which. It tracks its heat pump growth rates from I think 1980 all the way up to the present day. It is an upward trend with an extremely jagged line that goes up, down, up, down. It is not to do with years; it is the grant schemes coming in and out. That is simply how the markets respond to heat pump grants.

Because we need such a rapid trajectory for heat pump growth for our climate targets, we do not have time for any of those down bits. We have to have a straight line and almost exponential growth in heat pumps. Whatever support there is needs to be permanent, or certainly there for some time, with good foresight. It needs to be relied on.

We have three years of the Boiler Upgrade Scheme. We are more than half way through the first year and it is underperforming in terms of numbers. We are talking about something afterwards called the market-based mechanism on appliance manufacturers, which does not exist yet and is not even in legislation. We have other things coming along in theory too, such as the ban on oil, coal and propane heating in off-gas homes. The future homes standard is coming in in 2025 as well and, eventually, some sort of gas ban. All we have at the moment is this tiny subsidy pot when we need all these elements to come together. If one of those things does not happen then we are in real trouble.

Polly Billington: I imagine that all of you are thinking, “We know that the Government have no money and that the economy is in a bit of a pickle”, so a witness saying that we need to spend more money on more things can sometimes feel a little unhelpful. I would point out that PwC has done a piece of work on place-based decarbonisation that says that you get much more bang for your buck when you do it locally than if you do it from central government. Again, we can provide that report for you. It was commissioned by Innovate UK. It found that if you do things that are place agnostic by saying “Everybody do this” from Whitehall and expect your levers to work, it will not be as good as if you design it around the place.

I spend quite a lot of time reassuring my members that all of them are very individual, yet somehow they have quite a lot in common. The more we understand what they have in common, and the more national government can provide a framework so that they understand what they can and should do, and can therefore deploy these kinds of measures to support skills, create a supply chain, upskill their workforce and retain value in their communities, the more likely we are to meet some of the goals that are strongly becoming a political consensus in this place—to level up, grow and increase our productivity. Those things are possible. Decarbonisation could be a good driver, but simply saying that decarbonisation on its own will do it, without recognising the importance of place-based measures, will sometimes risk things being more expensive rather than less.

Baroness Young of Old Scone: I have lost track of where the off-grid scheme has got to. It was consulted on with a view to changes happening in 2026. Has there been an announcement or are we still waiting to hear?

Dr Richard Lowes: There is no legislation yet for that, as far as I am aware.

Andreas Graf: I want to comment on the financing of such a support scheme over time. There are two fundamental points to add. First, Germany offers at least to some extent an interesting example of how carbon pricing on building and transport fuels is being used to help finance some of this funding. Germany has a big climate and transformation fund that is in part, but not fully, financed by carbon pricing revenues from the national emissions trading system that it has introduced over the last couple of years. It is not sufficient, but it not only improves the economics by making fossil fuels used for heating more expensive but channels that money into the investments we need to see. That will potentially be introduced at EU level as well, within the EU emissions trading system for buildings and transport. That might be worth considering as a model in the UK.

Secondly, we will probably increasingly have conversations about targeting support such as energy price interventions. We will still see higher energy prices over the coming years; they will not go away over time. They are partly structural now, due to the current developments on the energy markets, with LNG setting the price of gas, for example, but also simply with lower supplies. We will need to target the support that we do provide more strongly to those in greatest need and the most vulnerable, whether that is lower-income households or senior citizens on fixed, low pensions.

This will also perhaps need to be part of the discussion we have on heat pumps. As important as it is to meet our targets and set support in line with them, we should be aware that not only will those in greatest need need more, but if we do have conversations about reducing budgets or providing insufficient budgets to meet the targets, then the budget we do provide should be targeted at those in greatest need. That does not mean that support should not be provided, but we might also have to have a conversation about shifting more of it to low interest rate loans, so that it is still very easy to finance the investment but less of it is as grants for the upper-income elements of our society.

Q57 Baroness Young of Old Scone: I will now go on to the question that I was going to ask, but we have actually talked quite a lot about some of the elements. It is about the barriers to uptake of the scheme and to the uptake of low-carbon heating systems more widely. We have talked a bit about the availability of installers and the cost, but we have not talked much yet about whether the public are aware enough that some sort of juggernaut is coming down the road towards them. There is also the hassle factor; we heard from some of our witnesses that you needed to be a very determined human being at the moment in the UK to install a heat pump. Have you any insights for us about public awareness and reducing the hassle factor?

Polly Billington: Again, we need to acknowledge the hassle factor and, given the evidence you will have taken from consumer groups, understand when people choose to make these big investments, particularly for the “able to pay” market. That is important.

Also, the comfort of being not the only one is important. The over-the-fence conversations are important. I would support some of this work being done in a place-based way, partly because you can have a verifiable delivery body such as the local authority. The last thing that we want is random people turning up with clipboards at doors with single people behind them, making them feel uncomfortable.

Ensuring that a verified, reliable person is coming to talk to an individual about how this might work, and that that individual is not the only one in the street having that conversation, will certainly reduce some of their anxiety. It might raise the collective anxiety, but we must work with that. Our members work a lot on how to build that public consent and support for this kind of transformation. There is a way of ensuring that you are not doing this on your own, that other people are doing it and that you have reliable delivery bodies that people know and trust. Local authorities are better trusted than the private sector and national government.

Baroness Young of Old Scone: Are there examples of countries that have dealt with awareness and the hassle factor well?

Yannick Monschauer: Ireland is a great example. They have implemented what you would call a one-stop shop, an entity that helps consumers identify and compare different options, helps them apply for the different types of financial support—grant or loan—and guides them through the whole process, taking up a lot of the admin work and making it as easy as possible. There are probably other examples but that is the one that comes to mind. I have also seen interesting points in Richard’s report on community-based aspects which are worth discussing.

Dr Richard Lowes: When we were writing our heat pump toolkit, we discovered that in Sweden, community forums emerged, discussion groups where people could talk about how their installation went, how it was working, the hassle that they had, how they found an installer, and so on.

Currently, there is nothing like that in the UK. Interestingly, there are Facebook groups that talk about heat pump performance, but Facebook is very difficult because people just say what they want to, and it may not be very constructive. There is a really important role for the Government here. However, it is not apparent that it should be government communications. I agree with Polly that there is something important for local authorities to do, as they are more trusted and more local and will work with local utilities as well.

With the renewable heat incentive, the Government did no real communication with the public; they just did some installer road shows. Naturally, awareness of the scheme was quite low, and it is the same with the Boiler Upgrade Scheme. Beyond the website, there has been no communication around it. That is due to change next year if it all goes through. One of the biggest barriers is people not knowing the scheme exists, which seems strange since the Government have introduced it to increase uptake.

Baroness Young of Old Scone: Andreas, have you experienced anything that would help us with hassle factor or public awareness?

Andreas Graf: I am not sure whether it takes away the hassle factor but, observing the discussion in the UK from a distance, the UK has quite interesting social media presence from different actors working in this space doing quite impressive communications work. Richard is an example, having recently featured in a video that you can find on YouTube talking about his experience of installing a heat pump, in a quite attractive communication format.

There is an installer training website, Heat Geek, that is very active on YouTube, and a number of other social media influencers who provide great communications. You have to be interested in looking for the material, but it is there, to a great extent, for consumers to familiarise themselves with what it means to install a heat pump, from the very basic level to the very technical level. There are videos of heat pump installers who show the entire installation process in every detail.

Although it does not take away the hassle factor, it helps to make consumers aware of what is coming and make them more familiar with it. Once they are familiar with it, over time it will also become more natural to undergo such a process and prepare for it.

It is incredibly important that we send these clear regulatory signals. The earlier that we send this broad communication signal across the entire society, saying that there is an end date to the technology that you are using or when you might need to replace it with a different technology, the building owners, whether they are happy with that decision or not, can prepare for it and perhaps make use of some of those great communication tools that are already available in the UK.

Q58 Baroness Young of Old Scone: We have talked about local authorities and magnificent social network entrepreneurialism in the comms field. Should Governments lay an obligation on energy suppliers to do the job of communicating for them, since they are already talking to their customer base?

Dr Richard Lowes: I am always anxious about offloading those obligations on to potentially vested interests. Some of the suppliers have gas interests in particular and are actively promoting hydrogen despite its many downfalls. Other suppliers have more niche local interests. I will not go into what they might be, but we should be very careful about these communications. There is a risk of them becoming slightly captured, perhaps not in a pejorative way but in a way that reflects the interests of the company more than the interests of heat decarbonisation.

One example is an obligation on appliance manufacturers, which in the UK is primarily boiler manufacturers. I am often told that some of those appliance manufacturers are telling installers that they should not think about heat pumps because hydrogen will come along and save the day. We should be aware that those interests often come through in ways that you might not think of when planning the campaigns.

Q59 Baroness Boycott: I do not know whether I have misunderstood something, but regarding those local councils that you mentioned, Leeds and Stoke, can you apply as a council to get all the individual £5,000 grants? Would that be a way forward, if they could say, “I’ve got 200 houses”?

Polly Billington: With the green homes grant, a significant proportion was allocated via local authority delivery, and that was very successful. Local authorities applied for money from the green homes grant. One thing that local authorities are really good at is spending money. That is where you see the successful element of the green homes grant.

There is no such mechanism in this Boiler Upgrade Scheme, so we would argue that this needs to happen. The examples I have given of Stoke-on-Trent and Leeds were when they decided to use what was available at the time, the heat network programme, to secure something that otherwise would not be done. The examples from Europe are interesting. There is an understanding there of the municipal role for supplying—

Baroness Boycott: So, applying as a community or an area is not there yet.

Polly Billington: That does not exist in this scheme. It would be worth considering changing the design and delivery for that.

Q60 The Duke of Wellington: Listening to this incredibly interesting discussion this morning, it occurs to me that we have heard about the great success in Germany—for example, the enormous increase in manufacturing capability and the fact that the German manufacturers are training people to install their product, which is a natural and understandable commercial decision. That reminds me of what the Government did about cars, when they said that from a certain date hydrocarbon-fuelled cars would no longer be permitted. I have understood that Germany has said more or less that in future the current fossil fuel heating systems will no longer be allowed, which has led to this enormous increase in manufacturing capacity. Is that not the crux of the matter? If we really want domestic households to move away from current hydrocarbon heating systems, we have to say that from a certain date, which has to be sooner than, as I think you said, 2035—

Polly Billington: The CCC suggests 2033 for gas.

The Duke of Wellington: Right. So we have to do something similar for heating systems as we did for cars, and it is a great credit to the Government that they did that for motor vehicles some time ago. That seems to be the basic point here: in Britain we are not seeing a great change in manufacturing capacity, as in Germany. We are seeing very poor take-up of this Boiler Upgrade Scheme.

I do not understand why, if you buy a new boiler, the seller of that piece of equipment does not offer a financing scheme. A seller of a motor vehicle—a tractor or whatever—nearly always offers a financing scheme to go with it. I can see that these are relatively big-ticket items, particularly at the moment with the cost of living difficulties, so it is clear that people are more likely to buy a new boiler if there is a financing option available in addition to the grant offered by the Government.

I am still not quite clear about the point made that the scheme should really be administered locally. If the Government have said, from the centre, that a £5,000 grant is available, and that is applied for on behalf of a customer by the seller of the equipment, then in that sense the hassle factor is passed to the supplier of the equipment. I do not quite see why that would be better administered by a local authority.

I am left with the feeling that what we have at the moment is quite a sensible government scheme, provided that it continues, and clearly it is going to continue for a long time in future. Manufacturers need to be given a greater incentive and imperative to develop their manufacturing capacity. They will then offer financing and training, possibly through their distributors, as happened, as I understand it, in Germany. So I do not think what we have is too bad; it just needs to be expanded and extended. In order to sell the products, the market will then have to train and offer financing. Is that not the case?

Dr Richard Lowes: If there is an end date in place then what you have said works well, subject to there being some grant support for some time, which we expect—maybe three years. When we have thought about this, we see that continuing at some scale until the job is done, basically, because if you are a poorer household then you are going to need some help whatever happens. Over time, as costs come down to some extent—we think they should come down a bit, though not loads—you can reduce the size of the grant and potentially introduce some finance. Some boiler companies already offer some finance. You can already get a boiler on a plan if you want to, subject to all the credit checks and whether you can have it put on to your house.

I will point to two examples. In Germany—Andreas can probably talk more about this—you can get your capital money alongside a loan of up to €100,000 to do a total house transformation, which you pay back via a Government-backed low-interest loan. There is a similar scheme in Scotland, albeit much smaller in scale, where you can get up to £10,000 for a heat pump and up to £10,000 for energy efficiency, so up to £20,000 in total. That is part loan and part capital.

The Duke of Wellington: Sorry, did you say that exists in Scotland today?

Dr Richard Lowes: Yes, it exists.

The Duke of Wellington: I did not know that. That is interesting.

Dr Richard Lowes: In many ways Scotland is a long way ahead of England on policy. Deployment rates in Scotland are not particularly high because the regulatory bit has not come in yet, but those packages exist. To have your end date, which is important—your ban or whatever you call it—you need to make sure you have all those things lined up. What I am saying is that I agree with you; it just needs to be enabled.

Polly Billington: The case for local is partly about reducing the hassle, particularly if you are installing heat networks as part of it. It is everyone’s aspiration that the road gets dug up only once. That is what is extremely important about trusted communicators to communities. The local authority could say, “We have this amount of money to spend on decarbonising our homes locally, and we can help you do that.” Again, that could be done collectively in combination with other schemes. That would mean you could see things happening at scale. When you do things at scale, you get economies of scale, which at the moment are not built into the scheme.

If you look at how important the take-up is, you can see there is a clear problem with leaving it to central government to communicate. I can see your argument that installers would be much better at doing that but, again, if you are talking about trusted communicators and people who can do things at scale, that is why there is a role for local authorities to be part of the delivery mechanism.

The Duke of Wellington: I quite understand why local authorities would be the indicated point of focus on heat networks, but this inquiry is about the domestic Boiler Upgrade Scheme, which by definition is individual to each house or dwelling. Forgive me, but I still need to be convinced that that is better administered by a local authority than by central government, who after all are giving a huge incentive to the manufacturer, installer or distributor of the equipment, because they are able to go to a potential customer and say that there is a £5,000 grant available on a piece of equipment which costs £10,000 or £12,000, and they—as I think they should—will offer financing on the balance of the price. That seems to be a perfectly normal commercial proposition, which is very advantageous to the manufacturer or distributor and the client because there is this government grant covering roughly 40% of the cost.

Polly Billington: I am not opposed to that at all. I am simply saying that there are a couple of ways to make sure that you can get it rolled out faster. The Solar Together proposal is basically a reverse auction where local authorities have offered communities the chance to bid to be part of the Solar Together programme. That has ended up with increased uptake in solar panels on people’s roofs and increased deployment, because once you know how to do it on one roof, the rest of the road is probably pretty similar.

The same will probably happen with Richard’s garden. I imagine there are quite a few people looking over the fence saying, “Well, it depends, because we want to have a pool there, but we could do it”, or “No, it’s not going to work on our patio”. You could say, “We can come in and work with your individual needs as a home owner, but we can also see what works in this place at scale”. I am not saying that they need to be the sole delivery mechanism, but they need to be part of that mechanism in order for us to do things at scale, which also has economies of scale.

Q61 The Lord Bishop of Oxford: Thank you so much for the fascinating evidence this morning. I particularly appreciated the comparisons with other countries and wondered whether some of that information could be tabulated by our committee’s team and used in our report. It is really striking.

My question is deepening the conversation about local authorities and civil society groups and what more they can do. I was particularly interested in what can be done at a national level to enable that further. Polly has talked about making some of the funding available to local authorities, but we also had a reference earlier to mandatory heat planning for local authorities in Germany. It would be good to expand on that and whether it would be a helpful and positive development in the UK.

Polly Billington: One thing about making sure that it is administrated more effectively via local authorities is about processing the applications and getting the money out of the door much faster. That is one of the things that definitely works.

We have also been giving evidence to Ofgem about its plans. It finally published its final determinations last week. Ofgem uses very particular language, but this is basically the rules for the business plans for the distribution network operators—the people who own the pipes and wires. Ofgem is now saying that those organisations and companies must work with local authorities to design local area energy planning. Of course, that will involve heat, because we need to decarbonise heat.

I am keen for the other contributors to talk about what happens in Germany; I am not aware of that. What I am saying is that we have started to get a sense and an understanding at a national level of the regulatory changes that are required for this to happen in a place-based way. The Energy Systems Catapult has done an enormous amount of work on how we need to be able to plan, particularly around decarbonising heat in places.

Andreas Graf: I want to underline one point on the obligation on municipalities and local government to do this planning. If you introduce such an obligation, it must go hand in hand with supporting local authorities to do the work. I believe that this is a sensible measure and that local authorities are the natural actor to perform the assessment, either alone or together with a consultant that they hire.

In Germany, to support this, they are doing at least two things. For example, the region of Baden-Württemberg, which was one of the first regions to introduce such an obligation before the national Government discussed doing so, has a certain amount of support per citizen that it provides to each municipality doing such planning. The money is then there to hire local staff and consultants, et cetera, to be able to perform this.

The national Government are now also providing support which, in general, has historically been met by a contribution from local government. However, to incentivise local governments to do this quickly, instead of taking time to set up their teams and do the assessment, the German Government are currently covering 100% of the costs until the beginning or end of 2024—one of the two. They are giving this incentive to say, “Okay, if you do the planning now, we will support you with the full extent of the costs you have in performing this task”.

This comes at a cost, but those costs are relatively low compared with all the other investments we have to make. It is worth investing in the institutional capacity we need to make this transition happen.

The Lord Bishop of Oxford: Would our other panellists like to comment?

Dr Richard Lowes: The Netherlands takes a similar approach to Germany, although they mandated it a few years ago with their heat Act, which basically said that every municipality had to come up with some sort of local heat plan. They have now been developed and they get submitted for consultation. So, such models do exist.

I want to drill down into something that Polly said about local authorities in the UK. We have this fabulous resource, the Energy Systems Catapult, which has spent many years—a decade, almost—thinking first about smart systems and heat and then about local energy area planning. It has developed a tool, which is an off-the-shelf, government-owned product, but a local authority can take it and say, “Please can I have a map of this area to optimise where my heat network and heat pumps should go and where there might be a role for hybrids and whatever else?”

It would not take a lot to get the Energy Systems Catapult or local authorities to work together to have a map for every area. Once you have that map, you know what to do. Then it is just about implementation and you can make the decisions that you currently cannot. Right now, if you live or own buildings in a big urban area, you do not know whether a heat network will arrive at some point or what will come down the road. Quite a simple step can be taken: getting the UK fully mapped for heating.

On a slightly more negative note, we have done this before; a heat map has already been done. It was developed by DECC in around 2010 and hosted by the Centre for Sustainable Energy in Bristol. However, if you search for it now, it is just an inactive page, because the funding was removed. It feels in some ways like we have lost a huge amount of time here, but the models we have now are much better, so we could quite easily get on with this if we wanted to.

Lord Lilley: I am not quite sure what a local heat plan would be, other than identifying where communal heat systems work. Where they do not, it must be heat pumps, because the local authority does not produce, provide or supply. I am attracted by Polly’s idea that we should mobilise local authorities, but at present I do not see what their role is on heat pumps. Is this plan about identifying communal systems?

Dr Richard Lowes: Yes, the plans themselves are wider than just heat. The Energy Systems Catapult model includes things such as electric vehicle charging and power networks, where you might have waste heat. But fundamentally, yes, it is about mapping where you have your heat networks and where you do not.

If you would like to see an equivalent model of this which is currently being done, you can look at Bristol. I think Bristol has developed maps which point to where there is going to be a heat network zone—for people who may want to build there to be aware of—and areas where there will be heat pumps. However, they do not currently have the powers to mandate. It has to be heat pumps, but they have done the mapping.

Andreas Graf: There is another important point here. Yes, it is about identifying in which areas it makes sense to develop a heat network, and then there are still further steps to identify whether the project will be taken forward.

However, it is just as important to ensure that heat pumps being installed in the same area that is being developed for a heat network are not undermining the economics of the heat network. Essentially, we really need to take a targeted approach here. If we are decarbonising very densely populated urban areas—for example, cities such as London, which have high heat densities, great potential for district heat networks and existing gas networks—we need to identify where we are going to build them.

Heat pumps may be a solution for individual buildings, but where it makes more sense to develop a heat network, we need to make sure that the economics pan out and not invest in or support things which go against what we think is needed in that area. Again, this may link to the Boiler Upgrade Scheme. It probably does not make sense to spend £5,000 on a heat pump that should be developed into a heat network over time.

Q62 Baroness Northover: You have been covering my question throughout the session, but I will put it to you so that you can add to what you have said or summarise what you feel are the main points. What changes would you recommend to the UK Government for the design and delivery of the Boiler Upgrade Scheme?

Dr Richard Lowes: The scheme is very important, despite its size. It has to grow. It must be given support to grow and it must be communicated. There are two things. There is a need for leadership from policymakers to say that we have this scheme and that we are proud because we want to grow the British renewable energy economy. There is a very good news story here about not importing foreign gas, producing our own electricity and using it in heat pumps very efficiently. That story resonates with the general public. It is a very positive outcome that no one has talked about, as far as I can see. You can promote the BUS and sell it on those points, as well as others around cost and so on. The big thing missing is communication, subject to it having the backing it needs for the foreseeable future.

That links to a general point on leadership on heating in the UK. We are talking about such a big transition that someone must at some point say that something is going to happen, because stuff has to happen to people’s homes in a way that is not true of other parts of the energy transition; electric vehicles and clean electricity do not have a huge impact, but heating does.

This can be framed much more positively, with honest communication about the upcoming bans in new buildings, oil buildings and, eventually, on-gas buildings. It might get difficult headlines to start with, as we have seen already, but it will get people talking about heat pumps. When the Government’s heat and buildings strategy came out about a year ago, the role for heat pumps was in the press for the first time. It was on lunchtime news and in all the papers. People were talking about it and, for the first time in my career, people were approaching me to talk about heat pumps. A lot of early legwork needs to be done on communication and the first part of that is communicating the Boiler Upgrade Scheme a lot better.

Baroness Northover: To come back on the points we have just been discussing, you have collectively made the point that if we get sidetracked by discussions about hydrogen we will not get on with doing what has to happen with something that is actually there now. We have just got into a discussion about networks. Andreas made the point that you do not want either side to be undermined economically by putting the wrong thing in. This has come in at a late stage of our discussions. Can you factor it in? You are saying to communicate on heat pumps; what about networks? How do you factor that in?

Dr Richard Lowes: I worked on this for a gas network company about 10 years ago, and again a bit more recently than that. On decommissioning and what happens to the gas grid—

Baroness Northover: Sorry, I meant in terms of heat networks, so that instead of individuals doing this, you have a local authority acting in the way you just described, with certain places in Bristol earmarked for a network and other areas where individual heat pumps are advised.

Dr Richard Lowes: You must get to the point where you have done the mapping. Local authorities first have to understand where the best place for the heat network is, then someone has to tell people that they need to wait for a few years, which we have seen in some countries. The Netherlands now has zones where you can keep your gas boilers for longer than in zones outside these mapped areas, so it is slightly converse. Local authorities must determine that first. There is currently no law that disallows someone putting a boiler in, so legislation would need to be developed to allow a local authority to say, “This is a zone where you shouldn’t put heat pumps in”.

Generally, the economics between heat pumps and heat networks are quite closely balanced so, to disagree slightly with Andreas, there might not be a huge risk in putting a heat pump in a house in an urban area, subject to other things. It might just be easier. None the less, it requires that certainty and vision from local authorities to say, “This is a heat network zone area”.

Baroness Northover: So there is a risk if we wait for that; we have to get on with the individual heat pumps.

Dr Richard Lowes: A lot of heat pumps will still be needed. When we look at the cost-optimal energy mix that comes out of the analysis, we are talking about some 20 million heat pumps compared with 5 million on heat networks. The scale of heat pumps is much higher.

Yannick Monschauer: It is worth repeating two points: the scheme should grow in absolute terms and it could be targeted more towards lower-income households. Additionally, we touched only a little on how delivery is being approached at the moment. Installers now handle the applications. We said earlier that this is great from the consumer’s perspective. I wonder whether that might also be a reason why uptake is slow: installers might not have an incentive to promote the scheme, because they see only the additional burden. They are familiar with replacing a gas boiler. You also have to take into account that more than half of boiler replacements are usually in situations when the boiler breaks down in deep winter and you want to get it fixed as soon as possible, so you might go for the simplest option when your installer tells you, “I’m more used to gas boilers; why don’t we just do another one?” That is definitely something that we can think about: what can we do to make it attractive for installers to promote the scheme and heat pump uptake?

Something manufacturers can do on that is help installers. They could produce heat pumps in a more standardised way so that they are easier to install and take less time to build. They could also equip installers with some apps and digital tools to help them to do it more quickly. There are definitely aspects that can help delivery and therefore promote the scheme more widely.

Polly Billington: I go back to the fact that fewer than a third of all possible applications for the year were made in the first six months. Clearly, something about the applications and their processing is not working. Only £34 million-worth of vouchers has been issued. That is a strong case for thinking about how we do that with local deployment. It goes to some of the points other people have made about the importance of understanding where this will be most suitable to target and market to people in terms of the typology of their homes.

Also, if you were really to transform its design, you would combine it with a similar kind of support for energy efficiency measures. There is no energy efficiency measure support for those able to pay, apart from the VAT reduction, which is quite short term. That is where we have a big problem. Let us think about the overall cost of this transformation: those able to pay will be able to do it only when they are doing a whole house refurb. As Yannick said, when a boiler goes, you want to get it done by the end of the weekend rather than thinking, “Oh yes, I’m going to transform my whole house and do energy efficiency measures everywhere”. That is where you need to have some proper financial support.

One organisation that has not been mentioned today, which I am sure you have taken evidence from, is the Green Finance Institute, which is looking at different financial models to support this kind of transition beyond straightforward grants, particularly for the “able to pay” market. Together with 3Ci, which is supported by the Connected Places Catapult, it is trying to find ways to construct a finance model to support deep retrofit, because without deep retrofit in existing homes we will not be able to decarbonise our heat. A number of initiatives, in finance and in regulation, need to be considered if we are really to ensure that a scheme like this works properly.

Andreas Graf: I will make four points. First, as we have touched on multiple times today, the Boiler Upgrade Scheme must be coupled with a strong regulatory signal, not only to consumers purchasing the boilers but to manufacturers that they must scale up manufacturing. This is a fundamental tool to scale this market. The two must go hand in hand. Secondly, if you are going to start scaling the market, you must also scale the budget of the Boiler Upgrade Scheme; £450 million is wholly insufficient.

Thirdly, I mentioned in my first statement the biomass component of this Boiler Upgrade Scheme. We have not talked much about it today. It is not in line with where we need to go and what we need to support. I recommend thinking hard about how further to restrict support for biomass boilers and channelling that money towards technologies that we need.

Finally, the Boiler Upgrade Scheme as it currently exists does not support connection to a district heat network. In the German system, the scheme that supports heat pumps also provides support for homes that are connecting. That comes with additional costs. Those costs are financed differently in different countries but putting the substation in the building and making the necessary retrofits to connect to that network are costs. If we want to put heat networks on at least an equal footing with heat pumps and not undermine the case for heat networks, you should think very hard about integrating that into the scheme.

Q63 Baroness Young of Old Scone: Is there a risk as this process develops of ending up with a rump of folk for whom there is no obvious solution, either because their houses are incredibly hard to retrofit or because they are poor and very disengaged? If so, how have other countries that are further down the curve dealt with that?

Andreas Graf: As difficult as it is for those who have a vision of an entirely clean heating system from tomorrow to accept, the obligations that I mentioned earlier are not bans on fossil fuel technologies entirely but obligations that create a minimum threshold for renewables, for efficiency or for the type of technology.

As I mentioned earlier, in Germany it is a 65% renewables obligation. This means that a hybrid heat pump technology, or a different type of heat pump technology using gas, is still permitted. In most cases, a household will think very strongly about installing a full heat pump solution, because the economics might be more favourable or the technology simpler or less prone to challenges. However, in principle, within that threshold there are cleaner heating technologies that can be used in any type of building. It is banning installing a fossil fuel boiler, not coupling it with a heat pump or any other renewables technology to a sufficient level.

The same is true of the efficiency requirement discussed under eco design. The same is true for the Netherlands and its hybrid heat pump requirement. It is not saying that it must be a heat pump or a heat network that is not even in place yet. It is saying that there is a minimum renewables and efficiency requirement that is above the current condensing gas boiler technology. If you set a requirement like this, we should not be concerned about buildings not being suitable for the heating technologies. It also gives a clear push to heat pumps because in many cases it will make more sense for the consumer to install the heat pump.

Dr Richard Lowes: The most difficult houses in the UK regarding heat pumps are those that are big and inefficient. Efficient houses, big or small, are fine with heat pumps. Small houses that are inefficient are okay with heat pumps as well, because you can get around it. It is big houses which are the issue, particularly historic houses. There are plenty of examples of National Trust houses and buildings being heated by heat pumps. The National Trust currently has a programme to do that, so the technology can be made to work.

We have not talked in much detail about hybrid heat pumps. The Boiler Upgrade Scheme does not support hybrid heat pumps at the moment, because they are seen as quite niche. If you have a big and inefficient house, that is the most difficult situation. Some thought should be given to that, but it is quite a small proportion.

The Chair: Thank you. I am afraid that we have gone over two hours, but that is because you have been so fascinating, so it is not a criticism. It has been a joy to listen to you, but I must bring the session to a close. I thank all four of our witnesses. It has been a superb session. Thank you so much.

[1] Yannick Monschauer later clarified that it was 70,000 in the first half of 2022 alone. This was reflected in their subsequent written submission.