Written evidence submitted by Octopus Energy (HEA0153)

Executive summary

Octopus Energy welcomes the opportunity to respond to the Energy Security and Net Zero (ESNZ) Committee Inquiry into the issues surrounding the ability of UK citizens to heat their homes. We have focussed our answers on Octopus’s areas of expertise, including policy changes that can help to unlock cheaper, cleaner energy and protect consumers.

To accelerate the transition to lower-cost, greener and more secure domestic heating, the UK needs clear leadership from Government to signal that the solution lies in heat pumps. Currently, many consumers are deterred from making the switch to heat pumps by high prices, or by obstacles in the planning system or the EPC framework, or by persistent myths about heat pumps’ suitability for various kinds of homes. Meanwhile for manufacturers and installers, there is still too much doubt about the future shape of the domestic heating market, which holds back investment in production lines, supply chains, training and installation processes that could bring down prices.

Both sides of the market are waiting for a signal that now is the right time to invest in heat pumps. Until we see that signal, it is difficult to accelerate the virtuous circle of market growth, economies of scale, lower prices, and greater uptake that will drive the transition to heat pumps. Only Government can send that signal.

Government therefore needs to chart a way forward with certainty: drawing an end to debate and ambiguity about heat pumps versus hydrogen, and signalling clearly and vocally to consumers and industry that electrification is the solution for the vast majority of homes.

Alongside this, Government must remove the policy obstacles that unnecessarily deter consumers from switching to heat pumps, such as in the planning system, the balance of green levies, or in the outdated EPC framework.

Through a combination of clear signals, and removing obstacles, consumers and industry will have the confidence to invest in heat pumps and other electrified technologies, giving access to the  economies of scale that will make heat pumps more affordable for all.

We have responded in detail to the Committee’s questions below, with the exceptions of questions 4 and 8.

About Octopus Energy

Octopus Energy Group is a global energy tech pioneer, launched in 2016 to use technology to unlock a customer-focused and affordable green energy revolution. Octopus Energy’s retail energy supplier now serves 5m customers in Britain with cheaper, greener power.

We are working to provide lower bills to consumers and make the UK’s domestic energy supply more secure. We believe electrification is the way to deliver this, and a vital part of that is accelerating the roll-out of heat pumps across the UK, which we see as the future of cheaper and greener home heating.

Home heating is one of the key contributors to greenhouse gas emissions in the UK, making up around 14% of the UK’s carbon emissions.[1] The UK has the opportunity to lead on decarbonising home heating, through the installation of less polluting technologies such as heat pumps. Not only do heat pumps use 4 times less energy and emit 3 times less CO2 per kWh of heat than gas boilers, but they help save households money – £96 or more annually with the Octopus smart tariff – and place less stress on the energy grid by shifting usage and reducing peak heat energy by up to 61%.

To this end, Octopus Energy has created a state-of-the-art Research & Development (R&D) centre in Slough to train 1000 heat pump engineers a year, and has invested in our manufacturing, to make  heat pumps as accessible as possible with 90% of our cost quotes lower than the national average of £8,000.

Question 1. What policy changes are needed to deliver energy efficient homes across the UK?

Electrification is the way to deliver cheaper, cleaner, and more secure energy. A vital part of that is accelerating the roll-out of heat pumps across the UK, which are the future of cheaper and greener home heating.

We know that heat pumps are the most energy efficient way to heat homes, being up to 4 times more efficient than a gas boiler.  The heat pumps installed by Octopus Energy have a Seasonal Coefficient of Performance (SCOP) rating of 3.33, which means for 3.33kWh of energy out for every 1kWh put in – or an efficiency of 330%. By comparison, most gas boilers in the UK are only 83% efficient.

There are three broad actions we would like to see from the Government that set a clear course for the transition to cleaner, cheaper energy for consumers:

●        Stop publishing separate parallel strategies on hydrogen and heat pumps, which sends conflicting messages to customers, installers and manufacturers. Government should instead publicly commit to electrification as the main route to decarbonise home heating to give them the certainty that they need to invest

●        Continue to support Boiler Upgrade Scheme (BUS) and consider tapering the funding to drive competitive cost pressure and enable it to be spread across more homes in the future

●        Continue to support the Clean Heat Market Mechanism and Future Homes Standard to gradually phase out fossil fuel systems

In addition, there are more specific policy changes that are necessary to support this transition, specifically removing barriers to heat pump uptake in planning permission, fuse upgrades and EPC frameworks, and rebalancing green levies.

A.      Breaking down barriers to make heat pumps as easy to install as gas boilers

Currently, bureaucratic barriers are in place that make it difficult to install heat pumps with the same ease as is the case with gas boilers. There are three main issues that need to be addressed:

i.            Planning permission reform

One of the main hurdles facing the installation of heat pumps is that households are too often required to seek planning permission to have one installed. To date, 27% of our customers have been requested to obtain planning permission, which is not necessary with a gas boiler.

Planning permission involves regulations focusing on noise, boundaries, and size, which are too restrictive and are not uniformly applied by Local Authorities. For example, we have seen examples of customers’ applications being rejected because of councils setting arbitrary noise limits for heat pumps as low as 30db, equivalent to whispering. Meanwhile, external oil boilers producing noise levels of up to 70db do not require planning permission.

Many customers decide against heat pumps when they become aware of the planning permission requirements. Those who try to proceed end up waiting an additional 8 to 10 weeks on average. This may push them into the Winter period they are trying to avoid, leading to further cancellations. Even if customers meet all the requirements, there is no guarantee that local councils will grant the permission, as they all have different interpretations of central planning guidelines. The combined impact of all these things mean that very few of the 27% of customers who require planning have made it to install. 

Our recommendations on planning are as follows:

●        Specify the noise standards for heat pump installations nationwide in permitted development to reduce ambiguity, and raise the sound threshold for planning permission to 47 dB. For comparison, this is still below the noise level of a typical refrigerator hum, or of  moderate rainfall.

●        Remove rules requiring planning permission for heat pumps within 1m of a property boundary to help the millions of homes with smaller outdoor spaces get a heat pump. The feedback from our customers is that they and their neighbours have no issue with the heat pump being within 1 metre of the property, so long as it meets the other conditions around noise.

●        Remove the size limitation on outdoor heat pump units to unlock the benefits of new heat pumps that offer higher efficiency, lower noise, and environmentally-friendly refrigerant.

ii.            DNO connection and fuse upgrade reform

When installing a heat pump, 45% of our customers require a fuse upgrade. In most cases, DNOs insist on performing this fuse upgrade themselves, in a separate visit to the property, before the heat pump has been installed. This requires yet another external process, and another visit to the property, and adds delays of up to 12 weeks before an installed heat pump can be switched on.

Octopus Energy has already demonstrated a successful trial with UK Power Networks (UKPN) to have customers receive fuse upgrades at the same time as their heat pumps being installed. However, not all DNOs are so open to testing out new innovative models. An application is often required to connect heat pumps, adding another delay to the implementation process.

This process should be reformed through the following changes:

●        Allow a fuse upgrade for low carbon technology to be granted to any customer immediately – no questions asked.

●        DNOs should allow any qualified electrician to connect and upgrade the fuse. This would also enable the speed required for a distress installation, e.g. when the existing boiler has broken down and a new heating solution is needed urgently.

iii.            Reform Energy Performance Certificates (EPC) ratings

The current EPC framework is also a major obstacle to improving the energy efficiency of homes, especially the rollout of heat pumps. We examine this in detail in response to the question Do the current EPC frameworks help consumers make informed decisions on transition? below.
 

B.      Rebalancing green levies to make electrification the cheapest option

Currently, green levies (RO, FiT, CfD and ECO) are 23x higher for electricity than gas, despite gas emitting significantly higher carbon emissions. This means that heat pump customers are financially penalised for choosing a cleaner alternative to gas boilers. By shifting these levies from electricity to gas, those making the change to a heat pump would see their bills go from an £29 additional cost, to a £251 saving a year for an average home.

Historically, electricity prices in the UK are on average 3.3 times higher than gas - one of the highest electricity-to-gas price ratios in Europe. This price difference is exacerbated by the current balance of green levies. This price difference is a disincentive to adopt heat pumps: countries installing the most heat pumps in Europe having the smallest electricity to gas price ratios.[2]

However, by shifting policy costs from electricity to gas, heat pumps would be cheaper and greener to run – which, as we’ve seen across Europe, is the tipping point for mass take up. Despite the efficiencies made by heat pump customers above, the green levies placed on electricity are eliminating the savings for consumers.

Octopus Energy saw the positive impact of the Treasury’s decision to remove the green levies in 2022 on uptake of heat pumps. With green levies temporarily removed from energy bills altogether, customers who switched to heat pumps saved an average of £120 a year compared to staying with a gas boiler.

Since the levies have been reintroduced, the running costs of heat pumps have gone up. Due to the balance of green levies, heat pumps are now more expensive to run than gas boilers, for the first time since April 2021, despite being up to four times more energy efficient. With an extra running cost of £29 a year, the current balance of green levies diminishes the financial incentive to install a heat pump – limiting the market to those who are motivated by reducing their energy consumption, rather than by reducing their bills.

By permanently removing green levies from electricity and/or shifting to gas, Government would send a strong signal to the market to encourage heat pump adoption.

Question 2. What are the key factors contributing to the under-delivery of the UK’s government-backed retrofit schemes?

We recognise that it is normal for a new scheme to take time to get off the ground. For example, the Renewable Heat Initiative (RHI), the predecessor to the Boiler Upgrade Scheme, only had 500 applications in its first quarter. By the end of the fourth quarter this had increased to 2,500 – a 500% growth.

However, there are issues we have identified that have set the BUS scheme back. Along with the reasons we set out above in response to Question 1, we have set these out below:

●        Looking back at the RHI, there was a significant spike in its applications (5,000 in its final quarter) as people looked to install their heat pumps before the scheme closed. This, combined with an almost 2-month delay for the BUS from 1 April to 23 May, meant that installers had nothing to offer during this period and led to a lack of heat pump retrofitting taking place.

●        There is a backlog of heat pump installers that are still waiting to pass the checks for the scheme. With new installers signing up every week, this list will only grow longer – and needs to be addressed and managed in a timely manner.

●        As set out below, the additional requirement to have a valid EPC from the past 10 years, creates an instant barrier for the 50% of homes which don’t have one currently, limiting take up of the grant. Without this needless restriction, volumes could be much higher.

Despite these challenges, heat pumps have reached record installation levels at 3,000 per month, showing that there is a clear demand which can be further unleashed through policy reforms.

Although insulation is no more a requirement for a heat pump system than a gas boiler, the improved criteria for the GBIS are welcome and will help homes with all heating systems become warmer and more efficient. We urge Ofgem to issue the supplier guidance this month, so that customers can take advantage of this before the coldest months hit, and help protect them from another winter of high energy prices.

Question 3: Which standards and assessment frameworks are needed to deliver a reliable, skilled workforce capable of transitioning UK homes to modern heating solutions?

We do not have a workforce shortage. We already have 130,000 gas-safe engineers – but the challenge is upskilling them. Luckily, upskilling can only take two weeks.

Octopus has committed to train 1,000 heat pump engineers by the end of 2023, through our £10 million R&D centre.

Government must show certainty about electrification, and thus heat pumps, being the future. Even for aspiring heat pump engineers, taking two weeks off from work for training requires confidence in the future role of heat pumps. Such certainty would also stimulate installation companies to invest in upskilling their workforce and transitioning their business towards electrification. 

Question 5: What role should customer choice play in the future planning of energy networks for home heating?

Customer choice should play a larger role in guiding where energy network investment and/or upgrade decisions are made.

Currently, Distribution Network Operators (DNOs) use modelling to predict changes in customer demand, and strategically upgrade the areas where they expect demand to be strongest. However, DNOs are often slow to react to customers who have purchased and are applying to connect their technology, such as heat pumps, solar PV generation and electric vehicle chargers. To remedy this issue, DNOs should also be flexible enough to respond to actual customer interest where it emerges, in addition to making strategic investments based on predicted demand. DNO’s need to evolve their network planning approaches to not rely on historical profile and (After Diversity Max Demand (ADMD) and instead factor in actual demand.

Question 6: Does the current state of consumer protections for low-carbon home technologies represent a barrier to the uptake of these products?

Organisations such as the Microgeneration Certification Scheme (MCS) and the Renewable Energy Consumer Code (RECC) lay out extremely high standards for consumer protection in renewables, which Octopus welcomes. However the process to ensure the products meet these standards is overly arduous compared to a gas boiler.

The MCS mandated process requires a 2-3 hour in-home survey in the home, and several hours design work, to ensure it meets a minimum efficiency standard for your home. Gas boilers on the other hand are often purchased ‘blind’ and set up at a far too high a temperature for the system to run efficiently. This stark difference in approach means that heat pumps can never compete with gas boilers for distress installs, which represent the majority of new heating installations today in the UK.

It also often leads to other recommendations to make your home more efficient e.g. radiator upgrades, insulation, which leads to the public perception that all households must have larger radiators and more insulation before acquiring a heat pump. Gas boilers would also benefit from the same upgrades, however this is not required by gas installation bodies such as Gas Safe.

We recommend that gas boilers go through the same comprehensive checks, including a room by room heat loss, radiator and insulation assessment, to match the heat pump process and ensure the most efficient installation possible.

Question 7: How will the public be able to afford the switch to decarbonised heating?

Octopus is leading in its advocacy of heat pumps and efforts to scale their manufacture and installation, which is key to bringing down costs. As a result of relentless optimisation and standardisation of our supply chain and installation processes, we are able to offer heat pumps to our customers at a significantly reduced price, several thousand pounds below the national average.

However, this could be taken much further, and made even more affordable, with the scale enabled by the policies laid out in question 1.

Question 9: Do the current EPC frameworks help consumers make informed decisions on transition?

The current EPC framework is a poor guide to consumers looking to improve the energy efficiency of their homes. The process is subjective, inaccurate, and based on outdated assumptions about energy prices, efficiency, and tariffs.

Some simple changes to the EPC would produce more accurate results, and help consumers make better informed decisions around the energy efficiency of their homes, thus reducing energy bills and decarbonising heat.

There is a significant upside to reforming EPCs. Making EPCs more accurate could unlock Green Mortgages to fund EPC upgrades. This would give homeowners access to preferential loans for much-needed retrofits. All major banks have made a commitment to decarbonise their mortgage book but are currently facing difficulties in linking loans credibly to energy efficiency improvements.

Modernising EPC treatment of heat pumps and removing the need for an EPC to access Government’s Boiler Upgrade scheme would improve the uptake of heat pumps, and help achieve the installation target of 600k a year by 2028.

Below we summarise the main problems with EPCs, and make some simple suggestions for improvement:
 

A.      EPCs never recommend heat pumps, even when it makes sense

No EPC ever recommends a heat pump or any other renewable energy source for space heating. Even if a property is currently heated by an old, inefficient oil boiler, the EPC will not recommend a heat pump – it will recommend the installation another fossil fuel consuming boiler, or even the use of electric heaters, which use four times as much electricity as a heat pump to heat the same space.

Recommendation: Add heat pumps as an EPC recommendation where it is more cost effective.

B.       Outdated metrics and measurements result in unreliable EPC ratings

EPC assessments are a relatively quick, subjective process, where the assessor asks questions such as 'how many showers do you have a day' and hence the outputs can vary widely. We've seen up to a 40% variance in the total energy requirement for heating and hot water from one assessor to another.

EPC ratings are currently based on the cost to heat a home rather than the total heating requirement, which is hugely affected by the fuel used to heat a home. This means a home heated by gas would currently have a better EPC efficiency rating than the same home heated by a heat pump, despite the fact that the heat pump will use four times less energy.

Recommendation: Review underlying gas/ electricity costs to close the gap between electricity and gas prices, to accelerate our transition to net zero through electrification.
 

C.      EPCs assume 'dumb' tariff price inputs, instead of smart tariffs

The electricity and gas price inputs on which EPC ratings are based are taken from SAP tables, which are often very out of date and don't include the savings from smart tariff optimization. Heat pump customers on smart tariffs are able to flex their heat pump usage in response to price signals, reducing their electricity usage during peak demand. This can lower the average electricity price for a heat pump user by 30%. 

Recommendation: Allow specific smart tariff input into EPC to give more accurate cost, and encourage smart optimisation of heat pumps.
 

D.      EPCs are based on outdated assumptions about the efficiency of heat pumps

Where the specific heat pump is not known (which is usually the case for an EPC assessment) a assumed standard efficiency rating of 1.7 must be used, which means every 1 kWh of electricity produces 1.7 kWh of heat. This is way below the expected efficiency of a modern system. This is another reason why heat pumps can fare so badly on EPC ratings. In reality, the heat pumps installed by Octopus Energy have an efficiency of 3.3, and indeed the minimum requirement for heat pumps eligible for the Boiler Upgrade Scheme is 2.8.

Recommendation: Increase the EPC framework’s assumed efficiency of  heat pumps to 2.8, in line with BUS, to reflect modern installations.

Figure 1: Comparative efficiencies of a heat pump vs gas boiler in home heating

This table demonstrates that heat pumps are four times as efficient as a typical gas boiler in home heating.

E.       EPC requirements for BUS add another obstacle to heat pump installation

In order to qualify for BUS grant funding, properties must have a current EPC with no outstanding recommendations for loft or cavity wall insulation. But the current EPC scheme is not a good indicator of a property's suitability for heat pump installation, and nearly half of homes don’t have an EPC. Even those that do have an EPC are not typically updated once home insulation has been installed, making active EPCs an unreliable indicator of a home's energy efficiency. Furthermore, Two EPCs for the same home may vary by a factor of 40% due to assessments being quick and subjective, and do not accurately indicate the energy efficiency of a home.

A thorough heat loss assessment process, performed by the installer, is already required prior to installing a heat pump in a property  as a condition of receiving the BUS grant. This assessment involves checking the fabric and insulation of the property, and is a much more robust measure of a home’s suitability for a heat pump than an EPC assessment.

Recommendation: remove the requirement for an active EPC to determine eligibility for the BUS to improve the uptake of heat pumps, and help achieve the installation target of 600k a year by 2028. 

Question 10: Do standards need to differ for different types of housing?

Standards should be harmonised as much as possible. This will simplify decisions for consumers, and create the necessary economies of scale for manufacturers and installers to deliver new heating and insulation technologies quickly, and at reduced cost.

For consumers, the process of installing a heat pump is already overly bureaucratic, slow, and overcomplicated. Keeping standards streamlined will remove bureaucracy and hugely inconvenient delays from the installation process.

Further savings, in a larger market, can be achieved by simplifying standards, rather than creating different standards for different housing. All of which will bring down costs, bring forward investment, and remove delays from the process.

For manufacturers, the more consistency there is in standards for homes, the easier it is to produce heat pumps that suit those standards, in large quantities. That brings down costs due to economies of scale.

For installers (like Octopus, but also smaller firms which is most of the heating installer industry), the greater consistency of standards, the easier it is to streamline and standardise installation processes. Octopus has shown this is possible through our standardisation of the installation process, delivering heat pumps at an average cost thousands of pounds below the national average.

However, adjusting our processes to meet different standards would introduce more complexity – and therefore cost – to the installation process. This is a deterrent to other installers to invest in installing heat pumps.

Question 11: What is the role of different levels of government in developing, funding and implementing schemes?

There must be more harmonisation amongst different levels of Government, including between devolved governments, so that schemes are able to be smoothly carried out. Greater coherence will enable the schemes to scale on a far greater level.

Conclusion

Octopus Energy knows that the widespread and rapid adoption of heat pumps across the UK is critical to delivering cheaper, greener and more secure home heating.

While schemes such as BUS are welcomed, more must be done to remove unnecessary obstacles to heat pump installations, as we have set out. Alongside that, Government and energy providers must both begin clearly and unambiguously signalling to consumers, manufacturers and installers that heat pumps are the heating solution for the vast majority of UK households. Only with those signals, will the heat pump market grow to a scale necessary to bring down costs significantly through standardisation, and at a pace necessary to help meet the UK’s decarbonisation commitments.

August 2023